FHA Loan Program Guide

Transcription

1 Fixed Rate and 5/1 Hybrid ARM Wholesale Lending August 17, 2015 Table of Contents Program Overview... 4 Credit Philosophy... 4 Ability to Repay and Qualified Mortgages... 4 Program Parameters... 5 Eligible Programs... 5 Program Details... 5 ARM Program Information... 5 FHA ARM Adjustment Date Matrix... 6 Eligible Section of the ACT... 6 Loan Limits... 6 All Eligible States... 7 Loan to Value (LTV) Matrices... 7 Assets... 7 Asset Documentation... 7 Cash Deposit on Sales Contract (Earnest Money)... 8 Cash Reserves... 8 Cash Saved at Home... 9 Commission from Sale... 9 Gift Funds Large Deposits Retirement Accounts Sale of Personal Property Secured/Unsecured Loans Unacceptable Sources Borrowers Age of Borrower Borrower Eligibility Employee Loan Policy Identity of Interest Transactions Non-Borrowing Spouse Non-Occupying Co-Borrowers Non-U.S. Citizens Social Security Number (SSN) Validation FHA Loan Program Guide Wholesale Lending Page 1 of 53 08/17/2015

2 Case Numbers Credit / Underwriting Back to Work Extenuating Circumstances due to an Economic Event Bankruptcy (BK) CAIVRS (Credit Alert Verification Reporting System) Collection Accounts Consumer Credit Counseling Services (CCCS) Credit Analysis Credit Report and Scores Disputed Accounts Foreclosure Judgments Manual Downgrades Minimum Loan Decision Scores Modified Mortgages Mortgage/Rental History Multiple FHA Loans Non-Traditional Credit Restructured Mortgages/Short Payoff Short Sale / Pre-Foreclosure Tax Liens Collateral Appraisal Borrower Acknowledgement Escrow Holdbacks Flip Properties Leaseholds Leaseholds are allowed for all transaction types, with the exception of FHA streamline refinances. Leaseholds must meet all applicable FHA requirements Manufactured Homes Mixed Use Properties Property Listed for Sale Property Overlays Reminders for Minimum Property Requirements Debt to Income Ratios / Qualifying Debt to Income (DTI) Ratio Matrix Compensating Factors Qualifying Rate Residual Income Geographic Restrictions Income and Employment Borrower Employed By a Family Member Borrower Returning to Work Child Support, Alimony, Separate Maintenance Commission Income Employment Gaps IRS Form 4506-T FHA Loan Program Guide Wholesale Lending Page 2 of 53 08/17/2015

3 Non-Taxable Income Rental Income Self-Employed Income Verification of Employment (VOE) Liabilities Alimony Payments Contingent Liability Installment Debt Lease Payments Revolving Debt Tax Liens Mortgage Insurance Property Insurance Secondary Financing Government Entity Seller/Interested Party Contributions Transactions Cash Out Refinance Purchase Rate/Term Refinance Streamline Refinance Pricing and Fees Escrow Waivers Fees Product Codes Appendix Documentation FHA Loan Program Guide Wholesale Lending Page 3 of 53 08/17/2015

4 Program Overview This FHA Program Guide provides an overview of the FHA products and policies eligible for delivery to Pacific Union Financial for financing consideration. The details are based on the policies outlined in the HUD Handbooks and applicable Mortgagee Letters. This document also identifies overlay restrictions specific to Pacific Union Financial. Credit Philosophy The Pacific Union Financial philosophy is to offer the Program with minimal overlays to our clients. All loans are evaluated in accordance with the following principles: All loans must be submitted to TOTAL Scorecard except as follows: Streamline Refinances Loans for borrowers without a credit score Manual underwriting is required on the following: Loans that receive a Refer recommendation through TOTAL Scorecard. Loans in which the borrower does not have a credit score. Manual underwriting is required when the loan decision score is <620 and the borrower s DTI is >43%. Loans that received an Accept recommendation, but were downgraded to a Refer by the underwriter. Streamline Refinance transactions. Each loan is evaluated in accordance with: FHA policies (collectively defined in the , Mortgage Credit Analysis for Mortgage Insurance Handbook and subsequent Mortgagee Letters) and all applicable HUD Handbooks. Desktop Underwriter (DU) or Loan Prospector (LP) recommendations. Loans that do not receive a TOTAL Scorecard approval via DU or LP may not be resubmitted to the other automated underwriting system. Policies as outlined within this Program Guide. Each loan applicant is underwritten individually, and all credit standards are applied consistently to each borrower. All factors are weighed in when evaluating a loan file. The underwriting decision is not based on any single item or factor. Ability to Repay and Qualified Mortgages Pacific Union is committed to complying with Ability-to-Repay and Qualified Mortgage rules (ATR/QM) by making a reasonable, good-faith determination that borrowers have a reasonable ability to repay the loan in accordance with the polices set forth within The Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) guidelines. Factors considered in making this determination include the borrower s income, assets and employment status (if relied on) against the mortgage loan payment, ongoing expenses related to the mortgage loan or the subject property, payments on simultaneous loans secured by the subject property, other debt obligations, and alimony and child-support payments as required by the FHA Loan Program Guide Wholesale Lending Page 4 of 53 08/17/2015

5 HUD/FHA. A borrower s credit history is also considered in the evaluation and must comply with HUD/FHA policies. Pacific Union will utilize reasonably reliable third party sources of information. Program Parameters Eligible Programs Standard 15 year Fixed Rate Conforming Balance only 20, 25 and 30 year Fixed Rate Conforming and High Balance 5/1 fully amortizing 30 year Hybrid ARM with 1/1/5 caps Specialty 15 Fixed Rate Conforming balance 20, 25 and 30 year Fixed Rate Conforming and High Balance ARMs are not allowed Program Details All programs are fully amortizing loans. Loans are assumable by a qualified borrower during the life of the loan. Temporary Buydowns are not permitted. ARM Program Information 5/1 Hybrid ARM loans: Index used to calculate interest rate adjustments is the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year, commonly referred to as the 1-Year Constant Maturity Treasury (CMT) index. 2% margin see daily rate sheet. Interest rate cannot increase or decrease more than 1% per year or more than 5% over the life of the loan. The interest rate is fixed for the first 60 months and will adjust on the following Jan 1, April 1, July 1 or October 1. Adjustments will occur annually thereafter. Payment adjustments will occur one month after the interest rate adjustment. ARMs are not convertible. FHA Loan Program Guide Wholesale Lending Page 5 of 53 08/17/2015

6 FHA ARM Adjustment Date Matrix The first interest rate adjustment and payment adjustments for the 5/1 CMT ARM will be as follows: Closing First Pymt Date 5/1 ARM First Interest Rate Change Date Number of Months Until 1 st change 09/02-10/01 11/01 01/ /02-11/01 12/01 01/ /02-12/01 01/01 01/ /02 01/01 02/01 04/ /02/ /09/ /01 07/ /10/ /01/ /01 07/ /02 03/01 04/01 04/ /02 04/01 05/01 07/ /02 05/01 06/01 07/ /02 06/01 07/01 07/ /02 07/01 08/01 10/ /02-08/01 09/01 10/ /02-09/01 10/01 10/01 61 Eligible Section of the ACT Eligible Section of the Act DE ADP Code Brief Description 203(b) 703 Fixed Rate 203(b) 729 Adjustable Rate Mortgage 203(b) 734 Fixed Rate Site Condominium 203(b) 731 Adjustable Rate Mortgage Condominium 203 (b) 821 Refinance of Borrower in Negative Equity Position (Non-condo) 234(c) 734 Fixed Rate Attached Condos 234(c) 831 Refinance of Borrower in Negative Equity Position (Condo) Loan Limits The maximum base loan amount (excluding UFMIP) cannot exceed the FHA Statutory Mortgage Limits for the applicable county. Conforming Balance and High Balance loan amounts are available. A complete schedule of FHA mortgage limits by county is available at: FHA Loan Program Guide Wholesale Lending Page 6 of 53 08/17/2015

7 All Eligible States Units Conforming Balance (Maximum) High Balance (Minimum to Maximum) 1 $417,000 $417,001 to FHA county limit 2 $533,850 $533,851 to FHA county limit 3 $645,300 $645,301 to FHA county limit 4 $801,950 $801,951 to FHA county limit Loan to Value (LTV) Matrices The loan to value is the base loan amount divided by the lesser of the appraised value or the purchase price. Purpose Units Base LTV CLTV Occupancy Purchase % 5,6 96.5% 1,5,6 Rate/Term % 97.75% Primary Residence Cash Out % 2 85% 2 Streamline with Appraisal % 3 125% All 7 Streamline without Appraisal % 3,4 125% 4 1. In some circumstances (subordinate financing provided by a family member, private individuals, other organizations/non-government agencies, a borrower >60 years of age, etc.) subordinate financing may be as high as 100%. Subordinate financing provided by a government entity may exceed 100% CLTV by the cost to acquire the property, see Government Entity for additional details. 2. Maximum LTV/CLTV is 80% if Conforming Balance Specialty or 75% if High Balance Specialty 3. Non-credit qualifying streamlines: New base loan amount may not exceed the current outstanding principal balance. 4. Streamline without appraisal: The original appraised value must be used to calculate the maximum LTV/CLTV. 5. Maximum 110% LTV/CLTV for HUD REO with escrow repair transactions. 6. Maximum 100% LTV/CLTV for HUD REO $100 Down Payment program transactions. 7. ARMs not allowed for Second Homes and Investment properties. Assets Borrowers must have sufficient cash to cover the required 3.5% minimum down payment from their own funds. The seller, any entity that may financially benefit from the transaction or any person who is reimbursed by a prohibited source may not provide funds for the required minimum down payment. However, under certain conditions, the minimum down payment may be provided by a Government Entity. See Government Entity topic below for more details. Refer to Chapter 5 of the HUD for guidelines not addressed in this section. Asset Documentation For TOTAL Scorecard Approve/Eligible or Accept/Eligible recommendations, assets may be documented in accordance with the AUS findings. Loans that FHA Loan Program Guide Wholesale Lending Page 7 of 53 08/17/2015

8 are manually underwritten or downgraded to a manual underwrite must be documented as follows: Written VOD and the borrower s most recent asset statements; or Original asset statements covering the most recent three-month period. If the asset statement shows the previous month s balance, this requirement is met by obtaining the two most recent, consecutive statements. Verification of Deposit (VOD) VODs must be on a standard verification form and must be sent directly from the loan originator to the financial institution and returned directly from that entity. Faxed verification forms are acceptable if it is clear from the document that the information was sent by fax transmission directly from the source to the originator. The original documents must not contain any alterations, erasures, correction fluid or correction tape. The loan file must include legible copies of the originals. The VOD form must identify all of the following, when applicable: The name of the financial institution Account number Account owner(s) Type of account Account open date Current account balance Average balance for the previous two months Outstanding loans If a securities account, the specific stocks/securities The title, signature, and phone number of the individual completing the VOD. Funds must be properly sourced when an account is opened within 90 days of the VOD and/or when the current account balance is significantly greater than the average balance. If a portion of the borrower s funds were to be saved by the borrower between the date of the loan application and the date of the loan closing, the loan file documents must show that funds were accumulated and deposited prior to closing. Cash Deposit on Sales Contract (Earnest Money) Must be verified if the earnest money deposit exceeds 2% of the sales price OR appears excessive based on the borrower s income and savings history. Cash Reserves Excess gift funds may be used as cash reserves on loans that receive an Accept recommendation through TOTAL Scorecard. For manually underwritten loans, reserves are defined as: The sum of verified and documented borrower funds; minus FHA Loan Program Guide Wholesale Lending Page 8 of 53 08/17/2015

