FANNIE MAE FIXED 5/1 LIBOR ARM REVISED 5/25/2012

FANNIE MAE FIXED 5/1 LIBOR ARM REVISED 5/25/2012 Transaction Type (1) Primary Residences Purchase Money Mortgage and Limited Cash-Out Refinance Cash-Out Refinance Number of Units Eligible Property Types (2) Maximum LTV/CLTV/HCLTV Condominium 97% / 97% / 97% 1-Unit PUD Manufactured ( < 30 Years) 85% / 90% / 90% 2-Units Multi-Family 80% / 80% / 80% 3-4 Units Multi-Family 75% / 75% / 75% Condominium 85%/ 85% / 85% 1 Unit PUD Manufactured ( < 20 Years) 65% / 65% / 65% 2-4 Units Multi-Family 75% / 75% / 75% Second Homes Owns 5-10 Financed Properties = See Page 12 Purchase Money Mortgage and Limited Cash-Out Refinance Cash-Out Refinance Investment Properties 1-Unit 1-Unit Condominium PUD Manufactured ( < 30 Years) Condominium PUD Manufactured ( < 20 Years) Owns 5-10 Financed Properties = See Page 12 1 Unit Condominium Purchase Money PUD Mortgage Limited Cash Out Cash-Out Refinance Minimum Credit Score (3) 90% / 90% / 90% LTV > 80% 720 LTV 75.01-80% 660 LTV < 75% 620 85% / 90% / 90% 75% / 75% / 75% NA / NA / NA 80% / 80% / 80% (5) Maximum DTI Ratio (4) 620 45% 680 680 if LTV > 75% 620 if LTV < 75% 1 Unit Manufactured NA / NA / NA NA 2-4 Units Multi-Family 75% / 75% / 75% 660 1-4 Units Condominium PUD Multi-Family 75% / 75% / 75% 1-2 Units = 620 3-4 Units = 660 1 Unit Manufactured NA / NA / NA NA 1 Units Condominium PUD 75% / 75% / 75 700 - All LTV 2-4 Units Multi-Family 70% / 70% / 70% 680 - All LTV (1) Highlights are based on FNMA Eligibility Guidelines. Although loan may be eligible for FNMA, it may not be eligible for MI or DGU. Refer to MI or DGU for qualifying guidelines. (2) Attached Condominium and PUD must meet secondary market and MI minimum project review guidelines (3) Loans not meeting minimum credit score must receive AUS approval, and have direct approval by MI Company, if applicable (4) Ratios exceeding maximum must have strong compensating factors, receive AUS approval, and direct approval by MI Company (5) Investment Property LTV reduced from FNMA guideline due to LTV > 80% is ineligible for Mortgage Insurance 45% 45% M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 1 of 13

GENERAL GUIDELINES: All loans must be eligible to be sold to Fannie Mae. (Refer to efanniemae.com, MRI FNMA Standards Quick Reference, and/or MI Company site for complete guidelines) LOAN TYPE / AMORTIZATION: 10, 15, 20, 30, 40-Year Fixed 30- and 40-Year 5/1 LIBOR ARM 5/1 LIBOR ARM: ARM Features: 5/1 Libor ARM Index 1-Year LIBOR Index Margin 1.75% Fixed Rate Period 60 Months First Adjustment Cap 5.00% Periodic Interest Rate Cap 2.00% Lifetime Interest Rate Cap 5.00% Conversion Option to Fixed Rate No Qualifying Rate: Qualifying rate is the note interest rate plus 2% or the fully indexed rate whichever is greatest. MAXIMUM LOAN LIMITS: 1 Unit $417,000 2 Units $533,850 3 Units $645,300 4 Units $801,950 GEOGRAPHIC MARKET AREAS: Washington State only ELIGIBLE APPLICANTS: Borrower must be eligible for credit union membership U.S. Citizens Inter Vivos Revocable Trusts (Must be approved by title company - see investor guidelines for requirements) Permanent Resident Aliens (the right to live and work in the US permanently) Non-permanent Resident Aliens (the right to live and work in the US temporarily) are eligible for: Purchase and Rate/Term Refinance Owner-Occupied only Evidence of Occupancy status is validated by one of the following required INS documents: - Unexpired foreign passport containing INS form I-94 stamped with Employment Authorized - Temporary Resident Card form I-688 - Employment Authorization Card form I-688 A or O containing the applicant s photograph Evidence of Residency status is validated by a copy of the borrower s temporary work Visa (INS form I- 94). The following documentation is required for Residency eligibility: - Borrower must have established a 2-year history of residency, employment and credit within the US - VISA status must provide a remaining duration of at least three years - Heavy emphasis will be placed on employment and likelihood of continuation - Assets for down payment, closing costs and reserves should be verified on deposit in a US financial institution for at least 6 months M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 2 of 13

