FHA Guidelines. Minimum loan amount $75, (k) minimum loan amount$125,000

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1 These program guidelines provide a general overview of the FHA products and policies eligible for delivery to Endeavor America Loan Services (EA) for financing consideration. The details are based on the policies outlined in the applicable HUD handbooks and Underwriter letters. This document should be used solely as a reference to EA s interpretation of the HUD/FHA guidelines and does not constitute a commitment to lend. 30 year Fixed 15 year Fixed 640 minimum FICO AUS Approve/Eligible 1 unit family Standard Advantage Minimum Loan Amounts Notes 30 year Fixed 15 year Fixed 580 minimum FICO AUS Approve/Eligible; AUS Refer/Eligible; manual underwrites 1 unit family Minimum loan amount $75, (k) minimum loan amount$125,000 Standard Balance Occupancy Loan Purpose Units FICO 1 LTV CLTV Purchase % 2, % 2,3,4 Primary Simple Refinance, Rate/Term Refinance % 97.75% Cash-out Refinance % 85% Streamline Refinance % All 6,7 125% 6,7 5 Streamline Refis, Mortgage Rating Only % 6,7 125% 6,7 High Balance Occupancy Loan Purpose Units FICO 2 LTV CLTV Primary All 1 Purchase % 2, % 2,3,4 Rate/Term Refinance % 97.75% Cash-out Refinance % 85% Simple Refinances % 97.75% Streamline Refinance % 6,7 125% 6,7 Streamline Refinances, Mortgage Rating Only % 6,7 125% 6,7 Mortgage Insurance Factors for Case Assignments on/after June 3, Base Loan >15 Year Term 15 Year Term LTV UFMIP Annual 9 LTV UFMIP Annual 9 78% 1.30% 78% 0.45% $625,500 > 78% and 95% 1.30% > 78% and 90% 0.45% > 95% 1.35% > 90% 0.70% 1.75% 1.75% 78% 1.50% 78% 0.45% > $625,500 > 78% and 95% 1.50% > 78% and 90% 0.70% > 95% 1.55% > 90% 0.95% Streamline Refinance endorsed on/before 5/31/ % UFMIP 0.55% annual MIP Base Loan Amount $625,500 > $625,500 Mortgage Insurance Factors for Case Assignments on/after January 26, 2015 >15 Year Term <15 Year Term LTV UFMIP Annual LTV UFMIP Annual 78%.80% 78% 0.45% > 78% and 95%.80% > 78% and 90% 0.45% > 95%.85% > 90% 0.70% 1.75% 1.75% 78% 1.00% 78% 0.45% > 78% and 95% 1.00% > 78% and 90% 0.70% > 95% 1.05% > 90% 0.95% 1. Lowest FICO is shown per FHA Advantage program. Please refer to the specific loan program for the minimum FICO required: 640 for Standard; 580 for Advantage, as well as the underwriting options (AUS Approve/Eligible or AUS Refer/Eligible or manual underwrites). 2. FICO <620 max cash in hand $2, FICO <620 may not own another property (see page 38). 4. FICO <620 recent installment lates in the last six months are not eligible. 5. FICO <640 No NSF/overdraft fees allowed, either recent or YTD. Negative ending bank balances will be considered NSF. 6. FICO <640 must have 0x30 housing payment history. If renting, property management VOR or private VOR & 12 months canceled checks required. 7. FICO <640 All Borrowers on loan must be at their current employer for a minimum of one year. 8. New Jersey No NSF/overdraft charges regardless of FICO; No 203(k) loans; No 2-4 unit properties. 9. Texas No Cash-Out transactions allowed. 10. Authorized user accounts: credit report must contain at least one open tradeline with satisfactory payment history for 1 month in the applicant s name to be eligible for financing 11. Case Numbers on/after 09/14/15: R&T Refi max LTV/CLTV of 97.75% must be a Principal Residence & owned for a min of 12 months or if owned for less than 12 months as Principle Residence since date of acquisition 12. Case Number on/after 09/14/15: R&T Refi max LTV 85%/CLTV 97.75% for Principal Residence owned less than 12 months or if owned less than 12 months as Principal Residence for entire period of ownership 13. DTI >50% requires 2 of the 4 compensating factors: a) 680+ FICO and 3 tradelines rated for 12 months or 2 tradelines rated for 12 months and a VOR. b) 3 months reserves. c) 12 months on the same job. d) No gift funds used. 14. Installment lates in the last 5 years after BK or foreclosure was discharged requires 2 of the 4 compensating factors: a) 680+ FICO and 3 tradelines rated for 12 months or 680+ FICO and 2 tradelines rated for 12 months and a VOR. b) 3 months reserves after closing. c) 12 months on the same job. d) No gift funds used. 15. <640 if paying off revolving debt to qualify, accounts must be closed. 16. EA does make exceptions/overrides to GSE guidelines Check FHA mortgage limits per subject property county Endeavor America Loan Services 05/18/2016 Page 1 of 191

2 Endeavor America s Credit Philosophy General Requirements Maximum Age of Mortgage Documents General Document Age Appraisal Validity Initial Appraisal Validity Appraisal Update Handling of Documents Information Sent Electronically Information Obtained via Internet Signature Requirements for all Application Forms Policy on Use of Electronic Signatures Definition Use of Electronic Signatures Third-Party Documents Mortgage Application and Initial Supporting Documentation URLA and HUD/VA Addendum to URLA Mortgage Application Name Requirements Standard Required Documentation Borrower s Authorization for Verification Information Borrower s Authorization Standard Required Documentation HUD Form A Part IV: Borrower Consent for Social Security Number Verification Tax Verification Form or Equivalent Endeavor America Loan Services 05/18/2016 Page 2 of 191

3 Sales Contract and Supporting Documentation Standard Amendatory Clause Amendatory Clause Real Estate Certification Program Eligibility Purchase Refinance Types of Refinances Rehabilitation Loans (Purchases and Refinances) (k) Standard and Streamlined Rehabilitation Mortgages Borrower Eligibility General Eligibility Requirements Social Security Number Borrower Age Limits Borrower Minimum Decision Credit Score Borrower and Co-Borrower Ownership and Obligation Requirements Principal Residence in the United States Military Personnel Eligibility Citizenship and Immigration Status Residency Requirements Lawful Permanent Resident Aliens Permanent Resident Aliens Non-Permanent Resident Aliens Non-Permanent Resident Aliens (continued) Non-U.S. Citizens without Lawful Residency Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt Endeavor America Loan Services 05/18/2016 Page 3 of 191

4 Verification of Delinquent Federal Non-Tax Debt Eligibility Period for Borrowers Delinquent on FHA-Insured Mortgages Excluded Parties Borrowers Other Parties to the Transaction Occupancy Types Principal Residence FHA-Insured Mortgages on Principal Residences Exceptions to the FHA Policy Limiting the Number of Mortgages per Borrower Second Homes Investment Property Property Eligibility and Acceptability Criteria Special Flood Hazard Areas Seller Must Be Owner of Record Appraisal General Information Appraisal Order Documents Appraisal Form Requirements Acreage Accessory Dwelling (ADU) Age-Restricted Properties (55+ Senior Communities) Condominiums Declining Market Mixed Use Minimum Property Requirements (MPRs) New Construction New Construction Exhibits Endeavor America Loan Services 05/18/2016 Page 4 of 191

5 Properties Listed for Sale Property Flipping Time Restriction on Transfers of Title Restrictions on Resales Occurring 90 Days or Fewer After Acquisition Restrictions on Resales Occurring Between 91 Days and 180 Days After Acquisition Exceptions to Time Restrictions on Resale Required documentation Termite Inspections Existing Homes: may require soil or termite treatment Well and Septic General Requirements Exception Requirements Dug Wells, Cisterns, Holding Tanks Assets Assets Bank Statements Checking and Savings Large Deposits Large Deposits Tax Refunds Insufficient Funds (NSF) on Borrower Business Funds Cash Saved at Home Down Payment and Closing Costs Earnest Money Employer Assistance/ Relocation Guaranteed Purchase Relocation Guaranteed Purchase Employer Assistance Plans Endeavor America Loan Services 05/18/2016 Page 5 of 191

6 Gift Funds Gift Letter Donors Family Close Friends Organizations Gift Funds Acceptable Gift Funds Source Gift Transfer DU/LSC Data Integrity Gift of Equity Consumer Debts Paid with Gift Funds Joint Accounts Real Estate Commission Rent Credit Reserves Retirement Accounts Required Documentation Sale of Home Proceeds Sale of Personal Property Stocks and Bonds Sweat Equity Unacceptable Assets CAIVRS Verification Resolution Required Documentation Eligibility Period for Borrowers Delinquent on FHA-Insured Mortgages LDP/SAM Endeavor America Loan Services 05/18/2016 Page 6 of 191

7 Credit and Liabilities Credit Report and Loan Decision Score Satisfactory Credit Payment History Requiring Additional Analysis Authorized User Accounts Non-Traditional Credit Day Charge Accounts Adverse Credit Alimony/Child Support Bankruptcy Chapter Chapter Collections Consumer Credit Counseling Contingent Liability Mortgage Assumption Co-Signed Loan Business Debt Student Loans Required Documentation Calculating the Student Loan Obligation Disputed Accounts Delinquent Federal Tax Liens State and/or Local Tax Liens Foreclosures/Deed-in-Lieu Second Mortgage Foreclosure Housing History Endeavor America Loan Services 05/18/2016 Page 7 of 191

8 Inquiries and Undisclosed Debt(s) Judgments Modified/Restructured Loans Debt Payoff to Qualify Recurring Debts Short Sale/Pre-Foreclosure Mortgage Current at the Time of Short Sale Defaulted Mortgage at the Time of Short Sale Community Property States Community Property States Disaster Re-Inspections Disaster Re-inspections Eligible/Ineligible Property Types Eligible Properties Ineligible Properties Eligible Transactions Purchase Refinance Ineligible Products or Transactions Employment and Income Documentation General Information and Requirements Current Employment Employment History Employment Gaps Alimony/Child Support Auto Allowance Bonus and Overtime Endeavor America Loan Services 05/18/2016 Page 8 of 191

9 Calculation of Effective Income Capital Gains/Losses Commission Income Required Documentation Calculation of Effective Income Disability Income Family Employer Farm Income/Loss Interest and Dividend Primary Employment Calculation of Effective Income Salary Hourly Military Income Active Duty Reserve/National Guard VA Benefits Non-Taxable Income Section 8 Homeownership Vouchers (TOTAL) (E) Required documentation Calculation of Required Income Other Public Assistance (TOTAL) (F) Required documentation Calculation of Effective Income Part-Time and Seasonal Calculation of Effective Income Required Documentation Endeavor America Loan Services 05/18/2016 Page 9 of 191

10 Parsonage Housing Allowance Rental Income Limited or No History of Rental Income Two to Four Units One Unit History of Rental Income Limited or No History of Rental Income History of Net Rental Income Self-Employed Borrower Stability of Self-Employment Income Self-Employed Income Documentation Requirements Business Tax Returns Borrower s Earnings Trend Business Financial Strength Social Security Benefits Tip Income Escrows/Insurance Hazard Insurance General Requirements Manufactured Homes Coverage Requirements Deductibles Refinance Flood Insurance Wind Insurance Real Estate Taxes Property Tax Calculation Endeavor America Loan Services 05/18/2016 Page 10 of 191

11 States with Taxes Paid in Arrears Escrow Holdbacks Identity-of-Interest Maximum LTV for Identity-of-Interest/Landlord Transactions Maximum LTV Exceptions Interested Party Concessions Maximum Loan Amount Maximum Loan Term Mortgage Insurance UFMIP/Monthly MIP Qualifying AUS TOTAL Scorecard Approvals Manual Underwrites Purchases Refinances General Eligibility FHA-Insured to FHA-Insured (A) Refinances (FHA-to-FHA) General Borrower Eligibility General Property Eligibility General Mortgage Eligibility Required Documentation Refinances Cash-Out Refinances Borrower Eligibility Occupancy Requirements Exception Required Documentation Payment History Requirements Endeavor America Loan Services 05/18/2016 Page 11 of 191

12 Required Documentation Maximum Mortgage Amounts Maximum Loan-to-Value Maximum Combined Loan-to-Value Nationwide Mortgage Limit No Cash out Refinances Borrower Eligibility Occupancy Requirements Required Documentation Payment History Requirements (Manually Underwritten) Required Documentation Maximum Mortgage Amount Maximum Loan-to-Value Ratio Calculating Maximum Mortgage Amount Short Payoff Short Payoffs Refinancing to Buy Out Title-Holder Equity Refinancing to Pay off Recorded Land Contracts Use of Estimates in Calculating Maximum Mortgage Amount Excess Cash Back Required Documentation Maximum Combined Loan-to-Value Ratio Streamline Refinance Streamline Refinance Exemptions Non-Credit Qualifying Exemptions Streamline Refinance Credit Qualifying Exemptions Endeavor America Loan Services 05/18/2016 Page 12 of 191

13 Borrower Eligibility Required Documentation Payment History Requirements Required Documentation Non-Owner Occupied Properties and HUD-Approved Secondary Residences General Information Applicable to All Streamline Refinances Mortgage Seasoning Requirements Use of TOTAL Mortgage Scorecard on Streamline Refinances Net Tangible Benefit of Streamline Refinances Reduction in Term Reviewing Limited Denial Participation and SAM Exclusion Lists Borrower Additions to Title Borrower Credit Reports Funds to Close Maximum Mortgage Amortization Period Maximum Mortgage Calculation for Streamline Refinances Use of Estimates in Calculating Maximum Mortgage Amount Excess Cash Back Required Documentation Maximum CLTV Ratio and Subordinate Financing Appraisal and Inspection Requirements on Streamline Refinances Assessing Upfront and Annual MIP Streamline Refinance Non-Credit Qualifying Borrower Eligibility Exception Special Documentation and Procedures for No Credit Streamline Refinances Streamline Refinance Credit Qualifying Endeavor America Loan Services 05/18/2016 Page 13 of 191

14 Borrower Eligibility Credit Underwriting Qualifying Streamline Refinance with Appraisal Streamline Refinance with NO Appraisal Secondary Financing Secondary Financing Down Payment Assistance Program (DAP) Secondary Financing Cash Back Purchases CLTV Purchase Refinances Unless otherwise noted in the specific Secondary Financing source type, the CLTV of the FHA base loan and Secondary Financing amount must not exceed the FHA LTV limit; Grace Period Loan Purposes Purchases Refinances Qualifying Simultaneous Closing Soft/Silent Liens Secondary Financing Sources and Terms Underwriting Automated Underwriting System (AUS) Endeavor America Loan Services 05/18/2016 Page 14 of 191

15 Underwriting Manual Underwriting/Downgrades Manual Underwriting Compensating Factors Compensating Factors Documentation Residual Income Residual Income Table Back to Work Extenuating Circumstances General Information Applicability Definitions Economic Event Economic Event Onset Economic Recovery Household Income Household Member Housing Counseling Satisfactory Credit Underwriting Criteria Economic Event Loss of Employment Loss of Income Post-Economic Event Income Derogatory Credit Bankruptcy Chapter 7 bankruptcy Chapter 13 bankruptcy Endeavor America Loan Services 05/18/2016 Page 15 of 191

16 Collections and Judgments Foreclosure Pre-Foreclosure/Short Sale Non-Traditional Credit CAIVRS: Request for Waiver or Resolution Housing Counseling Housing Counseling Disclosures HUD REO Purchases Program Overview Insured Section 203(b) $100 Down Case Assignment Appraisal Down Payment Eligible Transactions Loan Amount, LTV/CLTV Section 203(b) with repair escrow $100 Down $100 Down with Repair Escrow Sales Contract General Contract Sales Terms Closing Costs and Sales Commission Paid by HUD Manufactured Homes Program Overview Title II Eligibility Requirements Additions/Modifications (State Requirements) Endeavor America Loan Services 05/18/2016 Page 16 of 191

17 Manufactured Homes Appraisal Requirements Credit Score Elevation Certificate Flood Zones A & V Eligibility for Manufactured Housing in SFHAs Manufactured Homes Engineer s Certification of Foundation FHA Connection Appraisal Logging screen: Y for Yes to Manufactured Housing indicator (source document appraisal) Hazard Insurance HUD Label Red Tags HUD Data Plate Ineligible Manufactured Homes Modular Homes Manufactured Homes New Construction Proposed Construction Under Construction or Existing <1 Year Title Binder Trade-In (k) Loan Program Ineligible Property Types Ineligible Programs Standard 203(k) Transactions Standard 203(k) Eligible Improvements Types of Improvements General Improvement Standards Endeavor America Loan Services 05/18/2016 Page 17 of 191

18 Specific Improvement Standards Standard 203(k) Ineligible Improvements/Repairs Standard 203(k) Establishing Repairs and Improvements Exception for Borrowers Doing Own Work Standard 203(k) Financeable Repair and Improvement Costs and Fees Standard 203(k) Financeable Contingency Reserve Standard 203(k) Financeable Mortgage Payment Reserves Standard 203(k) Financeable Mortgage Fees Origination Fee Discount Points Standard 203(k) Required Documentation and Review Review of Contractor Qualifications Consultant s Work Write-Up and Cost Estimate Architectural Exhibits Sales Contract Limited 203(k) Transactions Limited 203(k) Eligible Improvements Types of Improvements Improvements Standards General Improvement Standards Specific Improvement Standards Limited 203(k) Ineligible Improvements/Repairs Limited 203(k) Establishing Repair and Improvement Costs Exception for Borrowers Doing Own Work Limited 203(k) Financeable Repair and Improvement Costs and Fees Limited 203(k) Financeable Contingency Reserves Limited 203(k) Financeable Mortgage Fees Endeavor America Loan Services 05/18/2016 Page 18 of 191

19 Origination Fee Discount Points Limited 203(k) Ineligible Fees and Costs Payments & Draws 203(k) Limited Limited 203(k) Required Documentation Required Documentation for Limited 203(k) Only Contractor s Cost Estimate Appraisals for Standard 203(k) and Limited 203(k) Establishing Value Appraisal Reports Adjusted As-Is Value Purchase Transactions Refinance Transactions After Improved Value Documents to be Provided to the Appraiser at Assignment Maximum Mortgage Amount for Purchase Maximum Mortgage Amount for Refinance Loan-to-Value Ratios for Refinance Required Documentation Combined Loan-to-Value Secondary Financing Provided by Family Members Secondary Financing Provided by Private Individuals and Other (C)Organizations Mortgage Insurance Premium Underwriting Required Documentation Standard 203(k) and Limited 203(k) Identity-of-Interest Certification Borrower s Certification Endeavor America Loan Services 05/18/2016 Page 19 of 191

20 203(k) Consultant s Certification Borrower Acting as General Contractor or Doing Own Work (Self-Help) Repairs Noted by the Appraiser (k) Borrower s Acknowledgment (Form HUD A) Feasibility Study Borrower Contractor Agreement Required Documentation for Standard 203(k) Only Consultant Final Work Write-Up and Cost Estimate Architectural Exhibits Consultant/Borrower Agreement Consultants Overview Consultant Duties Feasibility Study Consultant Inspection Draw Request Inspection Change Order Work Stoppages or Deviations from the Approved Write-Up Consultant Fee Schedule Feasibility Study Work Write-up Draw Inspection Fee Change Order Fee Re-inspection Fee Mileage Fee Endeavor America Loan Services 05/18/2016 Page 20 of 191

21 Endeavor America s Credit Philosophy Endeavor America s credit philosophy is to offer loan programs with minimal overlays to our clients. EA evaluates each loan individually based solely on the Borrower(s) creditworthiness and in accordance with the following principles: All loans must be submitted to DU/LSC TOTAL Scorecard and receive an Approve rating with the exception of FHA Streamline Refinances. Some loans that receive DU/LSC Refer may be manually underwritten. Please refer to the Manual Underwriting section of this guide for details. All FHA policies as outlined in the HUD handbooks and subsequent, applicable Underwriter letters have been met. All requirements of the DU/LSC Approve/Eligible recommendation have been met for AUS approvals. All prudent factors have been weighed and evaluated on the loan file and no reasonable doubt remains about the Borrower s ability to meet the terms of the loan. Topic General Requirements Guidelines Maximum Age of Mortgage Documents General Document Age Documents used in the origination and underwriting of a Mortgage may not be more than 120 days old on the disbursement date. Documents whose validity for underwriting purposes is not affected by the passage of time, such as divorce decrees or tax returns, may be more than 120 days old at the time of disbursement. For purposes of counting days for periods provided in these guidelines, day one is the day after the effective or issue date of the document, whichever is later. Appraisal Validity Initial Appraisal Validity The 120 day validity period for an appraisal may be extended for 30 days at the option of the DE Underwriter if (1) the Underwriter approved the Borrower before the expiration of the original appraisal; or (2) the Borrower signed a valid Sales Contract prior to the expiration date of the appraisal. Appraisal Update An appraisal update must be performed before the initial appraisal, with no extension, has expired. Where the initial appraisal is subsequently updated, the updated appraisal is valid for a period of 240 days after the effective date of the initial appraisal report that is being updated. Endeavor America Loan Services 05/18/2016 Page 21 of 191

22 General Requirements Handling of Documents Underwriters must not accept or use documents relating to the employment, income, assets, or credit of Borrowers that have been handled by, or transmitted from or through the equipment of unknown parties, or interested parties. Underwriters may not accept or use any third-party verifications that have been handled by, or transmitted from or through any interested party, or the Borrower. Information Sent Electronically The Underwriter must authenticate all documents received electronically by examining the source identifiers (e.g., the fax banner header or the sender s address) or contacting the source of the document by telephone to verify the document s validity. The Underwriter must document the name and telephone number of the individual with whom they verified the validity of the document with. Information Obtained via Internet The Underwriter must authenticate documents obtained from an Internet website and examine portions of printouts downloaded from the Internet including the Uniform Resource Locator (URL) address, as well as the date and time the documents were printed. The Underwriter must visit the URL or the main website listed in the URL if the page is password protected to verify the website exists and print out evidence documenting the visit to the URL and website. Documentation obtained through the Internet must contain the same information as would be found in an original hard copy of the document. Signature Requirements for all Application Forms All Borrowers must sign and date the Initial and Final Fannie Mae Form 1003/Freddie Mac Form 65, Uniform Residential Loan Application (URLA). All Borrowers must sign and date page two of the Initial HUD A form, HUD/VA Addendum to Uniform Residential Loan Application (Application), and sign and date the complete Final HUD A form. The Application may not be signed by any party who will not be on the Mortgage Note. NOTE: Initial 1003 must be signed by the borrower(s) prior to underwrite. Endeavor America Loan Services 05/18/2016 Page 22 of 191

23 General Requirements Power of Attorney A Power of Attorney (POA) may not be used unless the Underwriter verifies and documents all of the following requirements have been satisfied: For military personnel, a POA may only be used for one of the Applications (Initial or Final), but not both: when the service member is on overseas duty or on an unaccompanied tour; when the Underwriter is unable to obtain the absent Borrower s signature on the Application by mail or via fax; and where the attorney-in-fact has specific authority to encumber the Property and to obligate the Borrower. Acceptable evidence includes a durable POA specifically designed to survive incapacity and avoid the need for court proceedings. For incapacitated Borrowers, a POA may only be used where: the Borrower is incapacitated and unable to sign the Mortgage Application; the incapacitated individual will occupy the Property to be insured, or the Property is being underwritten as an eligible Investment Property; and the attorney-in-fact has specific authority to encumber the Property and to obligate the Borrower. Acceptable evidence includes a durable POA specifically designed to survive incapacity and avoid the need for court proceedings. Policy on Use of Electronic Signatures Definition An electronic signature refers to any electronic sound, symbol, or process attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record. EA does not accept an electronic signature that is solely voice or audio. Digital signatures are a subset of electronic signatures. Use of Electronic Signatures An electronic signature conducted in accordance with the Electronic Signature Performance Standards (Performance Standards) is accepted on documents requiring signatures to be included in the Case Binder for Mortgage Insurance, unless otherwise prohibited by law. Electronic signatures meeting the Performance Standards are treated as equivalent to handwritten signatures. Third-Party Documents Third-party documents are those documents originated and signed outside of the control of EA, such as the Sales Contract. EA will accept electronic signatures on Third-party documents included in the Case Binder for mortgage insurance endorsement in accordance with the E-Sign Act and the Uniform Electronic Transactions Act (UETA). An indication of the electronic signature and date should be clearly visible when viewed electronically and in a paper copy of the electronically signed document. Endeavor America Loan Services 05/18/2016 Page 23 of 191

24 General Requirements Mortgage Application and Initial Supporting Documentation URLA and HUD/VA Addendum to URLA Unless otherwise noted, URLA and HUD/VA Addendum to the URLA refer to both Initial and Final Applications. The Underwriter must obtain the Borrower s Initial complete, signed URLA (Fannie Mae Form 1003/Freddie Mac Form 65) and page two of the HUD A form before underwriting the Mortgage Application. The Underwriter must also include the debt of a Non-Borrowing spouse on the URLA if the Borrower resides in or the Property to be purchased is located in a community property state. The Loan Originator identified on the URLA must be the actual licensed loan originator even if the Loan Originator is employed by a sponsored third-party originator (TPO). The URLA must contain the Loan Originator s name, Nationwide Mortgage Licensing System and Registry (NMLS) identification number, telephone number, and signature. Mortgage Application Name Requirements Standard All mortgage applications must be executed in the legal names of all Parties. All mortgage applications must be executed in the name of one or more individuals. Required Documentation The Underwriter must include a statement that it has verified the Borrower s identity using valid government-issued photo identification prior to endorsement of the Mortgage and may choose to include a copy of such photo identification as documentation. Borrower s Authorization for Verification Information Borrower s Authorization Standard The Underwriter must obtain the Borrower s authorization to verify the information needed to process the Mortgage Application. The Underwriter must obtain a Non-Borrowing Spouse s consent and authorization where necessary to verify specific information required to process the Mortgage Application, including the Non-Borrowing Spouse s consent to verify their SSN with the Social Security Administration (SSA). Required Documentation For each individual, Borrower authorization may be accomplished through a blanket authorization form. Endeavor America Loan Services 05/18/2016 Page 24 of 191

25 General Requirements HUD Form A Part IV: Borrower Consent for Social Security Number Verification The Underwriter must obtain the Borrower s signature on Part IV of form HUD A to verify the Borrower s SSN with the Social Security Administration (SSA). Tax Verification Form or Equivalent The Underwriter must obtain the Borrower s signature on the appropriate Internal Revenue Service (IRS) form to obtain tax returns directly from the IRS for all credit-qualifying Mortgages at the time the Final URLA is executed. Sales Contract and Supporting Documentation Standard The Underwriter must ensure that (1) all purchasers listed on the Sales Contract are Borrowers and (2) Only Borrowers sign the Sales Contract. A family member of a purchaser, who is not a Borrower, may be listed on the sales contract without modifications or removal. An addendum or modification may be used to remove or correct any provisions of the Sales Contract that do not conform to these requirements. Amendatory Clause If the Borrower does not receive the HUD B form, Conditional Commitment Direct Endorsement Statement of Appraised Value, before signing the sales contract, the sales contract must be amended before closing to include an amendatory clause that contains the following language: It is expressly agreed that notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise, unless the purchaser has been given, in accordance with HUD/FHA or VA requirements, a written statement by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement Underwriter setting forth the appraised value of the property of not less than $.* The purchaser shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation. The appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or condition of the property. The purchaser should satisfy himself/herself that the price and condition of the property are acceptable. *The Underwriter must ensure the actual dollar amount of the Sales Price stated in the Contract has been inserted in the Amendatory Clause. Increases to the Sales Price require a revised Amendatory Clause. Endeavor America Loan Services 05/18/2016 Page 25 of 191

26 General Requirements Amendatory Clause The Amendatory Clause is not required in connection with: HUD REO sales; FHA s 203(k) mortgage program; sales in which the seller is: Fannie Mae; Freddie Mac; U.S. Department of Veterans Affairs (VA); United States Department of Agriculture (USDA) Rural Housing Services; other federal, state, and local government agencies; a Underwriter disposing of REO assets; or a Seller at a foreclosure sale; Real Estate Certification The Borrower, Seller, and the Real Estate Agent or Broker involved in the sales transaction must certify, to the best of their knowledge and belief, that (1) the terms and conditions of the Sales Contract are true and (2) any other agreement entered into by any Parties in connection with the real estate transaction is part of, or attached to, the Sales Agreement. A separate certification is not needed if the Sales Contract contains a statement that (1) there are no other agreements between Parties and the terms constitute the entire agreement between the Parties, and (2) all Parties are signatories to the Sales Contract submitted at the time of underwriting. Required Disclosures The Lender must provide or ensure the Borrower is provided with any disclosure required by FHA, including the following disclosures: Informed Consumer Choice Disclosure The lender must provide the Borrower with an Informed Consumer Choice Disclosure in accordance with the requirements of 24 CFR if the Borrower may qualify for similar non FHA-insured mortgage products offered by the Underwriter. Form HUD B, Important Notice to Homebuyers The Lender must provide the Borrower with a copy of form HUD B, Important Notice to Homebuyers, signed by the Borrower and provide the Borrower with a copy to keep for the Borrower s records when the Borrower applies for the mortgage. The Underwriter must retain the original form HUD92900-B signed by the Borrower. Endeavor America Loan Services 05/18/2016 Page 26 of 191

27 General Requirements Lead-Based Paint If the property was built before 1978, the seller must disclose any information known about lead-based paint and lead-based paint hazards before selling the house, in accordance with the HUD-EPA Lead Disclosure Rule (24 CFR 35, subpart A, and the identical 40 CFR 745, subpart F). For such properties, the Underwriter must ensure that: the Borrower has been provided the EPA-approved information pamphlet on identifying and controlling lead-based paint hazards ( Protect Your Family From Lead In Your Home ); the Borrower was given a 10-Day period before becoming obligated to purchase the home to conduct a lead-based paint inspection or risk assessment to determine the presence of lead-based paint or lead-based paint hazards, or waived the opportunity; the sales contract contains an attachment in the language of the contract (e.g., English, Spanish), signed and dated by both the seller and purchaser: containing a lead warning statement as set forth in 24 CFR 35.92(a)(1). providing the seller s disclosure of the presence of any known lead-based paint and/or lead-based paint hazards in the target housing being sold, or indication of no knowledge of such presence; listing any records or reports available to the seller pertaining to lead-based paint and/or lead-based paint hazards in property housing being sold, or indication by the seller that no such records or reports exist; and affirming that the Borrower received the pamphlet, disclosure, and records or reports, above; and when any Agent is involved in the transaction on behalf of the seller, the sales contract includes a statement that the agent has informed the seller of the seller s Lead Disclosure Rule obligations, the Agent is aware of his/her duty to ensure compliance with the requirements of the Rule, and the agent has signed and dated the contract. Form HUD CN, For Your Protection: Get a Home Inspection Lenders are required to provide Form HUD CN, For Your Protection: Get a Home Inspection, to prospective homebuyers at first contact, be it for pre-qualification, pre-approval, or initial application. Endeavor America Loan Services 05/18/2016 Page 27 of 191

28 General Requirements Statement of Appraised Value The Borrower must receive a copy of Form HUD B. A statement of appraised value is not required in connection with: HUD REO sales; FHA s 203(k) mortgage program; Sales in which the seller is: Fannie Mae; Freddie Mac; VA; USDA Rural Housing Services; Other federal, state, and local government agencies; A Lender disposing of REO assets; or A seller at a foreclosure sale. Program Eligibility Purchase The Borrower may finance the purchase of an existing one to four-unit residence. Properties to be acquired through an unrecorded land contract must be treated as a purchase. Refinance A refinance transaction is used to pay off the existing debt or to withdraw equity from the Property with the proceeds of a new mortgage for a Borrower with legal title to the subject property. Types of Refinances 1. Non-Cash-Out Refinances of FHA-insured and non-fha-insured Mortgages are designed to pay existing liens. These include: Rate and Term and Streamline Refinances. 2. Cash-Out Refinances are designed to pull equity out of the Property. 3. Refinances of non FHA-insured Mortgages are available for qualified Borrowers in negative equity positions (referred to as a Short Refinance). 4. Refinances for rehabilitation or repair Section 203(k). 5. Simple Refinances. Endeavor America Loan Services 05/18/2016 Page 28 of 191