9 The sum the borrower is required to pay at closing (down payment, closing cost, prepaid expenses, any payoffs that are a condition of loan approval, and any other expense required to close the loans); but may not include the following: The amount of cash taken at settlement in cash-out transactions; or Incidental cash reserved at settlement in other loan transactions, or Gift funds in excess of the amount required for the cash investment and other expenses; or Equity in another property; or Borrowed funds from any source. Credit qualifying manually underwritten loans must meet the following reserve requirements, with the exception of transaction for borrowers with 2-4 unit properties located in New Jersey: 1-2 unit properties 1 month PITI required. 3-4 unit properties 3 months PITI required. AUS approved and credit qualifying manually underwritten loans for 2-4 unit properties located in New Jersey: 2 units: 3 months PITI required 3-4 units: 6 months PITI required Cash Saved at Home Borrowers who have saved cash at home and are able to adequately demonstrate the ability to do so, are permitted to have this money included as an acceptable source of funds to close the mortgage, subject to the following; The funds must be verified, whether deposited in a financial institution, or held by the escrow/title company. The borrower must provide satisfactory evidence of the ability to accumulate the savings. The borrower must explain in writing: How the funds were accumulated, and The amount of time it took to accumulate the funds. It must be determined that the accumulation of cash is reasonable, based on the time period during which the funds were saved, and the borrower s income stream, spending habits, documented expenses, and the borrower s history of using financial institutions. Borrowers with checking or savings accounts are less likely to save money at home than individuals with no history of using bank accounts. Commission from Sale If the borrower is a licensed real estate agent and is entitled to a commission from the sale of the subject property, the commission funds may be credited towards borrower's minimum down payment and/or closing costs. A family member entitled to a commission from the sale of the subject property may gift their commission funds to the borrower. FHA Loan Program Guide Wholesale Lending Page 9 of 53 08/17/2015

10 Gift Funds FHA Loan Program Guide Gift funds from an acceptable source may be used to pay closing costs and the borrower s minimum down payment. See Cash Reserves for excess gift fund usage allowance. Gifts may be obtained from the following acceptable sources: Family member/relative, defined as a parent, grandparent, spouse, child (including son, daughter, stepson, stepdaughter, legally adopted child, and foster child) or other related individual (including relation by blood, marriage, adoption, legal guardianship, domestic partnership, fiancé, or fiancée). The borrower s employer or credit union A close friend with a clearly defined and documented interest in the borrower A charitable organization A government agency or public entity that has a program providing home ownership assistance to low and moderate income families and first time homebuyers Federal, State, local government agencies and approved non-profit agencies considered by to be an instrumentality of the government may provide funds for down payment, closing costs and prepaid expenses. Gifts may not be obtained from the following sources: The seller The real estate agent or broker The builder An associated entity Gifts given in the form of cash are not acceptable. Generally, FHA Is not concerned with the source of the donor funds, provided that the funds are not derived in any manner from a party to the transaction. Donors may borrow the gift funds as long as the borrower is not obligated on the note(s) acquired to secure the borrowed funds. Brokers are encouraged, but not required to use the Pacific Union Financial Gift Letter. A gift letter must be signed by the donor and the borrower. DONOR(S) MUST PROVIDE EVIDENCE OF THEIR ABILITY TO DONATE GIFT FUNDS AND EVIDENCE OF RECEIPT OF THOSE GIFT FUNDS FROM THE DONOR S ACCOUNT MUST BE PROVIDED PER THE FOLLOWING. If the gift funds... Then the required documentation is... Are in the borrower s account Are to be provided at closing AND In the form of a certified check from donor s account A copy of the cancelled check (both sides) or other withdrawal document showing that the withdrawal was from the donor s account, AND Borrower s deposit slip and bank statement showing the deposit. Note: The donor s bank statements are not required. Bank statement showing the withdrawal from the donor s account disclosed in the gift letter, AND Copy of the certified check made payable to escrow company FHA Loan Program Guide Wholesale Lending Page 10 of 53 08/17/2015

11 Are to be provided at closing AND Are in the form of a cashier s check, money order, official check, or other type of bank check Are to be provided at closing AND Are in the form of an electronic wire transfer to /or cashier s check deposited with the closing agent Are being borrowed by the donor, AND Documentation from the bank or other savings account is not available Have the donor provide a withdrawal document or cancelled check (both sides) for the amount of the gift, evidencing that the funds came from the donor s personal account disclosed in the gift letter, AND A copy of the check, AND Borrower s deposit slip or bank statement that shows the deposit and new balance OR the check may be given directly to the Title Company or Realtor who must provide written acknowledgment identifying the specific check received & being held in escrow by the Title Company Have the donor provide documentation of the wire transfer from donor s account disclosed in gift letter, AND Written acknowledgement that the specific check or wire transfer was received and is being held in escrow by the Title Company Written evidence provided by the donor to evidence that the funds were borrowed from an acceptable source. Funds may not be provided by an interested party to the transaction, including the lender. Borrower s deposit slip or bank statement showing the deposit and new balance OR Written acknowledgment that the specific check was received and is being held in escrow by the Title Company Large Deposits If there is a large increase in the borrower s account or if the account was recently opened, the borrower must provide a credible explanation and documentation to source large deposits for all transactions. A large deposit is considered the lesser of: A deposit that resulted in an increase greater than 25% of the borrower s gross monthly income; or A deposit that is more than 2% of the sales price. Retirement Accounts Up to 60% of the value of assets such as Individual Retirement Accounts (IRA), thrift savings plans, 401(k) and Keogh accounts may be included in the underwriting analysis, unless the borrower provides conclusive evidence that a higher percentage may be withdrawn, after subtracting any Federal income tax and withdrawal penalties. Redemption evidence is required. Evidence of liquidation is not required, unless more than 60% of the amount in the account is used The portion of the assets not used to meet closing requirements, after adjusting for taxes and penalties may be counted as reserves. Sale of Personal Property Borrower may sell personal property such as cars, recreational vehicles, stamp or coin collections, or baseball collections subject to the following: Borrower must provide a satisfactory estimate of the value of the items and evidence that the items were sold. The value estimate may be in the form of: FHA Loan Program Guide Wholesale Lending Page 11 of 53 08/17/2015

12 Published value estimates issued by organizations such as automobile dealers or associations related to the asset type, or A separate written appraisal by a qualified appraiser with no financial interest in the transaction. The lower of the estimated value or the actual sales price may be used as assets to close. Secured/Unsecured Loans Loan from a Family Member A secured or unsecured loan from a family member covering 100% of borrower s down payment and closing costs is allowed subject to the following: Family Member is defined as a child, parent, grandparent, (biological, foster or step), sister, step-sister, brother, step-brother, legally adopted son or daughter, a child who is a member of the borrower s household due to placement by an authorized agency for legal adoption, aunt, and uncle. Borrower may not receive cash back at closing (except for documented earnest money). Loan payment (if applicable) must be included in debt to income ratio. Loan terms cannot require a balloon payment within the first 5 years. If the family member borrowed the funds, the initial source of the funds cannot be a party with an interest in the transaction. The family member may borrower from a banking affiliate of the lender provided the loan is made under the same terms and conditions available to all customers. Secured Loans Proceeds from a loan secured by financial assets such as stocks, bonds, Certificates of Deposits, or real property may be used for the total required investment. The assets securing the loan may not also be used an asset for qualifying purposes. Unacceptable Sources Unsecured loans Cash advances on credit cards Borrowing against household goods and furniture Other unsecured financing Borrowers Age of Borrower All borrowers must have reached the age at which the mortgage note can be legally enforced in the jurisdiction where the property is located. There is no maximum age limit for borrowers. All applicants are evaluated on their ability to meet underwriting guidelines. FHA Loan Program Guide Wholesale Lending Page 12 of 53 08/17/2015

13 Borrower Eligibility Pacific Union Financial makes mortgages to natural persons only. Borrowers are ineligible for a mortgage if they are a different type of legal entity or hold title as a different type of legal entity. These legal entities include, but are not limited to, the following: Corporations S corporations Borrowers with diplomatic immunity Inter vivos trusts Life estates Land trusts General partnerships Real estate syndications Additionally, loans where a custodian, agent, conservator, or guardian is signing on behalf of the borrower, non-borrowing spouse, or a vested owner are not allowed. A CAIVRS screening must be performed on all loan obligors. Screening is not required on a non-borrowing spouse or on a streamline refinance. Refer to Credit section for additional information regarding CAIVRS. First time homebuyers are eligible. Employee Loan Policy Loans to the originating Broker and/or their employees are allowed, subject to a Second Level Risk Review and approval by a Credit Risk Underwriter. Identity of Interest Transactions Identity of Interest Transactions are transactions between family members, business partners or other business affiliates. Identity-of-interest transactions are restricted to a maximum LTV of 85%. However, maximum financing above 85% is permissible under the following circumstances: Family member purchasing another family member s principal residence. Family member is defined as a child, parent, grandparent, (biological, foster or step), sister, step-sister, brother, step-brother, legally adopted son or daughter, a child who is a member of the borrower s household due to placement by an authorized agency for legal adoption, aunt, and uncle. Employee of builder purchasing home from builder. Current tenant purchasing home he/she has rented for at least six (6) months predating the sales contract (with lease or other written evidence). Sales by corporations purchasing an employee s home and reselling to another employee. FHA Loan Program Guide Wholesale Lending Page 13 of 53 08/17/2015

14 Non-Borrowing Spouse In community property states, a credit report is required and the debts of the non-borrowing spouse must be included when determining qualifying ratios. Community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. The non-borrowing spouse s credit history is not taken into consideration. Non-Occupying Co-Borrowers Non-occupying co-borrowers may not be added on cash-out refinance transactions. Maximum 75% LTV except as stated below. For one unit properties only, maximum financing is allowed if: Non-occupying co-borrower is related to the borrower by blood, marriage, or law, or Non-occupying co-borrower can document a family-type, long-standing relationship with the borrower unrelated to the loan transaction. Occupying borrower must meet FHA minimum credit requirements. If a parent is selling to a child, the parent may be a non-occupying coborrower only if LTV is 75%. All borrowers, including non-occupying co-borrowers must sign the note and security instrument. Non-U.S. Citizens Borrowers with Diplomatic Immunity Not allowed. Non-Permanent Resident Aliens Primary Residence only. Borrower must be eligible to work in the U.S. Evidence of valid Social Security number required Evidence of residency and work status to be obtained through documentation from US Bureau of Citizenship and Immigration Services (BCIS), formerly INS. Documentation requirement(s): Copy of the Employment Authorization Card, I-688B. This card carries an expiration date. A social security card is not acceptable as evidence of work status. If the card expires in less than one year, a legible copy of the previously expired card(s) is required to evidence a history of regular renewals. Permanent Resident Aliens Same terms as US Citizens. FHA Loan Program Guide Wholesale Lending Page 14 of 53 08/17/2015