Ineligible: Non-Resident Aliens, Partnerships, Corporations, Syndications, Trusts (other than Inter Vivos Revocable Trusts), and Foreign Nationals DOCUMENTATION: If MI or DGU, loan must meet their minimum documentation requirements; regardless of AUS recommendation Credit documentation cannot be over 90 days old at time of closing DU recommended documentation acceptable. Verbal verification of employment and copy of business license, if applicable IRS 4506T for each applicant; verified prior to doc prep FraudGuard and clearance of red flags Liabilities not reflected on the credit report are to be fully documented by supplement to credit report, direct verification of loan-mortgage, or copies of most recent real estate tax and insurance statement for other real estate owned. Investment transactions require documentation verifying primary residence mortgage payment includes PITI or member is to provide copies of current real estate tax statement and insurance statement. 1008 underwriting comments to clearly characterize the loan and justify approval Any additional documentation deemed necessary by underwriter NON-OCCUPANT CO-APPLICANTS: Non-occupant co-applicants are allowed Refer to Mortgage Insurance Company Guidelines For mortgage loans with a non-occupant co-borrower, the LTV, CLTV, and HCLTV ratios cannot exceed 90% for manually underwritten loans, or 97% for loan case files underwritten with DU. These limitations are not applicable if the maximum LTV ratios for the transaction are lower than 90 or 97%, respectively. DU will analyze the risk factors in the loan casefile without the benefit of the non-occupant co-borrower's income or liabilities and will not require verification of employment or income for the non-occupant coborrower. For manually underwritten loans, the income from a non-occupant co-borrower may be considered as acceptable qualifying income. This income can offset certain weaknesses that may be in the occupant borrower s loan application, such as limited financial reserves, limited credit history, or higher-than-normal qualifying ratio. However, it may not be used to offset significant or recent instances of major derogatory credit in the occupant borrower s credit history. The occupant borrower must still reasonably demonstrate an ability and willingness to make the mortgage payments and maintain homeownership. Note: If loan is manually underwritten, DU report would not be part of the loan file, and ALL Fannie Mae manual underwriting requirements for the loan in its entirety applies. MORTGAGE INSURANCE: Refer to MI Premium Schedule Delegated MI Underwriting is not allowed - Direct MI Approval Required LTV > 95% to be insured by MGIC Loan must meet MI company minimum underwriting guidelines; regardless of AUS recommendation CREDIT HISTORY: A joint credit report on more than one individual applicant, without regard to marital status, is acceptable. 3-file instant merged credit reports, with 3 credit scores are generally required. Two credit scores are acceptable if that is the extent of the data available for the member; the lesser of the two will be used as the representative credit score. Non-Traditional Credit - Refer to MI Company, efanniemae.com and/or MRI FNMA Standards Quick Reference guidelines Contingent Liability - Refer to MI Company, efanniemae.com and/or MRI FNMA Standards Quick Reference guidelines Revolving Accounts: All outstanding revolving accounts, regardless of remaining number of months, are to be considered in qualifying DTI ratio. If the revolving accounts will be paid off and closed on or before M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 3 of 13