29 General Requirements Rehabilitation Loans (Purchases and Refinances) 203(k) Standard and Streamlined Rehabilitation Mortgages The Section 203(k) Rehabilitation is used to: Rehabilitate an existing one to four-unit structure, which will be used primarily for residential purposes; Rehabilitate such a structure and refinance the outstanding indebtedness on the structure and the Real Property on which the structure is located; or Purchase and rehabilitate the structure and purchase the Real Property on which the structure is located. Borrower Eligibility General Eligibility Requirements In order to obtain FHA financing with EA, all borrowers must meet the eligibility criteria in this section. A Party who has a financial interest in the mortgage transaction, such as the Seller, Builder or Real Estate Agent, may not be a Co- Borrower or a Co-Signer. Exceptions may be granted when the Party with the financial interest is a family member. Social Security Number Each Borrower must provide evidence of their valid SSN. The Underwriter must: validate and document an SSN for each Borrower, Co-Borrower (or Co-Signer) on the Mortgage by: entering the Borrower s name, date of birth, and SSN in the Borrower/address validation screen through FHAC; and examining the Borrower s original pay stubs, W-2 forms, valid tax returns obtained directly from the IRS, or other document relied upon to underwrite the Mortgage; and Resolve any inconsistencies or multiple SSNs for individual Borrowers that are revealed during Mortgage processing and underwriting using a service provider to verify the SSN with the SSA. Borrower Age Limits The Borrower must be old enough to enter into a Mortgage Note that can be legally enforced in the state, or other jurisdiction, where the Property is located ( State Law ). There is no maximum age limit for a Borrower. Endeavor America Loan Services 05/18/2016 Page 29 of 191

30 General Requirements Borrower Minimum Decision Credit Score The Minimum Decision Credit Score (MDCS) refers to the credit score reported on the Borrower s credit report when all reported scores are the same; where three differing scores are reported, the middle score is the MDCS; where two differing scores are reported, the MDCS is the lowest score; where only one score is reported, that score is the MDCS. An MDCS is determined for each Borrower. Where the Mortgage involves multiple Borrowers, the Underwriter must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers. Where the Mortgage involves multiple Borrowers and one or more of the Borrowers do not have a credit score (non-traditional or insufficient credit), the Underwriter must select the lowest MDCS of the Borrower with credit score(s). Borrower and Co-Borrower Ownership and Obligation Requirements Co-Borrowers Co-Borrowers will have/already have, ownership rights, are obligated, and must sign the Note and all security instruments. Co-Borrowers must still meet FHA basic eligibility requirements, regardless of occupancy. Co-Borrowers may not have a financial interest in the transaction such as Seller, Builder, Realtor, etc. Refer to Identity-of-Interest section of this guide for additional requirements. Co-Borrowers must have a Principal Residence in the U.S. unless due to either: Military service with overseas assignment as verified with a Certificate of Veteran Status/VA Form ; or U.S. citizen living abroad. Borrowers / Co-Borrowers with <620 FICO may not own another property. Endeavor America Loan Services 05/18/2016 Page 30 of 191

31 General Requirements Non-Occupant Co-Borrower Additional requirements apply when the Co-Borrower does not/will not reside in the subject property. Maximum financing is permitted only for a1-unit residence if: o Borrowers are qualifying family members (see identity of interest section for full list) o Parents helping children buy their first home are permitted as long as non-occupant Co-Borrower is not developing a portfolio of rental properties. The Underwriter must carefully review the financial contribution by non-occupant Co- Borrower and the number of real estate owned. Non-Occupying co-borrowers may not be added in a Cash-Out Refinance. Non-occupying Co-Borrower s primary housing expense must be included in combined qualifying ratios. o EA requires consecutive, canceled rent checks for the most recent 12 months if the Co-Borrower rents from a private landlord. o EA does not accept a non-occupying Co-Borrower who has no housing history (living rent-free) Occupant Borrower(s), with insufficient/non-traditional credit, must meet FHA standard guidelines. Such cases are manually underwritten. Income from a non-occupant co borrower may not be used to qualify for a cash out mortgage. Principal Residence in the United States Non-occupying Co-Borrowers must either be a United States citizen or have a principle residence in the U.S. Military Personnel Eligibility Borrowers who are military personnel, who cannot physically reside in the Property because they are on Active Duty, are still considered owner occupants and are eligible for maximum financing if a family member of the Borrower will occupy the Subject Property as their Principal Residence, or the Borrower intends to occupy the Subject Property upon discharge from military service. The following additional guidance applies to owner occupancy for Military personnel: The Borrower intends to occupy the Subject Property upon discharge from military service. Underwriter must: 1) Obtain copy of the Borrower s military orders evidencing the Borrower s Active Duty status. 2) Document that the Borrower s duty station is more than 100 miles from Subject Property; and 3) Obtain the Borrower s intent to occupy the Subject Property upon discharge from military service, if a family member will not occupy the Subject Property as their Principal Residence. FHA Single Family Housing Policy II.b.ii.7.a-b Endeavor America Loan Services 05/18/2016 Page 31 of 191

32 General Requirements Citizenship and Immigration Status U.S. citizenship is not required for Mortgage eligibility. Residency Requirements The DE Underwriter must determine the residency status of the Borrower based on information provided on the Mortgage Application and other applicable documentation. In no case is a Social Security card sufficient to prove immigration or work status. Lawful Permanent Resident Aliens A Borrower with lawful permanent resident alien status may be eligible for FHA financing with EA provided the Borrower satisfies the same requirements, terms, and conditions as those for U.S. Citizens. Each loan must include evidence of the permanent residency and indicate the Borrower is a lawful permanent resident alien on the URLA. The U.S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security provides evidence of lawful, permanent residency status. Permanent Resident Aliens Borrower eligibility for permanent resident aliens are the same as with U.S. citizens. Evidence lawful, permanent residence provided by U.S. Citizenship and Immigration Services (USCIS). Non-Permanent Resident Aliens Non-permanent resident aliens are considered eligible Borrowers provided all of the following are met: Property will be the Borrower s Principal Residence. Borrower has a valid SSN (social security card cannot be used as evidence of work status). Borrower is eligible to work in the U.S., as evidenced by an unexpired Employment Authorization Document (EAD) issued by USCIS. o EAD will expire within one (1) year, /then document prior history of renewals as acceptable evidence of continued/ residency status. o EAD is not required with documentation from USCIS that the Borrower has refugee or asylum status. Non-U.S. citizens who do not have lawful residency in the U.S. are not eligible for FHA financing. Endeavor America Loan Services 05/18/2016 Page 32 of 191

33 General Requirements Non-Permanent Resident Aliens (continued) The Employment Authorization Document is required to substantiate work status. If the Employment Authorization Document will expire within one year and a prior history of residency status renewals exists, the DE Underwriter may assume that continuation will be granted. If there are no prior renewals, the DE Underwriter must determine the likelihood of renewal based on information from the USCIS. Non-U.S. Citizens without Lawful Residency Non-U.S. citizens without lawful residency in the U.S. are not eligible. Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt DE Underwriters are prohibited from approving an Application for an FHA loan for Borrowers with delinquent federal non-tax debt, including deficiencies and other debt associated with past FHA-insured Mortgages. The DE Underwriter is required to determine if the Borrower has delinquent federal non-tax debt. DE Underwriters may obtain information on delinquent federal debts from public records, credit reports or equivalent, and must check all Borrowers against the Credit Alert Verification Reporting System (CAIVRS). Verification of Delinquent Federal Non-Tax Debt If a delinquent federal debt is reflected in a public record, credit report or equivalent, or CAIVRS or an Equivalent System, the DE Underwriter must verify the validity and delinquency status of the debt. If the debt was identified through CAIVRS, the Creditor agency using the contact phone number and debt reference number reflected in the Borrower s CAIVRS report must be contacted to verify the debt. If the Creditor confirms the debt is valid and in delinquent status, then the Borrower is ineligible for an FHA-insured Mortgage until the Borrower resolves the debt with the Creditor. The DE Underwriter may not deny a Mortgage solely on the basis of CAIVRS information that has not been verified by contacting the Creditor. If resolved either by determining that the information in CAIVRS is no longer valid or by resolving the delinquent status as stated above, the DE Underwriter may continue with the Mortgage Application. Eligibility Period for Borrowers Delinquent on FHA-Insured Mortgages If a Borrower is currently delinquent on an FHA-insured Mortgage, they are ineligible for a new FHA-insured Mortgage unless the delinquency is resolved. Endeavor America Loan Services 05/18/2016 Page 33 of 191

34 General Requirements Excluded Parties Borrowers The DE Underwriter must establish that no participants are Excluded Parties and document the determination on Form HUD LT, FHA Loan Underwriting and Transmittal Summary. A Borrower is not eligible to participate in FHA-insured Mortgage transactions if they are suspended, debarred, or otherwise excluded from participating in HUD programs. The DE Underwriter must check the HUD Limited Denial of Participation (LDP) list to confirm the Borrower s eligibility to participate in an FHA-insured Mortgage transaction. The DE Underwriter must check System for Award Management (SAM) and follow appropriate procedures defined by that system to confirm eligibility for participation. The DE Underwriter must check the Yes box on Form HUD LT if the Borrower appears on either the LDP or SAM list. Other Parties to the Transaction Mortgage is not eligible for FHA insurance if anyone participating in the Mortgage transaction is listed on HUD s LDP list or in SAM as being excluded from participation in HUD transactions. This may include, but is not limited to: Seller (except where selling the Principal Residence) Listing and selling Real Estate Agent Loan Originator Loan Processor Underwriter Appraiser 203(k) Consultant The DE Underwriter must check the HUD LDP list and SAM and follow appropriate procedures defined by that system to confirm eligibility for all participants involved in the transaction. Endeavor America Loan Services 05/18/2016 Page 34 of 191

35 Occupancy Types Principal Residence A Principal Residence refers to a dwelling where the Borrower maintains or will maintain their permanent place of abode, and which the Borrower typically occupies or will occupy for the majority of the calendar year. A person may have only one Principal Residence at any one time. At least one Borrower must occupy the property within 60 days of signing the Security Instrument and intend to continue occupancy for at least one year. FHA-Insured Mortgages on Principal Residences FHA will not insure more than one Property as a Principal Residence for any Borrower, except as noted below. EA will not allow FHA financing as a vehicle for obtaining Investment Properties, even if the Property to be insured will be the only one owned using FHA Mortgage Insurance. Properties previously acquired as Investment Properties are not subject to these restrictions. Endeavor America Loan Services 05/18/2016 Page 35 of 191

36 Occupancy Types Exceptions to the FHA Policy Limiting the Number of Mortgages per Borrower The table below describes the only circumstances in which a Borrower with an existing FHA-insured Mortgage for a Principal Residence may obtain an additional FHA-insured Mortgage on a new Principal Residence. Policy Exceptions Eligibility Requirements Relocation A Borrower may be eligible to obtain another FHA-insured Mortgage without being required to sell an existing Property covered by an FHA-insured Mortgage if the Borrower is: Relocating or has relocated for an employment-related reason; and Establishing or established a new Principal Residence in an area more than 100 miles from the Borrower s current Principal Residence. If the Borrower moves back to the original area, the Borrower is not required to live in the original house and may obtain a new FHA-insured Mortgage on a new Principal Residence, provided the relocation meets the two requirements above. Vacating a jointly-owned Property A Borrower may be eligible for another FHA-insured Mortgage if the Borrower is vacating (with no intent to return) the Principal Residence which will remain occupied by an existing Co-Borrower. Non-occupying Co-Borrower A non-occupying Co-Borrower on an existing FHA-insured Mortgage may qualify for an FHA-insured Mortgage on a new Property to be their Principal Residence. Increase in family size A Borrower may be eligible for another house with an FHAinsured Mortgage if the Borrower provides satisfactory evidence that: The Borrower has had an increase in legal dependents and the Property now fails to meet the family s needs; and The loan-to-value (LTV) ratio on the current Principal Residence is equal to or lesser than 75% or is paid down to that amount, based on the outstanding Mortgage balance and the current residential appraisal. Endeavor America Loan Services 05/18/2016 Page 36 of 191

37 Occupancy Types The Borrower must indicate on the URLA (Fannie Mae 1003/ Freddie Mac 65) the Property will be the Borrower s Primary Residence and certify to that fact on HUD form A, HUD/VA addendum to URLA. FHA 7-Unit Limitation HUD prohibits FHA financing on a property that may be rented and is part of, adjacent to, or contiguous to property, subdivision, or group of properties that the Borrower has/will have a financial interest in which total more than seven (7) dwellings units (regardless of financing type) within a two block radius. A map must be provided identifying the properties owned by the Borrower. The limitation counts detached/attached properties as well as each dwelling unit in a multi-unit owned by the Borrower, including the rental units in an owner-occupied multi-unit. Second Homes Second homes are not eligible for financing with Endeavor America. Investment Property Investment Properties are not eligible for financing with Endeavor America unless done as a non-credit qualifying Streamline Refinance. Property Eligibility and Acceptability Criteria The Property must be located within the U.S. Special Flood Hazard Areas The DE Underwriter must determine if the Property is located in a Special Flood Hazard Area (SFHA) as designated by the Federal Emergency Management Agency (FEMA). The DE Underwriter must obtain flood zone determination services, independent of any assessment made by the Appraiser to cover the Life of the Loan Flood Certification. A Property is not eligible for FHA insurance if: a residential building and related improvements to the Property are located within SFHA Zone A, a Special Flood Zone Area, or Zone V, a Coastal Area, and insurance under the National Flood Insurance Program (NFIP) is not available in the community; or the improvements are, or are proposed to be, located within a Coastal Barrier Resource System (CBRS) Note: see specific sections on required documentation and coverage for manufactured, and new construction. Endeavor America Loan Services 05/18/2016 Page 37 of 191

38 Occupancy Types Appraisal Seller Must Be Owner of Record To be eligible for an FHA insured Mortgage, a Property must be purchased from the Owner of Record. The transaction may not involve any sale or assignment of the Sales Contract. The Underwriter must obtain documentation verifying that the Seller is the Owner of Record. Such documentation may include, but is not limited to: a Property sales history report; a copy of the recorded Mortgage Deed from the Seller; or other documentation, such as a copy of the Property tax bill, Title Commitment, or binder, demonstrating the Seller s ownership of the Property and the date it was acquired. General Information For Purchase transactions, the Borrower must acknowledge in writing of his/her/their intent to proceed when the purchase price exceeds the appraised value. HUD/FHA and EA require the Subject Property and FHA appraisal comply with all applicable requirements in the Appraiser and Property Requirements for Title II Forward and Reverse Mortgage section published in the FHA Single Family Housing Policy Handbook (HUD ). The latest published version, its glossary, acronyms, and SF Handbook FAQs may be accessed through the HUD Housing Handbook website. FHA appraisals must be reported in accordance with Acceptable Appraisal Reporting Forms and Protocols. HUD s required Property Acceptability Criteria includes FHA s MPR and MPS and provide the requirements for Appraisers to establish a credible appraised value for a Subject Property. This criteria applies to both existing and new construction for 1-4 units residential properties, individual condominium units, manufactured housing units, and related improvements, and site considerations. EA will review the appraisal for accuracy and completeness and will also: Determine whether Subject Property meets HUD s Property Acceptability Criteria including HUD s MPR/MPS, and may require inspections, certifications, or repairs by appropriate qualified professionals to demonstrate compliance with this criteria. Evaluate if the appraisal complies with requirements in HUD s Valuation and Reporting Protocols, and any additional appraisal requirements specific to the Subject Property. Determine if the appraisal provides a credible analysis of the Subject s marketability and value. Determine if Property s market value is sufficiently supported and the Property will serve as adequate collateral for the FHA loan. Reference: HUD ; FHA Appraisal Report and Data Delivery Guide Endeavor America Loan Services 05/18/2016 Page 38 of 191

39 Appraisal Appraisal Order Documents Prior to beginning the appraisal, the Appraiser must be provided all of the following with the appraisal order: For a Purchase, a complete copy of the fully executed Sales Contract for the Subject; and Surveys or legal descriptions, if available; and Any other legal documents contained in the loan file. Appraisal Form Requirements Must be UAD compliant All FHA appraisals must also be prepared in accordance to the most recently published FHA Single Family Housing Appraisal Report and Data Delivery Guide. This new HUD reference provides instructions detailing specific requirements for reporting the results of the appraisal, including the data and file format and delivery. This resource may be accessed through HUD s Single Family Housing Handbook References. Form 1004 is for 1-unit single family Property and the appraisal report must include: o Interior photos of the Kitchen Examples of physical All bathrooms deterioration, if present Main living area Examples of recent updates such as restoration, remodeling and renovation, if present Clear, original photos of the front and rear at opposite angles to show all sides of the Subject and Subject s street views. Additional photos are required for any improvement/site feature with contributory market value that are not clearly seen in the Subject front and rear photos. Comparable photos must include the front view of each comparable. Multiple Listing Service (MLS) photos can be used to supplement the Appraiser s photos to evidence the comparable condition at the time of sale. Appraiser to comment if MLS photos are used (e.g. gated community). Endeavor America Loan Services 05/18/2016 Page 39 of 191

40 Appraisal Appraisal Form Requirements (Cont.) Additional interior photos must also include: all bedrooms; basement, attic, crawl space, and any other rooms representing overall condition. Subject photos of any deficiency or condition requiring inspection or repair. Street scene photo should include a portion of the subject site. Comparable photos should be taken at an angle to show the front and side when possible. Photo of the subject s superior view when an adjustment is made for view amenity Reference: HUD ; FHA Appraisal Report and Data Delivery Guide Form 1004C for 1-unit Manufactured Housing Form 1073 is required for condominiums including site condos. Form 1025 is required on 2-4 unit properties. 1004MC Market Conditions Addendum is required on all appraisal reports. Cost approach is required for new construction, manufactured homes, unique properties, and if requested by the Underwriter. FNMA Form 1007 and FHLMC Form 998 are required as additional appraisal exhibits when qualifying with rental income for a 1-unit property. These exhibits verify and document the proposed rental income showing the fair market rent, and if available, the prospective lease. FNMA Form 1004D: Summary Appraisal Update Report (top portion of the form) may be used only once to extend the appraisal validity if completed by the original Appraiser before the original appraisal has expired (within 120 days of the original appraisal report s effective date). o The original Appraiser must: still be in good standing on the FHA Appraiser Roster; and adhere to the Scope of Work and Appraiser s Certification on the form which includes an exterior inspection of the subject property, at least from the street if the improvements can be observed; and provide a photo of the front of the subject property taken from the public street; and determine that the property has not declined in value since the effective date of the appraisal report being updated based on his/her research, analysis and verification of the current market data. o 1004D may not be used if any of the following apply: The Property has declined in value. Building improvements that contribute to value to the Property cannot be observed from the street or a public way. Exterior Property inspection reveals deficiencies or other significant changes that did not exist as of the original appraisal s effective date. Endeavor America Loan Services 05/18/2016 Page 40 of 191

41 Appraisal Appraisal Form Requirements (Cont.) Certification of Completion, Part B (bottom portion of the form) o Part B of 1004D may be used for an existing Property to report completion of a repair and/or the satisfaction of requirements and conditions noted in the original appraisal report. o It may be completed by the original Appraiser or another FHA Appraiser currently in good standing on the FHA Appraiser Roster HUD Form / Compliance Inspection Report ( CIR ) This form must be used for New Construction or Manufactured Housing HUD removed the requirement for DE to countersign the CIR form. HUD Form B / Conditional Commitment must be completed by the DE Underwriter where a Statement of Appraised Value is required. A copy is delivered to the Borrower(s). A Statement of Value is not required in connection with: o REO sales or FHA 203(k) loans or sales in which the Borrower will not be an owner-occupant (e.g. nonprofit agencies); o Sales in which the Seller is: Fannie Mae Other federal, state, or local government agencies Freddie Mac A Underwriter disposing of REO assets VA A Seller at a foreclosure sale USDA Rural Housing Services Reference HUD II.A.1.a.i(E)(2); II.A.3.c. The following additional guidance applies to cost approach: The Appraiser must utilize all appropriate approaches when applicable. The Sales Comparison Approach is required for all appraisals. Reference: HUD II.B.4.c(E) The new Appraisal Reporting Requirements emphasize some of the Appraiser s reporting protocol and analysis. Endeavor America Loan Services 05/18/2016 Page 41 of 191

42 Appraisal Appraisal Reporting Requirements The Appraiser must report as instructed in the HUD so EA may determine whether the Subject Property complies with FHA s MPR/MPS. The Appraiser must immediately communicate with EA s designated FHA appraisal point of contact any MPR/MPS noncompliance that cannot be resolved and makes the Property ineligible (e.g. Subject located within the special airport hazard for new construction) As part of the highest and best use analysis ( HABU ) analysis of the Subject Property, the Appraiser must determine whether the Property s current use complies with the zoning ordinances as well as whether it is legal or legal non-conforming use. For legal non-conforming (e.g. use, lot size, improvement size, off-street parking, etc.), the Appraiser must provide a brief explanation and state whether the Property may be legally rebuilt if destroyed with verification source. The rebuilt verification will ensure the Collateral continues to support the FHA loan. The Appraiser must report and analyze the prior sales/transfers history of the Subject Property and each comparable that occurred within three (3) years of the appraisal effective date. Any prior transfer regardless of conveyance type or consideration amount must be reported. The Appraiser must describe the difference between recent transfers versus the current sale or offering and the effect on the appraisal. He/she must evaluate the relevancy of prior transfers to the current sale or offering of the Subject or comparable. The Appraiser must provide an analysis of the prior sale or transfer history. Simply reporting a transaction is not sufficient analysis or explanation. Appraiser must note presence of any easements and Deed restrictions and analyze the effect these legal restrictions have on the Subject s use, value and marketability. Appraiser must also review recorded subdivision plats, if available. Appraiser must report any encroachment of the Subject dwelling, garage, or other improvements onto an adjacent property, right-of-way, utility easement, or building restriction line. Encroachments of a neighboring dwelling, garage, other structure or improvement onto the Subject property must also be noted by the Appraiser. Endeavor America Loan Services 05/18/2016 Page 42 of 191

43 Appraisal Appraisal Reporting Requirements (continued) Identify and consider how externalities will affect the Subject s marketability by reporting the issue and market reaction, as well as to address any positive or negative effects on Subject s value within the approaches to value. Storage Tanks o Subject Property has an ineligible site if its property line is within 300 feet distance of a stationary storage tank (aboveground or subsurface) with 1,000+ gallons capacity of flammable or explosive material regardless if domestic or commercial use including automotive service station tanks. High Voltage Transmission Lines o Property eligibility is based on whether the Dwelling Structure or related property improvement is located within the utility easement. The power line must be relocated for the Property eligibility if: Any overhead electric power transmission line that pass directly over any Dwelling Structure or related property improvements including pools; or Any local distribution line may not pass directly over any pools, spas, or water features. o A certification must be obtained from the appropriate utility company or local regulatory agency stating the relationship between the improvements and the local distribution lines conform to the local standards and is safe. If the Dwelling or related Property improvements are located within an easement area; or if Dwelling/related improvements appear to be located within an unsafe distance of any power line or tower, Methamphetamine contaminated properties have potentially significant environmental risk due to the use/storage of dangerous chemicals on the Property. o Any party related to the transaction (Mortgage Broker, Seller, Realtors, Buyers) must inform the Underwriter and the Appraiser if the Property is contaminated by the presence of methamphetamine (meth), either by its manufacture or consumption. o Appraiser must render the appraisal subject to the Property being certified safe for habitation by licensed, qualified professional/entity. o Appraiser must also analyze and report any long-term stigma caused by the Property s meth contamination and the impact to marketability. Appraiser is required to inspect the Subject s attic, basement and/or crawl space. He/she must provide photos and address all visible deficiencies. Appraiser is required to observe the interiors of all attic spaces (not just head and shoulders ). If unable to view improvements safely in their entirety, the appraisal will be made subject to inspection by the Appraiser or a licensed, qualified professional. Endeavor America Loan Services 05/18/2016 Page 43 of 191

44 Appraisal Appraisal Reporting Requirements (continued) Appraiser is required to observe all areas of the crawl space. o Appraiser must notify the Underwriter of a MPR/MPS deficiency when the crawl space does not comply with any of the following: Floor joists must be sufficiently above ground level to provide access for maintenance and repair of ductwork and plumbing; 18 inches minimum vertical clearance between grade and the bottom of the floor joists if crawl space contains any system components; Crawl space must be properly vented unless the area is mechanically conditioned; Crawl space must be free of debris, trash and vermin; Crawl space must not be excessively damp and may not have water pooling. o Appraiser must report any evidence that may indicate a structural support issue; deficiency evidence (water stained subflooring, smell of mold). o Appraiser should report if the crawl space is an intentional void (historic houses) with no mechanical systems and no intention or reason for access. The utilities should be turned on at the time of appraisal inspection. If utilities not turned on, satisfactory re-inspection; and state utilities was off at time of appraisal and include extraordinary assumption that mechanical equipment does not require alteration, repair or further inspection once the utilities are restored. HUD/FHA considers built-in appliances as Real Property. The Appraiser must indicate which appliances are considered Personal Property or Real Property. He/she must operate and observe the performance of all conveyed appliances. Any inoperable conveyed appliance is considered a MPR/MPS deficiency. A legible location map must be included in the appraisal report that shows the location of the Subject and each comparable including sales, listings and rentals, and other data points utilized. Additional legible maps must be provided if there exists substantial distance between the Subject and comparables. The building sketch must include show the GLA calculations, all exterior dimensions of the house, patios, porches, decks, garages, breezeways, and any other attachments or out buildings with contributing value. Covered or uncovered must be indicated in the sketch for patio, decks, etc. An interior sketch or floor plan is also required for a Property exhibiting the functional obsolescence attributable to the floor plan design. Describe any physical deterioration and/or functional or external depreciation noted in or on the Property. Provide a conclusion as to the overall condition of the improvements that is supported by the previous descriptive sections. For roofs covered with snow, the Appraiser must explain why the roof is unobservable and report results of assessment of the undersides of the roof, the attic and the ceilings. Reference: HUD II.B.3; II.B.4 Endeavor America Loan Services 05/18/2016 Page 44 of 191

45 Appraisal Acreage Property sites larger than what is typical in its neighborhood, or multiple lots/parcels may be considered as excess land or Surplus Land by HUD/FHA. Excess land refers to land that is not needed to serve or support the existing Property improvements. o Excess land may have the potential to be sold separately. If the Subject of an appraisal contains two (2) or more legally conforming platted lots under one legal description and ownership, and the second vacant lot is capable of being divided and/or developed as a separate parcel where such a division will not result in a non-conformity in zoning regulations for the remaining improved lot, the second vacant lot is excess land. o The Appraiser must include the HABU analysis in the appraisal report to support his/her conclusion of the existence of excess land. Note: The HABU of the excess land may or may not be the same as the HABU of the improved parcel. o The Appraiser must provide a value of only the Principal site and improvements under a hypothetical condition. The value of the second vacant lot must be excluded from the final value conclusion of the appraisal. The Appraiser must include all comparable land sale data and analysis in the appraisal report. Surplus land refers to land that is not currently needed to support the existing improvement. o Surplus land cannot be separated from the Property and sold off. o Surplus land does not have an independent HABU, and may or may not contribute to the value of the improved parcels. o The Appraiser must include surplus land in the in Property valuation. SFH maximum acreage limits may not exceed 30 acres Manufactured homes with excess land to value ratios will be reviewed as follows: Single wide manufactured max land to value ratio may not exceed 30% Double and triple wide manufactured max land to value ratio may not exceed 50% Reference: HUD II.B.3.c.vi; II.B.4.c.(E)(1)(a)(ii) Endeavor America Loan Services 05/18/2016 Page 45 of 191

46 Appraisal Accessory Dwelling (ADU) ADU definition clarified to refer to a subordinate habitable living unit, added to, created within, or detached from a Primary 1- Unit Single Family Dwelling, which has a separate kitchen, sleeping, and bathroom facilities. ADUs are typically subordinate in size, location and appearance to the Primary Dwelling. ADU utilities may or may not be separately metered and it may or may not have a separate ingress or egress. The Appraiser determines whether to classify the Subject as Single Family with an ADU or a 2-unit Property as part of the highest and best use analysis (HABU) as improved, in relation to the neighborhood and the current market conditions. The Appraiser analyzes and reports if the ADU is complies with the local zoning ordinances and is permissible as legal or legal non-conforming (grandfathered use) noting the source(s) of this verification. The Appraiser must analyze and report if the ADU has any contributory value; however, the Appraiser must not include the ADU living area in the Primary Dwelling GLA calculation The Appraiser should provide comparables with ADUs to demonstrate market acceptance. If there are multiple ADUs, the Property condition is not eligible for FHA financing. Reference: HUD II.B.3.c.vii(E) Age-Restricted Properties (55+ Senior Communities) For age-restricted properties, such as 55+ senior communities, the following must be met: The appraisal must reflect the impact that the restrictions have on the Property s value and marketability. The appraisal must be supported by comparables with similar restrictions. Borrower(s) must acknowledge the restriction terms by signing a Resale Restriction Notice at Closing. Endeavor America Loan Services 05/18/2016 Page 46 of 191

47 Appraisal Condominiums EA accepts Condominiums located in HRAP and DELRAP approved projects. Case Assignment must include the HUD issued Condo Project ID Number. Search FHA-approved Condominiums here. The EA FHA Condo Questionnaire must be completed for Purchases, Rate/Term Refinance, Cash-Out Refinances, and Simple Refinances. The Underwriter must complete and sign the Certification for Individual Unit Financing for attached Condominiums, except for Streamline Refinances. For New Construction, the Builder/Developer must also complete the Pre-Sale Certification. For site Condominiums, full project approval is required unless all of the following requirements are met: All units are Single Family detached Dwellings (no shared garages or any other attached buildings such as archways, breezeways; Encumbered by a declaration of condominium covenants or condominium form of ownership; The Condominium unit consists of the entire Structure, as well as the site and air space, and is not considered to be common areas or limited common areas; Insurance and maintenance costs are totally the responsibility of the unit owner; Any common assessments collected will be for amenities outside of the footprint of the individual site. For Condominiums, additional photos of the Project s common areas and shared amenities are required. Reference: HUD II.B.4 Reference: HUD s FHA Condominium Mortgage Insurance website for more information regarding condominium projects. Declining Market Generally, a housing market is identified as declining if the trend extended for a period of at least six (6) months prior to the appraisal effective date. The Appraiser must provide a summary comment as to whether the current trend will continue or if the trend appears to be changing. The Appraiser must also support for all conclusions including any published sources referenced HUD references have been superseded in whole with : ML ; 08-40; 07-11; 05-06; 05-02; Section 2; FNMA Ann ; e Reference: HUD II.B.4.c.iii(F); Transmittals Endeavor America Loan Services 05/18/2016 Page 47 of 191

48 Appraisal Mixed Use Mixed use may include a combination of the following uses: residential, commercial, retail or parking space. The non-residential use(s) may not affect the health and safety of the occupants and may not impair the Subject s residential character or marketability. Non-residential use(s): must be 49% of the entire building square footage; and must be legally permitted and conform to current zoning requirements; and must be subordinate to its residential use, character and appearance; and must not be an actively listed under the Ineligible Properties section. Non-residential portion calculation must include the storage areas or similar spaces that are integral parts of the non-residential use(s). The Subject value may not include the business valuation, personal property, or business fixtures. Reference: HUD II.A.1.b.iv(B); II.B.3.c.ii(B) Endeavor America Loan Services 05/18/2016 Page 48 of 191

49 Appraisal Minimum Property Requirements (MPRs) The Appraiser provides preliminary verification that a property meets the property acceptability criteria, which includes HUD s Minimum Property Requirements (MPR) and Minimum Property Standards (MPS). The Lender must use professional judgment in determining when inspections are necessary to determine that a property meets MPR or MPS. The Lender must also use professional judgment in determining when a property condition poses a threat to the health and safety of the occupancy and/or jeopardizes the soundness and structural integrity of the property, such that additional inspections and/or repairs are necessary. Appraiser must report any evidence indicating issues that may affect the safety, soundness and security of the Property HUD/FHA requires the Appraiser to report any readily observable defective conditions and/or lack of compliance with MPS or MPR. Appraiser must also provide photographic documentation of the defective conditions in the appraisal report. Minimum Property Requirements (MPR) refer to general requirements that all homes with FHA insurance be safe, sound and secure. Minimum Property Standards (MPS) refer to the regulatory requirements relating to safety, soundness and security of New Construction. Appraiser must promptly communicate any noncompliance issues to the Underwriter s designated point of contact information. If the Property has a defective condition(s) and the Underwriter evaluate the appraisal and determine the correction is not feasible, EA must reject the Property. Defective conditions refer to defective construction, evidence of continuing settlement, excessive dampness, leakage, decay, termites, environmental hazards or other conditions affecting the health and safety of occupants. Appraiser may require an inspection by a qualified individual or entities if he/she cannot determine the Property meets FHA s MPR or MPS. The Appraiser must cite the reason for requiring an inspection. Conditions that require an inspection by a qualified individual or entities include: standing water against the foundation and/or excessively damp basements; hazardous materials on the site or within the improvements; faulty or defective mechanical systems (electrical, plumbing or heating/cooling; evidence of possible structure failure (e.g. settlement or bulging foundation wall, unsupported floor joists, cracked masonry walls, or foundation); evidence of possible pest infestation; leaking or worn-out roofs; or any condition that in the Appraiser s professional judgment warrants inspection. EA will require corrective work to mitigate any condition that arises which may affect the health and safety of the occupants, the Property s ability to serve as adequate Collateral, or the structural soundness of the improvements. Reference: HUD II.B.3; II.B.4; II.B.5 Endeavor America Loan Services 05/18/2016 Page 49 of 191