15 Evidence of lawful, permanent residency issued by the Bureau of Citizenship and Immigration Services (BCIS), formerly INS. Documentation requirement(s): Copy of the valid Alien Registration Receipt Card (Resident Alien card), I- 551 Social Security Number (SSN) Validation All borrowers must have a valid social security number as evidenced by one of the following: Pay stub W2 Valid tax returns Case Numbers The loan officer s name and NMLS number must be provided when requesting an FHA case number. FHA Connection will not issue a case number if the loan originator s name or NMLS number is not provided. Cancelling and Reinstating Case Numbers Case number cancellation request must be ed to the FHA Resource Center at [email protected] using the Case Cancellation Request Form. FHA systems will automatically cancel any uninsured FHA case number after six months, if one of the following actions is not performed as a last action: Entry of appraisal information; FHA issuance of a Firm Commitment; FHA receipt of the insurance application and subsequent updates; or A Notice of Return (NOR) has been issued and resubmissions have occurred. Note: Last action does not include updates to borrower names and/or property addresses. Reinstatement of cancelled case numbers must be ed to the FHA Resource Center at [email protected] using the Case Reinstatement Request Form. Case numbers that are automatically cancelled will only be reinstated if the one of the following is provided: Evidence that the subject loan was closed prior to the case number cancellation, such as a Settlement Statement or similar legal document; or Evidence that not reinstating the case number will cause the borrower undue hardship based on recent changes to mortgage insurance premiums and underwriting requirements. FHA Loan Program Guide Wholesale Lending Page 15 of 53 08/17/2015

16 Credit / Underwriting Loans must comply with FHA policies and the policies outlined within this document. Refer to Chapter 4 of the HUD for additional guidelines not addressed within this section. Back to Work Extenuating Circumstances due to an Economic Event An Economic Event is when a borrowers has experienced an occurrence beyond their control that resulted in a loss of income, loss of employment, or a combination of both. TOTAL Scorecard Refer recommendations or the manual downgrade of an Accept/Approve recommendation, may be eligible for FHA purchase transaction financing provided all the following requirements are met: The Economic Event lasted at least 6 months; and The Economic Event resulted in a 20% or more reduction in the borrower s household income; Documented evidence that the delinquencies were due to the Economic Event must be provided; Borrower must have reestablished a Satisfactory Credit history for at least 12 months; Borrower must have fully recovered from the Economic Event ; Housing counseling is required, as follows: The borrower must attended an approved housing counseling program at least 30 days, but no more than 180 days prior to initial application. Counseling must be performed by a HUD approved housing counseling agency, state housing finance agency, approved intermediaries or their sub-grantees. Counseling may be conducted in person, via telephone, via internet, or other methods approved by HUD. Upon completion of the required counseling, the borrower will be given a Counseling Certificate of Completion that must include the counselor s handwritten signature. In instances that the counseling certificate is received electronically or via other means and does not include a counselor s handwritten signature, the borrower must obtain the counselors signature. This may be accomplished by faxing or ing the certificate to the counselor to obtain their handwritten signature. All other HUD requirements must be met, per Mortgagee Letter and the HUD Bankruptcy (BK) Chapter 7 Requires at least two years from the discharge date, and the borrower must have re-established good credit or chosen not to incur any new credit. FHA Loan Program Guide Wholesale Lending Page 16 of 53 08/17/2015

17 Seasoning of less than two years but no less than 12 months may be acceptable if the borrower: Can show that the bankruptcy was caused by extenuating circumstances beyond the borrower s control (defined as death or long-term disability of the primary wage earner) and Has since exhibited a documented ability to manage his/her financial affairs in a responsible manner. Documentation must be provided to evidence that the borrower s current situation indicates that the events which led to the BK are not likely to recur. Exceptions to the two year seasoning requirements may be permitted based on Back to Work Extenuating Circumstances, see guidelines below for additional details. Chapter 13 Borrower may be eligible provided that: At least 12 payments have been made under the BK plan, and All payments have been made on time, and The borrower has written permission from the BK court to enter into the mortgage transaction. Refer to Manual Downgrade topic. CAIVRS (Credit Alert Verification Reporting System) A CAIVRS screening must be performed on all obligors on the loan. Screening is not required on a non-borrowing spouse. If CAIVRS screening indicates an applicant is delinquent on a Federal debt or has had a claim paid on an FHA insured loan within the previous three years, the borrower is NOT eligible for a new FHA loan. The CAIVRS confirmation code must be entered on the LT. Exceptions are allowed only under the following circumstances: The borrower sold the property, with or without a release of liability, to an individual who subsequently defaulted. The borrower must prove that the loan was current at the time of the assumption. A divorce decree or legal separation agreement awarded the property and responsibility for payment to the former spouse. The borrower is not eligible if FHA paid a claim on his/her mortgage in default prior to the divorce. The borrower may be eligible for an FHA-insured mortgage if: The property was included in a bankruptcy caused by circumstances beyond the borrower s control, such as the death of the principal wage earner, or a serious long-term uninsured illness, and, The borrower meets the requirements for previous bankruptcy described in Chapter 4 of the HUD Eligible Back to Work - Extenuating Circumstances, see guidelines below for additional details. Refer to Chapter 4 of the HUD for additional information on exceptions. FHA Loan Program Guide Wholesale Lending Page 17 of 53 08/17/2015

18 Collection Accounts FHA does not require outstanding collection accounts to be paid off as a condition of loan approval. TOTAL Scorecard approved loans: The presence of collection accounts has been considered in the borrower s credit history. A letter of explanation or supporting documentation is not required. TOTAL Scorecard Refer recommendations and manually underwritten loans: Collection accounts must be considered when underwriting the loan. The borrower must provide a letter of explanation and supporting documentation consistent with the explanation, for all collection accounts. Collection accounts with an aggregate balance equal to or greater than $2,000, excluding medical collections and charge off accounts, must meet the following capacity analysis: Collection Account(s) Status: Paid in full at closing or prior to closing Approved payment arrangements No payment arrangements Capacity Analysis Requirement: The funds used for payment must be verified and sourced The monthly payment amount must be verified and included in the borrower s debt-to-income ratio for all transactions, regardless of the TOTAL Scorecard recommendation 5% of each outstanding collection account balance must be included in the borrower s debt-to-income ratio for all transactions, regardless of the TOTAL Scorecard recommendation Consumer Credit Counseling Services (CCCS) These guidelines apply only to manually underwritten loans. For loans that receive an approval through TOTAL Scorecard, no further documentation/evaluation is required. Borrowers that are participating in a consumer credit counseling program may be eligible with documentation of the following: One year of the pay-out period has elapsed under the plan. The borrower s payment history has been satisfactory and all required payments have been made on time, and The borrower has received written permission from the counseling agency to enter into the mortgage transaction. Credit Analysis Loans submitted to TOTAL Scorecard must receive an Approve/Eligible or Accept/Eligible recommendation. Loans that receive a Refer/Eligible must be manually downgraded and underwritten manually. FHA Loan Program Guide Wholesale Lending Page 18 of 53 08/17/2015

19 Credit Report and Scores FHA Loan Program Guide A tri-merge credit report is required on all loans. For Streamline Refinance transactions, it is used solely to validate the credit score. Credit Score Methodology The following criteria may be used to determine each individual borrower's credit score using the "middle/lower" method. If there are three valid credit scores for a borrower, the middle score (numerical middle of the three scores) is used. If there are three valid scores for a borrower but two of the scores are the same, the duplicate score is used. If there are two valid scores for a borrower, the lower of the two scores is used. If there is one valid score for a borrower, that score is used. Loan Decision Score Selection After selecting the appropriate credit score for each borrower, the loan decision score must be determined as follows: One borrower: The selected credit score is also the loan decision score. More than one borrower: The lowest selected credit score among all borrowers is the loan decision score. More than one borrower and one or more of the borrowers does not have a credit score (non-traditional or insufficient credit): The lowest credit score of the borrower(s) must be used as the minimum loan decision score. Disputed Accounts Borrower(s) disputing derogatory credit account(s) must provide a letter of explanation and documentation to support the reason for the dispute. If the borrower is disputing a medical accounts, a letter of explanation and supporting documentation are not required. Disputed accounts include non-medical: Derogatory charge-off accounts, and Disputed collections; and Disputed accounts with late payments with in the most recent 24 months. Disputed account(s) analysis requirements are as follows: Disputed Account: Cumulative outstanding balance of all borrower account(s) is greater than or equal to $1,000 Cumulative outstanding balance of all borrower account(s) is less than $1,000 Disputed Accounts Analysis Requirement: The mortgage application must be downgraded to a Refer and a Direct Endorsement underwriter is required to manually underwrite the loan A manual downgrade to a Refer is not required FHA Loan Program Guide Wholesale Lending Page 19 of 53 08/17/2015

20 Disputed Account: Excluded Accounts, regardless of the amount Disputed Accounts Analysis Requirement: Disputed medical accounts are excluded from the $1,000 limit and do not require documentation Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized uses are excluded from the $1,000 limit. Documentation, such as a police report disputing the fraudulent charges, must be provided. If the original or updated credit report indicates that a disputed account meets any one of the following requirements, a manual downgrade is not required: The disputed account(s) are non-derogatory; or The disputed account(s) have a zero balance; or The disputed account(s) indicate paid in full or resolved ; or The disputed account(s) are less than $1,000; or The disputed account(s) with late payments aged 24 months or more; or The disputed account(s) is current and paid as agreed. If the dispute results in the borrower s monthly debt payment being less than indicated on the credit report, the borrower must provide documentation to support the lower payment. Foreclosure If the borrower has had past delinquencies or has defaulted on an FHA insured loan, there is a three-year waiting period before the borrower can regain eligibility for another FHA-insured mortgage. The three-year waiting period begins when FHA pays the initial claim to the lender. This includes deed-in-lieu of foreclosure, as well as judicial and other forms of foreclosures. Foreclosure or deed-in lieu of foreclosure on a non-fha loan requires three years seasoning. Exceptions are possible if the foreclosure was the result of documented extenuating circumstances that were beyond the borrower s control, such as a serious illness or death of a wage earner, and the borrower has reestablished good credit since the foreclosure. Exceptions may be permitted based on Back to Work Extenuating Circumstances, see guidelines below for additional details. Divorce is not considered an extenuating circumstance; however an exception may be granted where a borrower s loan was current at the time of the divorce, the ex-spouse received the property, and the loan was later foreclosed. The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance. FHA Loan Program Guide Wholesale Lending Page 20 of 53 08/17/2015

21 Judgments FHA Loan Program Guide Judgments must be paid in full prior to loan approval, with the exception of a court ordered judgment with payment arrangements. If payment arrangements have been made with the creditor of a court ordered judgment and three months scheduled payments were made prior to loan approval, payment in full is not required. The following requirements must be met: The verified payment must be included in the DTI. The borrower must provide a copy of the payment agreement and evidence that the payments were made in accordance with the agreement. Prepayment of the scheduled payments in order to meet the minimum three month requirement, are not allowed. Note: In a community property state, non-purchasing spouse judgments must be paid in full, or meet the payment arrangement requirements detailed above. Manual Downgrades Loans that are manually downgraded from a TOTAL Scorecard Approve or Accept recommendation to a Refer recommendation are subject to FHA s standard documentation requirements for manually underwritten loans and are not eligible for documentation relief indicated in the AUS findings. The underwriter may not rely on the TOTAL Scorecard recommendations for creditworthiness or eligibility. The loan must be reviewed for compliance with FHA manual underwriting guidelines. All manually underwritten loans require Cash Reserves. HUD requires the underwriter to manually downgrade a TOTAL Scorecard Approve or Accept recommendation to a Refer recommendation and perform a complete manual underwrite based on standard FHA guidelines if any of the following credit characteristics exist: Loans with a decision credit score <620 and DTI ratio >43%. Additional derogatory credit references are received that were not included on the credit report evaluated by TOTAL Scorecard. Suspended and debarred individuals may not be approved, even though manual underwriting, if any party (borrower, seller, loan officer, listing or selling agent, appraiser) is included on the LDP or GSA list. Loans in which borrower(s) have disputed accounts with a cumulative outstanding balance equal to or greater than $1,000. See Disputed Accounts for additional guidelines. FHA Loan Program Guide Wholesale Lending Page 21 of 53 08/17/2015