50 Appraisal Multi-Unit (2-4 Unit) Subject Property EA does not allow multiple unit properties. New Construction FHA defines three (3) stages of New Construction as follows: Proposed construction o No concrete or permanent material has been placed at the Property site. o Digging of footing and placement of rebar are not considered permanent. Under Construction o First placement of concrete (other permanent material) to 100% completion or 90% completed with only customer preferences (e.g. interior wall finishes, floor coverings, appliances, counter tops and fixtures, minor trim work, sodding/seeding, etc.) Existing Construction o Existing Construction applies when the appraisal is completed within one (1) year of the issuance of the Certificate of Occupancy and the Property is 100% complete (e.g. model home; resale within first year of completion). Appraiser to provide the following comment for an as-is appraisal: Property was built in accordance with submitted plans and specifications. All new construction properties must comply with the following requirements, regardless of LTV: 2000 International Energy Conservation Code (aka Model Energy Code by CABO) that can be accessed at the U.S. Department of Energy s website for Building Energy Codes Program. FHA Minimum Property Standards for New Construction. Property location cannot be within Runway Clear Zones (aka Runway Protection Zones) at civil airports, or within Clear Zones at military airfields. o Accident Potential Zone 1 at military airfield may be eligible if the Property is compatible with DOD guidelines. o Buyer(s) must acknowledge notification that the Property is located in a Runway Clear Zone and the implications associated with this site. Appraiser must provide the following for all New Construction Properties: Two (2) comparable sales from competing builders and at least one (1) comparable sale outside the Subject subdivision/project. Completed cost approach and gross rent multiplier for 3-4 unit properties, if applicable. Comment grading and drainage are adequate. Comment the utilities were on and functional at the time of final inspection when not noted on the original appraisal report. Endeavor America Loan Services 05/18/2016 Page 50 of 191

51 Appraisal New Construction Exhibits The table below identifies the required construction exhibits depending on the stage of construction Required Construction Exhibit Existing Under Proposed 1) Builder s Certification Form HUD a) HUD-92541, fully completed and signed should be furnished to the Appraiser prior to property inspection. b) Appraiser must comment any inconsistencies or discrepancies c) Underwriter must resolve all inconsistencies/discrepancies 2) 1 Year Builder s Warranty Form HUD ) Building Permit and Certificate of Occupancy 4) Ten-Year HUD Approved Protection Plan/Warranty a) Required for maximum financing if property was not approved prior to beginning of construction or was not built in compliance. b) List of acceptable Ten-Year Protection Plans/warranties may be accessed here. 5) Clear Final Inspection with photos using 1004D with subject to original appraisal report. 6) Subterranean Termite Soil Treatment Builder (NPMA-99-A and NPMA-99- B). a) Both NPMA-99-A and NPMA-99-B are required if treated with soil termiticide or bait systems. b) NPMA-99-A is required if chemically treated wood is used, or physical barrier system is installed. c) Builder must also provide one (1) year warranty against termites 7) Well Water Analysis and Septic Report, if applicable 8) Description of Materials Form HUD were approved by VA or DE Required if before construction began. <90% 9) Complete set of Plans and Specifications were approved by VA or DE construction began: a) Plot, identifying locations of well/septic systems (if applicable) b) Foundation or basement plan c) All exterior building elevations, sections, and details complete Required if <90% complete Endeavor America Loan Services 05/18/2016 Page 51 of 191

52 Appraisal New Construction Exhibits (continued) Required Construction Exhibit Existing Under Proposed 10) Final Inspection required if original appraisal made subject to with: a) Form HUD Compliance Inspection Report (CIR) by FHA roster Appraiser (preferably the original Appraiser) is required when: The Property was <90% complete on initial inspection date The local jurisdiction does not issue a final certificate of occupancy or its equivalent. Appraiser must provide following comment This is a newly completed Dwelling that was not completed under HUD/VA inspections. The Dwelling appears to be in conformance with submitted construction exhibits. b) Form 1004D may be used if the Property was > 90% complete on initial inspection date. 11) Flood Certificate reflects Property is located within a SFHA zone a) FEMA states the Property is not in a flood plain with a LOMA (Letter of Map Amendment) or LOMR (Letter of Map Revision) Flood insurance is not required b) Elevation Certificate (FEMA Form 81-31) Must be prepared by a state license Surveyor or Engineer Must document the lowest floor including basement and all related improvements are built at/above 100-year flood elevation in compliance with NFIP criteria. Flood insurance is required Properties Listed for Sale Properties that were previously listed for sale are eligible for refinance provided the listing was expired or canceled prior to the Loan Application date. Borrower(s) must certify intent to continue to reside in the Subject Property as a Principal Residence. Endeavor America Loan Services 05/18/2016 Page 52 of 191

53 Appraisal Property Flipping Property Flipping is indicative of a practice whereby recently acquired Property is resold for a considerable profit with an artificially inflated value. Property flipping refers to the purchase and subsequent resale of a property in a short period of time. Time Restriction on Transfers of Title The eligibility of a Property for a Mortgage insured by FHA is determined by the time that has elapsed between the date the seller has acquired title to the Property and the date of execution of the sales contract that will result in the FHA insured Mortgage. FHA defines the seller s date of acquisition as the date the seller acquired legal ownership of that Property. FHA defines the resale date as the date of execution of the sales contract by all parties intending to finance the property with an FHA insured Mortgage. Restrictions on Resales Occurring 90 Days or Fewer After Acquisition A property that is being resold 90 days or fewer following the Seller s date of acquisition is not eligible for FHA insured mortgage. Restrictions on Resales Occurring Between 91 Days and 180 Days After Acquisition A second appraisal is required by another Appraiser if: The resale date of a property is between 91 and 180 days following the acquisition of the property by the seller; and The resale price is 100 percent or more over the price paid by the seller to acquire the property. If the second appraisal supports a value of the property that is more than 5 percent lower than the value of the first appraisal, the lower value must be used as the property value in determining the adjusted value. The cost of the second appraisal may not be charged to the borrower. Exceptions to Time Restrictions on Resale Properties acquired by an employer or relocation agency in connection with the relocation of an employee Resales by HUD under its REO program. Sales by other US government agencies of SF properties at a discount with resale restrictions. Sales of properties that are acquired by the seller by inheritance. Sales of properties by state and federally-chartered financial institutions and government-sponsored enterprises (GSE). Sales of properties by local and state government agencies. Sales of properties within declared disaster areas, only upon issuance of the notice of an exception from HUD. The restrictions listed above do not apply to a builder selling a newly built house or building a house for a borrower planning to use FHA insured financing. Required documentation Obtain a 12 month chain of title documenting compliance with time restrictions on resales. Endeavor America Loan Services 05/18/2016 Page 53 of 191

54 Appraisal Termite Inspections Form NPMA-99A is required indicating the type of termite treatment unless the subject property is located in an area of no to slight infestation. Please refer to HUD s Termite Treatment Exception Areas for listed states requirements. No treatment is required if the dwelling is constructed with steel, masonry, or concrete building components with only minor interior wood trim and roof sheathing. The Builder must note on the form NPMA-99A that the construction is masonry, steel, or concrete. Form NPMA-99B is only required when soil chemical termiticide is used to treat the property. It is unacceptable for termiticide to be applied only around the perimeter of the foundation as a post-construction soil treatment. Reference: HUD II.A.8.i.i; II.A.8.i.iii; II.A.8.i.iv Existing Homes: may require soil or termite treatment. Well and Septic Appraiser is not required to report well, septic and property line distances. This is the responsibility of the DE Underwriter to obtain information & accept. Appraiser to report ONLY the availability of public services. DE Underwriter to address feasibility for hook up to the public services. Appraiser to make appraisal subject to inspections if any deficiencies were noted at time of inspection. General Requirements Well- minimum of 50 feet from septic tank Well- minimum of 100 feet from drain/ leach fields Well- minimum of 10 feet from any property line Exception Requirements **Note: Should local regulations allow for distances that are less the FHA guideline the property may be consider for exception & granted by DE with documentation local regulations & the following distances are meet: minimum of 75 feet between well & leach field Well is not within 10 feet of a roadway Well is not within 10 feet of another SFR Well is not with 10 feet of commercial, industrial OR MFR Endeavor America Loan Services 05/18/2016 Page 54 of 191

55 Dug Wells, Cisterns, Holding Tanks Appraiser must report when water to a property is supplied by dug wells, cisterns or holding tanks used in conjunction with water purchased and hauled to the site. Appraiser must report whether such individual systems are readily accepted by the local market and provide comparable(s) with the same type of individual water system. Appraiser must comment if connection to public or Community Water System is available. DE will determine if such connection is feasible and available at a reasonable cost. Appraiser must report any readily observable FHA MPR/MPS deficiencies regarding the well, cistern or holding tank. The appraiser must require test or inspection if any of the following apply: the water supply relies upon a water purification system due to the presence of contaminates; corrosion of pipes (plumbing); an unusually objectionable taste, smell, or appearance of the hauled water. subject site is within 0.25 mile of: areas of intensive agricultural uses; coal mining or gas drilling operations; a dump, junkyard, landfill, factory, gas station, or dry cleaning operation. A pressure tank must have a minimum capacity of 42 gallons. Tanks must be equipped with a clean-out plug at the lowest point and suitable pressure relief valve. Pre-pressured tanks and other pressurizing devices are acceptable if delivery between the pump cycles equal or exceed that of a 42-gallon tank. An acceptable water test is required to verify the water quality meets the local jurisdictional health authority. If there are no local or state water quality standards, then the water quality must meet the EPA standards as presented in the National Primary Drinking Water regulations in 40 CFR 141 and 142 [web link ] When the property also has a septic system, then the minimum distances between the individual water and septic systems must also meet the FHA Well and Septic in the preceding section of this guide. Soil poisoning is an unacceptable method for treating termites for property with an individual water system. Reference: HUD II.B.3.p.iii; II.A.3.a.ii.(O)(2) Endeavor America Loan Services 05/18/2016 Page 55 of 191

56 Assets Assets Endeavor America requires that Borrower(s) have sufficient assets to meet the down payment, closing costs not financed into the loan, and the difference between the purchase and sales price (if higher), and cash reserves. AUS DU/LSC findings will be followed with the exception of Verification of Deposits, which are not accepted by EA. AUS Approve Loans: Obtain most recent bank statement for each account. Manual Underwrites: Obtain most recent two (2) months consecutive statements for each account NSF charges to Borrower by banking institutions on any statement in the file with FICOs <620 are ineligible for financing (includes recent or YTD charges; no exceptions); Negative ending balances on a bank statement will be treated as NSF. Does not apply to Co-Borrowers FICOS >620 Bank Statements Checking and Savings Provide most recent bank statement (all pages) covering a full month with beginning and ending account balance. VODs are not an acceptable asset verification by Endeavor America Provide an additional consecutive month s bank statement if beginning and ending balances are not shown. Refer to the following Large Deposits section below for additional requirements. Endeavor America Loan Services 05/18/2016 Page 56 of 191

57 Assets Large Deposits The Underwriter must verify and document the existence of and amounts in the Borrower s checking and savings accounts. For recently opened accounts and recent individual deposits of more than 1% of the Adjusted Value (lesser of the purchase price minus inducements or the appraised value), the Underwriter must obtain documentation of the deposits. The Underwriter must also verify that no debts were incurred to obtain part, or all, of the minimum investment. Large Deposits Tax Refunds When sourcing large deposits into a Borrower s account which is from a tax refund, the following documentation is required: Signed LOE from the Borrower for the deposit; and A copy of Where is my refund results printout from the IRS; or A copy of the full IRS transcripts for the year the refund was received. Insufficient Funds (NSF) on Borrower Borrowers with FICOs 640 or greater, and a significant number of NSF fees and/or overdraft charges should be satisfactorily explained by Borrower(s). Borrowers with <640 FICO: Any NSF/overdraft fees on any bank statement submitted are ineligible for financing with EA. Underwriter should analyze NSF fees, which may indicate the Borrower is unable to manage their current obligations or may currently be experiencing hardship. Business Funds Document Borrower s ownership (e.g. business license, corporate/partnership status). Used for down payment and closing costs (cannot be used for reserves). CPA provides letter stating: Borrower has full use of the business funds. No repayment is required and funds are not an advancement against future earnings/cash distributions. Withdrawal of funds does not have a negative impact on the business and a comment on future tax implications. Endeavor America Loan Services 05/18/2016 Page 57 of 191

58 Assets Cash Saved at Home To consider cash saved at home as an acceptable source of funds, all of the following must be met: The funds must be verified as either: Deposited in a financial institution, or Held by the Escrow/Title Company prior to Closing The Borrower must provide a detailed explanation of how the funds were accumulated and the amount of time it took to save these funds. The Underwriter must determine the reasonableness of the Borrower s ability to accumulate such savings based on: Time period during which the funds were save, and Borrower s income stream, and Borrower s spending habits, and Documented expenses, and History of using financial institutions NOTE: Borrowers with checking and/or savings accounts are less likely to save money at home than individuals with no bank depository history. Down Payment and Closing Costs The minimum cash investment is typically 3.5% of the lesser of the appraised value or the sales price unless: EA offered HUD/FHA program specifies otherwise in this FHA guide (e.g. HUD REO $100 down). Borrower wants to make a larger down payment that results in the AUS Approve/Accept recommendation. Allowable fees charged to the must be reasonable and customary with the following limitations: Tax service fee is not allowed Origination may exceed 1% of the base loan. Third-party fees must be the actual costs charged by each Service Provider (credit reporting agency, Appraiser, etc.) Fees and charges must comply with all local, state, and federal regulations and predatory lending rules. Consulting fees are permitted under the 203(k) program. Refer to EA s 203(k) Loan Program section of these guidelines for specific program criteria. Endeavor America Loan Services 05/18/2016 Page 58 of 191

59 Assets Earnest Money Verify and document the deposit amount and source of funds if the amount of the earnest money deposit exceeds 1% of the sales price or is excessive based on the Borrowers history of accumulating savings, by obtaining: A copy of the Borrower s canceled check; Certification from the deposit-holder acknowledging receipt of funds; or A bank statement showing that the average balance was sufficient to cover the amount of the earnest money deposit at the time of the deposit. Employer Assistance/ Relocation Guaranteed Purchase Employer assistance refers to benefits provided by an employer to relocate the Borrower or financial assistance with the Borrower s housing purchase. Relocation Guaranteed Purchase If the employer guarantees to purchase the Borrower s previous residence as a result of relocation, obtain the executed Buyout Agreement. Document receipt of net proceeds based on guaranteed sales price minus the outstanding liens and expenses. Verify employer/relocation services firm takes responsibility for the outstanding mortgage debt. Employer Assistance Plans A salary advance cannot be considered as assets to close. Employer may provide financial assistance as employee compensation toward the Subject purchase: Verify the assistance will be applied toward closing costs, MIP, and/or the minimum required cash investment. If received at Closing, document Borrower s receipt. If received after Closing, document Borrower has sufficient cash for Closing. Gift Funds Gift Letter The gift letter must: Identify the gift amount Identify the relationship, Donor s name and address, date gift given, Donor s source account. States no portion of the gift funds must be repaid. Executed by the Donor and Borrower(s). Endeavor America Loan Services 05/18/2016 Page 59 of 191

60 Assets Donors Acceptable donors are: Family As defined under the identity of interest section of the guidelines; gift funds from a child to a parent are not eligible for financing with EA. Close Friends Close friends/family friends are eligible with a clearly defined and documented interest in the borrower. An LOE alone does not support the relationship. A close friend is defined as: a family friend; a fiancé. Note: A signed explanation alone does not document a relationship. Organizations Government (federal, state, or local) agencies or instrumentalities of governments that have programs providing homeownership assistance to low/moderate income families or first-time homebuyers. Government agency may not be the gift donor when the agency is also selling the subject property (VA or USDA RHS foreclosures). FHA considers this an inducement to purchase and must be subtracted from the sales price. Borrower s employer or labor union if gift is not paid from a personal account. Charitable organizations Charities IRS Publication 78 is a list of charities which can be checked online to see if the 501(a) tax exempt status has been revoked. Nonprofits HUD s approved roster of nonprofits and nonprofit instrumentalities of government Secondary Financing providers may be accessed here. Gift Funds Acceptable Gift Funds Source Donor s ability must be documented from an acceptable source. Cash on hand is not acceptable. Large deposits on the Donor s bank statement must be sourced to document gift funds are not from a person or entity with an interest in the subject s sale. Endeavor America Loan Services 05/18/2016 Page 60 of 191

61 Assets Gift Transfer Document the gift transfer according to the documentation requirements below If the gift funds Are already deposited in the Borrower s account Will be provided at closing via certified check, cashier s check, money order, official check, or other type of bank check Are being borrowed by the Donor, and Documentation from the bank or other savings account is not available Then document gift transfer by Obtain bank statement showing gift funds withdrawn from the Donor s account that was noted on the Gift Letter, and Borrower s deposit slip and bank statement showing gift funds available. Bank statement showing the gift funds withdrawn from the donor s account that was noted on the Gift Letter, and Copy of certified check; closing agent s acknowledgement of gift receipt if check was payable to the Escrow Agent. Having the donor provide written evidence that the funds were borrowed from an acceptable source, not an interested party to the transaction. Note: Cash on hand is not an acceptable source of Donor gift funds. Endeavor America Loan Services 05/18/2016 Page 61 of 191

62 Assets Gift Funds (continued) DU/LSC Data Integrity In DU/LSC Section II, Source of Down Payment, the full gift amount* must be entered from the source (relative, government agency, nonprofit) regardless if: * the amount has been partially spent and is not being used for down payment, or * the gift amount exceeds the down payment amount [This will accurately reflect in the Source of Down Payment, Settlement Charges, and/or Subordinate Financing section found on page 1 of the URLA/1003.] In DU/LSC Section VI, Assets, the available gift amount* must be separately entered as follows: If the gift has been deposited into the Borrower s account, then separate the total gift amount from the checking/savings account balance and identify as Gifts Not Deposited for account type. o If the original gift has been partially spent to pay off/pay down debts to qualify or used for the earnest money, then separate the remaining gift amount as Gifts Not Deposited and subtract this amount from the updated account balance. Note the Holder in the Asset section as Asset balance lower than Gift Amount. Note the LT: Gifts total: $ ; AUS ran with remaining gift of $ available after receipt of gift funds. If the gift has not been deposited, then enter the full gift that will be given at Closing. Multiple Gifts: Multiple gifts should be listed individually in both sections, Section II, Source of Down Payment and Section VI Assets Gift of Equity Only family members, as defined in the identity of interest section of the guidelines, may provide a gift of equity. Gift of equity must be noted on the fully executed Sales Contract and Closing Disclosure (CD). Obtain existing Mortgage payoff to verify this family transfer is not a distress sale. Evidence the Seller will not continue to reside in the Subject Property that HUD may construe as a circumvention of the Cash- Out Refinance LTV/CLTV restrictions. Exception: The HOC can waive this restriction provided the Seller is contributing to or operating an acceptable affordable housing program. Obtain written approval from the appropriate HOC with jurisdiction for the subject location. Endeavor America Loan Services 05/18/2016 Page 62 of 191

63 Assets Gift Funds (Continued) Consumer Debts Paid with Gift Funds Only family members, as defined in the identity of interest section of the guidelines, may provide gift funds to pay off/pay down the Borrower s consumer debts. Any other Donor is considered a third party by HUD. HUD/FHA regards payment of a Borrower s consumer debts with gift funds from third parties as an inducement to purchase and A dollar-for-dollar reduction to the sales price is required when calculating the maximum Mortgage. Joint Accounts If the Borrower does not hold the deposit account solely, all non-borrowing parties on the account must provide a written statement that the Borrower has full access and use of the funds Real Estate Commission If the Borrower is a licensed Realtor, then he/she may use the entitled real estate commission from the sale of the Subject property toward the required cash investment and/or closing costs, with no adjustments to the maximum Mortgage. A family member whom is a Realtor may provide a gift to the Borrower that is sourced from the entitled commission from the sale or listing of the Subject Property. If there is an identity of interest between the Buyer and Seller, then the real estate commission from the sale or listing of the Subject Property cannot be used for down payment. Rent Credit The cumulative amount of rental payments that exceed the Appraiser s estimate of fair market rent may be considered as accumulation of the Borrower s cash investment with the following documentation: Rent with Option to Purchase Agreement, and Appraiser s estimate of fair market rent, and Documented rent payments. Inducement to Purchase: Underwriter must treat the excess rent as an inducement to purchase with a dollar-for-dollar reduction to the lesser of the sales price/appraised value for the maximum mortgage calculation if the Sales Agreement reveals the Borrower: Has been living rent free in the subject property, or Has an agreement with the Seller to rent the Subject or another property at an agreed time and then permits the Borrower to occupy that or another unit for less than market rent, in anticipation of an eventual purchase. Exception may be considered when a Builder fails to deliver a property at an agreed time and then permits the Borrower to occupy that or another unit for less than market rent temporarily until construction is complete. Endeavor America Loan Services 05/18/2016 Page 63 of 191

64 Assets Reserves Verify all assets submitted to TOTAL DU/LSC that support the resulting DU/LSC Approve/Eligible overall risk recommendation. All manually underwritten loans must meet or exceed the following: Minimum Reserves o 1-2 units: One (1) total monthly Mortgage payment. o 3-4 unites: Three (3) total monthly Mortgage payments. To be cited as a compensating factor: o 1-2 units: Three (3) total monthly Mortgage payments. o 3-4 unites: Six (6) total monthly Mortgage payments. Reserves are defined as the Borrower s liquid assets minus funds required to pay: minimum cash investment, cash to close (including closing costs and prepaids), any payoffs as conditioned in the Loan Approval, and any other expense(s) required to close the loan. The following assets cannot be considered as reserves on manual underwrites: o Gift funds o Equity from another property o Borrowed funds o Cash received from cash-out refinance loan proceeds or incidental adjustments made at closing Retirement Accounts The Underwriter may include up to 60% of the value of assets, less any existing loans, from the Borrower s retirement accounts, such as IRAs, thrift savings plans, 401(k) plan, and Keogh accounts, unless the Borrower provides conclusive evidence that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties. The portion of the assets not used to meet closing requirements, after adjusting for taxes and penalties, may be counted as reserves. Required Documentation The Underwriter must obtain the most recent monthly or quarterly statement to verify and document the existence and amounts in the Borrower s retirement accounts, the Borrower s eligibility for withdrawals, and the terms and conditions for withdrawal from any retirement account. If any portion of the asset it required for funds to close, evidence of liquidation is required Endeavor America Loan Services 05/18/2016 Page 64 of 191

65 Assets Sale of Home Proceeds For arms-length real estate sale, obtain an executed Final HUD-1 Settlement Statement (loan applications on/before 10/02/2015) or Closing Disclosure (loan applications on/after 10/03/2015) and deposited receipt of Borrower s share of the net proceeds. Loan Approval is conditioned upon receipt of executed Closing Disclosure if the property will close simultaneously to our Subject transaction. If Property settlement will occur after our Subject transaction, then the Borrower must qualify with the Mortgage payment(s), taxes, insurance, and HOA/condo dues. Sale of Personal Property When the Borrower sells their personal property (e.g. cars, recreational vehicles, stamps, coins, baseball card collections, etc.), document as follows: Evidence of receipt and deposit of proceeds from the sale of personal property items; and Satisfactory recent estimated valuation of the personal property (prior to sale date) by using: Published value estimates issued by organizations such as auto dealers (N.A.D.A Guide or Kelly Blue Book); or Professional associations related to the assets; or A written appraisal by a qualified Appraiser with no financial interest in the loan transaction. Assets to close considered from this source of funds will be only the lesser of the estimated value or actual sales price. Stocks and Bonds Most recent monthly/quarterly statement(s) provided by the stockholder or financial institution managing the portfolio to verify the value of the stocks and bonds. Sweat Equity Sweat equity refers to labor performed, or materials furnished, by or on behalf of the Borrower before closing on the Property being purchased. A reasonable estimated cost of the work or materials may be considered the equivalent of a cash investment. Sweat equity may also be gifted. Sweat equity for labor or work performed by the Borrower may not be escrowed at Closing. Endeavor America Loan Services 05/18/2016 Page 65 of 191

66 Assets Sweat Equity (continued) Sweat Equity Category Requirement(s) Existing Construction Only repairs or improvements to make the property meet FHA MPRs and listed on the appraisal are eligible for sweat equity. Note: Any work completed or materials provided before the appraisal are not eligible. Proposed Construction The Sales Contract must indicate the tasks to be performed by the Borrower during construction related to make the Property meet FHA MPRs Borrower s Labor The Borrower must demonstrate his/her ability to complete the work in a satisfactory manner. The Underwriter must document the contributory value of the labor either through: The Appraiser s estimate, or A cost-estimating service. Delayed Work The following cannot be include as sweat equity: Delayed work (on-site escrow) Clean up Debris removal, and Other general maintenance. Cash Back Cash back to the Borrower is not permitted in sweat equity transactions. Sweat Equity on Other Sweat equity is not acceptable on properties other than the Subject Property being purchased. Properties Compensation for work performed on other properties must be in cash and properly documented. Source of Funds If the Borrower furnishes funds or materials, provide evidence of: Source of funds, and Market value of the materials. Unacceptable Assets Unsecured financing or unsecured loans (e.g. auto loans, signature loans, etc.) Cash advances or credit cards Loans secured against household goods and furniture Gift funds with repayment or from an unacceptable donor/source Auto loans Signature loans, etc. Endeavor America Loan Services 05/18/2016 Page 66 of 191

67 CAIVRS HUD s Credit Alert Verification Reporting Systems (CAIVRS) screening is required on each Borrower and any co-obligor. CAIVRS is not required for Non-Borrowing Spouses. All negative alert must be satisfactorily resolved before the application can proceed. Underwriters are prohibited from processing an application for an FHA-insured mortgage for Borrowers with delinquent federal non-tax debt, including deficiencies and other debt associated with past FHA-insured mortgages. Underwriters are required to determine whether the Borrowers have delinquent federal non-tax debt. Underwriter may obtain information on delinquent Federal debts from public records, credit reports or equivalent, and must check all Borrowers against the Credit Alert Verification Reporting System (CAIVRS). Verification If a delinquent Federal Debt is reflected in a public record, credit report or equivalent, or CAIVRS or an Equivalent System, the Underwriter must verify the validity and delinquency status of the debt by contacting the creditor agency to whom the debt is owed. If the debt was identified through CAIVRS, the Underwriter must contact the creditor agency using the contact phone number and debt reference number reflected in the Borrower s CAIVRS report. If the creditor agency confirms that the debt is valid and in delinquent status as defined by the Debt Collection Improvement Act, then the Borrower is ineligible for an FHA-insured Mortgage until the Borrower resolves the debt with the creditor agency. The Underwriter may not deny a mortgage solely on the basis of CAIVRS information that has not been verified by the Underwriter. If resolved either by determining that the information in CAIVRS is no longer valid or by resolving delinquent status as stated above, the Underwriter may continue to process the mortgage application. Resolution In order for a Borrower with verified delinquent Federal Debt to become eligible, the Borrower must resolve their federal non-tax debt in accordance with the Debt Collection Improvement Act. The creditor agency that is owed the debt can verify that the debt has been resolved in accordance with the Debt Collection Improvement Act. Endeavor America Loan Services 05/18/2016 Page 67 of 191

68 CAIVRS Required Documentation The Underwriter must include documentation from the creditor agency to support the verification and resolution of the debt. For debt reported through CAIVRS, the Underwriter may obtain evidence of resolution by obtaining a clear CAIVRS report. Eligibility Period for Borrowers Delinquent on FHA-Insured Mortgages If a Borrower is currently delinquent on an FHA-insured Mortgage, they are ineligible for a new FHA-insured Mortgage unless the delinquency is resolved. LDP/SAM The federal government lists must also be checked for all parties involved in the transaction. Any matching results must be immediately escalated to the Underwriting Team Lead for resolution. System for Award Management (SAM) list must be checked to determine if the U.S. General Services Administration has barred a party from doing business with the federal government. Exception may be made if the Seller is on the SAM list but Property being sold is the Seller s Principal Residence. Limited Denial of Participation (LDP) must be checked to determine if an individual has been barred from doing business with the federal government. All parties must be verified as follows: Seller (except where selling Principal Residence ) Listing Agent and selling Real Estate Agent Loan Originator Loan Processor Appraiser 203(k) Consultant FHA Single Family Housing Policy II.b.ii.B.a-b Endeavor America Loan Services 05/18/2016 Page 68 of 191

69 Credit and Liabilities Credit Report and Loan Decision Score A tri-merged credit reported dated within 120 days of the funding date is required on all loans. For Streamline Refinance transactions, it is used solely to validate the credit score. Each Borrower s respective credit score is determined by using the middle/lower method. If there are three (3) valid credit scores, then the middle of the three is used. If there are three (3) valid credit scores and two (2) of the scores are the same, then the duplicate score is used. If there are two (2) valid credit scores, then the lower of the two scores is used. If there is one (1) valid credit score, then that score is used. Loan decision score is determined as follows: When there is no Co-Borrower, the Borrower s representative credit score is the decision credit score. When there are multiple Borrowers, the lowest representative credit score amongst all Borrowers is the loan decision score. Satisfactory Credit The Underwriter may consider a Borrower to have an acceptable payment history if the Borrower has made all housing and installment debt payments on time for the previous 12 months and has no more than two 30-day late mortgage payments or installment payments in the previous 24 months. The Underwriter may approve the Borrower with an acceptable payment history if the Borrower has no major derogatory credit on revolving accounts in the previous 12 months. Major derogatory credit on revolving accounts must include any payments made more than 90 days after the due date, or three or more payments more than 60 Days after the due date. Payment History Requiring Additional Analysis If a Borrower s credit history does not reflect satisfactory credit as stated above, the Borrower s payment history requires additional analysis. The Underwriter must analyze the Borrower s delinquent accounts to determine whether late payments were based on a disregard for financial obligations, an inability to manage debt, or extenuating circumstances. The Underwriter must document this analysis in the mortgage file. Any explanation or documentation of delinquent accounts must be consistent with other information in the file. The Underwriter may only approve a Borrower with a credit history not meeting the satisfactory credit history above if the Underwriter has documented the delinquency was related to extenuating circumstances. Authorized User Accounts Accounts for which the Borrower is an authorized user must be included in a Borrower s DTI ratio unless the Borrower can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three (3) payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower s DTI. Endeavor America Loan Services 05/18/2016 Page 69 of 191

70 Credit and Liabilities Non-Traditional Credit Borrowers without a credit score, obtain a non-traditional mortgage credit report (NTMCR) from a credit reporting company or independently develop the Borrower s credit history using the requirements outlined below. Payment histories are reviewed in the following cascading priority order which HUD/FHA considers indicative of a Borrower s future payment performance: First previous housing expenses, including utilities; Second installment debts; Third revolving accounts. Non-traditional credit may not be used to: Offset derogatory credit, or Enhance poor payment history, or Manufacture a credit report for a Borrower without verifiable credit history. For each Borrower, sufficient credit history includes a minimum of three (3) credit references from Groups I and II in the table below to evaluate his/her paying habits. While it is preferred that all credit references from Group I, at least one of the three references must be from Group I. Group I Group II Rental housing payments (subject to independent verification) Rental verification from a professional property management company Completed VOR and 12 months consecutive cancelled checks for private landlord including a family member Utility company reference (if not included in current rent) Gas Electricity Water Land-line home telephone service Cable TV Insurance premiums not payroll deducted (medical, auto, life, renter s insurance) Payment for child care providers (made to the business) School tuition Retail store credit cards (department, etc.) Rent-to-Own (furniture or appliances) Payment of medical bills not covered by insurance Internet/Cell phone services 12 months savings history evidenced by: Non-payroll deducted regular deposits which occurred at least quarterly with an increasing account balance and no insufficient funds fees Automobile leases Personal loan with documented written repayment terms with 12 months canceled checks to document payments The NTMCR must not include subjective statements such as satisfactory or acceptable must be formatted in a similar fashion to traditional references, and provide the: Creditor s name Date of opening High credit Current status of the account 12-month history of the account Required monthly payment Unpaid balance; and Payment history in the delinquency categories Endeavor America Loan Services 05/18/2016 Page 70 of 191

71 Credit and Liabilities 30-Day Charge Accounts Open 30-day charge accounts (monthly payment reported as equal to outstanding balance or as $0) requires the balance to be paid in full every month. If additional liquid assets are verified to sufficiently cover the unpaid balance, the debts may be excluded from the DTI. Otherwise, the entire outstanding balance must be included in the DTI. If the credit report reflects any late payments in the last 12 months, utilize 5% of the outstanding balance as the Borrower s monthly debt to be included in the DTI Adverse Credit Total DU/LSC Approve Credit explanation is not required from the Borrower for adverse credit or other derogatory information Manual Underwrite Borrower must provide an explanation for all derogatory credit in the past two (2) years including judgments and collections Alimony/Child Support For alimony, if the Borrower s income was not reduced by the amount of the monthly alimony obligation in the calculation of the Borrower s gross income, verify and include the monthly obligation in its calculation of the Borrower s debt. Child support and maintenance are to be treated as a recurring liability and must be included in the Borrower s monthly obligations. Verify the payment amount and the current status of the account by obtaining the official signed divorce decree, separation agreement, or other legal order. Obtain paystubs covering no less than 28 consecutive days to verify any garnishment of payments For qualifying use the greater of the amount from the most recent court order or amount of garnishment Delinquent child support must be considered in the overall creditworthiness. If the account is > 90 days past due and there is no repayment arrangement, downgrade to a Refer Endeavor America Loan Services 05/18/2016 Page 71 of 191

72 Credit and Liabilities Bankruptcy Chapter 7 DU/LSC Approve: Chapter 7 BK must be discharged more than two (2) years from discharge date of BK to the case number assignment date. If the bankruptcy was discharged within two (2) years from the date of Case Number assignment, the loan must be downgraded to a Refer and manually underwritten. Manual underwrites allow a Chapter 7 that was discharged within one-two (1-2) years provided both requirements are met: Obtain complete and thorough documentation trail of the circumstances that led up to the bankruptcy were beyond the Borrower s control (e.g. unemployment, prolonged strikes, medical bills not covered by insurance). Document reestablished credit with four (4) consumer debts opened after the bankruptcy with satisfactory 12 month pay history. Bankruptcy is discharged within the past 12 months is not permitted. Chapter 13 DU/LSC Approve: Chapter 13 BK must be discharged more than two (2) years from discharge date to Case Number assignment date. Manual Downgrade is required for a Chapter 13 discharged less than two (2) years; obtain bankruptcy and discharge documentation. BK in repayment is eligible as a manual underwrite if the following is met: Documentation of debt restructure; approval from court Most recent 12 months acceptable payment history in accordance to the Chapter 13 Approved Plan. If the Borrower converts a Chapter 13 into a Chapter 7 that was subsequently discharged within the past 12 months, then refer to Chapter 7 guidance above. Collections Underwriter must calculate the cumulative balance of all non-medical derogatory collections (including any collections accounts of a non-purchasing spouse in community property states unless excluded by law). The Underwriter may need to apply the capacity analysis test to consider the impact of the outstanding collections on Borrower s ability to repay the Mortgage. All medical collections and all charge-offs accounts (medical and non-medical) are excluded in calculating the $2,000 cumulative limit. Endeavor America Loan Services 05/18/2016 Page 72 of 191

73 Credit and Liabilities Collections/Charge Offs (continued) DU/LSC Approve/Eligible No explanation or documentation is required. The presence of the collections have already been taken into consideration in the Borrower s credit score < $2,000 cumulative balance, the Underwriter is not required to consider or evaluate the collections accounts. > $2,000 cumulative balance the Underwriter must include monthly payments in the DTI for accounts that will remain open after closing. Capacity Analysis is required with > $2,000 cumulative balance of all outstanding collections (excluding medical and charge offs), and includes any of the following actions: Payment in full of the unpaid collection with verified funds from an acceptable source; or Documented payment arrangement with the creditor with evidence of scheduled monthly payments made and include in the DTI ratio; or If no payment arrangement can be documented, then calculate the monthly payment of 5% of each unpaid collection balance in the DTI ratio. Manual Underwrites Underwriter must consider unpaid collections in the creditworthiness analysis and document reasons for loan approval. Regardless of the outstanding collection amount, the Underwriter must determine if the collection resulted from: Disregard for financial obligations; or Inability to manage debt; or Extenuating circumstances beyond the Borrower s control Borrower must provide a written explanation and provide supporting documentation for each collection, which must be consistent with other credit information in the loan file. NOTE: Supporting documentation: refers to documentation to support the letter of explanation provided to explain the derogatory items. Endeavor America Loan Services 05/18/2016 Page 73 of 191

74 Credit and Liabilities Consumer Credit Counseling Voluntary participation in Consumer Credit Counseling Services (CCCS) does not disqualify a Borrower from obtaining a FHA loan. DU/LSC Approve No explanation or additional documentation is required if the credit report shows consumer credit counseling. Borrower s credit scores already reflect any degradation in credit history Manual Underwrite All of the following documentation is required: Document the debt restructure and one year of the pay-out period has elapsed under the plan Borrower s payment performance has been satisfactory and all required payments have been made on time. Borrower has received written permission from the counseling agency to proceed with a new FHA loan. Contingent Liability A Contingent Liability refers to a liability that may result in the obligation to repay only when a specific event occurs. For example, a contingent liability exists when an individual can be held responsible for the repayment of a debt if another legally obligated party defaults on the payment. Contingent liabilities may include Cosigner liabilities and liabilities resulting from a Mortgage assumption without release of liability. Include monthly payments on contingent liabilities in the calculation of the Borrower s monthly obligations unless the Underwriter verifies and documents that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default or the other legally obligated party has made 12 months of timely payments. Obtain the agreement creating the contingent liability or assumption agreement and deed showing transfer of title out of the Borrower s name. Endeavor America Loan Services 05/18/2016 Page 74 of 191

75 Credit and Liabilities Mortgage Assumption TOTAL DU/LSC Approve Obtain a copy of the divorce decree ordering the spouse to make payments, or Assumption agreement and deed showing transfer of title out of the Borrower s name Manual Underwrite The contingent mortgage liability must be included in the DTI on a Property the Borrower sold within the last 12 months, or will sell as an assumption without release of liability, unless Payment history from Mortgage servicer verifying the assumed Mortgage is current and paid on time in the past 12 months. < 75% LTV established based on lesser of appraisal or Closing Disclosure (CD) from the sale and the assumed Mortgage loan (minus UFMIP). Co-Signed Loan If the cosigned liability is not included in the monthly obligation, obtain documentation to evidence that the other party to the debt has been making regular on-time payments during the previous 12 months, and does not have a history of delinquent payments on the loan. Late payments reported on debts assigned to the ex-spouse in a divorce do not need to be charged to the Borrower if the delinquencies occurred after the divorce. Endeavor America Loan Services 05/18/2016 Page 75 of 191

76 Credit and Liabilities Business Debt When business debt is reported on the Borrower s personal credit report, the debt must be included in the DTI calculation, unless documentation can be obtained to show the debt is being paid by the Borrower s business, and the debt was considered in the cash flow analysis of the Borrower s business. The debt is considered in the cash flow analysis where the Borrower s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented as paid out of company funds. Where the Borrower s business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis. When a self-employed Borrower states debt appearing on their personal credit report is being paid by their business, the documentation must be obtained to show the debt is paid out of company funds and that the debt was considered in the cash flow analysis of the Borrower s business. Student Loans All student loans must be included in the borrower s liabilities regardless of the payment type or status of payments. Required Documentation If the payment used for the monthly obligation is: Less than 1% of the outstanding balance reported on the borrowers credit report, and Less than the monthly payment reported on the borrowers credit report; The lender must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor. Calculating the Student Loan Obligation Regardless of the payment status, the mortgagee must use either: The greater of: o One percent (1%) of the outstanding balance on the loan; or o The monthly payment reported on the borrowers credit report; or The actual documented payment, provided the payment will fully amortize the loan over its term. Endeavor America Loan Services 05/18/2016 Page 76 of 191

77 Credit and Liabilities Disputed Accounts FHA revised its policy regarding manual downgrades for TOTAL Approve/Accept loans to reflect the risk associated with derogatory disputed accounts for factors such as age and outstanding balance amount. Accounts that appear as disputed on the Borrower s credit report are not considered in the credit score utilized by TOTAL Mortgage Scorecard in rating the application. To determine if a manual downgrade is required, collection accounts for non-purchasing spouse in a community property state are not included in the cumulative balance. Disputed derogatory credit accounts include: Disputed charge-offs, Disputed collections, and Disputed accounts with late payments < 24 months. If AUS And Then TOTAL DU/LSC Approve/Eligible < $1,000 cumulative balance all disputed derogatory accounts (excluding medical, and Identity theft, credit card theft, unauthorized use, etc., must be documented (police report disputing fraudulent charges) Manual downgrade is not required. Non-Derogatory Disputed Accounts; and disputed accounts not indicated on the credit report > $1,000 cumulative balance all outstanding disputed accounts (excluding medical) Manual downgrade is required. Disputes must be removed from the credit report and loan must maintain an Approve/Eligible with new credit to be eligible for financing with Endeavor America Disputed accounts excluded in $1,000 limit: Medical accounts do not require documentation; Identity theft, credit card theft, unauthorized use, etc., must be documented (police report disputing fraudulent charges); Non-derogatory disputed accounts; Not indicated on the credit report as disputed including non-derogatory disputed and derogatory disputed accounts: If a Borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the Underwriter is not required to downgrade the application to a Refer. However, the Underwriter must analyze the effect of the disputed accounts on the Borrower s ability to repay the Mortgage. If the dispute results in the Borrower s monthly debt payments utilized in computing the Debt-to-Income (DTI) ratio being less than the amount indicated on the credit report, the Borrower must provide documentation of the lower payments. Endeavor America Loan Services 05/18/2016 Page 77 of 191

78 Credit and Liabilities Delinquent Federal Tax Liens Federal tax liens/delinquent taxes may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three (3) months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three (3) months of payments. The payment amount from the repayment agreement must be included in the calculation of the Borrower s Debt-to-Income (DTI) ratio. (The three (3) months seasoning is based on Case Assignment date.) NOTE: Delinquent taxes that are not liens or judgements should be treated as follows: If tax returns, and or tax transcripts provided indicate the borrower owes outstanding taxes, documentation must be provided to show these taxes have been paid, or valid IRS repayment plan is in place. If a repayment plan is established, documentation must be provided to support the borrower has made 3 months of payments following the requirements outlined above. The loan may not close until documentation is provided to support all three consecutive payments have been made. State and/or Local Tax Liens Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the lien holder to make regular payments on the debt and the Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three (3) months of payments. The lien holder must subordinate the tax lien to the FHA-insured Mortgage. Endeavor America Loan Services 05/18/2016 Page 78 of 191

79 Credit and Liabilities Foreclosures/Deed-in-Lieu Three (3) years minimum seasoning from transfer of title to case assignment date is required for prior foreclosure (FC) and Deed-in-Lieu (DIL) on both AUS Approved and manually underwritten loans. If prior FHA foreclosure, three (3) years seasoning is based on the date that HUD paid a claim on the prior FHA loan. FHA Resource Center ( ) can provide the FHA claim paid date and initial default date. If less than three (3) years seasoning, Borrower must provide a detailed explanation with documentation to support the extenuating circumstances (serious uninsured illness or death of a wage earner) that caused the foreclosure or deed-in-lieu were beyond the Borrower s control and unlikely to recur. Extenuating circumstance is not an inability to sell the house because of a job transfer or relocation to another area. Divorce is not considered an extenuating circumstance. Exceptions: o Divorce: Former spouse defaulted on previous Mortgage after marital property transferred per divorce terms and was current at time of divorce. o Borrower may also be eligible for Back-to-Work Extenuating Circumstances section of this Guide. Must have reestablished credit with no housing or installment late payments after foreclosure. Second Mortgage Foreclosure A second Mortgage may continue to show derogatory on the credit report after the title has been transferred back to the Underwriter. If the second Mortgage was secured against the property that was foreclosed, the outstanding lien may be excluded with three (3) years seasoning based on the date when the first lienholder completed the foreclosure and title was transferred back. Endeavor America Loan Services 05/18/2016 Page 79 of 191

80 Credit and Liabilities Housing History TOTAL DU/LSC Approve Rental verifications are typically not required on a DU/LSC Approve. Follow the DU/LSC Findings unless; Downgrade to a Refer and manually underwrite the loan when any Mortgage tradeline during the last 12 months reflects: 3x30 days late; or 1x60 days late plus 1x30 days late; or 1x90 days late FICOs must have a housing history verified by a management company VOR or a private party VOR and 12 months cancelled checks. Loans that must be downgraded due to housing history are not eligible with Endeavor America Loan Services Manual Underwrite All Borrowers housing history must be verified for the previous 12 months with no late payments. Endeavor America Loan Services 05/18/2016 Page 80 of 191

81 Credit and Liabilities Inquiries and Undisclosed Debt(s) TOTAL DU/LSC Approve No explanation is required for credit inquiries. Undisclosed Debt(s) may be revealed in Borrower s asset statements, paystubs, or as a result of a credit inquiry: Verify the monthly payment amount of any, and Update the DTI ratio with additional obligations, and Resubmit into DU/LSC. Undisclosed Mortgage Debt When a debt secured by a mortgage is listed on the 1003, and/or the credit report, or does not report to the credit report/aus, the underwriter MUST: o Verify the monthly payment amount and obtain a 12 month payment history, and o Update the DTI ratio with additional obligations, and o Resubmit into AUS. NOTE: Loan must meet housing history requirements to qualify. Manual Underwrite Satisfactorily explain all inquiries within the past 120 days listed on the credit report and address the reason and disposition of each inquiry. Undisclosed Debt When a debt or obligation is revealed during the application process that was not listed on the 1003 and/or credit report, the Underwriter MUST: o Verify the payment amount. o Include the payment amount in the agreement in the Borrowers monthly liabilities and debt. o Determine whether any unsecured funds borrowed were not / will not be used for the borrower s MRI. Undisclosed Mortgage Debt When a debt secured by a mortgage is not listed on the 1003 and does not report on credit, the loan must be downgraded to manual underwrite. The underwriter must verify the following to proceed as a manual underwrite: o Verify the monthly payment amount and obtain a 12 month payment history, and o Update the DTI ratio with additional obligation, and o Resubmit to AUS NOTE: Loan must meet housing history requirements to qualify for the manual downgrade. Endeavor America Loan Services 05/18/2016 Page 81 of 191

82 Credit and Liabilities Judgments TOTAL DU/LSC Approve No explanation or documentation is required. The presence of the judgments have already been taken into consideration in the Borrower s credit score. Manual Underwrite Judgments may indicate a Borrower s disregard for credit obligations and must be considered in the creditworthiness analysis. For both AU Approve and manual underwrites, pay off all outstanding judgments, including Non-Borrowing Spouse s in a community property state, shown on the credit report, unless Documented Borrower s payment agreement with the creditor to make regular scheduled payments, and Evidence at least three (3) months consecutive payments were made on time prior to loan approval. Borrower may not prepay the scheduled payments simply to meet this requirement. Payments must be included in the DTI ratio. Judgments on title must be paid if they will impair EA/FHA s first lien position. Modified/Restructured Loans Purchase and refinance transactions where the Borrower has had a modified/restructured loan within the past three (3) years may be acceptable as follows: The modification/restructure adjusted the terms and/or payment only. The Mortgage must be current with no late payments within the most recent 12 months. Loans that were modified with a principal forgiveness of the loan balance must follow foreclosure seasoning requirements of three (3) years. Debt Payoff to Qualify Payoff of revolving debt to qualify is allowed with a credit supplement showing a zero balance. FICO <640 account must be paid in full prior to closing and closed with: Credit supplement verifying a zero balance and the account has been closed. Gift funds for debt payoff is acceptable only with a family member donor. Recurring Debts Monthly payments on revolving or open-ended accounts, regardless of their balances, are counted as liabilities for qualifying purposes even if the accounts appear likely to be paid off within ten (10) months or less. Monthly payments > $100 must be included in the DTI even if there is less than ten payments remaining. The debt(s) will affect the Borrower s ability to pay the Mortgage during the months immediately after the loan closing, especially if the Borrower will have limited or no cash assets. Installment lates within the last six (6) months on FICOs <620 are not eligible for financing. Endeavor America Loan Services 05/18/2016 Page 82 of 191

83 Credit and Liabilities Short Sale/Pre-Foreclosure A Borrower is not eligible for a new FHA loan if he/she has pursued a short sale or pre-foreclosure with the past three (3) years to: Take advantage of the declining market conditions, and Purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to the current market value. Mortgage Current at the Time of Short Sale A Borrower is considered eligible for a new FHA loan if, from application date, all criteria is met: No late payments on the prior mortgage for 12 months preceding the short sale, and No late payments on any installment debts for the same period of time. Defaulted Mortgage at the Time of Short Sale A Borrower must wait three (3) years from the date of the short sale/pre-foreclosure if he/she defaulted on the prior Mortgage If the Property was sold under FHA s pre-foreclosure sale program, the three (3) year wait period begins from the date FHA paid the claim. Exception to three-year wait-period may be considered if the: Default was due to circumstances beyond the Borrower s control (death of primary wage earner, long-term uninsured illness, etc.), and The credit report indicates satisfactory credit prior to the circumstances that caused the default. Exceptions must be manually underwritten. Refer to Manual Underwriting, Manual Underwriting Matrix and Compensating Factors sections for further information. Endeavor America Loan Services 05/18/2016 Page 83 of 191

84 Community Property States Community Property States Community property states are: Alaska (optional), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin. If the Borrower resides in a community property state OR if the Subject Property is located in a community property state: Debts of the non-purchasing spouse must be considered in the DTI ratio and in the residual income calculation. o Obligations specifically excluded by state law need not be counted with satisfactory documentation to support the exempted debts. o Collection accounts for non-purchasing spouse in a community property state are included in the $2,000 cumulative limit. Monthly payments may be included in the DTI to analyze the impact of Borrower s ability to repay. o Disputed debts need not be counted if there is satisfactory evidence to support the validity of the dispute. The greater of the reported monthly payment or 5% of the outstanding balance must be counted as the monthly obligation. Judgments, liens, and any other delinquent credit that would compromise Endeavor America s first lien position must be paid off prior to closing. Other delinquent debts would only be required to be paid off at the Underwriter s discretion. If the Non-Purchasing Spouse doesn t have a SSN, a credit report is still required with public records search. Endeavor America Loan Services 05/18/2016 Page 84 of 191

85 Disaster Re- Inspections Disaster Re-inspections Appraisal inspected on/before a declared disaster incident period end date: Property must be re-inspected by the original Appraiser or acceptable inspection source (e.g. a nationally recognized field company or local professional licensed inspector). The Appraiser/property inspector must provide the following commentary/evidence: Property is free from damage and the disaster had no effect on the value or marketability. If the re-inspection indicates damage, the extent of the damage must be addressed. Completion of repairs is required prior to funding as evidenced by Form 1004D with photos. Non-qualifying Streamlines will require an inspection on either appraisal form 2055 or 1004D to determine the Property is free from damage. Form 2055 will be ordered by EA and will not be charged to the Broker/Borrower. Appraisal inspected after a declared disaster incident period end date: An interior inspection is required in all state and federal declared disaster areas for 90 days from the date of the disaster declaration to funding date. The Appraiser must provide current photos of the subject property and comparable sales. Photos from MLS or the Appraiser s database are not acceptable. Non-qualifying Streamlines will require an inspection on either appraisal form 2055 or 1004D. The Broker will be responsible for ordering and paying for the inspection; it will not be the responsibility of the Underwriter or the Borrower. Endeavor America Loan Services 05/18/2016 Page 85 of 191

86 Eligible/Ineligible Property Types Eligible Properties The following properties are permitted under the EA FHA Loan Program: 1-unit single family. HRAP and DELRAP approved condominium (HUD website). Manufactured homes classified as real estate and meets FHA requirements (single or doublewide). Manufactured PUDs, so long as it is fee-simple. New construction, proposed construction and under construction. NOTE: EA only provides the permanent financing, not construction draws. Ineligible Properties A property is ineligible if any of the following conditions are present: Marijuana grow facilities for income and/or personal use are on the premises 2-4 multi-unit residential properties Commercial properties (bed & breakfast, condotel, motel, orchards/working farms) Condominium or manufactured home with less than 400 square feet Cooperatives Manufactured Homes which are: All Condos (including site condos), Co-op, Parks Located in ground lease communities Multi-unit Not permanently affixed to the lot and is not considered real estate under state law; Native American Leaseholds Hawaii Home Land Loans Hawaii homes located in Lava Flow Hazard Zones 1 or 2, as determined by the USGS On-frame modular units Property that cannot meet FHA s Minimum Property Standards Property has Chinese drywall Property located in any of the following: a Special Flood Hazard Area (S) and flood insurance is not available a designated Coastal Barrier Resources System area an airport Noise Zone 3, if proposed or under construction a transmission line easement involving high-pressure gas or liquid petroleum or high voltage electricity, if any part of the residential structure is located within the easement an area susceptible to geological or soil instability (earthquakes, landslide or other history of unstable soils) if proposed/under/new construction and the builder cannot provide evidence that either the site is not affected or the problem has been adequately addressed in the engineering design. Transient housing or timeshares (boarding house, private club, tourist house) Unique properties New Jersey 203(k) and 2-4 multi-unit residential properties are ineligible. Endeavor America Loan Services 05/18/2016 Page 86 of 191

87 Eligible/ineligible Transaction Types Eligible Transactions Purchase Principal residence only. Refinance Cash-Out Refinance on Principal Residence only. Rate & Term Refinance on Principal Residence only. Streamline Refinance (Credit-Qualifying and Non-credit Qualifying) may be Principal, Second Home or Investment Property. Simple Refinances on Principal Residence only. Ineligible Products or Transactions Non-occupying Co-Borrower who is not a family member. Energy Efficient Mortgages (EEMs) HECM Living and Land Trust Non-arms-length transaction on a short sale when the Seller and Buyer are related. Temporary buydowns Unsecured loans or loans secured by less than a first lien FHA ARMs Streamline Refinance currently delinquent within the past three (3) months at the time of application SFH with acreage exceeding 30 acres Manufactured: single wide with land to value ratios exceeding 30%, double/triple exceeding 50% Endeavor America Loan Services 05/18/2016 Page 87 of 191

88 Employment and Income Documentation General Information and Requirements Sources of effective income used to qualify for FHA loans must be verifiable, stable and reasonably expected to continue through the at least the first three (3) years of the Mortgage loan, and as such, Endeavor America will perform a verbal verification on all loans, regardless of loan or program type. For credit qualifying FHA loans, an IRS 4506T must be executed by each Borrower. If the Borrower only receives W-2 income, then W-2 transcripts can be ordered. Otherwise, tax transcripts for the most recent two (2) years filings are required. Refer to the income type below for additional documentation requirements. EA reserves the right to request full transcripts on a W2 wage earner should documentation in the file indicates additional expense may exist. Income stability takes precedence over job stability when analyzing the Borrower s employment record to determine probability of continued employment. The Underwriter would likely consider favorably a Borrower who had frequent job changes within the same line of work, but continued to advance in income or benefits, if there was no significant negative impact to Borrower s credit from the frequent job changes. Below are the documentation requirements for the acceptable sources of income as well as the income stability, organized in two parts. Endeavor America Loan Services 05/18/2016 Page 88 of 191

89 Employment and Income Documentation Current Employment TOTAL DU/LSC Approve Written VOE or Verbal VOE with 3 rd party employer validation Most recent paystub that covers at least one (1) full month of employment including: Year-to-date information Bonus information Overtime information Loans with qualifying FICOs of , all Borrowers on application must be employed with their current employer for a minimum of 12 months Same as DU Manual Underwrite Employment History TOTAL DU/LSC Approve Borrower s previous two years employment history must be verified and documented. Direct verification is not required if ALL the following conditions are met: Current employer confirms two (2) year history; or a paystub reflects the hiring date; Base pay only is used to qualify (no overtime or bonuses); Manual Underwrite Borrower s previous two (2) years employment history must be verified with: Written VOEs W-2s W-2 transcripts or tax transcripts 4506T Endeavor America Loan Services 05/18/2016 Page 89 of 191

90 Employment and Income Documentation Employment Gaps Frequent change in employment If the Borrower has changed jobs more than three (3) times in the previous 12 months, or has changed lines of work, we must take additional steps to verify and document the stability of the Borrower s employment income. Additional analysis is not required for fields of employment that regularly require a Borrower to work for various employers (such as temp companies or union trades). The following documentation requirements are: Transcripts of training and education demonstrating qualification for a new position; or Employment documentation evidencing continual increase in income and/or benefits. Addressing temporary reduction in income for Borrowers with a temporary reduction of employment income due to short-term disability or similar temporary leave, the Underwriter may consider the Borrower s current income as effective income, if it can verify and document: The Borrower intends to return to work; The Borrower has the right to return to work; and The Borrower qualifies for the Mortgage taking into account any reduction of income due to the circumstances. For Borrowers returning to work before or at the time of the first mortgage payment due date, the Underwriter may use the Borrower s current income plus available surplus liquid asset reserves (above and beyond the required reserves) as an income supplement up to the amount of the Borrower s pre-leave income. The amount of the monthly income supplement is that total amount of surplus reserves divided by the number of months between the first payment due date and the Borrower s intended date of return to work. Required documentation the following documentation for the Borrower s temporary leave must be provided: A written statement from the Borrower confirming their intent to return to work, and the intended date of return; Documentation generated by the Borrower s current employer confirming the Borrower s eligibility to return to their current employer after temporary leave; and Documentation of sufficient liquid assets, in accordance with the sources of funds requirements, used to supplement the Borrower s income through intended date of return to work with their current employer. Endeavor America Loan Services 05/18/2016 Page 90 of 191

91 Employment and Income Documentation Alimony/Child Support TOTAL DU/LSC Approve Most recent three (3) months canceled checks or bank statements to document receipt and deposit Divorce decree (front page and applicable pages) providing details of support payments and prove three (3) years continuance. Effective with Case Assignments on or after 9/14/15 Voluntary payment agreements require the following: 12 months canceled checks, deposit slips, or tax returns; if there is evidence of receipt for the most recent six (6) months, may use the current payment to calculate income; if there are not six (6) months of consistent payments, may average the income received over the prior two (2) years, or less if the income has not been received that long Manual Underwrite 12 months receipt for manual approval Divorce decree (front page and applicable pages) providing details of support payments and prove three (3) years continuance. Voluntary payment agreements require the following: 12 months canceled checks, deposit slips, or tax returns; if there is evidence of receipt for the most recent six (6) months, may use the current payment to calculate income; if there are not 6 months of consistent payments, may average the income received over the prior two (2) years, or less if the income has not been received that long Endeavor America Loan Services 05/18/2016 Page 91 of 191

92 Employment and Income Documentation Auto Allowance Auto allowance refers to the funds provided by the employer for car related expenses. Only the amount that an auto allowance and/or expense account payments exceed the actual expenditures can be considered income. Required documentation: Employer must verify in writing that the auto allowance will continue; Verify auto allowance received from the employer for the previous two (2) years. Tax returns for the most recent two (2) years, with all schedules including IRS Form 2106 Employee Business Expenses. To calculate the amount of auto allowance that may be considered as effective income: Average the auto expenses in the past two (2) years filed under IRS Form 2106, and o If the Borrower uses standard per-mile rate in calculating auto expenses, as opposed to actual cost method, the portion that IRS considers depreciation may be added back to income. Subtract the averaged expenses from the current amount of the auto allowance received; and Add as qualifying income if positive amount. Expenses that must be treated as recurring debt for DTI calculation: Borrower s monthly car payment which cannot be offset by the car allowance; If there is a loss between the car allowance and actual expenditures. Bonus and Overtime The Underwriter may use overtime and bonus income as effective income if the Borrower has received this income for the past two (2) years and it is reasonably likely to continue. Periods of overtime and bonus income less than two (2) years may be considered effective income if the Underwriter documents that the overtime and bonus income has been consistently earned over a period of not less than one year and is reasonably likely to continue. Calculation of Effective Income For employees with overtime or bonus income, Underwriter must average the income earned over the previous two (2) years to calculate effective income. However, if the overtime or bonus income from the current year decreases by 20% or more from the previous year, the Underwriter must use the current year s income. Endeavor America Loan Services 05/18/2016 Page 92 of 191

93 Employment and Income Documentation Capital Gains/Losses Generally, capital gains or losses are one time occurrences from the disposition of an asset (stock, bond, or real estate), and should not be considered as effective income. However, this type of income may be considered when a Borrower has a constant turnover of assets based on the following requirements: At least three (3) years tax returns are required to evaluate the earnings trend; and If the trend results in a gain, it may be added as effective income; or If the trend consistently shows a loss, it must be deducted from the total qualifying income. The Borrower must document anticipated continuation of income through verified assets. Commission Income Use commission income as effective income if the Borrower earned the income for at least one year in the same or similar line of work and it is reasonably likely to continue. Required Documentation For commission Income less than or equal to 25% of the Borrower s total earnings, Underwriter must use traditional or alternative employment documentation. For commission income greater than 25% of the Borrower s total earnings, the Underwriter must obtain signed tax returns, including all applicable schedules, for the last two (2) years. In lieu of signed tax returns from the Borrower, obtain the most recent two (2) years of 1040 tax transcripts. Calculation of Effective Income The Underwriter must calculate effective income for commission by using the lesser of (a) the average net commission income earned over the previous two years, or the length of time commission income has been earned if less than two (2) years; or (b) the average net commission income earned over the previous one (1) year. The Underwriter must calculate net commission Income by subtracting the unreimbursed business expenses from the gross commission income. The Underwriter must reduce the effective income by the amount of any unreimbursed employee business expenses, as shown on the Borrower s Schedule A or Form Endeavor America Loan Services 05/18/2016 Page 93 of 191

94 Employment and Income Documentation Disability Income Long-term disability income (such as worker s compensation or private insurance) may be considered qualifying income with a reasonable expectation of continuance for three (3) years from the date of Application. Temporary/short-term disability income is not considered consistent or stable income source and may not be used to qualify. Required documentation: Current disability income verified with most recent check or bank statement with direct deposit; Last Notice of Award (or its equivalent document) that establishes the award of benefits to the Borrower. Continuance may be documented with: Social Security Disability Income with last Notice of Award. Refer to Social Security Benefits section for additional documentation requirements. Verification of VA Benefits (form VA Form ) verifies the Borrower s benefit amount for VA disability compensation or non-service connected pension. Private disability provider must verify or document the amount of assistance and the expiration date of benefits, if any. If no defined expiration date, the disability income may be considered likely to continue. Note: Under no circumstance may the Borrower be asked to document the nature of his/her disability or medical condition. Pending or current re-evaluation of medical eligibility for benefit payments is not considered an indication that the benefit payment is not likely to continue. If disability income will expire within three (3) years of the Mortgage Application, it may only be considered as a compensating factor. If non-taxable, disability income may be grossed up and used to qualify. Family Employer The Borrower must provide the standard income documentation; and Evidence of the Borrower is not an owner of the family-owned business with one of the following: Signed personal tax returns for most recent two (2) years; Signed federal business returns for most recent two (2) years, showing ownership percentages (usually shown on Schedule K-1), if applicable. Endeavor America Loan Services 05/18/2016 Page 94 of 191