22 Minimum Loan Decision Scores Feature Standard Specialty Purchase and Rate/Term if LTV >90% - Conforming Balance 600 if LTV >90% - High Balance 560 if LTV 90% - Conforming Balance and High Balance 560 Conforming Balance Credit Qualifying if LTV >90% - High Balance Streamline Refinance 560 if LTV 90% - High Balance Non-Credit Qualifying Streamline Non-Traditional Credit 620 for pricing purposes only Not eligible Cash Out Refinance 620 A credit report is not required, but may be used if the score will improve pricing. Loans with a credit score will be priced to the lowest pricing tier. If a decision score is not provided, assume the following for pricing purposes only: Conforming Balance High Balance Conforming Balance: 600 if LTV >75% but 80% 560 if LTV 75% High Balance: 600 if LTV 75% Modified Mortgages A modified mortgages is one in which a permanent change has been made to the original loan terms without forgiveness of any principal or accrued interest. This may include, but is not limited to: A change in amortization term A reduction in interest rate A reduction in the scheduled monthly payment amount Non-Pacific Union Financial serviced loans must meet the 6-12 month agency payment history requirements and must have a minimum 24 month mortgage payment history under the new terms. In addition to meeting the agency payment history requirements during the most recent 6-12 month payment period, no late payments are allowed during the month period post modification. Pacific Union to Pacific Union refinance transaction must only meet the agency 6-12 month payment history requirements. A 24 month payment history is not required. A copy of the modified note must be in the loan file. See Restructured Mortgages, if applicable. Mortgage/Rental History New Jersey borrowers securing a 2-4 unit dwelling must provide 12 months cancelled checks if mortgage/rental history is not provided on the credit report. Borrower s living rent-free during the most recent 12 months are not allowed. FHA Loan Program Guide Wholesale Lending Page 22 of 53 08/17/2015

23 See Streamline Refinance and Back to Work Extenuating Circumstances topics for additional requirements. Multiple FHA Loans A borrower may have more than one FHA loan only under the following circumstances: Borrower is relocating and establishing residency in an area outside reasonable commuting distance. In this case, the relocation is not required to be employment related. The borrower must provide evidence of the increase in number of dependents and the property s failure to meet current needs. Borrower must have 25% equity in the current property as evidenced by an appraisal. Tax assessments and broker market analysis are not acceptable. Borrower is vacating a jointly owned home. Borrower was or will be a non-occupying co-borrower with a joint interest in a property purchased by other family members as their primary residence. Qualified investor entities are limited to a financial interest (this includes any type of ownership, regardless of the type of financing) in seven rental dwelling units, when the subject property is part of, adjacent to, or contiguous to, a property, subdivision or group of properties owned by the investor. The units that count toward this limitation include: Each dwelling unit in a two, three, and four family property, and The rental units in an owner-occupied two, three, or four unit property. Non-Traditional Credit Non-traditional credit must be documented using a Non-Traditional Mortgage Credit Report (NTMCR). Direct verifications may be obtained only when a NTMCR is impractical or the service is not available. Non-traditional credit may be used when the borrower does not have the type of credit that appears on a traditional credit report or to supplement an insufficient number of tradelines. Ratios may not exceed 31%/43% DTI. Increases based on compensating factors are not allowed. Income from non-occupant co-borrowers may be included in the DTI ratios. Non-traditional credit may not be used to: Offset derogatory credit; or Create a credit report for a borrower without a verifiable credit history; or Enhance a poor payment history Non-traditional credit must: Include three credit references, including at least one from Group I, and Exhaust all Group I references prior to considering Group II references Group I references include rental housing payments or utility company references. FHA Loan Program Guide Wholesale Lending Page 23 of 53 08/17/2015

24 Eligible Group II references include: Medical, life, auto or renters insurance coverage that is not payroll deducted. Payment to child care providers made to a business providing such services. School tuition Retail stores department, furniture, appliance stores, specialty stores; rent to own i.e., furniture, appliances Payment of medical bills not covered by insurance Internet/cell phone services Documented 12 month history of saving by regular, non-payroll deducted deposits resulting in an increasing balance to the account. No NSF activity reported. Automobile leases Personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments. Non-traditional credit references must include a minimum of 12 months history with: No history of delinquency on rental housing payments. No more than one 30-day late payment on all other references. No collection accounts / court records reporting (other than medical) within the last 12 months. Insufficient Non-Traditional Credit For borrowers with no credit references or only Group II references: A satisfactory credit history with at least 12 months of history must include no more than one 30-day delinquency on any Group II reference, and no collection accounts/court records (other than medical) filed within the last 12 months, and Ratios may not exceed 31%/43% and must be computed only on those borrowers occupying the property and obligated on the loan. Ratio increases based on compensating factors are not allowed. See Cash Reserves for additional requirements. Restructured Mortgages/Short Payoff A restructured mortgage is one in which the original terms have been changed, including through the origination of a new mortgage, resulting in any of the following: Forgiveness of principal and/or interest on either the first or second mortgage. Application of a principal curtailment by or on behalf of the investor to stimulate principal forgiveness. Conversion of any portion of the original mortgage debt to a mortgage that is fully forgiven over a period of time or due upon the sale of the subject property (a soft subordinate mortgage). FHA Loan Program Guide Wholesale Lending Page 24 of 53 08/17/2015

25 Conversion of any portion of the original mortgage debt from secured to unsecured. A restructured mortgage may be identified as follows: The borrowers tax return (if obtained) reflects income from a 1099C from the mortgage lender, mortgage insurance company or third party investor, or The payoff amount is significantly less than the credit report balance or the current monthly payment disclosed on the 1003 varies from the payment reported on the credit report, or The borrower s credit report reflects verbiage such as Settled for less than amount owed, or Paid In Full not as agreed. Non-Pacific Union Financial serviced loans must meet agency requirements and must have a 24 month mortgage payment history immediately after the loan was restructured. In addition to meeting the agency requirements during the 6-12 month payment period, no late payments are allowed during the month period immediately after the loan was restructured. Note: A 24 month payment history is not required if Pacific Union to Pacific Union refinance transaction. A restructured mortgage may not be accurately reflected on the borrower s credit report. If it is known or suspected that the borrower had a previous restructure, the credit report must be updated and the loan rescored and resubmitted to TOTAL Scorecard. A restructured mortgage is sometimes referred to as a short pay loan, a short pay refinance or a short refinance. A copy of the restructured note must be in the loan file. See Modified Mortgages, if applicable. Short Sale / Pre-Foreclosure A borrower is not eligible for a new FHA-insured mortgage if he/she pursued a short sale agreement on his/her principal residence to take advantage of declining market conditions and purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value. A borrower is considered eligible for a new FHA-insured mortgage if from the date of loan application for the new mortgage, all the following applied: Mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and All installment debt payments for the same time period were also made within the month due. A borrower in default on his/her mortgage at the time of the short sale or pre-foreclosure sale is not eligible for a new FHA-insured mortgage for three years from the date of the short sale or pre-foreclosure sale. A borrower who sold his/her property under FHA s pre-foreclosure sales program is not eligible for a new FHA-insured mortgage from the date that FHA Loan Program Guide Wholesale Lending Page 25 of 53 08/17/2015

26 Tax Liens FHA Loan Program Guide FHA paid the claim associated with the pre-foreclosure sale. Exceptions to the three year seasoning requirements may be made if the: Default was due to circumstances beyond the borrower s control, such as the death of a primary wage earner, long-term uninsured illness or a Back to Work - Extenuating Circumstance; and The credit report indicates satisfactory credit prior to the event that caused the default. Failure to make payments on a delinquent federal debt must be considered when analyzing the borrower s creditworthiness. The underwriter must provide justification as to why the previous failure does not represent a risk of mortgage default. The borrower is not eligible for a mortgage loan until the delinquent account is brought current, paid, otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing. If a tax lien has NOT been recorded, the taxes may remain unpaid if the borrower has a written repayment agreement in place. A minimum of three months repayment history is required and the payment amount must be included in the DTI ratios. If a tax lien has been recorded and the borrower has entered into a repayment arrangement, the lien is not required to be paid off subject to the following: A minimum of three months repayment history with no late payments is required and the payment amount must be included in the DTI ratios. No exceptions allowed. Late payments made prior to the most recent three month period must be due to documented extenuating circumstances. If no payment arrangements have been made the tax lien must be paid in full. Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA insured mortgage. IRS tax liens do not require a subordination agreement unless there is evidence that the IRS has demanded a first lien position. Collateral Appraisal An FHA Appraisal may be transferred from another lender to Pacific Union Financial. Only the appraisal is assignable. The appraisal must be evaluated by a Pacific Union Financial underwriter. The transferred appraisal: May not be expired. May not have been used to complete another transaction that has closed. FHA Loan Program Guide Wholesale Lending Page 26 of 53 08/17/2015

27 Borrower Acknowledgement FHA Loan Program Guide All files must include one of the following acknowledgements from the borrower: Receipt of the appraisal at least three days prior to closing. Waiver of right to receive appraisal within three days prior to closing. Escrow Holdbacks Non-HUD REO: An escrow repair is allowed for repairs that cannot be completed due to weather related delays, but do not affect the livability, safety or structural integrity of the property or affect the ability to obtain a Certificate of Occupancy on new or proposed construction. Refer to the Escrow Holdback Policy for detailed guidelines. HUD REO: Refer to the HUD REO Loan Program Guide for detailed requirements. Flip Properties Property flipping is a practice whereby a recently acquired property is resold for a considerable profit. These type transactions are allowed if the property is not misrepresented and/or the value of it is not artificially inflated. In an effort to prevent illegal property flipping, FHA implemented the following property flipping policy: Only owners of record may sell properties that will be financed using FHAinsured mortgages; and. Any re-sale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing, and For sales that occur between 91 and 180 days, where the new sales price exceeds the previous sales price by one hundred percent (100%) or more, FHA will require additional documentation validating the property s value. Sale by the Owner of Record FHA considers the re-sale date as, the date of execution of a sales contract by the buyer. The property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. This applies to all FHA purchase money mortgages regardless of the time between re-sales. The file must include documentation verifying that the seller is the owner of record. This documentation may include, but is not limited to a property sales history report, a copy of the recorded deed from the seller, or other documentation such as a copy of a property tax bill, title commitment or binder, demonstrating the seller s ownership of the property and the date it was acquired. FHA Loan Program Guide Wholesale Lending Page 27 of 53 08/17/2015

28 Exceptions to the 90-Day Restriction Sales by HUD of its own Real Estate Owned (REO) properties. Properties that were HUD REOs and then rehabilitated and resold are not eligible under this exemption. Sales by other US Government agencies of single family properties pursuant to programs operated by these agencies. Sales of properties by non-profits approved to purchase HUD-owned singlefamily properties at a discount with resale restrictions. Sales of properties that are acquired by the sellers by inheritance. Sales of properties purchased by employers or relocation agencies in connection with relocations of employees. Sales of properties by state and federally charted financial institutions and Government Sponsored Enterprises. Sales of foreclosed properties by state licensed mortgage lenders. Any entity that sells foreclosed properties on behalf of an exempt lender or financial institution. Sales of properties by local and state government agencies. Sales of a previously foreclosed or abandoned property acquired, rehabilitated and resold by an entity using funds from and performing under agreements with state and local government agencies under a Neighborhood Stabilization Program (NSP). Notes: Documentation proving a seller is exempt from any of the property flipping guidelines is required in the endorsement file prior to approving the loan transaction. Re-sales that occur under this exemption within 90 days of last acquisition with a sales price increase of 100% or more require a second appraisal ordered from a Pacific Union Financial Appraisal Vendor service. Re-sales Occurring Between 91 and 180 Days Following Acquisition A second appraisal made by another appraiser ordered through Pacific Union Appraisal service is required if the re-sale price is one hundred percent (100%) or more over the price paid by the seller when the property was acquired. Example: If a property is re-sold for $80,000 within six (6) months of the seller s acquisition of that property for $40,000, a second appraisal supporting the $80,000 sales price is required. Documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value may be provided, but the second appraisal is still required. The cost of the second appraisal may not be charged to the homebuyer; however may be paid by the seller. Both appraisals must be FHA appraisals prepared by independent appraisers. Both appraisers must be on HUD s roster list of Approved Appraisers and be state certified with an unexpired license. Repairs on both appraisals must be resolved. FHA Loan Program Guide Wholesale Lending Page 28 of 53 08/17/2015