95 Employment and Income Documentation Farm Income/Loss In reviewing tax returns or tax transcripts, farm income/loss filed on IRS Form Schedule F must be included in Borrower s income analysis. Depreciation may be added back for most recent two (2) years; If the farm income/loss is derived from the Subject Property, the Property is considered as ineligible for financing by EA. Interest and Dividend Interest and dividend income may be considered for qualifying if: Consistent history of receipt for the past two (2) years and year-to-date interest earned/dividend distributions; Three (3) years continuance documented by the most recent statement of the underlying asset(s) that is the source of the income. o If the interest-bearing asset will be liquidated for minimum required cash investment and/or loan closing, then deduct this amount and determine impact before calculating continuance. Primary Employment Primary Employment is the Borrower s principal employment, unless the income falls within a specific category identified below. Primary employment is generally full-time employment and may be either salaried or hourly. Calculation of Effective Income Salary For employees who are salaried and whose income has been and will likely be consistently earned, the Underwriter must use the current salary to calculate Effective Income. Hourly For employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower s current hourly rate to calculate effective income. For employees who are paid hourly and whose hours vary, the Underwriter must average the income over the previous (2) two years. If the Underwriter can document an increase in pay rate the Underwriter may use the most recent 12-month average of hours at the current pay rate. Endeavor America Loan Services 05/18/2016 Page 95 of 191

96 Employment and Income Documentation Military Income Active Duty Most recent Leave and Earnings Statement (LES) and past two (2) years W-2s verifies base pay and allowances. Basic allowances: quarters (BAH), subsistence (BAS) and clothing o non-taxable and may be grossed up as effective income Additional allowances: flight or hazard pay, pro-pay, overseas pay and combat pay, voluntary separation (VSI): o may not be grossed up if taxable; and o verified continuance to use as effective income. If the Borrower s active duty release date or the end of the contract term is within 12 months of the closing date, obtain any of the following: Document re-enlistment to a date beyond the 12-month period from the closing. A statement from the service member that he/she intends to re-enlist or extend his/her period of active duty to date beyond the 12- month period plus a statement from his/her commanding officer confirming the service member is eligible to re-enlist or extend his/her active duty and that there is no reason re-enlistment or extension of active duty will not be granted. Verification of a valid offer of local civilian employment following the release from active duty. Reserve/National Guard Borrower must indicate whether his/her income will change in any part due to his/her participation in the Reserve/National Guard, and If Reserve/National Guard income will probably continue based on total length of service, then this income may be used to qualify. If continuance is not likely, the income may be considered compensating factor. For recently activated Reserve/National Guard, document the Borrower s income upon unit activation and duration of the temporary assignment. If income will be reduced by leaving current job, carefully evaluate the impact to the Borrower s ability to repay the loan as well as manage their current expenses. Borrower must certify property will continue to be their Primary Residence if temporary assignment will be completed within the first year of the FHA Mortgage servicing. If income will increase, then consider the likelihood the income will continue beyond a 12-month period. VA Benefits VA benefits must be documented by a copy of the veterans last benefits letter showing the amount of the assistance, and one of the following documents: Federal tax return; or Most recent bank statement evidencing receipt of income from the VA If the benefits letter does not have a defined expiration date, the mortgagee may consider the income effective and likely to continue for at least three years. VA Education Benefits are for education expenses. This benefit may not be used to qualify nor used to offset student loan payments. Endeavor America Loan Services 05/18/2016 Page 96 of 191

97 Employment and Income Documentation Non-Taxable Income Certain types of regular income may be federal tax-exempt including: Portion of social security benefits Some military allowances Child support Railroad retirement benefits Some federal or state government employee retirement income Note: Do not include the non-taxable portion in the residual income calculation for consideration as a compensating factor. The percentage of non-taxable income that may be added cannot exceed greater of 15% or the appropriate tax rate for the income amount, based on the Borrower s tax rate for the previous year. If the Borrower not required to file a federal tax return for the previous tax reporting period, the Underwriter may gross up non-taxable income by a maximum of 15%; however, there may not be additional adjustments or allowances made based on the number of the Borrower s dependents. Endeavor America Loan Services 05/18/2016 Page 97 of 191

98 Employment and Income Documentation Section 8 Homeownership Vouchers (TOTAL) (E) Definition: Section 8 Homeownership Vouchers refer to housing subsidies received under the Housing Choice Voucher Homeownership option from a Public Housing Authority/Agency (PHA). Required documentation The Underwriter must document and verify the Borrower s receipt of the housing choice voucher homeownership subsidies; the Underwriter may consider this income is reasonably likely to continue for three (3) years. Calculation of Required Income The Underwriter may only use the Section 8 Homeownership Voucher subsidies as effective income if it is not used as on offset to the monthly Mortgage payment. The Underwriter must use the current subsidy rate to calculate the effective income. Other Public Assistance (TOTAL) (F) Definition: Public assistance refers to income received from government assistance programs. Required documentation The Underwriter must document and verify income received from the government agency. If any public assistance income is due to expire within three (3) years from the date of the Mortgage Application, that income cannot be used as effective income. If the documentation does not have a defined expiration date, the Underwriter may consider the income effective and reasonably likely to continue. Calculation of Effective Income The Underwriter must use the current rate of public assistance received to calculate the effective income. Endeavor America Loan Services 05/18/2016 Page 98 of 191

99 Employment and Income Documentation Part-Time and Seasonal Part-time employment refers to employment that is not the Borrower s primary employment and is generally performed for less than 40 hours per week. The Underwriter may use employment income from part-time employment as effective income if the Borrower has worked a parttime job uninterrupted for the past two years and the current position is reasonably likely to continue. Calculation of Effective Income The Underwriter must average the income over the previous two (2) years. If the Underwriter can document an increase in pay rate, the Underwriter may use a 12-month average of hours at the current pay rate. Seasonal employment can be considered effective income if the Borrower has worked the same line of work for the past two (2) years and is reasonably likely to be rehired for the next season. The Underwriter may consider unemployment income as effective income for those with effective income from seasonal employment. For employees with employment income from seasonal employment, the Underwriter must average the income earned over the previous two (2) full years to calculate effective income. Required Documentation For seasonal employees with unemployment income, the Underwriter must document the unemployment income for two (2) full years and there must be reasonable assurance that this income will continue. Endeavor America Loan Services 05/18/2016 Page 99 of 191

100 Employment and Income Documentation Parsonage Housing Allowance When the employer subsidizes a Borrower s Mortgage through direct payments, this housing allowance may only be considered in Borrower s gross income. Employer to verify the current subsidy amount and that Borrower will continue to be eligible to receive this compensation Document the receipt history of Mortgage assistance. The subsidy may not be used to offset the Mortgage payment directly, even if the employer pays the servicing Underwriter directly. Rental Income Rental income from other real estate holdings may be considered effective income if the documentation requirements listed below are met. If rental income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from their Principal Residence. The Underwriter must obtain a lease agreement of at least one year s duration after the Mortgage is closed and evidence of the payment of security deposit or first month s rent. Limited or No History of Rental Income When the Borrower does not have a history of rental income for the Property since the previous tax filing, including Property being vacated by the Borrower, the Underwriter must obtain an appraisal evidencing market rent and that the Borrower has at least 25% equity in the Property. The appraisal is not required to be completed by an FHA Roster Appraiser. Two to Four Units The Underwriter must verify and document the proposed rental income by obtaining an appraisal showing fair market rent (use Fannie Mae Form 1025/Freddie Mac Form 72, Small Residential Property Appraisal Report) and, if available, the prospective leases. One Unit The Underwriter must verify and document the proposed rental income by obtaining the Fannie Mae Form 1004/Freddie Mac Form 70 (Uniform Residential Appraisal Report), Fannie Mae Form 1007/Freddie Mac Form 1000 (Single Family Comparable Rent Schedule), and Fannie Mae Form 216/Freddie Mac Form 998 (Operating Income Statement), showing fair market rent, and if available, the prospective lease. Endeavor America Loan Services 05/18/2016 Page 100 of 191

101 Employment and Income Documentation History of Rental Income The Underwriter must obtain the Borrower s last two (2) years tax returns with Schedule E. Limited or No History of Rental Income To calculate the effective net rental income from other real estate holdings where the Borrower does not have a history of rental income since the previous tax filing, the Underwriter must deduct the principal, interest, taxes, and insurance (PITI) from the lesser of: The monthly operating income reported on Freddie Mac Form 998; or 75% lesser of fair market rent reported by the Appraiser; or The rent reflected in the lease or other rental agreement History of Net Rental Income The Underwriter must calculate the net rental income by averaging the amount shown on the Schedule E provided the Borrower continues to own all properties included in the Schedule E. Depreciation shown on Schedule E may be added back to the net income or loss. If the property has been owned for less than two (2) years, the Underwriter must annualize the rental income for the length of time the property has been owned. For properties with less than two (2) years of rental income history, the Underwriter must document the date of acquisition by obtaining the Mortgage Security Instrument (Mortgage/Deed of Trust), executed Final HUD-1 Settlement Statement (loan applications on/before 10/02/2015) or Closing Disclosure (loan applications on/after 10/03/2015), or similar legal document. Positive net rental income must be added to the Borrower s effective income. Negative net rental income must be included as a debt/liability. Endeavor America Loan Services 05/18/2016 Page 101 of 191

102 Employment and Income Documentation Self-Employed Borrower The Underwriter may consider Self-Employment income if the Borrower has been self-employed for at least two (2) years. If the Borrower has been self-employed between one (1) and two (2) years, the Underwriter may only consider the income as Effective Income if the Borrower was previously employed in the same line of work in which the Borrower is self-employed or in a related occupation for at least two (2) years. Stability of Self-Employment Income Income obtained from businesses with annual earnings that are stable or increasing is acceptable. If the income from businesses shows a greater than 20% decline in effective income over the analysis period, the loan must be manually downgraded, and the Underwriter must document that the business income is now stable. The income may be considered stable after a 20% reduction if the Underwriter can document the reduction in income was the result of an extenuating circumstance, the Borrower can demonstrate the income has been stable or increasing for a minimum of 12 months, and the Borrower qualifies utilizing the reduced income. Endeavor America Loan Services 05/18/2016 Page 102 of 191

103 Employment and Income Documentation Self-Employed Income Documentation Requirements AUS Approve/Accept Two (2) years most recent federal personal tax returns with all schedules and referenced statements. No business tax returns required if all are met: personal tax returns show increasing self-employed income; Business accounts are not the source of funds to close; FHA-insured Mortgage transaction is not a Cash-Out Refinance. YTD P&L and Balance Sheet (balance sheet not required for schedule C) Tax transcripts are still required; Resolve any discrepancies prior to final loan approval. AUS Refer/Manual Underwrite Two (2) years most recent federal personal tax returns with all schedules and referenced statements. Two (2) years most recent federal business tax returns with all schedules and referenced statements if business structure is partnership or S-corporation. YTD P&L and Balance Sheet (balance sheet not required for schedule C) Tax transcripts are still required; Resolve any discrepancies prior to final loan approval. Business credit report for a corporation or S-corporation Business Tax Returns AUS Approve/Accept Business tax returns are not required if the Borrower meets all of the following: Two (2) years most recent personal federal tax returns including all schedules, reflecting increasing self-employed income; and Business accounts are not the source of funds to close; and FHA-insured Mortgage transaction is not a Cash-Out Refinance. Tax transcripts are still required and any discrepancies must be resolved prior to final loan approval. AUS Refer/Manual Underwrite Two (2) years most recent personal tax returns with all schedules and referenced statements. Two (2) years most recent business tax returns with all schedules and referenced statements. Tax transcripts Endeavor America Loan Services 05/18/2016 Page 103 of 191

104 Employment and Income Documentation Self-Employed Borrower (continued) Self-Employed Profit and Loss; Balance Sheet Borrower s Earnings Trend When qualifying a self-employed Borrower, the earning trend must be established from the previous two (2) years using the tax returns. If the Borrower provides quarterly tax returns, the income analysis may include income through the period covered by the tax filings. If the Borrower is not subject to quarterly tax returns, or does not file them, the income analysis shown on the P&L may be included in analysis, provided the income stream based on the P&L is consistent with previous years earnings. If the P&L statements submitted for the current year show an income stream considerably greater than what was supported by the previous year s tax returns, the Underwriter must base the income analysis solely on the income verified through the tax returns. If the Borrower s earnings trend for the previous two (2) years is downward, and the most recent tax return or P&L is less than the prior year s tax return, the Borrower s most recent tax return or P&L must be used to calculate his/her income. Business Financial Strength The business income should be analyzed to determine if the Borrower s business is expected to generate sufficient income for his/her needs, the Underwriter must carefully analyze the business financial strength including the: Source of the business income General economic outlook for similar businesses in the area. Annual earnings that are stable or increasing are acceptable, while businesses that show a significant decline in income over the analysis period are not acceptable, even if the current income and debt ratio meet FHA guidelines. Social Security Benefits All income from the Social Security Administration (SSA) may be used as qualifying income if verified and likely to continue for at least three (3) years from the Application date. SSA pays retirement benefits and disability benefits Social Security Disability Insurance (SSDI) for the Borrower and Supplemental Security Income (SSI) for the dependent. SSA benefits may be verified with: Federal tax returns; Most recent bank statement evidencing SSA direct deposit; Budget Letter or Benefits Letter that evidences income from the SSA; Social Security Benefit Statement, SSA-1099/1042S Endeavor America Loan Services 05/18/2016 Page 104 of 191

105 Employment and Income Documentation Social Security Benefits (continued) Benefits continuance may be documented with: SSA s last issued Notice of Award letter (or its equivalent document) in which SSA determined Borrower s eligibility and benefits benefit income. If no defined expiration date, benefits shall be considered likely to continue without additional Borrower documentation. NOTE: Under no circumstance may the Underwriter inquire into or request documentation concerning the nature of the disability or the medical condition of the Borrower. Pending or current re-evaluation of medical eligibility for benefit payments is not considered an indication that the benefit payment is not likely to continue. If benefits will expire within three (2) years of the Mortgage Application, it may only be considered as a compensating factor. If SSA s Notice of Award specifies a start date in future, this amount may be considered as effective income. The Borrower must have other income to qualify for the Mortgage until the start date for receipt of income. Tip Income Tip income must have been received for at least the most recent two (2) years. Tip income should be averaged over the past two (2) years and documented as follows: Tip income is included in the W-2, then obtain: Only W-2 transcripts may be requested; and Written VOE with verified continuance and breakdown of tip income history for past two (2) years and YTD; and Most recent paystub and past two (2) years W-2s Tip income is not included in W-2, then document with: Tax transcripts are required; and Tax returns for past two (2) years, complete with all schedules and referenced statements; Subtract any unreimbursed employee expenses Written VOE with verified continuance and breakdown of tip income history for past two (2) years and YTD; Most recent paystub and past two (2) years W-2s Endeavor America Loan Services 05/18/2016 Page 105 of 191

106 Escrows/Insurance Hazard Insurance General Requirements Hazard insurance provides coverage for Property damage caused by fire, wind, or other natural disasters. Special coverage (or an endorsement to the Homeowner s Policy) is typically required for damage caused by other types of localized hazards such as flood, earthquake, high winds, hurricane, sinkhole, mine subsidence, and/or volcanic eruption. Manufactured Homes The minimum coverage is determined by the Insurer. Coverage Requirements At a minimum, the Mortgage premises must be protected against loss/damage from fire, and other dangers within the scope of standard extended coverage. The coverage should provide for claims to be settled on a replacement costs basis. The Policy must contain the standard clause that the Insurer will notify the named Underwriter at least 10 days before a reduction in coverage or a cancellation of the Policy. Deductibles The maximum deductible may be up to $2,500 for single family and multiple-unit properties. Refinance Minimum of two (2) months remaining coverage from the first payment of the Note. Endeavor America Loan Services 05/18/2016 Page 106 of 191

107 Escrows/Insurance Flood Insurance A Standard Flood Hazard Determination (flood certificate) is required on all loans. If none is shown in the Flood Designation Area because FEMA has not yet mapped the Subject area, EA does not require flood insurance. $250,000 per unit is the maximum insurance available under the appropriate NFIP. The maximum available also applies to PUD projects. $5,000 maximum deductibles for 1-4 unit Properties and PUD policies. PUD master policy may not exceed $25,000 maximum deductible. The following guidance applies to minimum flood insurance coverage: A Life of the Loan flood certification is required on all loans to determine if the Property is located in a SFHA as designated by the Federal Emergency Management Agency (FEMA) For properties located within a SFHA, flood insurance must be maintained for the life of the Mortgage. The minimum coverage must be equal to the lowest of: the appraiser s estimated replacement cost, less the site value; or the outstanding mortgage balance; or the maximum of NFIP insurance available with respect to the Property improvements. Reference: FHA II.A.1.b.iv(A)(1)(e); Wind Insurance Windstorm coverage is required and is usually included under the standard extended hazard coverage policy. If windstorm coverage is excluded/limited, then the Borrower must obtain a separate policy or an endorsement from another Commercial Insurer that, with the existing Policy, provides adequate total coverage. Max deductible may not exceed 5% of the limited maintained for dwelling coverage, or the maximum allowed under state law. Endeavor America Loan Services 05/18/2016 Page 107 of 191

108 Real Estate Taxes Property Tax Calculation Purchase Refinance CA Properties Use the higher of the actual amount on the Title Report or 1.25% of the sales price. Use the amount on the Title Report unless the Property was purchased in the last 12 months. Then use the higher of the amount on the Title Report or 1.25% of the previous All Other States Use the amount on the Title Report unless the tax information sheet completed by the Title company shows a higher amount. sales price. Use the amount on the Title Report or tax certification. States with Taxes Paid in Arrears The following guidance applies to states with taxes paid in arrears: If subject Property is located in a state where the real estate taxes are paid in arrears, the seller s real estate tax credit may be used to meet the FHA s MRI only if the Borrower can document sufficient assets from acceptable sources of funds to meet the MRI, plus the Borrower paid closing costs at the time of final loan approval. This permits the Borrower to bring a portion of their MRI to the closing and combine that portion with the seller s real estate tax credit for the total MRI. Reference: FHA II.A.4.d.i(B)(2)(j); II.A.5.c.i(B)(2)(j) Endeavor America Loan Services 05/18/2016 Page 108 of 191

109 Escrow Holdbacks Escrow holdbacks due to adverse weather conditions, are permitted for completion of repairs to the Subject to meet HUD Minimum Property Standards. All of the following requirements must be met: The Subject Property is currently habitable and free of any health and safety issues. There is legitimate cause on why deferred repairs cannot be completed prior to the loan closing and will be completed within six (6) months. The Appraiser comments that there is a minimum of $500 worth of repairs but no more than $5,000. Estimate(s) is/are provided from a Licensed Contractor or other qualified professional. Escrow holdback is funded at 150% of the repair estimate(s). Refer to HUD REO Purchase section for specific program requirements. Cost of Borrower labor may not be included in the repair escrow amount. At closing, Borrower will execute Endeavor America s Escrow Holdback Agreement, which identifies the escrow amount as well as the procedures and conditions upon which the required repairs must be completed. There are also two (2) required HUD forms: Underwriter will execute form HUD-92300/Underwriter s Assurance of Completion to indicate the repair escrow has been established. Satisfactory completion of repairs with photos will be done by either the original appraiser or by an active HUD Roster Inspector using form HUD-92051/Compliance Inspection Report. A 1004D form may not be used. Reference: II.A.6.a.viii(B) Endeavor America Loan Services 05/18/2016 Page 109 of 191

110 Identity-of-Interest An Identity-of-Interest transaction is a sale between parties with an existing business relationship or between family members. Business relationship refers to an association between individuals or companies entered into for commercial purposes. Family members are defined as follows, regardless of actual or perceived sexual orientation, gender identify, or legal marital status: child, parent, or grandparent; a child is defined as a son, stepson, daughter, or stepdaughter; a parent or grandparent includes a step-parent/grandparent or foster parent/grandparent; spouse or domestic partner; legally adopted son or daughter, including a child who is placed with the Borrower by an authorized agency for legal adoption; foster child; brother, stepbrother; sister, stepsister; uncle; aunt; or son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the Borrower. Endeavor America Loan Services 05/18/2016 Page 110 of 191

111 Identity-of-Interest Maximum LTV for Identity-of-Interest/Landlord Transactions The maximum LTV percentage for an Identity-of-Interest transaction on Principal Residences is restricted to 85%. The maximum LTV percentage where a tenant/landlord relationship exists at the time of contract execution is restricted to 85%. Maximum LTV Exceptions The 85% maximum LTV restriction does not apply for Identity-of-Interest transactions under the following circumstances: a) Family Member Transactions The Principal Residence of another family member; or Property owned by another family member in which the Borrower has been a tenant for at least six (6) months immediately predating the Sales Contract. A lease or other written evidence to verify occupancy is required. b) Builder s Employee Purchase c) Corporate Transfer d) Tenant Purchase The 85% LTV restriction may be exceeded if the employee of the Builder, who is not a family member, purchases one of the Builder s new houses or models as a Primary Residence. The 85% LTV restriction may be exceeded if a corporation transfer an employee to another location, purchases the employee s house, and sells it to another employee. The 85% LTV restriction may be exceeded if the current tenant purchases the Property where the tenant has rented the Property for at least six (6) months immediately predating the Sales Contact. A lease or other written evidence to verify occupancy is required. Endeavor America Loan Services 05/18/2016 Page 111 of 191

112 Interested Party Concessions FHA limits 6% maximum contributions paid by the Seller (or any party involved in the transaction) toward the Buyer s closing costs and/or prepaids on purchases. The 6% limit also includes: Interested Party payment for permanent and temporary interest rate buydowns, and other payment supplements Payments of mortgage interest for fixed rate mortgages Mortgage Payment Protection insurance and Payment of UFMIP (in full-no partial payment allowed) Interested Party Contributions may not be used for the Borrowers Minimum Required Investment. Maximum Loan Amount The maximum loan amount on a Purchase is calculated by taking the maximum loan-to-value (LTV) for the selected program and multiplying it by the lesser of the sales price or appraised value, and not to exceed FHA Statutory Loan Limit for the applicable county. Maximum Loan Term The maximum loan term for the FHA Mortgage is limited as follows: Purchases, Rate & Term, Simple Refinances, and Cash-Out Refinances: never longer than the remaining economic life of the Property as verified by the appraisal Streamline refinances without an appraisal: lesser of the remaining term of the existing Mortgage plus 12 years, or 30 years. Endeavor America Loan Services 05/18/2016 Page 112 of 191

113 Mortgage Insurance UFMIP/Monthly MIP The following chart provides the current upfront MIP and annual MIP factors for standard and high balance loan amounts. *Streamline refinances endorsed on or 0.01% UFMIP 0.55% Annual MIP before May 31, 2009 Loan Limits Region 1 Unit Low Cost Areas $271,050 High Cost Areas $625,500 AK and HI $938,250 Check FHA Mortgage limits per Subject Property county Endeavor America Loan Services 05/18/2016 Page 113 of 191

114 Qualifying AUS TOTAL Scorecard Approvals Qualifying ratios up to 50% and credit trade line requirements as per valid DU/LSC approval. DTI exceeding 50% requires two (2) of the four (4) compensating factors below: 680+ FICO and three (3) tradelines rated for 12 months or 680+ FICO and two (2) tradelines rated for 12 months and a VOR 3 months reserves after closing 12 months on the same job No gift funds used Any installment lates in the last five (5) years after a BK or foreclosure was discharged/released require two (2) of the four (4) compensating factors below: 680+ FICO and three (3) tradelines rate for 12 months or 680+ FICO and two (2) tradelines rated for 12 months and a VOR 3 months reserves after closing 12 months on the same job No gift funds used FICO <640 must have verified housing history reflecting 0x30 for the last 12 months. Housing history must be verified by a management company VOR or private VOR with 12 months canceled checks; credit supplements are not acceptable. Borrowers with individual credit must meet minimum trade line requirement. Spouse with no FICO/ limited credit is not required to meet tradeline requirements so long as primary Borrower meets requirements; Student loans in forbearance with derogatory credit history are not acceptable. Interest only accounts, and deferred student loans are acceptable to meet tradeline requirements Refer Manual Downgrades of this guide to determine when AUS Approve/Accept must be downgraded. Manual Underwrites FHA benchmark ratios are 31%/43% and may be stretched to 33%/45% for an energy efficient home. Maximum qualifying ratios are tiered based on the decision credit score and compensating factors. Refer to Manual Underwriting Matrix of this guide to determine when a loan needs to be manually underwritten. Endeavor America Loan Services 05/18/2016 Page 114 of 191

115 Purchases Principal Residence purchases only. Primary Borrower must occupy the Subject Property within 60 days of Note date and continue principal residency for next year. Borrower must not own a superior Property in regards to size and proximity to work. 96.5% LTV/CLTV on Purchase. The following specific programs may exceed 96.5% LTV/CLTV. o 110% LTV/CLTV for HUD REO Purchase with 203(b) with escrow. Refer to HUD REO Property topic in the Appraisal section for additional requirements. o 100% LTV/CLTV for HUD REO $100 Incentive Purchase o 100% maximum CLTV is manually calculated by Underwriter and based on the acquisitions costs for some down payment assistance programs from government agencies and some HUD approved nonprofits (CLTV reflected in AUS and LOS may seem to exceed 100%). Refer to Down Payment Assistance Program (DAP) topic in the Secondary Financing section of this guide for additional requirements. Maximum Mortgage is calculated based on the lesser of the sales price or the appraised value. Borrower s required minimum cash investment is 3.5% from FHA acceptable sources. Endeavor America Loan Services 05/18/2016 Page 115 of 191

116 Refinances General Eligibility FHA-Insured to FHA-Insured (A) Refinances (FHA-to-FHA) FHA-to-FHA refinances may be used with any refinance type. The Underwriter must obtain a Refinance Authorization Number from FHA Connection (FHAC) for all FHA-to-FHA refinances. FHA will not issue a new case number for any FHA to FHA refinance where the existing mortgage to be paid off has a Repair or Rehabilitation escrow account that has not been electronically closed out in FHAC. General Borrower Eligibility At least one Borrower on the refinancing mortgage must hold title to the property being refinanced prior to case number assignment. General Property Eligibility For a transaction involving a manufactured home to be considered a refinance, the manufactured home must have been permanently erected on a site for more than twelve months prior to case number assignment. General Mortgage Eligibility For cases endorsed on or before September 30, 2015, the Underwriter must not approve any mortgage that refinances or otherwise replaces a mortgage that has been subject to eminent domain condemnation or seizure, by a state, municipality, or any other political subdivision of a state. Required Documentation If the mortgage to be insured is located in an area where a state, municipality, or other political subdivision has exercised eminent domain condemnation or seizure of a mortgage, the Underwriter must obtain a certification from the Borrower stating the mortgage being refinanced was not subject to eminent domain condemnation or seizure. Endeavor America Loan Services 05/18/2016 Page 116 of 191

117 Refinances Cash-Out Refinances Borrower Eligibility Nonprofit agencies, state and local government agencies and instrumentalities of government are not eligible for Cash-Out Refinances. Income from a non-occupant Co-Borrower may not be used to qualify for a Cash-Out Refinance. Occupancy Requirements Cash-Out Refinance transactions are only permitted on owner-occupied principal residences. The Property securing the cash-out refinance must have been owned and occupied by the Borrower as their Principal Residence for the 12 months prior to the date of Case Number assignment. NOTE: At least one Borrower must have owned and occupied for 12 months. A Borrower may be added with documentation supporting they currently occupy the property. Exception In the case of inheritance, a Borrower is not required to occupy the Property for a minimum period of time before applying for a Cash-Out Refinance, provided the Borrower has not treated the subject property as an Investment Property at any point since inheritance of the Property. If the Borrower rents the Property following inheritance, the Borrower is not eligible for Cash-Out Refinance until the Borrower has occupied the Property as a principal residence for at least 12 months. Required Documentation The Underwriter must review the Borrower s employment documentation or obtain utility bills to evidence the Borrower has occupied the Subject Property as their principal residence for the 12 months prior to Case Number assignment. Payment History Requirements The Underwriter must document that the Borrower has made all payments for all their mortgages within the month due for the previous 12 months or since the Borrower obtained the mortgages, whichever is less. Additionally, the payments for all mortgages secured by the Subject Property must have been paid within the month due for the month prior to mortgage disbursement. Properties with mortgages must have a minimum of six (6) months of mortgage payments. Properties owned free and clear may be refinanced as cash-out transactions. Endeavor America Loan Services 05/18/2016 Page 117 of 191

118 Refinances Cash-Out Refinances (continued) Required Documentation If the Mortgage on the Subject Property is not reported in the Borrower s credit report or is not in the name of the Borrower, the Underwriter must obtain a verification of mortgage, bank statements, or other documentation to evidence that all payments have been made by the Borrower in the month due for the previous 12 months. The Underwriter must obtain the payoff statement for all existing mortgages. Maximum Mortgage Amounts Maximum Loan-to-Value The maximum LTV is 85% of the adjusted value. Maximum Combined Loan-to-Value The maximum CLTV is 85% of the adjusted value. Nationwide Mortgage Limit The combined mortgage amount of the first mortgage and any subordinate liens cannot exceed the Nationwide Mortgage Limit described in National Housing Act s Statutory Limits. Endeavor America Loan Services 05/18/2016 Page 118 of 191

119 Refinances No Cash out Refinances Borrower Eligibility Occupancy Requirements Rate and term refinance transactions are only permitted on owner occupied principal residences and HUD-approved secondary residence Required Documentation The Underwriter must review the Borrower s employment documentation or obtain utility bills to evidence the Borrower currently occupies the property and determine the length of time the Borrower has occupied the subject property as their rrincipal residence. Payment History Requirements (Manually Underwritten) For manually underwritten mortgages with less than six months of mortgage payment history, the Borrower must have made all payments within the month due. For manually underwritten mortgages with greater than six months history, the Borrower must have made all mortgage payments within the month due for the six months prior to case number assignment and have no more than one 30-Day late payment for the previous six months for all Mortgages. The Borrower must have made the payments for all mortgages secured by the subject property for the month prior to mortgage disbursement. Required Documentation If the mortgage on the subject property is not reported in the Borrower s credit report, the Underwriter must obtain a verification of mortgage to evidence payment history for the previous 12 months. Endeavor America Loan Services 05/18/2016 Page 119 of 191

120 Refinances Maximum Mortgage Amount Maximum Loan-to-Value Ratio The maximum LTV for a Rate and Term refinance is: 97.75% for Principal Residences that have been owner-occupied for previous 12 months, or owner-occupied since acquisition if acquired within 12 months, at case number assignment; 85% for a Borrower who has occupied the subject Property as their Principal Residence for fewer than 12 months prior to the case number assignment date; or if owned less than 12 months, has not occupied the Property for that entire period of ownership; or 85% for all HUD-approved Secondary Residences. Calculating Maximum Mortgage Amount The maximum mortgage amount for a Rate and Term refinance is: the lesser of: the Nationwide Mortgage Limit; the maximum LTV based on the maximum LTV ratio from above; or the sum of existing debt and costs associated with the transaction as follows: o existing debt includes: the unpaid principal balance of the first mortgage as of the month prior to mortgage disbursement; the unpaid principal balance of any purchase money junior mortgage as of the month prior to mortgage disbursement; the unpaid principal balance of any junior liens over 12 months old as of the date of mortgage disbursement. If the balance or any portion of an equity line of credit in excess of $1,000 was advanced within the past 12 months and was for purposes other than repairs and rehabilitation of the Property, that portion above and beyond $1,000 of the line of credit is not eligible for inclusion in the new mortgage; ex-spouse or Co-Borrower equity, as described in Refinancing to Buy out Title Holder Equity below; interest due on the existing mortgage(s); Mortgage Insurance Premium (MIP) due on existing mortgage; any prepayment penalties assessed; late charges; and escrow shortages; allowed costs include all Borrower paid costs associated with the new mortgage; and any Borrower-paid repairs required by the appraisal; less any refund of the Upfront Mortgage Insurance Premium (UFMIP), if financed in the original mortgage. Endeavor America Loan Services 05/18/2016 Page 120 of 191

121 Refinances Simple Refinance Simple Refinance refers to a no cash-out refinance of an existing FHA-insured Mortgage in which all proceeds are used to pay the existing FHA-insured mortgage lien on the subject property and costs associated with the loan transaction. Borrower Eligibility Simple Refi is only permissible for owner-occupied principal residence Note: EA does not allow second homes under the Simple Refinance program Required Documentation The lender must review the borrower s employment documentation to or obtain utility bills to evidence the borrower currently occupies the property as their principal residence. Maximum LTV The maximum LTV ratio for Simple Refinance is: percent Maximum CLTV The maximum CLTV foro a simle refinance is: percent Calculating Maximum Mortgage Amount for Simple Refinance The maximum mortgage amount for a simple refinance is: The lesser of: The Nationwide Mortgage Limit: The maximum LTV ratio from above; or The sum of existing debt and costs associated with the transaction as follows: Existing debt includes: o Unpaid principal balance of the FHA insured first mortgage as of the month prior to mortgage dispursement; o Interest due on existing mortgage Note: EA does not allow late charges and escrow shortages as a cost associated with the maximum mortgage calculation Allowed costs include all borrower paid costs associated with the new mortgage; and Borrower paid repairs required by the appraisal; o Less any refund of UFMIP (if financed in the original mortgage) Excess Cash Back When the estimated costs utlized in calculating the maximum mortgage amount resulted in great than $500 cash back to the borrower at mortgage dispursement, the lender may reduce the borrower s outstanding principal balance to satisfy the $500 cash back requirement. Endeavor America Loan Services 05/18/2016 Page 121 of 191

122 Refinances Short Payoff Short Payoffs The Underwriter may approve a Rate and Term Refinance where the maximum mortgage amount is insufficient to extinguish the existing mortgage debt, provided the existing Note holder writes off the amount of the indebtedness that cannot be refinanced into the new FHA-insured mortgage. Refinancing to Buy Out Title-Holder Equity When the purpose of the new mortgage is to refinance an existing mortgage to buy out an existing title-holder s equity, the specified equity to be paid is considered property-related indebtedness and eligible to be included in the new mortgage calculation. The Underwriter must obtain the divorce decree, settlement agreement, or other legally enforceable equity agreement to document the equity awarded to the title-holder. Refinancing to Pay off Recorded Land Contracts When the purpose of the new mortgage is to pay off an outstanding recorded land contract, the unpaid principal balance shall be deemed to be the outstanding balance on the recorded land contract. Endeavor America Loan Services 05/18/2016 Page 122 of 191

123 Refinances Use of Estimates in Calculating Maximum Mortgage Amount The Underwriter may utilize estimates of existing debts and costs in calculating the maximum mortgage amount to the extent that the actual debts and costs do not result in the Borrower receiving greater than $500 cash back at mortgage disbursement. Cash to the Borrower resulting from the refund of Borrowers unused escrow balance from the previous mortgage must not be considered in the $500 cash back limit whether received at or subsequent to mortgage disbursement. Excess Cash Back When the estimated costs utilized in calculating the maximum mortgage amount result in greater than $500 cash back to the Borrower at mortgage disbursement, Underwriters may reduce the Borrower s outstanding principal balance to satisfy the $500 cash back requirement. The Underwriter must submit the mortgage for endorsement at the reduced principle amount. Required Documentation The Underwriter must obtain the payoff statement on all existing mortgages. Maximum Combined Loan-to-Value Ratio The maximum CLTV ratio for a Rate and Term refinance is 97.75%. For open-end line of credit the Underwriter must utilize the maximum accessible credit limit of the subordinate lien to calculate the CLTV ratio Endeavor America Loan Services 05/18/2016 Page 123 of 191

124 Streamline Refinance Streamline Refinance Streamline Refinance may be used when the proceeds of the mortgage are used to extinguish an existing FHA-insured first mortgage lien. Underwriters must manually underwrite all Streamline Refinances in accordance with the guidance provided in this section. Streamline Refinance Exemptions Non-Credit Qualifying Exemptions Unless otherwise stated in this section, the following sections of Origination through Post-Closing/ Endorsement do not apply to non-credit qualifying Streamline Refinances: Ordering Appraisal Transferring Existing Appraisal Ordering Second Appraisal Ordering an Update to an Appraisal Borrower Minimum Decision Credit Score Borrower and Co-Borrower Ownership and Obligation Requirements Cosigner Requirements Principal Residence in the United States Military Personnel Eligibility Citizenship and Immigration Status Residency Requirements Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt Delinquent Federal Tax Debt Property Eligibility and Acceptability Criteria National Housing Act s Statutory Limits Nationwide Mortgage Limits LTV Limitations Based on Borrower s Credit Score Underwriting the Property Underwriting the Borrower Using the TOTAL Mortgage Scorecard Credit Requirements (Manual) Income Requirements (Manual) Asset Requirements (Manual) Underwriting of Credit and Debt (Manual) Underwriting of Income (Manual) Underwriting of Assets (Manual) Calculating Qualifying Ratios (Manual) Approvable Ratio Requirements (Manual) Documenting Acceptable Compensating Factors (Manual) Endeavor America Loan Services 05/18/2016 Page 124 of 191

125 Streamline Refinance Credit Qualifying Exemptions The following sections of Origination through Post-Closing/Endorsement do not apply to credit qualifying Streamline Refinances: Ordering Appraisal Transferring Existing Appraisal Ordering Second Appraisal Ordering an Update to an Appraisal Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt Delinquent Federal Tax Debt Property Eligibility and Acceptability Criteria National Housing Act s Statutory Limits Nationwide Mortgage Limits LTV Limitations Based on Borrower s Credit Score Underwriting the Property Underwriting the Borrower Using the TOTAL Mortgage Scorecard Borrower Eligibility Streamline Refinances may be used for principal residences or non-owner occupied properties. Required Documentation The Underwriter must review the Borrower s employment documentation or obtain utility bills to evidence that the Borrower currently occupies the property as their principal residence. The Underwriter must obtain evidence that the secondary residence has been approved by the Jurisdictional HOC. The Underwriter must process the Streamline Refinance as a non-owner occupied property if the Underwriter cannot obtain evidence that the Borrower occupies the property either as a principal or secondary residence Payment History Requirements Non-Credit Qualifying The Borrower must have made all mortgage payments for all mortgage on the subject property within the month due for the six months prior to case number assignment and have no more than one 30-day late payment for the previous six months for all mortgages on the subject property. The Borrower must have made the payments for all mortgages secured by the subject property within the month due for the month prior to mortgage disbursement. Borrower must have made at least six (6) payments on or before the Case Number assignment date Credit Qualifying The borrower must have made all mortgage payments for all mortgages on the subject property within the month due for the six months prior to the case assignment. The borrower must have made the payment for all mortgages secured by the subject property within the month due for the month prior to mortgage disbursement. For all mortgage on all other properties, the borrower must have no more than one 30-day late payment for the previous six months. Endeavor America Loan Services 05/18/2016 Page 125 of 191

126 Streamline Refinance Required Documentation If the Mortgage on the Subject Property is not reported in the Borrower s credit report, the Underwriter must obtain a verification of mortgage (VOM) to evidence payment history for the previous 12 months. Non-Owner Occupied Properties and HUD-Approved Secondary Residences Non-owner occupied properties and HUD-approved secondary residences are only eligible for Streamline Refinancing into a fixed rate mortgage. General Information Applicable to All Streamline Refinances Mortgage Seasoning Requirements On the date of the FHA case number assignment: the Borrower must have made at least six payments on the FHA insured mortgage that is being refinanced; at least six full months must have passed since the first payment due date of the mortgage that is being refinanced; at least 210 days must have passed from the closing date of the mortgage that is being refinanced; and if the Borrower assumed the mortgage that is being refinanced, they must have made six payments since the time of assumption FHA will not issue a case number for a Streamline Refinance where the existing mortgage to be paid is a 203(k) and the rehabilitation escrow close has not been completed Use of TOTAL Mortgage Scorecard on Streamline Refinances The Underwriter must manually underwrite all Streamline Refinances. The Underwriter may score the mortgage through TOTAL Mortgage Scorecard but the findings are invalid. Endeavor America Loan Services 05/18/2016 Page 126 of 191

127 Streamline Refinance Net Tangible Benefit of Streamline Refinances A net tangible benefit is a reduced combined rate, a reduced term, and/or a change from an ARM to a fixed rate mortgage that results in a financial benefit to the Borrower. Combined rate refers to the interest rate on the mortgage plus the Mortgage Insurance Premium (MIP) rate. The Underwriter must determine that there is a net tangible benefit to the Borrower. From Fixed Rate Any ARM with less than 15 months to next payment change date Any ARM with greater than or equal to 15 months to next payment change date Fixed Rate/New Combined Rate At least 0.5 percentage points below the prior combined rate. No more than 2 percentage points above the prior combined rate. No more than 2 percentage points above the prior combined rate. Reduction in Term The net tangible benefit test is met if: the Mortgage term is reduced; the new interest rate does not exceed the current interest rate; and the combined principal, interest and MIP payment of the new Mortgage does not exceed the combined principal, interest and MIP of the refinanced Mortgage by more than $50. Endeavor America Loan Services 05/18/2016 Page 127 of 191

128 Streamline Refinance Reviewing Limited Denial Participation and SAM Exclusion Lists The Underwriter must check the HUD Limited Denial of Participation (LDP) list to confirm the Borrower s eligibility to participate in an FHA-insured mortgage transaction. The Underwriter must check the System for Award Management (SAM) and must follow appropriate procedures defined by that system to confirm eligibility for participation. Borrower Additions to Title Individuals may be added to the title and mortgage on a non-credit qualifying Streamline Refinance without a creditworthiness review. Borrower Credit Reports FHA does not require a credit report on the non-credit qualifying Streamline Refinance. The Underwriter must obtain a credit report for the credit qualifying Streamline Refinance. If the Underwriter obtains a credit score, the Underwriter must enter it into FHAC. If more than one credit score is obtained, the Underwriter must enter all available credit scores into FHAC. Funds to Close The Underwriter must verify Borrower s funds to close, in excess of the total mortgage payment of the new mortgage, in accordance with Sources of Funds. Additionally, the Underwriter may provide an unsecured interest-free mortgage to establish a new escrow account in an amount not to exceed the present escrow balance on the existing Mortgage. Endeavor America Loan Services 05/18/2016 Page 128 of 191

129 Streamline Refinance Maximum Mortgage Amortization Period The maximum amortization period of a Streamline Refinance is limited to the lesser of: the remaining amortization period of the existing Mortgage plus 12 years; or 30 years. Maximum Mortgage Calculation for Streamline Refinances For owner-occupied principal residences and HUD-approved secondary residences, the maximum base loan amount for Streamline Refinances is: the lesser of: the outstanding principal balance of the existing mortgage as of the month prior to mortgage disbursement; plus: interest due on the existing Mortgage; and MIP due on existing Mortgage; or the original principal balance of the existing Mortgage (including financed UFMIP); less any refund of UFMIP (if financed in original Mortgage). For investment properties, the maximum base loan amount for Streamline Refinances is: the lesser of: the outstanding principal balance of the existing mortgage as of the month prior to mortgage Disbursement; or the original principal balance of the existing Mortgage (including financed UFMIP); less any refund of UFMIP (if financed in original Mortgage). Use of Estimates in Calculating Maximum Mortgage Amount The Underwriter may utilize estimates in calculating the maximum mortgage amount to the extent that the total mortgage amount does not result in the Borrower receiving greater than $500 cash back at mortgage disbursement. Cash to the Borrower resulting from the refund of Borrowers unused escrow balance from the previous mortgage must not be considered in the $500 cash back limit whether received at or subsequent to mortgage disbursement. Excess Cash Back When the estimates utilized in calculating the maximum mortgage amount resulted in greater than $500 cash back to the Borrower at mortgage Disbursement, Underwriters may reduce the Borrower s outstanding principal balance to satisfy the $500 cash back requirement. Endeavor America Loan Services 05/18/2016 Page 129 of 191

130 Streamline Refinance Required Documentation The Underwriter must obtain the payoff statement on the existing mortgage. Maximum CLTV Ratio and Subordinate Financing Existing subordinate financing, in place at the time of case number assignment, must be resubordinated to the Streamline Refinance. New Subordinate financing is permitted only where the proceeds of the subordinate financing are used to: reduce the principal amount of the existing FHA-insured Mortgage, or finance the origination fees, other closing costs, or discount points associated with the refinance There is no maximum CLTV. Underwriters must contact the National Servicing Center for processing of any HUD held lien subordination. Appraisal and Inspection Requirements on Streamline Refinances Appraisals are not required on Streamline Refinances. The receipt or possession of an appraisal by the Underwriter does not affect the eligibility or maximum mortgage amount on Streamline Refinances. Assessing Upfront and Annual MIP See Appendix 1.0 Mortgage Insurance Premiums for assessing upfront and annual MIP. For the purpose of calculating the MIP, FHA uses the original value of the property to calculate the LTV. Streamline Refinance Non-Credit Qualifying Borrower Eligibility A Borrower is eligible for a Streamline Refinance without credit qualification if all Borrowers on the existing mortgage remain as Borrowers on the new Mortgage. Mortgages that have been assumed are eligible provided the previous Borrower was released from liability. Exception A Borrower on the Mortgage to be paid may be removed from title and new mortgage in cases of divorce, legal separation or death when: the divorce decree or legal separation agreement awarded the Property and responsibility for payment to the remaining Borrower, if applicable; and the remaining Borrower can demonstrate that they have made the mortgage payments for a minimum of six months prior to Case Number assignment. Endeavor America Loan Services 05/18/2016 Page 130 of 191

131 Streamline Refinance Special Documentation and Procedures for No Credit Streamline Refinances Underwriters may use an abbreviated Uniform Residential Loan Application (URLA, Fannie Mae Form 1003/Freddie Mac Form 65) on non-credit qualifying Streamline Refinances only. Underwriters are not required to complete sections IV, V, VI, and VIII (a-k) on an abbreviated URLA, provided all other required information is captured. Streamline Refinance Credit Qualifying Borrower Eligibility At least one Borrower from the existing mortgage must remain as a Borrower on the new mortgage. Credit Underwriting In addition to the requirements in this section, credit qualifying Streamline Refinances must meet all requirements of Manual Underwriting, except for any requirements for appraisals or LTV calculations. Qualifying Credit qualifying Streamline must meet the manual underwriting guidelines as described in ML Refer to Manual Underwriting Matrix and Compensating Factors sections of this guide. Streamline Refinance with Appraisal An appraisal may be used to determine 125% CLTV based on subject s current value for subordinating junior liens. Properties listed for sale are permitted if the listing was canceled at least one day prior to the loan application date. A copy of the canceled/expired listing should be included in the loan file. Note: An appraisal may not be obtained to roll in costs. A full Rate & Term Refinance would need to be done to roll in closing costs and prepaids. Streamline Refinance with NO Appraisal LTV/CLTV is based on the original appraised value reported into FHA Connection as verified with a current FHA Refinance Netting Authorization. Endeavor America Loan Services 05/18/2016 Page 131 of 191

132 Secondary Financing Secondary Financing Secondary Financing is any financing other that the first mortgage that creates a lien against the subject property. Any such financing that does create a lien against the property is not considered a gift or a grant even if it does not require regular payments or has other features forgiving the debt. Down Payment Assistance Program (DAP) Down payment assistance programs (DAPs) may be provided by government agency or an eligible nonprofit agency considered an instrumentality of the government. FHA does not approve DAPs administered by charitable organizations such as nonprofits. A gift from a charitable organization must meet FHA requirements and the transfer of funds must be properly documented. Nonprofit entities may not provide gifts to pay off any of the following: installment loans, credit cards, collections, judgments, liens, similar debts. For down payment assistance from a charitable organization, obtain evidence the charitable organization has tax exempt status as per section 501(a) of the Internal Revenue Code (IRC) of 1986 pursuant to IRC section 501(c)(3). IRS Exempt Organization Select Check tool may be used to verify the charitable organization is eligible to receive taxdeductible charitable contributions. Gifts from Charitable Organizations without Federal Tax-Exempt Status For a charitable organization who loses or gives up its federal tax-exempt status, a gift towards the Borrower s down payment is acceptable to FHA only if both following requirements are met: o o the gift is made to the Borrower and is properly documented in accordance to FHA requirements; and the Borrower entered into a sales contract (including any amendments to the purchase price) on or before the date IRS officially announced the charitable organization s tax-exempt status was terminated. Reference: II.A.4.d.iii(I) Endeavor America Loan Services 05/18/2016 Page 132 of 191

133 Secondary Financing Cash Back Purchases No cash back to the Borrower from either the first or second mortgage when obtained simultaneously. Any remaining loan proceeds after closing should be applied as a principal reduction to the FHA Mortgage. CLTV Purchase 100% CLTV Acquisitions costs may exceed the appraised value with certain government assistance programs. Refinances 97.75% Rate & Term 85% Cash-Out 125% Streamline Existing junior liens, regardless of seasoning, may be paid down so that the combined outstanding liens comply with the CLTVs noted above. Unless otherwise noted in the specific Secondary Financing source type, the CLTV of the FHA base loan and Secondary Financing amount must not exceed the FHA LTV limit; Please refer to the documentation requirements that are specific to the Secondary Financing source types: Governmental Entities and HOPE Grantees; HUD-Approved Nonprofits; Family Members, and/or Private Individuals and Other Organizations. Grace Period The Secondary Financing must provide for a reasonable grade period before: A late charge becomes due, or Commencement of foreclosure proceedings in the event of default. Endeavor America Loan Services 05/18/2016 Page 133 of 191

134 Secondary Financing Loan Purposes Purchases Proceeds from the second Mortgage may be used for: closing costs, prepaids and/or down payment. Secondary Financing may not be used to pay any portion of the excess of the purchase price over the appraised value. Closing costs related to the down payment assistance Secondary Financing program(s) may only be included in the second lien. Refinances A new second Mortgage on a cash-out refinance may be used to cover closing costs, prepaids and/or pay down the outstanding existing mortgage(s) to LTV/CLTV maximum. Existing junior liens, regardless of seasoning, may re-subordinate to the FHA loan provide the total indebtedness does not exceed the applicable CLTV permitted for the type of Refinance. New second Mortgages are not allowed on Rate & Term and Streamline Refinance. Qualifying Borrower must qualify with all junior lien payment(s) which cannot exceed Borrower s reasonable ability to repay. Simultaneous Closing Soft or silent liens that are secured against the Property must be entered as Secondary Financing (not as gift funds). Such Secondary Financing has no scheduled repayments and the debt is forgiven over a period of time under the program guidelines. Soft/Silent Liens Soft or silent liens that are secured against the Property must be entered as Secondary Financing (not as gift funds). Such Secondary Financing has no scheduled repayments and the debt is forgiven over a period of time under the program guidelines. Endeavor America Loan Services 05/18/2016 Page 134 of 191

135 Secondary Financing Sources and Terms This secondary provider type has been renamed from Government Agency to Governmental Agencies and HOPE I Grantees. The following guidance applies: A Governmental Entity refers to any federal, state, or local government agency or instrumentality. FHA does not maintain a list of governmental entities. An Instrumentality of Government refers to an entity that was established by a governmental body or with governmental approval or under special law to serve a particular public purpose or designated law (statute or court opinion) and does not have a IRS 501(c)(3) status. FHA considers IRC section 115 entities including section 115 entities with 501(c)(3) status who providing Secondary Financing as instrumentalities of government for purpose of Secondary Financing only. o Section 115 does not require HUD approval to participate in FHA s Nonprofit Secondary Financing program. Section 115 Entities are not required to have voluntary board members Homeownership and Opportunity for People Everywhere (HOPE) refers to an Entity designated in the homeownership plan submitted by an applicant for an implementation grant under the HOPE program. Requirements for Secondary Financing from Governmental Entities and HOPE Grantees A government entity may provide for the Borrower s MRI through one of its homeownership programs. The funds must be provided in accordance with HUD s Interpretive Rule of Section 203(b)(9)(C) of the National Housing Act. [HUD II.A.4.d.ii, Source Requirements for Borrower s MRI ] o Secondary Financing funds must not be directly or indirectly sourced from the seller or any other person/entity who will financially benefit from the transaction; and there is/will be no reimbursements to an interested party in the transaction. There is no maximum CLTV for Secondary Financing loans provided by Governmental Entities or HOPE grantees. FHA-insured mortgage does not exceed FHA Nationwide Mortgage Limit for the area in which the subject property is located. FHA mortgage may not finance any cost associated with the Secondary Financing. Governmental entities may provide Secondary Financing assistance to homebuyers when that assistance is secured with a second mortgage or lien. o If a governmental entity will hold the Secondary Financing but the lien will close in the name of a nonprofit, then the nonprofit must be HUD-approved. The second lien may not have a balloon payment within 10 years from the Note execution date. Borrower may receive no cash back at closing from the Secondary Financing proceeds except for refund of documented earnest money deposit or other documented Borrower costs paid outside of closing. Endeavor America Loan Services 05/18/2016 Page 135 of 191

136 Secondary Financing Sources and Terms (continued) Documentation for Governmental Entities and HOPE Grantees Initial loan application must disclose the Secondary Financing. The Secondary Financing payment must be included in the monthly total mortgage payment. The governmental entity must provide a letter, signed by an authorized official on their letterhead, which contains the following information: o verifies the relationship between the nonprofit and the governmental entity; and o references the FHA case number, complete property address, Borrower(s) name(s); and o nonprofit info: name, address and Tax ID; and o amount and purpose of the Secondary Financing; and o verify that the Secondary Financing loan will close in the name of the governmental entity. If the Secondary Financing loan will close in the name of the nonprofit and held by the governmental entity, the nonprofit must be HUD-approved and placed in the HUD Nonprofits Roster. Document the amount of funds provided from the governmental entity or HOPE grantee to the Borrower for each Secondary Financing transaction. The governmental entity must provide the fully executed Final HUD-1 Settlement Statement (loan applications on/before 10/02/2015) or Closing Disclosure (loan applications on/after 10/03/2015), or similar legal documents along with the recorded Secondary Financing documents. These documents may either be provided directly to EA prior to closing, or to the settlement agent to return with the closing package. When Secondary Financing from a government entity is used for the Borrower s MRI, the obtain the following documentation: o Secondary Financing funds were sourced from the government entity s account with any of the following: cancelled check, or evidence of wire transfer, or other authorized draw request prior to or at closing; and o Letter from the government entity, signed by an authorized official, which verifies the governmental entity incurred prior to or at closing an enforceable legal liability or obligation to fund the Borrower s MRI. o As applicable, examples of acceptable language is shown below. The Governmental Entity has, at or before closing, incurred a legally enforceable liability as a result of its agreement to provide the funds for the Borrower s MRI. The Governmental Entity has, at or before closing, incurred a legally enforceable obligation to provide the funds towards the Borrower s MRI. The Governmental Entity has, at or before closing, authorized a draw on its account to provide the funds towards the Borrower s MRI. Endeavor America also requires the documentation of the actual transfer of funds in satisfaction of the liability or obligation to show these funds were not provided by a prohibited source.] Reference: I.B.4.a.i(C); I.B.4.a.i & iii; II.A.4.d.ii-iii(J)(1); V.D.3.d; 24 CFR ; Endeavor America Loan Services 05/18/2016 Page 136 of 191

137 Secondary Financing Sources and Terms (continued) HUD Approved Nonprofits The subordinate lien must be made in the eligible nonprofit name if the funds were originally sourced from the nonprofit. [NOTE: The jurisdictional HOC approves the nonprofit to provide Secondary Financing as well as the specific the down payment assistance programs offered by the nonprofit.] This secondary provider type has been renamed from Government Agency to HUD-Approved Nonprofits. The following guidance applies: FHA approval is required for the following Nonprofits: A nonprofit organization with a 501(c)(3) IRS tax-exempt status. A Nonprofit Instrumentality of Government (NPIOG) refers to a 501(c)(3) organization that was established by a governmental body or with governmental approval or under special law to serve a particular public purpose or designated as an instrumentality by law (statute or court opinion). FHA approval is not required if the entities listed below are not organized as a 501(c)(3) nonprofits: Governmental entities and their instrumentalities of government. Section 115 entities including entities that have both IRS section 115 and 501(c)(3) status only when providing Secondary Financing. Nonprofits with a documented agreement to support a governmental entity s Secondary Financing program. Requirements for Secondary Financing from HUD-Approved Nonprofits There is no maximum CLTV if HUD-approved Nonprofit provided the Secondary Financing Nonprofit Secondary Financing may not be used towards the Borrower s MRI except as a NPIOG with prior FHA approval. HUD-approved Nonprofits may provide Secondary Financing assistance to homebuyers when that assistance is secured with a second mortgage or lien. The second lien may not have a balloon payment within 10 years from the Note execution date. FHA mortgage may not finance any cost associated with the Secondary Financing. Borrower may receive no cash back at closing from the Secondary Financing proceeds except for refund of documented earnest money deposit or other documented Borrower costs paid outside of closing. When a nonprofit closes Secondary Financing in its own name, the nonprofit must have both FHA approval and placement in HUD Nonprofits Roster even if the Secondary Financing will be held by the Governmental Entity. Endeavor America Loan Services 05/18/2016 Page 137 of 191

138 Secondary Financing Sources and Terms (continued) For nonprofits assisting in the operation of a governmental entity s Secondary Financing assistance programs, FHA approval of the nonprofit is not required. There must be a documented agreement between the governmental entity and the nonprofit that indicates: o The functions performed by the nonprofit are limited to the governmental entity s Secondary Financing program; and o The Secondary Financing legal documents (e.g. Note and Deed of Trust) name the governmental entity as the Underwriter. For NPIOGs, FHA requires the governmental unit that established the nonprofit to exercise organizational as well as operational or financial control of the nonprofit in its entirety, or at minimum, the specific homebuyer assistance program. o Organizational control refers to the majority of governing board and/or Principal Officers that are named or approved by governmental body/officials. o Operational control refers to the requirement that the government body approves all major decisions and/or expenditures. o Financial Control refers to the requirement that the government body provides funds through direct appropriations, grants, or loans, with related controls applicable to all activities of the entity. o FHA will issue the NPIOG an approval letter and this approval will reflected on the HUD Nonprofits Roster. FHA may approve an NPIOG to provide Secondary Financing up to 100% of the Borrower s MRI. Documentation for HUD-Approved Nonprofits The Secondary Financing must be disclosed at the time of the loan application. The Secondary Financing payment must be included in the monthly total mortgage payment. Prior to closing, obtain the signed/executed loan approval(s) which should verify the terms and conditions of the Secondary Financing loan(s) Document the amount of funds provided from the HUD-approved nonprofit to the Borrower for each Secondary Financing transaction. The nonprofit must provide the fully executed Final HUD-1 Settlement Statement (loan applications on/before 10/02/2015) or Closing Disclosure (loan applications on/after 10/03/2015), or similar legal documents along with the recorded Secondary Financing documents. These documents may either be provided directly to EA prior to closing, or to the settlement agent to return with the closing package. For HUD-approved NPIOGs, check FHA s HUD Nonprofits Roster to ensure FHA approval status and to verify FHA s approved percentage of Secondary Financing from the NPIOG that may be applied toward Borrower s MRI. Reference: I.B.4.a.i-iii; II.A.4.d.iii(J)(2); V.D.3.d; 24 CFR ; Endeavor America Loan Services 05/18/2016 Page 138 of 191

139 Secondary Financing Sources and Terms (continued) The following guidance applies to family member Secondary Financing: Family member definition is now provided in FHA Single Family Housing Policy Handbook glossary. Additional requirements for Secondary Financing from family members: FHA base loan and the Secondary Financing must not exceed maximum 100% CLTV of adjusted value. No prepayment penalty. If the loan from the family member is secured against the property, then only the family member provider may be the Noteholder. The second lien does not provide for a balloon payment within 10 years from the Note execution date. FHA mortgage may not finance any cost associated with the Secondary Financing. Borrower may receive no cash back at closing from the Secondary Financing proceeds except for refund of documented earnest money deposit or other documented Borrower costs paid outside of closing. If the family member borrows the funds, an acceptable source may be a retail banking affiliate of a mortgage company only if the terms and conditions of the loan to the family member are not more favorable than loan terms offered to any other bank customers. Documentation required for Secondary Financing from family members: The Secondary Financing must be disclosed at the time of the loan application. The Secondary Financing payment must be included in the monthly total mortgage payment. Obtain a notarized copy of the Note or similar written agreement, executed between the family member and Borrower, which provides the Secondary Financing terms and conditions. Document the amount of funds provided from the family member to the Borrower for each Secondary Financing transaction and source the family member s funds. o If family member Secondary Financing was borrowed funds, then provide written evidence the family member borrowed funds from an acceptable source, not a party to the transaction. If the Secondary Financing will be secured against the property, the family member must provide the recorded Secondary Financing documents. These documents may either be provided directly to EA prior to closing, or to the settlement agent to return with the closing package. Reference: II.A.2.b.ii(A)(1); II.A.4.d.iii(J)(3); 24 CFR ; Handbook Glossary Endeavor America Loan Services 05/18/2016 Page 139 of 191

140 Secondary Financing Sources and Terms (continued) The following guidance applies to Private Individuals and Other Organizations: This guidance applies to any individuals or entities providing Secondary Financing not covered in prior three (3) source types. Additional Requirements for Secondary Financing from Private Individuals and Other Organizations The sum of the FHA base loan and the Secondary Financing must not exceed FHA s Nationwide Mortgage Limit for the area where the property is located. CLTV of the FHA base loan and Secondary Financing amount must not exceed the FHA LTV limit. Secondary Financing from private individuals and other organizations may not be used for the Borrower s MRI. No prepayment penalty after giving 30 days advance notice to the Secondary Financing Underwriter The second lien does not provide for a balloon payment within 10 years from the Note execution date. FHA mortgage may not finance any cost associated with the Secondary Financing. Borrower may receive no cash back at closing from the Secondary Financing proceeds except for refund of documented earnest money deposit or other documented Borrower costs paid outside of closing. Documentation required for Secondary Financing from family members The Secondary Financing must be disclosed at the time of the loan application. The Secondary Financing payment must be included in the monthly total mortgage payment. Prior to closing, obtain copy of the executed Note(s) or a copy of the signed loan approval which provides the Secondary Financing terms and conditions. Document the amount of funds provided from the lienholder to the Borrower for each Secondary Financing transaction. Obtain a copy of the loan instruments (Note and Deed of Trust). Reference: II.A.4.d.iii(J)(4); 24 CFR ; Endeavor America Loan Services 05/18/2016 Page 140 of 191

141 Underwriting Automated Underwriting System (AUS) The use of AUS DU/LSC or LP is mandatory for all loans with exception of non-credit qualifying Streamline Refinance and transactions involving all Borrowers with no credit scores. A loan may be processed and approved with reduced documentation as described in the recommendation results with the following AUS risk classifications: LP Accept/ Eligible DU/LSC Approve/Eligible 100% data integrity is required to prevent the AUS risk classification from being invalidated and/or affecting the mortgage insurance. It is imperative that the data entered into the AUS be accurately verified and documented according to HUD/FHA guidelines. Endeavor America Loan Services 05/18/2016 Page 141 of 191

142 Underwriting Manual Underwriting/Downgrades Endeavor America requires most loans to receive an AUS Approve/Eligible finding to DO/DU. Manual underwrites are allowed under the Advantage program only for the following reasons: Manual underwriting is required for the following transactions: Short sales in default at time of short sale with extenuating circumstances (death, severe documented illness, forced job relocation, etc.). Chapter 13 bankruptcy in process with 12 months timely payments made with court approval. Chapter 13 bankruptcy discharged less than two (2) years ago. Chapter 7 bankruptcy discharged within one-two (1-2) years of application date due to extenuating circumstances. Back-to-Work Initiative. Borrower s former spouse defaulted on joint mortgage subsequently after being awarded a property in the divorce. Seasonal worker/teachers where a VOE cannot be obtained to validate employment. Handwritten paystubs or those not reflecting year-to-date earnings. Borrower s with spouses without a FICO score. Foreclosures due to extenuating circumstances who have re-stablished good credit since the foreclosure for at least 12 months Foreclosures not reporting to credit report with documentation supporting three (3) year seasoning (foreclosure seasoning is from the transfer date to application date) EXCEPTION: If Borrower(s) have answered Yes to Section VIII, Declarations, Question C on the 1003 Uniform Residential Loan Application; and AUS findings read the declaration and give proper findings indicating the presence of a foreclosure in the past seven (7) years; and we are able to prove the foreclosure was completed at least three (3) years prior; and the risk classification from AUS is Approve/Eligible or Accept Mortgage credit rejects: If AUS Approve/Accept, ratios cannot exceed 50% and must have compensating factors. 20% decline in self-employed income Loans receiving an AUS refer recommendation due to erroneous credit reporting may be approved with supporting documentation of the incorrect reporting; an LOE is not sufficient on its own; and the loan meets all manual guidelines, and compensating factor requirements. NOTE: All manual approvals are subject to risk-based pricing adjustments. Manual Underwriting The Underwriter is required to: Cite the applicable compensating factor(s) used to determine Borrower s creditworthiness assessment on HUD LT. Underwrite the loan file in accordance to FHA standard underwriting guidelines. NOTE: The loan file must be documented according to FHA standard documentation requirements. AUS documentation relief no longer applies as a consequence of the manual downgrade. Endeavor America Loan Services 05/18/2016 Page 142 of 191