29 If there is a difference in value of more than five percent (5%) between the two appraisals, the appraisal with the lowest value must be used. The Conditional Commitment is issued based on the appraisal used by underwriting. Re-Sales Occurring Between 91 Days and 12 Months Following Acquisition FHA reserves the right to require additional documentation to support the resale value if the re-sale price is five percent (5.00%) or greater than the lowest sales price of the property during the preceding twelve (12) months. Documentation may include, but is not limited to, an appraisal from another appraiser. Date of Property Acquisition Determined by the Appraiser Information provided by the appraiser in compliance with the USPAP rules may be relied on to determine the seller s acquisition date. Appraisers are responsible for considering and analyzing any prior sales of the property being appraised within three years of the date of the appraisal. If the most recent sale of the property occurred at least one year previously, no additional documentation is required. Any conflicts in information must be resolved and the file must be documented accordingly. Leaseholds Leaseholds are allowed for all transaction types, with the exception of FHA streamline refinances. Leaseholds must meet all applicable FHA requirements. Manufactured Homes Permitted. Refer to the Manufactured Home Loan Program Guide for applicable guidelines and state restrictions. Note: Modular homes are eligible for financing and must follow standard site built housing requirements. Mixed Use Properties Mixed use properties are eligible provided the non-residential use does not impair the residential character and does not exceed 25% of the total square footage. Property Listed for Sale Eligible for Rate/Term or Streamline Refinance if listing was expired or cancelled prior to application date. Eligible for Cash-Out Refinance if listing was expired or canceled >90 days prior to loan application date. FHA Loan Program Guide Wholesale Lending Page 29 of 53 08/17/2015

30 Property Overlays Condo project must be on FHA s approved list. Properties located on an Indian Reservation are not eligible. Reminders for Minimum Property Requirements Property must be free of any health, safety or structural hazard that may impair the customary use and enjoyment of dwelling. All mechanical, heating and electrical supplies must be adequate for the dwelling. All properties must have safe potable drinking water and sanitary facilities for safe disposal of sewage. Connection to public or community water/sewage is required whenever feasible. Individual water systems: Systems must meet all requirements of the local and/or State Health Authority having jurisdiction. If the local authority does not have specific requirements, the maximum contaminant levels established by the EPA will apply. A water test or inspection is required if: Deficiencies are noted by the appraiser; There are observable signs of system failure; Required by the State or local jurisdiction; There is knowledge that the water may be contaminated; The water supply relies on a water purification system due to the presence of contaminants; The water has an unusual taste, smell or appearance; There is evidence of corrosion of the pipes (plumbing); or Any of the following are present within ¼ mile: Intensive agricultural operations, coal mining or gas drilling operations, dump, junkyard, landfill, factory, gas station or dry cleaning operations. Note: In some states County Health Authorities are required to collect the test samples; however, it they are unable or are not required to collect the samples, an individual/company acceptable to the State and the laboratory may collect the samples. Individual sewage inspections by a local health authority may be required when appraiser indicates a problem with either the septic system, indicates the subject is located in an area with soil percolation problems or is a condition of the appraisal. If roof is defective and has three or more layers of shingles, it must be corrected. Site must be graded to provide positive, rapid drainage form perimeter of will and prevent ponding on the site. Property may not be located in a high pressure gas, liquid petroleum or high voltage electric transmission line easement. Any defective paint condition in a dwelling build prior to 1978 will be assumed to contain lead and must be corrected. FHA Loan Program Guide Wholesale Lending Page 30 of 53 08/17/2015

31 Property must be free of wood destroying insect infestation, dry rot and fungus growth. A termite inspection is required when: The appraiser recommends an inspection or marks the evidence of infestation box on the appraisal report; or It is requested in the sales agreement; or It is mandated by the state or local jurisdiction; or At the Underwriter s discretion, if the property is located in a Termite Infestation Probability (TIP) zone per the CABO TIP Map, which can be located via the National Pest Management Association Inc. website at Debt to Income Ratios / Qualifying Debt to Income (DTI) Ratio Matrix TOTAL Scorecard Approve/Accept Eligible Transactions Lowest Minimum Loan Decision Score Maximum DTI Acceptable Compensating Factors % 50% unit properties located in New Jersey If a manual downgrade is required, follow Manual Underwriting requirements below. Not required Manually Underwritten Transactions (Refer/Eligible, Manually Downgraded Loans or Credit Qualifying Streamlines) Effective For Case Numbers Assigned On or After April 21, 2014 Lowest Minimum Loan Maximum Acceptable Compensating Factors Decision Score DTI 580 with 2 comp factors 40% / 50% Two of the following Compensating Factors are require: Verified and documented cash reserves; or Minimal increase in housing payment; or Significant additional income not reflected in the gross effective income; or Residual Income 580 with no other debt 40% / 40% The borrower must meet all the following requirements: Monthly housing payment must be the only open installment account and must have a minimum 6 month payment history; and Revolving credit must have been paid in full each month during the most recent 6 month period. Note: Other debts and additional compensating factors are not allowed. 580 with one comp factor 37% / 47% One of the Compensating Factors are required: Verified and documented cash reserves; Minimal increase in housing payment; or Residual Income 580 with no comp factors 31% / 43% Compensating factors not required. FHA Loan Program Guide Wholesale Lending Page 31 of 53 08/17/2015

32 Manually Underwritten Transactions (Refer/Eligible, Manually Downgraded Loans or Credit Qualifying Streamlines) Effective For Case Numbers Assigned On or After April 21, or Non- Traditional/Insufficient Credit 31% / 43% Compensating factors are not allowed. The DTI may not be exceeded. Non-traditional credit: Income from non-occupant co-borrowers may be included in the DTI ratios. Insufficient credit: Only income from borrowers occupying the property and obligated on the loan maybe used. Note: Second Level Risk Review may be required for loans that exceed 33% / 45% DTI or 36% DTI when the borrower has no other debts. Compensating Factors Manually underwritten loans, including those with ratios that exceed the 31%/43% ratio benchmark, must include documented compensating factors, when allowed per the Maximum Debt-to Income (DTI) Matrix, to justify approval. The compensating factors must be documented and recorded on the LT and, if applicable, a worksheet must be attached to reflect the calculation of Residual Income. The fact that the borrower has a job or has good credit are NOT acceptable compensating factors, as these characteristics are required for approval. Acceptable compensating factors are as follows: Acceptable Compensating Factor Minimal increase in housing payment Requirements To Support The Compensating Factor Effective For Case Numbers Assigned On or After April 21, 2014 The new total monthly mortgage payment does not exceed the current total monthly housing payment by more than $100 or 5%, whichever is less; and For purchase, streamline and rate/term refinances: the previous housing payment history must include no more than one mortgage late payment within the most recent twelve months; or For cash-out transactions: all mortgage payments must have been paid within the month due within the most recent twelve months. Note: If the borrower does not have a current housing payment, minimal increase in housing payment cannot be used as a compensating factor. Discretionary debt Residual income May be considered a compensating factor when all of the following apply: The borrower s housing payment is the only open account with an outstanding balance that is not paid off monthly; The credit report shows established credit (revolving and/or installment) in the borrower s name open for at least six months and it is verified that the credit account has been paid in full monthly within the most recent six month period. Must be equal to or higher than the applicable amounts on the Table of Residual Income by Region and calculated based on the following: All members of the household income may be included in the calculation, regardless of the nature of their relationship and without regard to whether they will be on the Note or title to the property. Members of the household may be omitted from the family size when determining residual income as a compensating factor, if the family FHA Loan Program Guide Wholesale Lending Page 32 of 53 08/17/2015

33 Significant additional income not reflected in gross effective income Verified and documented cash reserves member provides sufficient documentation verifying that they are fully supported by a source of income not included in the loan analysis. Verified and documented significant overtime or bonus income that is not considered effective income, but the borrower has received the income for at least one year but less than two years. The income must be likely to continue. Verified and document part-time or seasonal employment with income that is not considered effective income, but the borrower s part-time and seasonal work status has been uninterrupted for at least one year but less than two years and there are plans to continue this work. Note: If the income were included in the gross effective income, it must have been sufficient enough to reduce the qualifying ratios to 37% / 47%. Income from non-borrowing spouses or other parties not obligated on the mortgage may not be included. The borrower has substantial documented cash reserves, three months PITI required for 1-2 unit properties and six months PITI required for 3-4 unit properties. The reserves must be liquid or readily convertible to cash, and can be done so absent retirement or job termination. Funds and/or assets that are not to be considered as cash reserves include: Gift funds; Equity in other properties; Proceeds from a cash-out refinance; Borrowed funds; Incidental cash received at closing in the loan transaction. A portion of a borrower's retirement account (IRA, Thrift Savings Plan, 401k, and Keogh accounts) may be considered, subject to the following conditions: To account for withdrawal penalties and taxes, only 60% of the vested amount of the account, less any outstanding loans, may be used. Requires documentation of the existence of the account with the most recent depository or brokerage account statement. In addition, evidence must be provided that the retirement account allows for withdrawals under conditions other than in connection with the borrower's employment termination, retirement, or death. If withdrawals can only be made in connection with the borrower s employment termination, retirement, or death, the retirement account may not be included as cash reserves. If any of these funds are also to be used for loan settlement, that amount must be subtracted from the amount included as cash reserves. Qualifying Rate Fixed rate transactions: Qualify at note rate. Hybrid ARM transactions: Qualify at note rate, unless the subject is located in one of the following states. For these states the ARM must be qualified at the greater of the note rate or the fully indexed rate in order to meet both agency and state requirements. Illinois Maryland Minnesota New Mexico Pennsylvania FHA Loan Program Guide Wholesale Lending Page 33 of 53 08/17/2015

34 Vermont All HPML Hybrid ARM transactions must be qualified at the higher of the note rate or the fully indexed rate. Residual Income Residual income is the amount of income remaining after the deductions defined below have been subtracted from all occupying borrowers total/gross income. Total/Gross income may not include bonus, part-time or seasonal income that does not meet HUD s effective income requirements. Income from non-occupying co-borrower, co-signers, non-borrower spouses, or other parties not obligated on the mortgage may not be included. Non-taxable income may not be grossed up (taxes are taken into account during the residual income calculations). Residual income deductions include the following: The proposed total monthly fixed payment. State, Federal, local or other income taxes. If available, use the borrower s most recent tax returns to document federal, state and local taxes liabilities or taxes can be calculated using the most recent IRS Tax Tables and state or local taxing authorities tax requirements. Retirement and Social Security Paystubs or tax returns may be used to determine the maximum deduction. Estimated maintenance and utilities Maintenance and utility cost may be estimated by multiplying the living area of the property (square feet) by 14 cents. Job related expenses (e.g. child care) FHA requires a specific amount of monthly residual income be available for the borrower s use. This amount is based on the family size, location of the property and loan amount. Table for Residual Income By Region Loan Amounts $79,999 and Below 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 $1,004 Over 5 Add $75 for each additional family member up to 7 Loan Amounts $80,000 and Above 1 $450 $441 $441 $491 2 $755 $738 $738 $823 3 $909 $889 $889 $990 4 $1025 $1003 $1003 $ $1062 $1039 $1039 $1158 FHA Loan Program Guide Wholesale Lending Page 34 of 53 08/17/2015