143 Underwriting Minimum Loan Decision Score Non-Traditional, or Insufficient Credit Maximum Acceptable Compensating Factors Ratios 31/43 Borrowers with non-traditional or insufficient credit may not exceed FHA benchmark ratios of 31/43. Compensating factors do not apply. Non-occupant Co-Borrowers may be added for Borrowers with non-traditional credit; Non-occupant Co-Borrowers may not be added for Borrowers with insufficient credit. Refer to Non-traditional Credit section for additional guidelines. >580 Advantage 31/43 No compensating factors required. Energy Efficient Homes may have a stretch ratios of 33/45. >580 Advantage 37/47 One (1) of the following compensating factors is required. Verified and documented cash reserves Minimal housing expense increase Residual income >580 Advantage 40/40 No discretionary debt. >580 Advantage 40/50 Two (2) of the following compensating factors are required. Verified and documented cash reserves Minimal housing expense increase Significant additional income not reflected in gross effective income Residual income Endeavor America Loan Services 05/18/2016 Page 143 of 191

144 Underwriting Compensating Factors Compensating factors are required on all manually underwritten loans when the qualifying ratios exceed the benchmark of 31/43 percent. The following table describes the documentation requirements for each acceptable factor in order to cite these compensating factors in justifying manual approvals. Compensating Factors Documentation Compensating Factor Verified and Documented Cash Reserves Cash Reserves Minimal Housing Expense Increase No Discretionary Debt Documentation Reserves for the total monthly Mortgage payments 3 months for 1-2 units 6 months for 3-4 units Following assets cannot be considered as cash reserves: Gift funds; Equity from another Property; Borrowed funds; Cash received from Cash-Out Refinance loan proceeds, Incidental cash received at Closing Retirement accounts (IRA, Thrift Savings Plan, 401k and Keogh) accessible only upon employment termination, retirement, or death. The housing increase is the lesser of $100 or 5% of the current total monthly housing payment as compared to the proposed total monthly Mortgage payment; and 12 months most recent housing history with no more than 1 x 30 days late payment. No late Mortgage payments are allowed on a Cash-Out Refinance. If the Borrower has no current housing payment, this compensating factor cannot be cited. Borrower s housing payment is the only open account with an outstanding balance that is not paid off monthly; and The credit report shows established tradelines (revolving or installment) in Borrower s name open for at least six (6) months; and Account not in the Borrower s name including authorized user accounts do not qualify Non-traditional credit is not considered. Document Borrower has paid off all open account balances for at least the past six (6) months Endeavor America Loan Services 05/18/2016 Page 144 of 191

145 Underwriting Compensating Factors Documentation (continued) Compensating Factor Significant Additional Income Not Reflected in Effective Income Documentation Additional income from bonuses, overtime, part-time or seasonal employment that is not reflected in gross effective income can be cited as a compensating factor subject to the following requirements: the Underwriter must verify and document that the borrower has received this income for at least one year, and it will likely continue; and the income, if it were included in gross effective income, is sufficient to reduce the qualifying ratios to not more than 37/47. Income from non-borrowing spouses or other parties not obligated for the mortgage may not be counted under this criterion. This compensating factor may be cited only in conjunction with another compensating factor when qualifying ratios exceed 37/47 but are not more than 40/50. Residual Income The table below Residual Income by Region shows the minimum residual income according to the loan size, household size and geographic region of the country for the property location. Residual income should equal or exceeds the corresponding amounts on the table below for the applicable household size and geographic region. Residual income calculation: Total gross monthly income of occupant Borrowers and subtract the following: income taxes for federal, state and municipal, retirement & social security, proposed total fixed payment, estimated maintenance and utilities and any job related expenses. Bonus, part-time, or seasonal income may not be used to calculate the residual if the income source does not meet HUD/FHA effective income requirements. Non-taxable income may not be grossed up for the residual income calculation. Maintenance is based on 0.14 of the gross living area square footage. Job related expenses include: o Child care letter is required for all children 13-years-old or younger (state specific requirement supersedes) and must include: child care costs, name & address of the provider. If there is no child care expense, obtain an explanation. o IRS 2106 unreimbursed expenses. All members of the household are considered in the family size, regardless of the nature of their relationship or whether they will be on the Note or take title to the property. Household member(s) may be omitted from the family size if he/she can sufficiently document verifying that he/she is fully supported by an income source not included as effective income. Endeavor America Loan Services 05/18/2016 Page 145 of 191

146 Underwriting Residual Income Table Residual Incomes by Region Loan Amount <$80,000 Family Size Northeast Midwest South West 1 $390 $382 $382 $425 2 $654 $641 $641 $713 3 $788 $772 $772 $859 4 $888 $868 $868 $967 5 $921 $902 $902 $1, Add $75 for each additional family member Loan Amounts >$80,000 1 $450 $441 $441 $491 2 $755 $738 $738 $823 3 $909 $889 $889 $990 4 $1,025 $1,003 $1,003 $1,117 5 $1,062 $1,039 $1,039 $1, Add additional $75 for each additional family member Geographic Regions Northwest Midwest South West Connecticut Maine Massachusetts Illinois Indiana Iowa Alabama Arkansas Delaware District of Columbia Florida Alaska Arizona California Colorado New Hampshire New Jersey Kansas Michigan Minnesota Georgia Kentucky Louisiana Maryland Mississippi Hawaii Idaho Montana New York Pennsylvania Missouri Nebraska North Dakota North Carolina Oklahoma Puerto Rico South Carolina Nevada New Mexico Oregon Rhode Island Vermont Ohio South Dakota Wisconsin Tennessee Texas Virginia West Virginia Utah Washington Wyoming Endeavor America Loan Services 05/18/2016 Page 146 of 191

147 Back to Work Extenuating Circumstances General Information NOTE: Expiration of this program is 9/30/2016 EA currently participates in the FHA Back to Work Extenuating Circumstances policy implemented by HUD. This alternative guidance provides the underwriting standards and criteria to evaluate Borrowers who have experienced periods of financial difficulty due to extenuating circumstances of loss of employment or other severe reductions in income, or combination of both during the recent U.S. Great Recession. Applicability The following guidance clarifies the Back to Work Applicability: Back to Work Extenuating Circumstances guidance must be applied when manually underwriting a purchase loans for a Borrower who experienced an economic event resulting in a foreclosure, short sale/pre-foreclosure sale, bankruptcy, or other negative impact on credit. Verify and document the existence of an economic event that reduced household income by 20% or more or for a period of six (6) months. Reference: II.A.5.d.xi(B) Endeavor America Loan Services 05/18/2016 Page 147 of 191

148 Back to Work Extenuating Circumstances Definitions Economic Event Any occurrence beyond the Borrower s control that results in a 20% or more reduction in the Borrower s household income for a minimum period of six (6) months due to loss of employment, loss of income, or a combination of both. Economic Event Onset Refers to the month when loss of employment/income began. Economic Recovery Refers to the re-establishment of satisfactory credit for a minimum of 12 months. Household Income Refers to the gross income of the Borrower and all household members for the purpose of evaluating loss of income to define and economic event. Household income may not be used as effective income. Only the income from the Borrower may be used to qualify for the new loan. The gross income of each household member is determined and documented based on standard FHA income requirements. Household Member Refers to the Borrower and any individual residing at the Borrower s principal residence at the time of the economic event and was a Co-Borrower on the Borrower s previous mortgage for assessing loss of income. Household member does not refer to a renter or boarder that resided at the Borrower s residence. Housing Counseling Refers to a HUD-approved housing counseling agency related to the homeownership and residential mortgage loans that is provided in accordance to 24 CFR, part 214 Housing Counseling Program and satisfies the requirements identified Satisfactory Housing Counseling. Satisfactory Credit Verify and document the Borrower has re-established credit for a minimum period of 12 months as of the date of the FHA case assignment with: No late housing payments; and o Any open Mortgages must be current with a 12 months satisfactory payment history. o Mortgages may have been brought current through a loan modification (temporary or permanent) as long as all payments are documented as being received in accordance with modification agreement. No late installment payments; and No major derogatory credit issues on revolving accounts. Endeavor America Loan Services 05/18/2016 Page 148 of 191

149 Back to Work Extenuating Circumstances Underwriting Criteria To qualify for FHA s Back to Work program, all the following criteria must be met: Borrower experienced an economic event that lasted at least six (6) months and caused a reduction to his/her household income of 20% or more. Borrower s credit history prior to the economic event onset was satisfactory with no late payments on housing obligation or installment debt, and no major derogatory issues on revolving accounts. Borrower s delinquent and derogatory credit* after the economic event onset is analyzed to determine: (*includes collections, judgments, bankruptcies, foreclosures, deeds-in-lieu, short sales, and other credit problems) Eligible for Back to Work alternative guidance if late payments on the accounts resulted from the economic event Not eligible for Back to Work guidance if the Underwriter determines the derogatory credit resulted from his/her inability to manage debt, and/or a general disregard for managing financial obligations. Borrower meets the satisfactory credit definition above or non-traditional credit described below. Borrower has demonstrated full recovery from the economic event. Borrower has completed housing counseling as described below. A non-occupant Co-Borrower (non-household member) may be added to the application. The non-occupant Co-Borrower s credit history is not eligible FHA Back to Work alternative guidance. Endeavor America Loan Services 05/18/2016 Page 149 of 191

150 Back to Work Extenuating Circumstances Underwriting Criteria (continued) Economic Event Loss of Employment Obtain written VOE evidencing termination date. If prior employer is out of business, then Obtain written termination notice from Borrower or other publicly available documentation of business closure; and Document receipt of unemployment benefits Loss of Income Document Borrower s household income prior to economic event onset with: Written VOE verifying prior income; or Signed tax returns or tax transcripts, or W-2s o may also be used to verify household members residency. Seasonal Job: verify two (2) year history in the same field immediately prior to the loss of income. Part-time Job: verify two (2) year continuous history part-time employment just prior to the income loss. Provide authorization to verify the loss of income for any household member during the economic event who is not a Co- Borrower on the new FHA loan. Post-Economic Event Income In determining the 20% reduction, only the income of the household members at the time of economic event, can be considered. Document Borrower s household income as required in the HUD HB section, Manual Underwriting Income Requirements. Reference: II.A.5.b; II.A.5.d.xi(C)(4) Endeavor America Loan Services 05/18/2016 Page 150 of 191

151 Back to Work Extenuating Circumstances Derogatory Credit Borrowers should provide detailed explanation for the timeline of the economic event and the credit impairment. Below are the documentation requirements. Bankruptcy Chapter 7 bankruptcy: Verify and document the bankruptcy was the result of an economic event. Document a minimum of 12 months have elapsed since the bankruptcy discharge date. Borrower has met the re-established credit standard as described in Satisfactory Credit. Chapter 13 bankruptcy: The following clarification applies to Back to Work Chapter 13 Bankruptcy: Verify and document Chapter 13 bankruptcy payments as applicable all required bankruptcy payments were made on time, or a minimum of 12 months of the pay-out period under the bankruptcy has elapsed at the time of Case Number assignment and all required bankruptcy payments were made on time. Reference: II.A.5.d.xi(C)(1)(d) Endeavor America Loan Services 05/18/2016 Page 151 of 191

152 Back to Work Extenuating Circumstances Collections and Judgments The following guidance applies to Back to Work Collections and Judgments: Borrowers with open collection accounts or judgments must also meet the requirements in HUD HB for Evaluating Liabilities and Debt and Evaluating Credit History. Reference: II.A.5.d.xi(C)(1)(b); II.A.5.a.iv; II.A.5.a.iii Foreclosure Verify and document the foreclosure or DIL was the result of the economic event. Document a minimum of 12 months have elapsed since the date of the sale and re-established credit. Pre-Foreclosure/Short Sale Verify and document the short sale was the result of the economic event. Document a minimum of 12 months have elapsed since the date of the sale and re-established credit. Non-Traditional Credit Document non-traditional credit from 12 months preceding the Case Assignment through the month of closing, verifying all of the following have been met: No delinquency on rental housing payments; and No more than 1x30-days late on payments to other creditors; and No collection accounts or court records reporting (other than medical and/or identity theft) Endeavor America Loan Services 05/18/2016 Page 152 of 191

153 Back to Work Extenuating Circumstances CAIVRS: Request for Waiver or Resolution When an Application qualifies for the Back to Work policy and the CAIVRS screening indicates a paid claim on the Borrower s prior FHA loan, the Underwriter may submit a request to HUD for: Waiver of three (3) year wait period; or Resolution of the unresolved CAIVRS indicator. Before submitting the HUD request, the Underwriter must: fully underwrite the Application to determine all other eligibility requirements have been met; and approve the loan subject to additional conditions. Send HUD request to the address below and include both: A coversheet noting: CAIVRS clearance request for Back to Work, FHA Case Number, Borrower(s) name(s) with CAIVRS indicators, Underwriter contact; Page 3 of HUD A, signed by the Underwriter with Other: selected under the Additional Conditions section and the notation, Subject to CAIVRS indicator resolution by HUD. US Department of Housing and Urban Development Attn: Division Director, Home Mortgage Insurance Division 451 7th St. SW, Room 9266 Washington, DC Endeavor America Loan Services 05/18/2016 Page 153 of 191

154 Back to Work Extenuating Circumstances Housing Counseling Housing Counseling Disclosures The housing counseling agency must provide the Borrower all of the following disclosures which must be included in the Case Binder: Explicit description of any financial relationship between the Agency and any Underwriter. Statement that the Borrower is not obligated to pursue a loan with a Underwriter. Statement that Completion of this housing counseling program and receipt of a letter of completion of counseling do not qualify {you/the Borrower} for a FHA loan. An Underwriter will have to determine if {you/the Borrower} qualify for a loan. You understand that you may not be approved for a mortgage. The following guidance applies to Back to Work Housing Counseling: Housing counseling and education must be no more than 6 months prior to the submitting an application to the Underwriter. Housing counseling may be conducted in person, via telephone, via Internet, or other methods approved by HUD, and mutually agreed upon by the Borrower and the housing counseling agency as provided for in the Housing Counseling Program Handbook. The housing counseling may also be through an online course. The counseling completion certification must state, Counseling was delivered in accordance with Back to Work requirements. The housing counseling disclosure statement has been clarified as, Completion of this housing counseling program and receipt of a letter of completion of counseling do not qualify you (the Borrower) for a FHA-insured mortgage. A Underwriter (Underwriter) will have to determine if you (the Borrower) qualify for a mortgage. You understand that you may not be approved for a mortgage. Reference: II.A.5.d.xi(D) Endeavor America Loan Services 05/18/2016 Page 154 of 191

155 HUD REO Purchases Program Overview The HUD REO Purchase section includes information for maximum financing on HUD REO properties with required repairs, and HUD REO appraisal requirements. The underwriting criteria for Borrower s assets, credit, debts, employment, and income remain the same as previously described in this Guide. Borrowers must meet all other FHA requirements described in HUD and subsequent Underwriter Letters. HUD Homes use its Management and Marketing (M&M) contractors to dispose of its foreclosed single-family properties. The Statement of Insurability in the REO appraisal determines which FHA-insured financing program is eligible for the purchase. Insured Section 203(b) The HUD REO property meets HUDS MPR s in it s as-is condition with no repairs, alterations, or inspection required. Insured Section 203(b) with Repair Escrow The HUD REO property does not meet HUD s MPR in its as-is condition, but if repairs of no more than $5,000 are complete, the HUD REO property would meet HUD s MPR. An escrow account to complete the repairs necessary to meet MPR after closing is required. $100 Down The $100 Down sales incentive permits a borrower to purchase a HUD REO Property with FHA insured financing with a minimum down payment of $100 $100 Down purchases may be processed as section 203(b), 203(b) with Repair Escrow, or 203(k). Case Assignment Section 203(b) and Section 203(b) with repair escrow and 203(k): Mortgagee must order case numbers for insured HUD REO property purchases in accordance with Ordering Case Numbers. Mortgagee must select Real Estate Owned w/appraisal for processing type and enter the case number of the HUD REO property in the Prior Case Number field. The HUD REO property case number can be found in the top right corner of Form HUD Appraisal Lender must order appraisal in accordance with the requirements of Ordering appraisals Lender must review the appraisal and property conditions in accordance with the requirements of Underwriting the Property Endeavor America Loan Services 05/18/2016 Page 155 of 191

156 HUD REO Purchases Down Payment Borrower(s) must have sufficient liquid funds from acceptable sources for the required 3.5% minimum cash investment based on the lesser of the sales price or appraised value. Exception: if the sale involves a $100 down payment HUD REO purchase. Note: The following states are approved for the $100 down payment program: Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Mississippi, North Carolina, South Carolina, and Tennessee. Source of down payment may not come from an interested party to the transaction or an unacceptable source. Exception: if the sale involves a $100 down payment HUD REO purchase. Eligible Transactions Purchase transactions only. Property must be occupied by the Borrower as his/her principal residence. Occupancy must take place within 60 days after signing the Security Instrument, with continued occupancy for one (1) year. Loan Amount, LTV/CLTV Maximum base loan cannot exceed FHA Statutory Mortgage Limits for the applicable county. The maximum LTV is 96.5%. Section 203(b) with repair escrow Lender must initially calculate the mortgage amount in accordance with the requirements for section 203(b) above. Mortgagees must add to the amount resulting from the calculation the amount of an escrow account for eh completion of repairs after closing. The maximum escrow amount must be based on the the sum of the repairs required to meet the intent of HUD s MPR, plus a 10 percent contingency. The total escrow amount, including the 10 percent, must not exceed $5,500 $100 Down Calculate the maximum mortgage amount by subtracting $100 from the adjusted value. $100 Down with Repair Escrow Calculate the maximum mortgage amount by subtracting $100 from the sum of the adjusted value plus 110 percent of the estimated cost of repairs, not to exceed $5,500 Endeavor America Loan Services 05/18/2016 Page 156 of 191

157 HUD REO Purchases Sales Contract General The Underwriter must obtain FORM HUD-9548, Sales Contract Property Disposition Program, and any applicable addenda, which will establish the purchase price, price discount, eligibility for $100 down payment program, and meet the requirements for the Sales Contract. Contract Sales Terms Line four (4) of the Sales Contract will specify the insured HUD REO Property Purchase Program under which the Borrower is applying the down payment and the mortgage amount. Regardless of the insured HUD REO Property Purchase Program entered on line four (4) of Form HUD-9548, the Underwriter must determine the eligibility of the property, the eligibility of the borrower, and the specific insured HUD REO Property Purchase Program that must be used to finance the purchase. Closing Costs and Sales Commission Paid by HUD The amount on line 5 of Form HUD-9548, specifies the amount of closing costs that HUD will pay on behalf of the borrower. The amounts on line 6a and 6b represent the sales commissions HUD will pay to the Selling and Listing agents. Contributions by HUD toward the borrower s closing costs are not defined as Interest Party Contributions (IPCs) or inducement to purchase. Endeavor America Loan Services 05/18/2016 Page 157 of 191

158 Manufactured Homes Program Overview Endeavor America will lend on Manufactured Homes on Purchase, Rate & Term, Cash-Out, and Streamline Refinance transactions that comply with applicable requirements detailed below. Except for the requirements noted below that are specific for HUD REO sales, the underwriting criteria for Borrowers assets, credit, debts, employment, and income remain the same as previously described in this Guide. Borrowers must meet all other FHA guidelines. Title II Eligibility Requirements A Manufactured Home (MH) is constructed to the Federal Code, Model Manufactured Home Installation and Safety Standards. The dwelling is built on a steel chassis, assembled in units at the factory and then transported in one or more sections to the Property site. To be eligible for financing, all manufactured homes must comply with the following: Minimum floor area of 400 square feet. Constructed after June 15, 1976, in conformance with the Federal Manufactured Home Construction and Safety Standards (HUD Code), as evidenced by an affixed certification label in accordance with 24 CFR. Be classified and treated as real estate the by local authority (but need not be treated as real estate for purposes of state taxation). Mortgage must cover both the manufactured home and its site. Built and remains on a permanent chassis. Designed for occupancy as a principal residence and installed with a permanent foundation in accordance with Permanent Foundation Guidelines for Manufactured Housing (PFGMH). Fee simple title with Alta 7 endorsement. Manufactured units must not have been installed or occupied previously at any other location or site. Manufactured Home has been transported from the manufacturer or the dealership to the site. If there were two existing titles at the time the Manufactured Home unit was purchased, all state/local requirements for purging of the title (chattel or equivalent debt instrument) have been met, and subject Manufactured Home is classified as real estate prior to endorsement. Reference: HUD I.A.1.b.iv(B)(5)(b); II.B.5.i; Endeavor America Loan Services 05/18/2016 Page 158 of 191

159 Manufactured Homes Additions/Modifications (State Requirements) The following guidance applies to Manufactured Home additions/modifications: At the Underwriter s discretion, a foundation certification from a previous FHA mortgage may be used, that shows the foundation met the PFGMH published guidelines in effect at the time of the certification. If the previous foundation certification did not address the additions or alterations, then verify the structural integrity of the manufactured home and the addition by obtaining either: o o An inspection by the state administrative agency that inspects manufactured housing for compliance; or A certification of the structural integrity of the manufactured home and addition(s) must be completed by a state licensed structural engineer if the state does not employ inspectors. Reference: HUD I.A.1.b.iv(B)(5)(c); II.B.5.i. Endeavor America Loan Services 05/18/2016 Page 159 of 191

160 Manufactured Homes Appraisal Requirements Manufactured Home appraisals must be completed on form 1004C and satisfy all the following requirements: Appraisal validity is 120 days from the date of the Appraiser s initial property inspection. Market Conditions Addendum/Form 1004MC is included in appraisal MH land ownership rights must be bundled with the unit as security, and may be: Fee simple, or The enclosure must be adequately secured to the perimeter of the unit and allow for proper ventilation of the crawl space. If the non-load bearing skirting is comprised of lightweight material, then the entire surface area of the must be permanently attached to backing made of concrete, masonry, treated wood or a product with similar strength and durability. Reference: HUD II.B.5.c. Subject photos must reflect running gear has been removed and subject is attached to a permanent foundation so that is no longer capable of being removed. Comparable Selection At least two (2) of the comps must be manufactured. Combining of Land and Home Sales is not acceptable. Appraiser must describe any additions/modification made to the MH since its initial site placement. Appraiser must notify the Underwriter if it is suspected that an addition/modification poses a risk to the structural integrity of the home. Appraiser must notify the Underwriter and condition the appraisal for documentation verifying the HUD labels were issued to the Manufactured Home. Appraiser should provide a legible photo of the data plate. Appraiser should report if data plate is missing but need not reject the property. Appraiser should also check the data plate to see if the MH was constructed for the geographic area for which it was installed. If not, the Appraiser must report to the Underwriter who make the Borrower aware of this fact. Home-site must meets local standards for site suitability and has adequate water supply and sewage disposal facilities. For New Construction MH, the Appraiser must complete the Cost Approach section (less than one-year-old, initial sale form manufacturer/dealer) Appraiser may also include in the report, if available, the invoices for the total costs: the retail purchase price, delivery, installation and set-up costs. Appraiser must analyze the manufacturer s invoice and any other documents that pertains to what the sale included such as o Payoff of personal debt; o Land included in the contract; o Personal property was included in sale If well and/or septic, Appraiser must comment that distances meet with HUD/FHA requirements. Endeavor America Loan Services 05/18/2016 Page 160 of 191

161 Manufactured Homes Credit Score Endeavor America requires a minimum qualifying decision scores: 580 with a double-wide. 620 with a single-wide. Elevation Certificate Flood Zones A & V An elevation certificate is required if the Subject Manufactured Home is located in a flood hazard area. If Property is located in flood zones A and V, and MH without basement, the finished grade level beneath must be at or above the FEMA Special Flood Hazard Area (S) 100-year return frequency elevation. MH with basement, the grade beneath the basement floor shall be at or above the S. FEMA form Elevation Certificate must be dated and executed after the appraisal date. Eligibility for Manufactured Housing in SFHAs If any portion of the dwelling, related structures or equipment essential to the property value and subject to flood damage for both new and existing manufactured homes are located within an SFHA, the property is not eligible for FHA mortgage insurance unless: a FEMA issued LOMA or LOMR that removes the property from the SFHA; or a FEMA National Flood Insurance Program (NFIP) Elevation Certificate (FEMA form 81-31) prepared by a licensed engineer or surveyor stating that the finished grade beneath the manufactured home is at or above the 100-year return frequency flood elevation, and insurance under the NFIP is obtained. Reference: HUD II.A.1.b.(A)(1) Endeavor America Loan Services 05/18/2016 Page 161 of 191

162 Manufactured Homes Engineer s Certification of Foundation Manufactured Home appraisals should be completed on form 1004C. Foundation certification attesting compliance with HUD's PFGMH The Appraiser may also verify the manufactured home has not been moved from a previous location. The underwriter may choose to use the foundation certification from a previous FHA loan provided the foundation met the guidelines in the PFGMH that were in effect at the time of the certification and was completed by a state licensed engineer. A structural engineer must complete the foundation compliance certification when: the previous foundation certification does not address the additions/alterations; or the state administrative agency does not provide add compliance inspection. Refer to Manufactured Housing Additions/Modification subsection for additional requirements Reference: HUD II.A.1.b.iv(B)(5)(c)(ii); PFGMH Certification on Foundation Compliance is not required for: FHA to FHA refinance transactions provided that no modifications have been made to the foundation or structure from the date of the effective certification. HUD REO transaction made by the original purchaser from HUD. Endeavor America Loan Services 05/18/2016 Page 162 of 191

163 Manufactured Homes FHA Connection Correctly enter the following manufactured housing data into FHA Connection: Case Assignment screen: 77 should be entered as the two-digit Program ID Code when the loan is not processed as a construction-permanent loan. Appraisal Logging screen: Y for Yes to Manufactured Housing indicator (source document appraisal). Hazard Insurance The minimum amount of coverage is determined by the Insurer. HUD Label Red Tags All MHs must have a HUD label (commonly known as the Red Tag ), a metal tag affixed on outside of each transportable unit. A multi-wide unit has multiple HUD tags one for each transported section/unit. When the HUD labels are missing, Institute for Building Technology (IBTS) maintains data regarding HUD certification labels and data plates. IBTS can provide the following verifications: o HUD Label Verification letter includes: label number, serial number, date of manufacture, manufacturer name and plant location, location of the first destination (usually the retailer) HUD Data Plate/Compliance Certificate HUD Data Plate There is only one data plate that is made of paper. It is typically be found inside the home in one of three locations: adjacent to the electric service panel in the utility room, or in a kitchen cabinet, or in a bedroom closet. Data plate contains the HUD Certification Label number to assist in ordering the HUD Label verification letter from IBTS. It also contains useful information: manufacturer name, serial number, model and date of manufacture as well as wind, roof load and thermal zones. Endeavor America Loan Services 05/18/2016 Page 163 of 191

164 Manufactured Homes Ineligible Manufactured Homes The following property types are ineligible for delivery to Endeavor America: Condo, Co-Op, Parks Leasehold Multiple manufactured units on the same lot Single family with an accessory Manufactured Home (unless storage only use) Missing HUD Label (Red Tags) and HUD certification cannot be verified Singlewide with land to value ratios exceeding 30% Double/triple wide with land to value ratios exceeding 50% Maximum Mortgage Maximum loan amount is the county limits Modular Homes Modular housing refers to structures constructed according to state and local codes off-site in a factory, transported to a building lot, and assembled into a finished house. Although quality can vary, all of the materials from framing, roofing and plumbing to cabinetry, interior finish and electrical are identical to what is found in comparable quality conventional stickbuilt housing. Appraiser must select and analyze appropriate comparable sales which may include conventionally built housing, modular housing or manufactured housing. Reference: HUD II.B.3.c(D) Endeavor America Loan Services 05/18/2016 Page 164 of 191

165 Manufactured Homes New Construction New construction refers as the initial sale from a manufacturer or a manufactured home dealer to the Borrower(s). The Cost approach must be completed with cost estimates using published data such as National Automobile Dealers Association Manufactured Housing Appraisal Guide or Marshall & Swift Residential Cost Handbook. The cost approach is not required if the Manufactured Home is New (< 1 year old) construction code and the title has been re-conveyed after the initial sale from the Manufactured Home dealer. The 1004C appraisal must include the documentation to support the retail purchase price including the Manufactured Home unit bill of sale and all delivery, installation and set-up costs. These documents must be appended into. If using lot equity, the appraiser must describe the method used to estimate the site value and provide a detailed summary and analysis of the land sales data to support his/her opinion. Appraiser must provide the name of the retailer or distributor who sold the Manufactured Home unit. The FHA Roster Inspector must provide the installer information (installer name, installation date, model/year) in the if the original appraiser did not provide in the Manufactured Home appraisal. For Existing < 1 Year (100% complete and never occupied), HUD will only accept inspections by a local building authority (on form HUD-92051/CIR) for a newly installed manufactured home only if there are no FHA Roster Inspectors available to perform the inspections. DE underwriter must document efforts to obtain an FHA Roster Inspector. Below are clarification for the new construction exhibits table that follows: For a 10-year warranty plan, HUD requires evidence of acceptance or enrollment in the HUD approved plan; the application alone is not acceptable. Termite inspection report is required unless the property is located in an area of no to slight infestation as indicated in HUD s Termite Treatment Exception Areas. Please see Termite Inspection section for additional details. Reference: HUD II.A.8.ii(B); II.B.4.a-b; FHA Appraisal Report and Data Delivery Guide C.7. Endeavor America Loan Services 05/18/2016 Page 165 of 191

166 Manufactured Homes Proposed Construction > 90% LTV Building permit / Early Start Letter Engineer s Certification of Foundation (Structural Engineer if addition / modification) HUD-92541/Builder s Certification of Plans & Specs HUD-92544/Builder s 1-Year Warranty 2 Inspections: first (pre-pour) & final (after foundation installed) on HUD by FHA Roster Inspector, certifying Engineer or Architect; or 10 year warranty & HUD by FHA Roster Inspector or certifying Engineer / Architect Pest soil treatment (NPMA-99A and NPMA-99B) Well & Septic, if applicable Flood Zone Cert. and if applicable LOMA or LOMR or Elevation Certificate 90% LTV Building permit / Early Start Letter Engineer s Certification of Foundation (Structural Engineer if addition / modification) HUD-92541/Builder s Certification of Plans & Specs HUD / CIR by FHA Roster Inspector, certifying Engineer or Architect. Pest soil treatment (NPMA-99A and NPMA- 99B) Well & Septic, if applicable Flood Zone Cert. and if applicable LOMA or LOMR or Elevation Certificate Endeavor America Loan Services 05/18/2016 Page 166 of 191

167 Manufactured Homes Under Construction or Existing <1 Year (never occupied) 90% LTV Building permit / Early Start Letter Engineer s Certification of Foundation (Structural Engineer if addition / modification) HUD-92541/Builder s Certification of Plans & Specs HUD-92544/Builder s 1-Year Warranty 10-year warranty HUD / CIR by FHA Roster Inspector, certifying Engineer or Architect Pest soil treatment (NPMA-99A and NPMA-99B ) Well & Septic, if applicable Flood Zone Cert. and if applicable LOMA or LOMR or Elevation Certificate 90% LTV Engineer s Certification of Foundation HUD-92541/Builder s Certification of Plans & Specs HUD / CIR by FHA Roster Inspector, certifying Engineer or Architect Pest soil treatment (NPMA-99A and NPMA-99B) Well & Septic, if applicable Flood Zone Cert. and if applicable LOMA or LOMR or Elevation Certificate Site The manufactured unit must not have been installed or occupied previously at any other site or location. Manufactured units may be moved only from the Manufacturer's or dealer's lot to the site on which the unit will be insured. If a permanent foundation is to be constructed under an existing eligible unit, the unit may be jacked up in order to install a new foundation. Endeavor America Loan Services 05/18/2016 Page 167 of 191

168 Manufactured Homes Title Binder Preliminary Title binder must reference an Alta 7 endorsement will be included in the Final Policy. Title Binder for manufactured homes must include: Title to the Manufactured Home has been surrendered or purged in accordance with the jurisdictional requirements (relinquished Department of Motor Vehicles). Title Binder reflects the Manufactured Home will be recorded as real property. Improvement Tax shows what taxes will be once the manufactured home is classified and taxed as real estate. If the above three Title Binder requirements are met, then the survey requirement* is to be removed from the Final Title. [*Survey to show the Manufactured Home is attached to the land.] Borrower to execute an Affidavit of Affixation at closing. Trade-In Whether sold or trade-in, document MH ownership (manufacturer/model, year, size) and obtain a 3 rd party appraisal (such as N.A.D.A.) to validate the sales price or trade-in value. The sale proceeds or trade-in is based on the lesser of the two amounts. MH sale must also be documented with all of the following: a notarized bill of sale with the seller s contact information, receipt of the sale proceeds and evidence of deposit, and if applicable, evidence existing MH loan has been paid in full. MH trade-in must also be documented with all of the following: copy of the trade-in payment, and evidence the trade proceeds have been deposited with the settlement agent. The appraiser must report the removal of the existing MH. Reference: HUD II.A.4.d.iii(O) Endeavor America Loan Services 05/18/2016 Page 168 of 191

169 203(k) Loan Program Ineligible Property Types Manufactured homes Multi-Unit properties Mixed Use Properties Condo s Ineligible Programs Manual Underwrites Back to Work 203(K) Self help Standard 203(k) Transactions Standard 203(k) Eligible Improvements The Standard 203(k) requires a minimum of $5,000 in eligible improvements. Endeavor America Loan Services 05/18/2016 Page 169 of 191

170 203(k) Loan Program Types of Improvements Types of eligible improvements include, but are not limited to: converting a one-family Structure to a two-, three- or four-family Structure; decreasing an existing multi-unit Structure to a one- to four-family Structure; reconstructing a Structure that has been or will be demolished, provided the complete existing foundation system is not affected and will still be used; repairing, reconstructing or elevating an existing foundation where the Structure will not be demolished; purchasing an existing Structure on another site, moving it onto a new foundation and repairing/renovating it; making structural alterations such as the repair or replacement of structural damage, additions to the Structure, and finished attics and/or basements; rehabilitating, improving or constructing a garage; eliminating health and safety hazards that would violate HUD s Minimum Property Requirements (MPR); installing or repairing wells and/or septic systems; connecting to public water and sewage systems; repairing/replacing plumbing, heating, AC and electrical systems; making changes for improved functions and modernization; making changes for aesthetic appeal; repairing or adding roofing, gutters and downspouts; making energy conservation improvements; creating accessibility for persons with disabilities; installing or repairing fences, walkways, and driveways; installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven, and washer/dryer; repairing or removing an in-ground swimming pool; installing smoke detectors; making site improvements; landscaping; installing or repairing exterior decks, patios, and porches; constructing a windstorm shelter; and covering lead-based paint stabilization costs, if the Structure was built before 1978, in accordance with the Single Family mortgage insurance lead-based paint rule (24 CFR and (c)) and the U.S. Environmental Protection Agency s (EPA) Renovation, Repair, and Painting Rule (40 CFR 745, especially subparts E and Q). Endeavor America Loan Services 05/18/2016 Page 170 of 191

171 203(k) Loan Program General Improvement Standards All improvements to existing Structures must comply with HUD s MPR and meet or exceed local building codes. For a newly constructed addition to the existing Structure, the energy improvements must meet or exceed local codes and the requirements of the 2006 International Energy Conservation Code (IECC) or a successor energy code standard that has been adopted by HUD through a Federal Register notice. Specific Improvement Standards Any addition of a Structure unit must be attached to the existing structure. Site improvements, landscaping, patios, decks and terraces must increase the as-is property value equal to the dollar amount spent on the improvements or be necessary to preserve the Property from erosion. Standard 203(k) Ineligible Improvements/Repairs The 203(k) mortgage proceeds may not be used to finance costs associated with the purchase or repair of any luxury item, any improvement that does not become a permanent part of the subject property, or improvements that solely benefit commercial functions within the Property, including: recreational or luxury improvements, such as: swimming pools (existing swimming pools can be repaired) an exterior hot tub, spa, whirlpool bath, or sauna barbecue pits, outdoor fireplaces or hearths bath houses tennis courts satellite dishes tree surgery (except when eliminating an endangerment to existing improvements) photo murals gazebos; or additions or alterations to support commercial use or to equip or refurbish space for commercial use. Endeavor America Loan Services 05/18/2016 Page 171 of 191

172 203(k) Loan Program Standard 203(k) Establishing Repairs and Improvements The Mortgagee must select an FHA-approved 203(k) Consultant from the FHA 203(k) Consultant Roster in FHAC. The Mortgagee must not use the services of a Consultant who has demonstrated previous poor performance based on reviews performed by the Mortgagee. The Consultant must inspect the Property and prepare the Work Write-Up and Cost Estimate. The Work Write-Up refers to the report prepared by a 203(k) Consultant that identifies each work item to be performed and the specifications for completion of the repair. Cost Estimate refers to a breakdown of the cost for each proposed Work Item, prepared by a 203(k) Consultant. Work Item refers to a specific repair or improvement that will be performed. Exception for Borrowers Doing Own Work EA DOES NOT ALLOW BORROWERS TO DO OWN WORK. Standard 203(k) Financeable Repair and Improvement Costs and Fees The following repair and improvement costs and fees may be financed: costs of construction, repairs, and rehabilitation; architectural/engineering professional fees; the 203(k) Consultant fee subject to the limits in the 203(k) Consultant Fee Schedule section; inspection fees performed during the construction period, provided the fees are reasonable and customary for the area; title update fees; permits; and a Feasibility Study, when necessary to determine if the rehabilitation is feasible. Endeavor America Loan Services 05/18/2016 Page 172 of 191

173 203(k) Loan Program Standard 203(k) Financeable Contingency Reserve Contingency Reserve refers to funds that are set aside to cover unforeseen project costs. The Mortgagee must refer to the following chart to determine when a Contingency Reserve is required. The minimum and maximum Contingency Reserve is established as a percentage of the Financeable Repair and Improvement Costs. For Structures with an actual age of less than 30 years: Minimum Maximum Required when evidence of termite damage 10% 20% Discretionary No Minimum 20% For structures with an actual age of 30 years or more: Minimum Maximum Required 10% 20% Required when utilities are not operable as referenced in the Work Write-Up 15% 20% The Borrower may provide their own funds to establish the Contingency Reserves. Where the Borrower has provided their own funds for Contingency Reserves, they must be noted under a separate category in the Repair Escrow Account. Standard 203(k) Financeable Mortgage Payment Reserves A Mortgage Payment Reserve refers to an amount set aside to make Mortgage Payments when the Property cannot be occupied during rehabilitation. A Mortgagee may establish a financeable Mortgage Payment Reserve, not to exceed six months of Mortgage Payments. The Mortgage Payment Reserve may include Mortgage Payments only for the period during which the Property cannot be occupied. The number of Mortgage Payments cannot exceed the completion time frame required in the Rehabilitation Loan Agreement. For multi-unit properties, if one or more units are occupied, the Mortgage Payment Reserve may only include the portion of the Mortgage Payment attributable to the units that cannot be occupied. To calculate the amount that can be included in the Mortgage Payment Reserve, the Mortgagee will divide the monthly Mortgage Payment by the number of units in the Property, and multiply that figure by the number of units that cannot be occupied. The resulting figure is the amount of the Mortgage Payment that will be paid through the Mortgage Payment Reserve. The Borrower is responsible for paying the servicing Mortgagee the portion of the Mortgage not covered by the Mortgage Payment Reserve. **PLEASE NOTE EA DOES NOT ALLOW MULTI UNIT PROPERTIES** Endeavor America Loan Services 05/18/2016 Page 173 of 191

174 203(k) Loan Program Standard 203(k) Financeable Mortgage Fees The Mortgagee may finance the following fees and charges. Origination Fee The Mortgagee may finance a portion of the Borrower-paid origination fee not to exceed the greater of $350, or 1.5 percent of the total of the Financeable Repair and Improvement Costs and Fees, Financeable Contingency Reserves and Financeable Mortgage Payment Reserves. Discount Points The Mortgagee may finance a portion of the Borrower-paid discount points not to exceed an amount equal to the discount point percentage multiplied by the total of Financeable Repair and Improvement Costs and Fees, Financeable Contingency Reserves and Financeable Mortgage Payment Reserves. Standard 203(k) Required Documentation and Review Review of Contractor Qualifications Prior to closing, the Mortgagee must ensure that a qualified general or specialized contractor has been hired and, by contract, has agreed to complete the work described in the Work Write-Up for the amount of the Cost Estimate and within the allotted time frame. To determine whether the contractor is qualified, the Mortgagee must review the contractor s credentials, work experience and client references, and ensure that the contractor meets all jurisdictional licensing and bonding requirements. ***REFER TO EA CONTRACTOR ACCEPTANCE CHECKLIST UNDER 203(k) FORMS*** Consultant s Work Write-Up and Cost Estimate The Mortgagee must obtain the Consultant s Work Write-Up and Cost Estimate for all Standard 203(k) Mortgages. The Mortgagee must ensure the Work Write-Up/Cost Estimate specifies the type of repair and cost of each Work Item. The Mortgagee must review the Work Write-Up and ensure that all health and safety issues identified were addressed before, including additional Work Items. Architectural Exhibits The Mortgagee must obtain and review all applicable architectural exhibits. Sales Contract The Mortgagee must ensure the sales contract includes a provision that the Borrower has applied for Section 203(k) financing, and that the contract is contingent upon mortgage approval and the Borrower s acceptance of additional required improvements as determined by the Mortgagee. When the Borrower is financing a HUD REO Property, the Mortgagee must ensure that the first block on Line 4 of form HUD-9548, Instructions and Sales Contract, is checked, as well as the applicable block for 203(k). Endeavor America Loan Services 05/18/2016 Page 174 of 191

175 203(k) Loan Program Limited 203(k) Transactions Limited 203(k) Eligible Improvements The Limited 203(k) may only be used for minor remodeling and non-structural repairs. The total rehabilitation cost may not exceed $35,000. There is no minimum repair cost. Types of Improvements Eligible improvement types include, but are not limited to: eliminating health and safety hazards that would violate HUD's MPR; repairing or replacing wells and/or septic systems; connecting to public water and sewage systems; repairing/replacing plumbing, heating, AC and electrical systems; making changes for improved functions and modernization; eliminating obsolescence; repairing or installing new roofing, provided the structural integrity of the Structure will not be impacted by the work being performed; siding; gutters; and downspouts; making energy conservation improvements; creating accessibility for persons with disabilities; installing or repairing fences, walkways, and driveways; installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven and washer/dryer; repairing or removing an in-ground swimming pool; installing smoke detectors; installing, replacing or repairing exterior decks, patios, and porches; and covering lead-based paint stabilization costs (above and beyond what is paid for by HUD when it sells REO properties) if the Structure was built before 1978, in accordance with the Single Family mortgage insurance lead-based paint rule and EPA s Renovation, Repair, and Painting Rule. Endeavor America Loan Services 05/18/2016 Page 175 of 191

176 203(k) Loan Program Improvements Standards General Improvement Standards All improvements to existing Structures must comply with HUD s MPR and meet or exceed local building codes. Specific Improvement Standards Patios and decks must increase the As-Is Property Value equal to the dollar amount spent on the improvements. Limited 203(k) Ineligible Improvements/Repairs The Limited 203(k) mortgage proceeds may not be used to finance major rehabilitation or major remodeling. FHA considers a repair to be major when any of the following are applicable: the repair or improvements are expected to require more than six months to complete; the rehabilitation activities require more than two payments per specialized contractor; the required repairs arising from the appraisal: necessitate a Consultant to develop a specification of repairs/work Write-Up; or require plans or architectural exhibits; or the repair prevents the Borrower from occupying the Property for more than 15 Days during the rehabilitation period. Additionally, the Limited 203(k) mortgage proceeds may not be used to finance the following specific repairs: converting a one-family Structure to a two-, three- or four-family Structure; decreasing an existing multi-unit Structure to a one- to four-family Structure; reconstructing a Structure that has been or will be demolished; repairing, reconstructing or elevating an existing foundation; purchasing an existing Structure on another site and moving it onto a new foundation; making structural alterations such as the repair of structural damage and New Construction, including room additions; landscaping and site improvements; constructing a windstorm shelter; making additions or alterations to support commercial use or to equip or refurbish space for commercial use; and/or making recreational or luxury improvements, such as: o new swimming pools; o an exterior hot tub, spa, whirlpool bath, or sauna; o barbecue pits, outdoor fireplaces or hearths; o bath houses; o tennis courts; o satellite dishes; o tree surgery (except when eliminating an endangerment to existing improvements); o photo murals; or o gazebos. Endeavor America Loan Services 05/18/2016 Page 176 of 191

177 203(k) Loan Program Limited 203(k) Establishing Repair and Improvement Costs The Borrower must submit a work plan to the Mortgagee and use one or more contractors to provide the Cost Estimate and complete the required improvements and repairs. The contractors must be licensed and bonded if required by the local jurisdiction. The Borrower must provide the contractors credentials and bids to the Mortgagee. The Mortgagee must review the contractors credentials, work experience and client references and ensure that the contractors meet all jurisdictional licensing and bonding requirements. The Mortgagee must examine the work plan and the contractors bids and determine if they fall within the usual and customary range for similar work. The Mortgagee may require the Borrower to provide additional Cost Estimates if necessary. Exception for Borrowers Doing Own Work EA DOES NOT ALLOW BORROWERS TO DO OWN WORK. Limited 203(k) Financeable Repair and Improvement Costs and Fees The following costs and fees may be financed: costs of construction, repairs and rehabilitation; inspection fees performed during the construction period, provided the fees are reasonable and customary for the area; title update fees; and permits. Any costs for Energy Efficient Mortgages and Solar Energy Systems must not be included in financeable repair and improvement costs. For Borrowers performing their own work, the Mortgagee must include the costs for labor and materials for each Work Item to be completed by the Borrower under a Rehabilitation (Self-Help) Loan Agreement Endeavor America Loan Services 05/18/2016 Page 177 of 191

178 203(k) Loan Program Limited 203(k) Financeable Contingency Reserves A Contingency Reserve is not mandated; however, at the Mortgagee s discretion, a Contingency Reserve account may be established and may be financed. The Contingency Reserve account may not exceed 20 percent of the Financeable Repair and Improvement Costs. The Borrower may provide their own funds to establish the Contingency Reserves. Where the Borrower has provided their own funds for Contingency Reserves, they must be noted under a separate category in the Repair Escrow Account. Limited 203(k) Financeable Mortgage Fees The Mortgagee may include the following fees and charges in the rehabilitation Cost Estimates. Origination Fee The Mortgagee may include a portion of the Borrower-paid origination fee not to exceed the greater of $350, or 1.5 percent of the total of the Financeable Repair and Improvement Costs and Fees and Financeable Contingency Reserves. Discount Points The Mortgagee may include a portion of the Borrower-paid discount points not to exceed an amount equal to the discount point percentage multiplied by total of Financeable Repair and Improvement Costs and Fees and Financeable Contingency Reserves. Limited 203(k) Ineligible Fees and Costs The following fees and costs may not be financed under the Limited 203(k): Mortgage Payment Reserves architectural/engineering professional fees 203(k) Consultant fee a Feasibility Study Payments & Draws 203(k) Limited 203(k) Limited loans consist of two draws to the borrower. 50% first draw and the second draw is for the remaining funds, which requires that a final inspection and title update be completed prior to distribution. In addition, copies of any and all permits must be provided prior to the release of the funds. A maximum of two (2) payments may be made to specialized contractor throughout the loan process, but there is no maximum for general contractors. Endeavor America Loan Services 05/18/2016 Page 178 of 191

179 203(k) Loan Program Limited 203(k) Required Documentation The following documentation is required for the Limited 203(k): Work Plan The Mortgagee must obtain a work plan from the Borrower detailing the proposed repairs or improvements. The Borrower may develop the work plan themselves or engage an outside party, including a Contractor or a 203(k) Consultant, to assist. There is no required format for the work plan. Written Proposal and Cost Estimates [Highlighted text effective for case numbers assigned on or after June 30, 2016] The Mortgagee must obtain a written proposal and Cost Estimate from a contractor for each specialized repair or improvement. The Mortgagee must ensure that the selected contractor meets all jurisdictional licensing and bonding requirements. The written proposal must indicate Work Items that require permits and state that repairs are non-structural. The Cost Estimate must state the nature and type of repair and cost for each Work Item, broken down by labor and materials. The Mortgagee must obtain written Cost Estimates for each Work Item, broken down by labor and materials, to be performed by the Borrower under a self-help agreement. Sales Contract The Mortgagee must obtain a copy of the sales contract and ensure that the sales contract includes a provision that the Borrower has applied for Section 203(k) financing, and that the contract is contingent upon mortgage approval and the Borrower s acceptance of additional required improvements as determined by the Mortgagee. When the Borrower is financing a HUD REO Property, the Mortgagee must ensure that the first block on Line 4 of the form HUD- 9548, Instructions and Sales Contract is checked, as well as the applicable block for 203(k). Required Documentation for Limited 203(k) Only Contractor s Cost Estimate The Mortgagee must obtain the final contractor s itemized estimate of the repairs and improvements to be completed for all Work Items. Endeavor America Loan Services 05/18/2016 Page 179 of 191

180 203(k) Loan Program Appraisals for Standard 203(k) and Limited 203(k) Establishing Value The Mortgagee must establish both an Adjusted As-Is Value and an After Improved Value of the Property. Appraisal Reports An appraisal by an FHA Roster Appraiser is always required to establish the After Improved Value of the Property. Except as described below in cases of Property Flipping and refinance transactions, the Mortgagee is not required to obtain an as-is appraisal and may use alternate methods mentioned below to establish the Adjusted As-Is Value. If an as-is appraisal is obtained, the Mortgagee must use it in establishing the Adjusted As-Is Value. Adjusted As-Is Value The Mortgagee must establish the Adjusted As-Is Value as described below. Purchase Transactions For purchase transactions, the Adjusted As-Is Value is the lesser of: the purchase price less any inducements to purchase; or the As-Is Property Value. The As-Is Property Value refers to the as-is value as determined by an FHA Roster Appraiser, when an as-is appraisal is obtained. In the case of Property Flipping, the Mortgagee must obtain an as-is appraisal if needed to comply with the Property Flipping guidelines. Endeavor America Loan Services 05/18/2016 Page 180 of 191

181 203(k) Loan Program Refinance Transactions Properties Acquired Greater Than or Equal to 12 Months Prior to the Case Assignment Date The Mortgagee must obtain an as-is appraisal to determine the Adjusted As-Is Value when the existing debt on the Property plus the following items exceeds the After Improved Value: Financeable Repairs and Improvement Costs; Financeable Mortgage Fees; Financeable Contingency Reserves; and Financeable Mortgage Payment Reserves (for Standard 203(k) only). When an appraisal is obtained, the Adjusted As-Is Value is the As-Is Property Value. The Mortgagee has the option of using the existing debt plus fees associated with the new Mortgage or obtaining an as-is appraisal to determine the Adjusted As-Is Value when the existing debt on the Property plus the following items does not exceed the After Improved Value: Financeable Repairs and Improvement Costs; Financeable Mortgage Fees; Financeable Contingency Reserves; and Financeable Mortgage Payment Reserves (for Standard 203(k) only). Existing debt includes: the unpaid principal balance of the first Mortgage as of the month prior to mortgage Disbursement; the unpaid principal balance of any purchase money junior Mortgage as of the month prior to mortgage Disbursement; the unpaid principal balance of any junior liens over 12 months old as of the date of mortgage Disbursement. If the balance or any portion of an equity line of credit in excess of $1,000 was advanced within the past 12 months and was for purposes other than repairs and rehabilitation of the Property, that portion above and beyond $1,000 of the line of credit is not eligible for inclusion in the new Mortgage; interest due on the existing Mortgage(s); Mortgage Insurance Premium (MIP) due on existing mortgage; any prepayment penalties assessed; late charges; and escrow shortages. Endeavor America Loan Services 05/18/2016 Page 181 of 191

182 203(k) Loan Program Refinance Transactions (Continued) Properties Acquired Less Than 12 Months Prior to the Case Assignment Date For properties acquired by the Borrower within 12 months of the case number assignment date, an as-is appraisal must be obtained. The Adjusted As-Is Value is the As-Is Property Value. For properties acquired by the Borrower within 12 months of the case assignment date by inheritance or through a gift from a Family Member, the Mortgagee may utilize the calculation of Adjusted As-Is Value for properties acquired greater than or equal to 12 months prior to the case assignment date. After Improved Value To establish the After Improved Value, the Mortgagee must obtain an appraisal of the Property subject to the repairs and improvements. Documents to be Provided to the Appraiser at Assignment The Mortgagee must provide the Appraiser with a copy of the Consultant s Work Write-Up and Cost Estimate for a Standard 203(k), or the work plan, contractor s proposal and Cost Estimates for a Limited 203(k). Maximum Mortgage Amount for Purchase The maximum mortgage amount that FHA will insure on a 203(k) purchase is the lesser of: the appropriate Loan-to-Value (LTV) ratio from the Purchase Loan-to-Value Limits, multiplied by the lesser of: the Adjusted As-Is Value, plus: o Financeable Repair and Improvement Costs, for Standard 203(k) or Limited 203(k); o Financeable Mortgage Fees, for Standard 203(k) or Limited 203(k); o Financeable Contingency Reserves, for Standard 203(k) or Limited 203(k); and o Financeable Mortgage Payment Reserves, for Standard 203(k) only; or o o 110 percent of the After Improved Value (100 percent for condominiums); or the Nationwide Mortgage Limits. For a HUD REO 203(k) purchase utilizing the Good Neighbor Next Door (GNND) or $100 Down sales incentive, the Mortgagee must calculate the maximum mortgage amount that FHA will insure in accordance with HUD REO Purchasing. Endeavor America Loan Services 05/18/2016 Page 182 of 191

183 203(k) Loan Program Maximum Mortgage Amount for Refinance The maximum mortgage amount that FHA will insure on a 203(k) refinance is the lesser of: 1. the existing debt and fees associated with the new Mortgage, plus: Financeable Repair and Improvement Costs, for Standard 203(k) or Limited 203(k); Financeable Mortgage Fees, for Standard 203(k) or Limited 203(k); Financeable Contingency Reserves, for Standard 203(k) or Limited 203(k); and Financeable Mortgage Payment Reserves, for Standard 203(k) only; or 2. the appropriate LTV ratio below, multiplied by the lesser of: the Adjusted As-Is Value, plus: o o Financeable Repair and Improvement Costs, for Standard 203(k) or Limited 203(k); o o Financeable Mortgage Fees, for Standard 203(k) or Limited 203(k); o o Financeable Contingency Reserves, for Standard 203(k) or Limited 203(k); and o o Financeable Mortgage Payment Reserves, for Standard 203(k) only); or 110 percent of the After Improved Value (100 percent for condominiums); or 3. the Nationwide Mortgage Limits. Loan-to-Value Ratios for Refinance The table below describes the relationship between the Borrower s Minimum Decision Credit Score and the LTV ratio for which they are eligible. If the Borrower s Minimum Decision Credit Score is: Then the Borrower is: At or above 580 Eligible for maximum financing of 97.75% Between Limited to a maximum LTV of 90% For Secondary Residences, the maximum LTV is 85 percent. Required Documentation The Mortgagee must obtain the mortgage payoff statement for existing debt. If improvements were made to the Property subsequent to the acquisition, the Mortgagee must document the associated cost of the improvements by obtaining the following: a contract for completion of work; materials cost and paid receipts; and permit costs. Maximum Mortgage Amounts for Energy Efficient Mortgages, Weatherization Items, and Solar Energy Systems ***EA DOES NOT OFFER EEM MORTGAGES AT THIS TIME*** Endeavor America Loan Services 05/18/2016 Page 183 of 191

184 203(k) Loan Program Combined Loan-to-Value Secondary Financing Provided by Governmental Entities, Homeownership (A) and Opportunity for People Everywhere Grantees, and HUD-Approved Nonprofits. There is no maximum Combined Loan-to-Value (CLTV) for secondary financing meeting the requirements found in Governmental Entities, Homeownership and Opportunity for People Everywhere (HOPE) Grantees, and HUD-Approved Nonprofits. Secondary Financing Provided by Family Members There is no maximum CLTV for secondary financing meeting the requirements found in Family Members. Secondary Financing Provided by Private Individuals and Other (C)Organizations The maximum CLTV for secondary financing provided by private individuals and other organizations is 110 percent of the After Improved Value. Secondary financing provided by private individuals and other organizations may not be used to meet the Borrower s minimum down payment requirement. Mortgage Insurance Premium The Mortgagee must comply with the MIP requirements found in the MIP Chart. For the purpose of calculating the LTV for application of the MIP, the Mortgagee must divide the Base Loan Amount by the After Improved Value. Underwriting The Mortgagee must comply with the underwriting requirements found in Origination Through Post-Closing/Endorsement and the additional guidance provided below. Endeavor America Loan Services 05/18/2016 Page 184 of 191

185 203(k) Loan Program Required Documentation Standard 203(k) and Limited 203(k) Identity-of-Interest Certification Identity of Interest refers to a transaction between Family Members, business partners or other business affiliates. Conflict of interest refers to any party to the transaction who has a direct or indirect personal, business, or financial relationship sufficient to appear that may cause partiality and influence the transaction. Sales transactions between Family Members are permitted. The Mortgagee must ensure there are no other instances of Identity of Interest or conflict of interest between parties in the 203(k) transaction. The Borrower and the 203(k) Consultant must each sign an Identity-of-Interest certification that is placed in the case binder. If the Borrower selected a 203(k) Consultant to perform a Feasibility Study, the Mortgagee may select the same 203(k) Consultant for the project without creating an Identity of Interest. ***Example forms may be found under 203K forms*** Endeavor America Loan Services 05/18/2016 Page 185 of 191

186 203(k) Loan Program Borrower s Certification The Borrower must sign a certification stating the following: I hereby certify to the Department of Housing and Urban Development (HUD) and (Mortgagee), that I/We do or do not have an identity-of-interest with the seller. I/We do not have an identity-of-interest with the 203(k) Consultant of the property. I also certify that I/We do not have a conflict-of-interest with any other party to the transaction, including the real estate agent, mortgagee, contractor, 203(k) Consultant and/or the appraiser. In addition, I certify that I am not obtaining any source of funds or acting as a buyer for another individual, partnership, company or investment club and I/We will or will not occupy the residence I/We are purchasing or refinancing. Warning: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties. (18 U.S.C. 1001, 1010, 1012; 31 U.S.C. 3729, 3802). Borrower s Signature Co-borrower s Signature Date Date 203(k) Consultant s Certification All 203(k) Consultants are required to sign the following certification after preparing/reviewing the Work Write-Up and Cost Estimate, stating: I hereby certify that I have carefully inspected this property for compliance with the general acceptability requirements (including health and safety) in HUD s Minimum Property Requirements or Minimum Property Standards. I have required as necessary and reviewed the architectural exhibits, including any applicable engineering and termite reports, and the estimated rehabilitation cost and they are acceptable for the rehabilitation of this property. I have no personal interest, present or prospective, in the property, applicant, or proceeds of the mortgage. I also certify that I have no identity-of-interest or conflict-of-interest with the borrower, seller, mortgagee, real estate agent, appraiser, plan reviewer, contractor, subcontractor or any party with a financial interest in the transaction. To the best of my knowledge, I have reported all items requiring correction and that the rehabilitation proposal now meets all HUD requirements for 203(k) Rehabilitation Mortgage Insurance. Warning: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties. (18 U.S.C 1001, 1010, 1012; 31 U.S.C 3729, 3802). Consultant s Signature Date Endeavor America Loan Services 05/18/2016 Page 186 of 191

187 203(k) Loan Program Borrower Acting as General Contractor or Doing Own Work (Self-Help) ***EA DOES NOT ALLOW SELF HELP AT THIS TIME*** Repairs Noted by the Appraiser When an appraisal report identifies the need for health and safety repairs that were not included in the Consultant s Work Write- Up, Borrower s work plan, or contractor s proposal, the Mortgagee must ensure the repairs are included in the Consultant s final Work Write-Up or the Borrower s final work plan. 203(k) Borrower s Acknowledgment (Form HUD A) The Mortgagee must obtain an executed form HUD A, 203(k) Borrower s Acknowledgment. Feasibility Study If a Feasibility Study was performed to determine if the project is financially feasible, the Mortgagee must obtain a copy of the study. Borrower Contractor Agreement The Mortgagee must obtain a written agreement between the Borrower and the general contractor, or if there is no general contractor, for each contractor. The contractor must agree in writing to complete the work for the amount of the Cost Estimate and within the allotted time frame. Endeavor America Loan Services 05/18/2016 Page 187 of 191

188 203(k) Loan Program Required Documentation for Standard 203(k) Only Consultant Final Work Write-Up and Cost Estimate The Mortgagee must obtain the final Work Write-Up and Cost Estimate from the Consultant. The final Work Write-Up must include all required repairs and improvements to meet HUD s Minimum Property Standards (MPS) and MPR (as applicable) and the Borrower s electives. The Cost Estimate must state the nature and type of repair and cost for each Work Item, broken down by labor and materials. Lump sum costs are permitted only in line items where a lump sum estimate is reasonable and customary. Architectural Exhibits The Mortgagee must obtain and review all required architectural exhibits included in the Consultant s final Work Write-Up. Consultant/Borrower Agreement The Mortgagee must obtain a written agreement between the Consultant and the Borrower that fully explains the services to be performed and the fees to be charged for each service. The written agreement must disclose to the Borrower that any inspection performed by the Consultant is not a Home Inspection, as detailed in the disclosure form HUD CN, For Your Protection Get a Home Inspection. Endeavor America Loan Services 05/18/2016 Page 188 of 191

189 203(k) Loan Program Consultants Overview A Federal Housing Administration (FHA)-approved 203(k) Consultant is required for all Standard 203(k) mortgages and may be used for Limited 203(k) mortgages. Any Consultant who performs work on a 203(k) must be listed on the FHA 203(k) Consultant Roster. The Consultant inspects the property and prepares the architectural exhibits, the Work Write-Up and Cost Estimate. Consultant Duties The Consultant must perform the following duties in accordance with the requirements set forth below. Feasibility Study If requested by the Borrower or Underwriter to determine if a project is financially feasible, the Consultant must prepare a Feasibility Study. Consultant Inspection The Consultant must inspect the Property to ensure: there are no rodents, dry rot, termites and other infestation on the Property;- there are no defects that will affect the health and safety of the occupants; there exists adequate structural, heating, plumbing, electrical and roofing systems; and there are upgrades to the Structure s thermal protection (when necessary). The Consultant must prepare a report on the current condition of the property that categorically examines the structure utilizing the 35 point checklist. The report must address any deficiencies that exist and certify the condition of all major systems: Electrical Plumbing Heating Roofing and Structural The Consultant must determine the repairs/improvements that are required to meet the U.S. Department of Housing and Urban Development s Minimum Property Requirements (MPR), Minimum Property Standards (MPS) and local requirements. Endeavor America Loan Services 05/18/2016 Page 189 of 191

190 203(k) Loan Program Draw Request Inspection The Consultant must inspect the work for completion and quality of workmanship at each draw request. Change Order At the Borrower s or Underwriter s request, the Consultant must review the proposed changes to the Work Write-Up and prepare a change order. Work Stoppages or Deviations from the Approved Write-Up The Consultant must inform the Underwriter of the progress of the rehabilitation and of any problems that arise, including: work stoppages of more than 30 consecutive days or work not progressing reasonably during the rehabilitation period; significant deviations from the Work Write-Up without the Consultant s approval; any issues that could affect the health and safety of the occupants or the security of the structure. Consultant Fee Schedule Below are the maximum fees that may be charged by the Consultant. Feasibility Study If requested by the Borrower or Underwriter to determine if a 203(k) mortgage is feasible, the Consultant may charge an additional fee of $100 for the preparation of a Feasibility Study. Endeavor America Loan Services 05/18/2016 Page 190 of 191

191 203(k) Loan Program Work Write-up The Consultant may charge the fees listed below for the preparation of the Work Write-Up and review of architectural exhibits: Cost of Repairs Fee <$7,500 $400 $7, $15,000 $500 $15, $30,0000 $600 $30, $50,000 $700 $50, $75,000 $800 $75, $100,000 $900 >$100, $1,000 The Consultant may charge an additional $25 per additional Dwelling Unit. Draw Inspection Fee The Consultant may charge $100 per draw request. Change Order Fee The Consultant may charge $100 per change order request. Re-inspection Fee The Consultant may charge a $50 fee when re-inspection of a Work Item is requested by the Borrower or Underwriter. Mileage Fee The Consultant may charge a mileage fee at the current Internal Revenue Service (IRS) mileage rate when the Consultant s place of business is more than 15 miles from the property. Endeavor America Loan Services 05/18/2016 Page 191 of 191