35 Over 5 Add $80 for each additional family member up to 7 Region Northeast Midwest South West FHA Loan Program Guide States CT, MA, ME, NH, NJ, NY, PA, RI, VT IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK, PR, SC, TN, TX, VA, VI, WV AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY Geographic Restrictions No Texas Home Equity loans. Refer to the Geographic Matrix for restrictions. New Jersey 2-4 unit transactions: Maximum 50% DTI for TOTAL Scorecard Approve/Accept Eligible recommendations. No exceptions allowed. See below for additional New Jersey requirements. New Jersey transactions: For all 2-4 unit transactions, the following cash reserves are required regardless of underwriting type: 2 unit = 3 months PITI required 3 4 unit = 6 months PITI required Satisfactory 12 months housing expense must be verified by credit report or cancelled checks. Borrowers living rent-free during the most recent 12 months are not eligible. Income and Employment Loans must be documented in accordance with FHA Policies and the AUS findings. Only income that meets FHA standards for stable income should be included in the AUS submission. Typically, FHA defines stable income as income that has been received for at least 2 years and is likely to continue for at least 3 years. Refer to Chapter 4 of the HUD for guidelines not addressed in this section. Loans evaluated using TOTAL Scorecard that receive an Approve/Accept Eligible recommendation may be documented in accordance with the TOTAL Scorecard findings. Loans that are manually underwritten or downgraded to manual underwriting must be documented as follows: Written VOE and the borrower s most recent paystubs; or Original pay stub(s) covering the most recent 30-day period and original IRS W-2 forms from the previous two years. (Note: Any copy of the IRS W-2 not submitted with the borrower s tax return is considered an original. The original may be photocopied and returned to the borrower) and verbal verification of all current employers. File must also contain a certification that all original documents were examined. FHA Loan Program Guide Wholesale Lending Page 35 of 53 08/17/2015

36 Borrower Employed By a Family Member FHA Loan Program Guide In addition to standard income documentation, borrower must provide evidence that he/she does not have ownership in the business. Acceptable documentation includes: Copies of signed personal tax returns, or Signed copy of the corporate tax return showing ownership percentage. Borrower Returning to Work A borrower who is returning to work after an extended absence of six months or more is eligible subject to the following: Current employment of at least six months Documentation of two years of employment prior to the absence. Acceptable documentation includes W-2 forms, paystubs, or written verification of employment. Acceptable scenarios include an individual who took several years off to raise children, but has now returned to work. Child Support, Alimony, Separate Maintenance May be considered effective income if: Payments are likely to be received for the first three years of the mortgage, as documented by a divorce decree, legal separation agreement, court order, or voluntary payment agreement, and If borrower can provide evidence that payments have been received for the last 12 months, such as cancelled checks, deposit slips, tax returns, or court records. Note: Loans approved by TOTAL Scorecard, only require a three month history of receipt. Periods less than 12 months may be acceptable if the payer s ability and willingness to make the timely payments is documented. Commission Income Must be averaged over the previous two years. Borrower must provide copies of signed tax returns for the previous two years and the most recent paystub. Commission income showing a decrease from one year to the next requires significant compensating factors in order to use the income. Commission income received for more than 12 months but less than two years may be considered as effective income if the lender can document the likelihood that the income will continue and can rationalize the use of the income. Commission income received less than 12 months may not be considered as effective income, except in instances that the borrower s compensation changed from salary to commission within a similar position with the same employer. Unreimbursed business expenses must be subtracted from gross income. FHA Loan Program Guide Wholesale Lending Page 36 of 53 08/17/2015

37 Employment Gaps Manually underwritten loans: The borrower must explain any gaps of employment that span one month or more. AUS approved loans: The borrower must explain any gap in employment greater than 6 months. Allowances can be made for seasonal employment, if documented. IRS Form 4506-T A fully completed 4506-T is required on all borrowers, except Non-Qualifying Streamline Refinance transactions. Tax return transcripts must be provided for each year of income documentation. Income reported on the transcript must support the income entered in the AUS system. Any major discrepancies between the income verified in the file and tax transcripts must be reasonable and supported by documentation in the file. Non-Taxable Income Non-taxable income such as child support, public assistance, foster care and disability income may be acceptable provided the stability of such income as well as the likelihood of continuance for the first three years of the mortgage is documented. In addition, if a particular source of regular income is not subject to federal taxes, the amount of continuing tax savings attributable to the non-taxable income source may be added to the borrower's gross income. The lender should use the tax rate used to calculate last year's income tax for the borrower. If the borrower is not required to file a federal income tax return, the tax rate to use is 25 percent. Rental Income Boarder Income Income from roommates in a single family property occupied as the borrower s primary residence is not acceptable for qualifying. Rental income from boarders is acceptable if the boarders are related by blood, marriage or law. The rental income may be considered effective if shown on the borrower s tax return. If not on the tax return, rental income paid by the boarder may be considered as a compensating factor, and must be adequately documented by the lender. FHA Loan Program Guide Wholesale Lending Page 37 of 53 08/17/2015

38 Departing Property FHA Loan Program Guide Rental income from the property being vacated may not be used to qualify for the new mortgage. The applicant must qualify using the full PITI payment of the vacated property, even if a lease is provided. Exceptions are allowed as follows: The borrower is being relocated with a new or by a current employer to an area not within reasonable and locally recognized commuting distance. A minimum 12 month lease is mandatory and evidence of receipt of the security deposit and/or first month s rent should be considered as supporting documentation. The applicant has an LTV of 75% or less determined by either a current (no more than 6 months old) residential appraisal (2055 or full appraisal) or by comparing the unpaid primary balance to the original sales price of the property (documentation verifying both is required e.g. copy of current mortgage statement and copy of original HUD-1). Subject 2 Unit Property Rental income from a 2 unit property in which borrower occupies one unit may be used for qualifying purposes. Projected rent for the tenant occupied units may only be considered as gross income, after deducting the applicable Homeownership Center s (HOC) vacancy and maintenance factor. Rental income may not be used as a direct offset to the mortgage payment. One month cash reserves are required on all transactions, with the following exception for New Jersey: Three months reserves are required for 2 unit properties located in New Jersey. Subject 3-4 Unit Property The maximum mortgage is limited so that the ratio of the monthly mortgage payment (PITI plus HOA dues, if applicable) divided by the monthly net rental income does not exceed 100%. The monthly payment includes principal, interest, monthly mortgage insurance, taxes, insurance, and HOA dues computed at the note rate. Net rental is the appraiser s estimate of fair market rent from all units, including the unit the borrower will occupy, less the applicable HOC s vacancies and maintenance factor. The projected rent may be considered only as gross income for qualifying purposes, and not used to offset the monthly mortgage payment. Three months reserves after closing are required on all transactions, with the following exception for New Jersey. Six months reserves are required for 3-4 unit properties located in New Jersey. FHA Loan Program Guide Wholesale Lending Page 38 of 53 08/17/2015

39 Other Rental Properties FHA Loan Program Guide Rental income from properties currently owned by the borrower may be used subject to the following: Current lease or Agreement to Lease (acceptable only if the borrower obtained the property after the last tax return was filed). Reduce the gross rental amount by 25% (or the applicable HOC s vacancy and maintenance factor) 24 months rental history that is free of unexplained gaps greater than three months. Gaps could be explained by student, seasonal, or military renters, or property rehabilitation. Self-Employed Income A borrower who owns 25% or more of a business is considered self-employed Self-employed income may be considered in effective income if the borrower has been self-employed for two years or more. If self-employed less than two years, the borrower must have a minimum of two years of employment in the same line of work. A combination of one year of work and formal education or training in the same line of work is also acceptable. Borrowers who have been self-employed for less than one year are not eligible. Documentation Requirements Refer to Chapter 4 of the HUD and the TOTAL Scorecard feedback (if applicable) for documentation requirements. Income Calculation If a 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 shown on the P&L statement may be included in the analysis, provided the income stream based on the P&L is consistent with the previous years earnings. If a P&L statement is provided and shows an income stream considerably greater than what is supported by the tax returns, the income analysis must be based solely on the income verified through the tax returns. If the earnings trend for the previous two years is declining and the most recent tax return or P&L is less than the income from the previous year s tax return, the borrower s most recent year s tax return or P&L must be used to calculate his/her income. FHA Loan Program Guide Wholesale Lending Page 39 of 53 08/17/2015

40 Verification of Employment (VOE) FHA Loan Program Guide VOEs must be on a standard verification form and must be sent directly from the loan originator to the employer and returned directly from that entity. Faxed verification forms are acceptable if it is clear from the document that the information was sent by fax transmission directly from the source to the originator. The original documents must not contain any alterations, erasures, correction fluid or correction tape. The loan file must include legible copies of the originals. Verbal VOE (VVOE) A VVOE must be completed PRIOR to closing as follows: By a Pacific Union Financial closer within five business days prior to closing. A VVOE or VOE is not required for Non-Credit Qualifying Streamlines when an abbreviated URLA is utilized and employment is not disclosed. Verifications are always required on a Credit Qualifying Streamline. Liabilities Alimony Payments Alimony payments may be treated as a reduction to the borrower s income rather than treating it as a monthly obligation. Contingent Liability A contingent liability exists when a borrower holds a joint obligation with another person or persons. Obligations where the borrower is a co-signer must be listed as the borrower s debt, unless the borrower can provide conclusive evidence from the debt holder that there is no possibility the debt holder will pursue debt collection against him/her should the other party default. Co-Signed Obligations If the borrower is a co-signer, or otherwise co-obligated on a car loan, student loan, mortgage, or any other obligation, contingent liability applies unless the lender obtains documented proof that the primary obligor has been making payments during the previous 12 months on a regular basis and does not have a history of delinquent payments on the loan. Mortgage Debt If a borrower is obligated on an outstanding mortgage secured by a property which has been sold by assumption, Contract for Deed or traded within the last twelve months without a release of liability, or a property was FHA Loan Program Guide Wholesale Lending Page 40 of 53 08/17/2015

41 transferred because of divorce, contingent liability must be considered a recurring liability unless the following circumstances apply: Payment history reflects 0 x 30 for the last 12 months (see note below), or An appraisal or closing statement from the sale of the property supports a value that results in a 75% LTV ratio (the outstanding balance on the mortgage loan, minus any UFMIP, cannot exceed 75% of the appraised value or sales price). A copy of the divorce decree ordering the former/separated spouse to make payments or the assumption agreement and the deed showing transfer of title out of the borrower s name is required. Note: A 12 month payment history is required only on loans that do not receive a TOTAL Scorecard approval. Installment Debt Installment debt with less than 10 payments remaining may be excluded from DTI ratios. However, at the underwriter s discretion, installment debt less than 10 months may be included if the payment amount will affect the borrower s ability to pay the mortgage during the months immediately after loan closing, especially if the borrower will have limited reserves after closing. Installment debt may not be paid down to less than 10 months to qualify. Lease Payments Automobile lease payments must always be included in qualifying ratios regardless of the number of months remaining on the lease contract. Revolving Debt Tax Liens Revolving debt with an outstanding balance must always be included in qualifying ratios. If the credit report does not reflect a specific minimum monthly payment, the payment must be calculated using the greater of 5% of the outstanding balance or $10. If the actual monthly payment is documented using a statement from the creditor, that amount may be used. At the underwriter s discretion, it is acceptable for a borrower to pay down or pay off a revolving debt in order to qualify. Based on the borrower s overall credit profile, the underwriter may also require a revolving account to be closed prior to final loan approval. Verification of account closure is required. Refer to Tax Lien for detailed requirements. FHA Loan Program Guide Wholesale Lending Page 41 of 53 08/17/2015

42 Mortgage Insurance Mortgage Insurance is required on all loans. See the following charts for details on Upfront Mortgage Insurance Premium (UFMIP) and monthly Mortgage Insurance Premium (MIP). Transaction All except Streamline Loans Endorsed on or prior to May 31, 2009 Case Numbers Assigned on or after January 26, 2015 Base Loan Amount LTV Up-Front MIP Annual MIP Loan Terms >15 Year Terms $625,500 95%.80% $625,500 >95% 1.75%.85% >$625,500 95% 1.00% >$625,500 >95% 1.05% Loan Terms 15 Year Terms $625,500 >90%.70% $625,500 >78% % 90%.45% $625,500 78%.45% >$625,500 Not Allowed Not Allowed Not Allowed Streamline Loans Endorsed on or Prior to May 31, All loan amounts All LTVs.01%.55% 2009 Case Numbers Assigned June 3, January 25, 2015 Transaction All except Streamline Loans Endorsed on or prior to May 31, 2009 Streamline Loans Endorsed on or Prior to May 31, 2009 Base Loan Amount LTV Up-Front MIP Annual MIP Loan Terms >15 Year Terms $625,500 95% 1.30% $625,500 >95% 1.75% 1.35% >$625,500 95% 1.50% >$625,500 >95% 1.55% Loan Terms 15 Year Terms $625,500 >90%.70% $625,500 >78% % 90%.45% $625,500 78%.45% >$625,500 Not Allowed Not Allowed Not Allowed All loan amounts All LTVs.01%.55% Refund and Credit of Upfront Mortgage Insurance Premium (UFMIP) UFMIP is not refundable, except when refinancing to a new FHA-insured mortgage. If the borrower is refinancing their current FHA-insured mortgage to another FHA-insured mortgage prior to 36 monthly payments being made, a refund FHA Loan Program Guide Wholesale Lending Page 42 of 53 08/17/2015

43 credit can be applied to reduce the amount of the UFMIP paid on the new refinance transaction, according to the refund schedule in the table below: Upfront Mortgage Insurance Premium Refund Percentages Month of Year Year Property Insurance All loan files must contain evidence of appropriate hazard, title and flood insurance policies in accordance with FHA policies. As a rule of thumb, insurance policies that comply with Fannie Mae policies are acceptable. A life of loan flood policy is required on all loans and is ordered by the Pacific Union Financial closer. Secondary Financing Secondary financing is permitted to finance closing costs and down payment provided: The borrower is qualified with the debt as a long term obligation. The lien is secured by the subject property and subordinate to the first lien. The CLTV may not exceed the limits in the applicable LTV/CLTV matrices, with the exception of subordinated financing provided by a family member, private individuals, other organizations/non-governmental agencies or a borrower older than 60 years of age. Government Entity Federal, state, local government, and nonprofit agencies considered instrumentalities of government are allowable sources for providing funds to cover the borrower s minimum down payment. An FHA approved mortgagee or FHA approved non-profit on behalf of the Government Entity may also provide funds, as long as the subordinate lien is held by the Government Entity prior to submission of the file for FHA endorsement. Documented evidence that the Government Entity providing the required down payment is a HUD allowable source must be provided, as follows: If funds are provided prior to or at closing: a gift letter and cancelled check, evidence of wire transfer or other draw request evidencing that the Government Entity had authorization to provide the funds is required as proof of legal enforceable liability or obligation. If funds are provided before closing: verification of fund transfer is not required if a gift letter and documentation of a legally enforceable liability or obligation is provided. FHA Loan Program Guide Wholesale Lending Page 43 of 53 08/17/2015

44 Subordinate financing provided by a government entity may exceed the standard 100% CLTV by an amount equal to 100% of the cost to acquire the property. The cost to acquire the property is defined as the sales price plus allowable borrower paid closing cost, discount points, minimum down payment, prepaids and etc. The cost to acquire the property does not include buydown funds, funds to payoff personal debts, or unallowable closing cost, such as a tax service fee. Seller/Interested Party Contributions Contributions by an interested party may not exceed 6% of the properties established reasonable value. Seller concessions include, but are not limited to the following: Prepayment of the buyer's property taxes and insurance Gifts such as a television set or microwave oven Payment of extra points to provide permanent interest rate buydowns Provision of escrowed funds to provide temporary interest rate buydowns Payoff of credit balances or judgments on behalf of the buyer Seller concessions do not include payment of the buyer s closing costs or payment of points as appropriate to the market. Funds derived from Premium Pricing are not included in interested party contributions unless the credit exceeds the actual closing costs/prepaids. Transactions Cash Out Refinance 1-4 unit Primary Residence only Properties that are owned free and clear are eligible for FHA cash out refinance Full appraisal required Loans must be evaluated using TOTAL Scorecard. Non-occupying co-borrower may not be added. Any borrowers that are added to the loan must occupy the property. A payoff statement is required. Cash out may be used of any purpose. However, cash out used for debt consolidation may represent a higher level of risk and must be carefully evaluated. Refer to Revolving Debt for additional guidance. Paying off an installment debt for qualifying purposes is acceptable. It is not acceptable to pay down an installment debt for the purpose of omitting the payment. Refer to Installment Debt for additional guidance. FHA Loan Program Guide Wholesale Lending Page 44 of 53 08/17/2015

45 Mortgage payment history: Payment history <6 months: Cash out refinance not allowed Payment history 6 to 12 months: 0 x 30 for 12 months Payment history 12 months: Current and 0x30 in the most recent 12 months See Modified Mortgage and/or Restructured Mortgages/Short Payoff for additional requirements. Maximum LTV/CLTV for Cash Out Refinance Maximum 85% LTV/CLTV. If the borrower has owned and occupied the property for less than one year prior to loan application, the LTV/CLTV is limited to the lesser of the appraised value or the original sales price. If the borrower has owned and occupied the property for at least one year prior to loan application, the 85% LTV/CLTV is based on appraised value. If the borrower inherited the property and is occupying or will occupy the property as a primary residence, 85% LTV/CLTV based on current appraised value is allowed regardless of the length of ownership. Occupancy of Former Investment Property When a borrower is re-occupying a property formerly used as an investment property, the transaction must comply with all Rate/Term refinance policies but is limited to 85% LTV/CLTV. Secondary Financing New subordinated financing is not allowed. However, modifying an existing subordinate lien to lower the total indebtedness is not considered a new subordinate lien and may remain in place. If the secondary financing is an equity line, the maximum amount of the equity line is used in the calculating the CLTV. Net Tangible Benefit The refinance must provide a net tangible benefit as required by any state or local regulation. Purchase Property must be occupied by the borrower as their primary residence. Occupancy must take place within 60 days after signing the security instrument, with continued occupancy for one year. Maximum Loan Amount for Purchases The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the FHA Loan Program Guide Wholesale Lending Page 45 of 53 08/17/2015

46 lesser of the sales price, subject to certain required adjustments, or appraised value. In order for FHA to insure the maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the sales price or appraised value. Rate/Term Refinance May be used to pay off an existing FHA, VA or Conventional first lien. 1-4 unit Primary Residence only. Full appraisal required. Borrower may not receive more than $500 cash back at closing. Loans must be evaluated using TOTAL Scorecard. Payoff statement is required. See Modified Mortgage and/or Restructured Mortgages/Short Payoff for additional requirements. Maximum LTV/CLTV for Rate/Term Refinance The maximum mortgage amount is the lesser of: 97.75% of the appraised value (or acquisition cost as applicable), or The sum of the outstanding balance of the first lien up to two months of pro rate MIP if paying off an FHA mortgage, closing costs and prepaids, borrower paid discount points, purchase money seconds, non-purchase money second liens ONLY IF at least 12 payments have been made (see Subordinate Financing topic below), prepayment penalties, accrued late charges, escrow shortages, borrower paid repairs required by the appraisal, minus any refund of UFMIP. Prepaid expenses are limited to per diem interest and hazard/flood property taxes and mortgage insurance impound). If the loan being paid off is NOT an FHA loan and the borrowers have owned and occupied the property less than one year prior to application date, the LTV is based on the lesser of the current appraised value or original acquisition cost (sales price plus any documented costs to repair, rehabilitate, renovate or weatherize the property plus closing costs including reasonable discount points) or total of all mortgage liens held against the property. Use current appraised value for all other scenarios. The existing mortgage outstanding balance may include per diem interest charged as follows: Loans with an original note date prior to January 21, 2015: 30 days interest for the month preceding the month of closing, and Up to 30 days interest for the month of closing. Loans with an original date on or after January 21, 2015: 30 days interest for the month preceding the month of closing, and Per Diem interest through the payoff date only. Delinquent interest or late charges may not be included in the outstanding principal balance of the mortgage being paid off for the maximum mortgage calculation. FHA Loan Program Guide Wholesale Lending Page 46 of 53 08/17/2015

47 Occupancy of Former Investment Property The following guidelines apply when a borrower is re-occupying a property formerly used as an investment property: If re-occupied as a Primary Residence for 12 months or more prior to the initial loan application date: Maximum financing allowed. If re-occupied for less than 12 months prior to the initial loan application date: Allowed as a Rate/Term Refinance only, but LTV/CLTV is limited to 85%. Secondary Financing Subordinate liens (including credit lines), regardless of seasoning, may remain outstanding provided the combined liens do not exceed 97.75%. If disbursements from an equity line exceed a total of $1,000 within the past 12 month and the funds were NOT used for repair and rehabilitation of the subject property, the line of credit cannot be included in the new mortgage. Non-purchase money second liens must be seasoned 12 months (12 payments made) in order to be included in the loan amount. The maximum credit limit on a HELOC is used to calculate the CLTV. Spousal or Co-Borrower Buy-Out The amount of the buyout is considered property related indebtedness and can be included in the new loan. Buyout amount must be documented in a recorded property settlement agreement or divorce decree. If the borrower is newly separated and no property settlement agreement has been prepared, a legally recorded document prepared by an attorney specifically outlining the division of equity is acceptable to HUD. Short Refi / FHA Refinance of Borrowers in Negative Equity Positions The borrower must be current on the existing mortgage to be refinanced. All borrower(s) must occupy the subject property (1-4 units) as their primary residence. The borrower(s) must qualify for the new loan under standard FHA underwriting requirements. The existing loan being refinanced may not be an FHA loan and the existing lien holder must write off at least 10% of the original first lien mortgage unpaid principal balance. Existing subordinated mortgages must be re-subordinated and the new loan may not have a CLTV greater than 115%. At the discretion of the first lien holder, the new FHA mortgage to include the refinanced unpaid principal balance on the first lien after the required reduction of at least 10%, amounts used to pay down or pay off any existing second lien debt, plus the interest charged by the servicing lender, provided the new principal balance FHA Loan Program Guide Wholesale Lending Page 47 of 53 08/17/2015

48 has a loan-to-value (LTV) no greater than 97.75% and combined LTV no greater than 115%. For loans that receive a Refer recommendation and/or are manually underwritten, maximum ratios are 35% / 48%. Pacific Union Financial does not participate in the Trial Period option described in ML To find more information on this program, refer to: Mortgagee Letter Mortgagee Letter Net Tangible Benefit The refinance must provide a net tangible benefit as required by any state or local regulation. Streamline Refinance FHA Streamline Loan Purpose Application Type Credit Qualifying and Non- Credit Qualifying Streamline With Appraisal Non-Credit Qualifying With an Appraisal and Without an Appraisal (No Credit Score Streamlines) May be used to pay off an existing FHA first lien. Lower the monthly P&I on a current FHA-Insured mortgage. Net Tangible Benefit (NTB) requirements must be met. State specific Tangible Net Benefit requirements will supersede the NTB guidelines, if they are more conservative. All streamline refinance transactions must result in a NTB to the borrower. See detailed NTB requirements below. Manual underwriting required, streamline refinances should not be submitted to TOTAL Scorecard. If the loan is inadvertently submitted to an AUS, manual underwriting is still required and the underwriter s CHUMS ID must be entered on the A and LT. A payoff statement and Refinance Authorization Number from FHA Connection (FHAC), are required. If a condo project is no longer FHA approved, the transaction is eligible only as a Streamline without Appraisal Credit Qualifying: Fully completed 1003 Non-Credit Qualifying: An abbreviated 1003 is allowed. The following sections of the 1003, DO NOT have to be completed: IV. Employment Information, A VOE or VVOE is not required when an abbreviated URLA is utilized and employment is not disclosed V. Monthly Income and Combined Housing Expense Information, Note: In FLOW, enter $1 as the base income for the primary borrower. VI. Assets and Liabilities, VIII. Declarations (a) through (k) Appraisal Without an Appraisal: The original appraised value will be provided on the Refinance Authorization Without an appraisal The original appraised value will be provided on the Refinance Authorization. FHA Loan Program Guide Wholesale Lending Page 48 of 53 08/17/2015

49 FHA Streamline Credit Qualifying Higher Priced Mortgage Loan (HPML) Loan Decision Score Credit Qualifying and Non- Credit Qualifying Streamline With Appraisal With an appraisal If the appraised value is such that the borrower would be better advised to proceed as if no appraisal had been performed, the appraisal may be ignored/not used and the loan converted to a Streamline without an appraisal transaction. This decision must be noted on the LT. Non-Credit Qualifying With an Appraisal and Without an Appraisal (No Credit Score Streamlines) With an appraisal Appraisal required. Credit qualifying refinance must be considered: When a change in the mortgage term will result in an increase in the mortgage payment of more than 20% When deletion of a borrower(s) will trigger the due-on-sale clause Following the assumption of a mortgage that occurred less than six months previously that: Does not contain restrictions limiting assumptions to creditworthy borrowers; or Did not trigger the transferability restriction, such as in a property transfer resulting from a divorce decree, devise, or decent. Loans previously modified or restricted allowed. Individuals may be added to the title on a streamline refinance without a credit worthiness review and without triggering a due-on-sale clauses. HPMLs are eligible provided they comply with the Federal Higher Priced Mortgage Loan requirements (no prepayment penalties, ARMs are qualified at the higher of the note rate or fully indexed rate, etc.). The borrower s ability to repay must be satisfied as follows: A complete loan application. Fully documented income and asset. The payment must be equal to or lower than the existing payment. If a credit report is provided, the report will only be used to validate the mortgage payment history and if applicable, improve pricing. Note: Other information on the credit report will not be used in the underwriting analysis. HPML refinances are eligible when one of the following apply: The mortgage payment history complies with the mortgage payment history requirements. See Mortgage Payment History and Seasoning Requirements. The DTI on the new loan is congruent with or lower than the DTI on the loan being paid off. Verification that the new payment is equal to or lower than the existing payment. HPML Hybrid ARM transactions must be qualified at the higher of the note rate or the fully indexed rate. Credit Qualifying: See Minimum Loan Decision Scores. Non-Credit Qualifying: A decision score is not required, but may be used for improved pricing purposes. Maximum LTV/CLTV Without an appraisal 100% / 125% (based on the outstanding principal balance) FHA Loan Program Guide Wholesale Lending Page 49 of 53 08/17/2015

50 FHA Streamline Maximum Mortgage Amount Credit Qualifying and Non- Credit Qualifying Streamline With Appraisal With an appraisal Non-Credit Qualifying With an Appraisal and Without an Appraisal (No Credit Score Streamlines) 97.75% / 125% (based on the new appraised value) Cash back is limited to minor adjustments at closing, not to exceed $500. The existing mortgage outstanding principal balance may include per diem interest charged as follows: Loans with an original note date prior to January 21, 2015: 30 days interest for the month preceding the month of closing, and Up to 30 days interest for the month of closing. Loans with an original date on or after January 21, 2015: 30 days interest for the month preceding the month of closing, and Per Diem interest through the payoff date only. The existing mortgage outstanding principal balance MAY NOT include delinquent interest, late charges or escrow shortages. Discount points may not be included in the new loan amount. Credit Qualifying with an appraisal: The lesser of the outstanding principal balance of the existing mortgage: Minus the UFMIP refund; and Per diem interest, closing costs, prepaid, and the new UFMIP; or 97.75% of the appraised value plus the new UFMIP. Prepaid expenses may include: Per Diem interest on the new loan. Hazard/flood insurance premium deposits Up to two months monthly MIP. Any real estate tax deposits needed to establish the escrow account Credit Qualifying without an appraisal & Non-Credit Qualifying with or without an appraisal: Primary residence: May not exceed the outstanding principal balance: Minus the applicable refund of the UFMIP Plus the new UFMIP Second Home or Investment Property: Fixed rate only May not exceed the current outstanding principal balance Up to two months monthly MIP may be included in the mortgage amount. Note: For Non-Credit Qualifying transactions with an Appraisal, the appraisal may not be used to increase the new loan amount. Maximum Term Note: Pacific Union only allows terms in increments of 5 years. Mortgage Payment History and Seasoning Requirements Without an appraisal: The lesser of : the remaining term of the existing mortgage, plus 12 years; or 30 years. With an appraisal: 30 year Mortgage history must be verified as follows: Mortgage only credit report; or Cancelled checks (front and back); or VOM directly from the current servicer; or Payment history from servicers website provided by the borrower that includes the following: The servicers name in the header. At minimum, the last four digits of the mortgage account number. A verifiable URL that includes the mortgage servicer s name. FHA Loan Program Guide Wholesale Lending Page 50 of 53 08/17/2015

51 FHA Streamline Net Tangible Benefit Occupancy of Former Investment Property Occupancy Type Credit Qualifying and Non- Credit Qualifying Streamline With Appraisal Non-Credit Qualifying With an Appraisal and Without an Appraisal (No Credit Score Streamlines) The monthly payment amount. The date payments were made. The date the document was printed. FHA will not assign a Streamline refinance case number until the loan being refinanced meets all the following seasoning requirements: Must be current for the month due prior to closing and the month of closing. Six months payment history required. At least six full months must have passed since the first payment due date. At least 210 days must have passed from the closing date of the mortgage being refinanced. <12 months: 0 x 30 for 12 months 12 months: 1 x 30 for 12 months and 0 x 30 for the 3 months prior to the loan application. Loans that have been previously modified or restructured, require a 24 month satisfactory mortgage payment history under the new terms. This requirement will be waived for loans currently serviced by Pacific Union. Note: When a borrower has withheld payment due to a Formal or Informal Disaster Forbearance, the borrower s payment history should be analyzed, as noted above, based on the period prior to and, where applicable, following the forbearance period. See ML for additional details. All streamline refinance transactions must result in a net tangible benefit to the borrower by meeting one of the following requirements: The principal and interest payment (including monthly/annual MIP) must be reduced by 5% when refinancing: From a Fixed Rate to a Fixed Rate From a Fixed rate to a Hybrid ARM From a Hybrid ARM during the Fixed Rate period to a Fixed Rate From a Hybrid ARM during the Fixed Rate period to a Hybrid ARM The new interest rate must be no greater than 2% above the current interest rate of the existing ARM loan when refinancing: From a One-Year ARM to a Fixed Rate From a Hybrid ARM during the Adjustable Period to a Fixed Rate The new interest rate must be at least 2% less than the current interest rate when refinancing: From a One-Year ARM to a Hybrid ARM From a Hybrid ARM during the Adjustable Period to a Hybrid ARM Reducing the term of a mortgage is acceptable if the new mortgage meets the net tangible benefit test. Refinance transactions that are originated for the sole purpose of lowering the term with no net tangible benefit must be underwritten and closed as a Rate/Term Refinance. Prior to the loan application date, if the borrower has occupied the former investment property For 12 months or more, the maximum LTV is 97.75% / 125% Less than 12 months, the transaction is ineligible for a Streamline refinance. R/T only allowed, LTV may not exceed 85%. 1-4 unit primary residence only 1-4 unit second homes or investment properties only allowed when a change in the mortgage term resulted in an increase in the mortgage payment and required the loan to be credit qualified. 1-4 unit primary residence 1-4 unit second homes or investment properties allowed Fixed rate only. The maximum loan amount may not exceed the current outstanding balance of the existing loan. FHA Loan Program Guide Wholesale Lending Page 51 of 53 08/17/2015

52 FHA Streamline Property Type Credit Qualifying and Non- Credit Qualifying Streamline With Appraisal An appraisal should not be obtained. The maximum loan amount may not exceed the outstanding balance of the existing loan. Condo projects that are no longer FHA approved are NOT allowed. Reserves See Cash Reserves Not required. Subordinate Financing No new subordinate financing allowed. Subordinate financing (including a HELOC), regardless of when taken, may remain outstanding, but the entire lien must be subordinated at refinance. For HELOCs, the maximum accessible credit limit of the existing subordinate lien must be used to calculate the maximum 125% CLTV ratio. The CLTV is based on the new appraised value. FHA Loan Program Guide Non-Credit Qualifying With an Appraisal and Without an Appraisal (No Credit Score Streamlines) Note: Credit qualifying required if a change in the mortgage term will result in an increase in the mortgage payment. Condo projects that are no longer FHA approved are allowed. No new subordinate financing allowed. Subordinate financing (including a HELOC), regardless of when taken, may remain outstanding, but the entire lien must be subordinated at refinance. For HELOC s, the maximum accessible credit limit of the existing subordinate lien must be used to calculate the maximum 125% CLTV ratio. Without an appraisal: The maximum CLTV is calculated by taking the original FHA base loan amount (excluding UFMIP), adding all the financed liens still outstanding, and dividing the total by the original appraised value. With an appraisal: The CLTV is based on the new appraised value. Pricing and Fees Refer to the daily rate sheet for current pricing. Escrow Waivers Not permitted. Fees Charge relates to services performed by a third party, the amount paid by the borrower must be limited to the actual charge of that third party. Product Codes See Product Code Master List FHA Loan Program Guide Wholesale Lending Page 52 of 53 08/17/2015

53 Appendix Documentation The following table lists the most commonly used forms and certifications required by FHA. Additional certifications and or documents may be required depending upon the scenario. FHA Form# Form Name When Required HUD A HUD/VA Addendum to Uniform All transactions Residential Loan Application HUD LT FHA Loan Underwriting and Transmittal All transactions Summary HUD B Important Notice to Homebuyers All transactions Informed Consumer Choice Disclosure All transactions HUD Hotel and Transient use of property All 2-4 unit transactions IRS Form 4506-T Real Estate Certification / Amendatory Clause Request for tax transcripts Required on all purchase transactions if not contained within the purchase agreement Required on all loans except Non- Qualifying Streamline Refinance FHA Loan Program Guide Wholesale Lending Page 53 of 53 08/17/2015