closing, the payment does not have to be included in the DTI ratio providing the file is documented that the revolving account has be paid off and closed. If the revolving account is not closed, the payment based on the reported balance must be included in the DTI ratio. Installment Loans: All outstanding installment debts, including deferred student loans, are to be considered in qualifying DTI ratio. An exception may be made if less than 10 months remaining and verified adequate cash reserves to cover monthly payment. Verified Minimum Payment: If the payment is not verified on the credit report, 5% of the unpaid balance for revolving accounts, and 2% of the unpaid balance on student loans is to be used in qualifying. LTV > 80% - No bankruptcies, deeds in lieu, short sales or foreclosures in the past 4 years Bankruptcy (Chapter 7 and 10) LTV < 80% 4 years (2 years exception for extenuating circumstances) from the date of discharge or dismissal of bankruptcy action Bankruptcy (Chapter 13) - LTV < 80% 2-years from discharge date, or 4 years (2 years exception for extenuating circumstances) from dismissal date Multiple Bankruptcy Filings - LTV < 80% 5-years if more than one filing within the past 7 years from most recent dismissal or discharge date. (3 years exception for extenuating circumstances) The most recent bankruptcy must have been the result of extenuating circumstances. Foreclosures - LTV < 80% 7-years from completion date (3 years exception for extenuating circumstances). Purchase of a principal residence is permitted with a minimum of 10% down payment and minimum representative credit score of 680. Second home and investment property are not permitted. Cashout refinances are not permitted for any occupancy. Deed-in-Lieu - LTV < 80% 2-years from completion date. Purchase of a principal residence, second home or investment property with the greatest of 10% minimum down payment or the minimum down payment required for the transaction. Limited cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted. Pre-foreclosure Sale - LTV < 80% - 2-year period from completion date. Short Sale - LTV < 80% - 2-year period from completion date. Past-Due, Collections, and Charge-Off Accounts o If mortgage insurance is required, all collections, and charges-off accounts are required to be paid in full at or before closing. o Accounts that are reported as past due (not reported as collection accounts) must be brought current. o For one-unit, owner-occupied properties, borrowers are not required to pay off outstanding collections or charge-offs regardless of the amount provided the collection will not threaten Fannie Mae s first-lien position. o o For two- to four-unit owner-occupied and second home properties, collections and charge-offs totaling more than $5,000 must be paid in full prior to or at closing. For investment properties, individual accounts equal to or greater than $250 and accounts that total more than $1,000 must be paid in full prior to or at closing. Judgments, garnishments, and liens. Open judgments, garnishments, and all outstanding liens that are in the Public Records section of the credit report will be identified in the Underwriting Findings report, and must be paid off at or prior to closing. Documentation of the satisfaction of these liabilities, along with verification of funds sufficient to satisfy these obligations, must be maintained in the permanent loan file. Extenuating Circumstances: Extenuating circumstances are nonrecurring events that are beyond the borrower s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.). The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances; confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations. M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 4 of 13

SOURCE OF DOWN PAYMENT AND / OR CASH RESERVES: Down payment and cash reserves may derive from the following sources: Member s checking-savings accounts, stocks, bonds & mutual funds, trust accounts, retirement account. 70% of the value of stock and investment account balance. If used for down payment, copy of liquidation check and bank deposit slip is required. 60% of borrower s vested retirement account balance will be considered as cash reserves providing borrower funds are accessible and loan is documented on the terms under which the retirement funds can be accessed. If used for down payment, copy of liquidation check and bank deposit slip is required. Gift from a relative (spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption or legal guardianship) or a fiancé, fiancée, or domestic partner, who is not a party to the transaction (not allowed on investment transactions). Gift letter, copy of gift check received along with copy of bank deposit slip depositing funds is required. Loan secured by a marketable asset such as 401(k), CD, cash value of life insurance or vehicle. Copy of loan documents, proceeds check along with copy of bank deposit slip depositing funds required. If loan is secured by a financial asset (401(k), TSP, CD, or cash value of life insurance) vested financial asset amount is to be reduced by the loan amount. Monthly payment will not be considered in qualifying. Refer to efanniemae or MRI FNMA Quick Reference Guide for details concerning funds derived from donations from entities, employer assistance, bridge loan, trade equity, rent credit, sale of personal property, gift of equity, cash value of life insurance, and pooled savings. Proceeds from sale of other real estate. Copy of final HUD-1 settlement statement is required prior to closing. Source of any large deposits reflected on bank statements to derive from an acceptable source and be documented in the loan file. Bank statements that include account ownership by unknown parties must include explanation why unknown parties are on account, and certification funds represent applicant s own funds and can be used towards transaction. Unacceptable Source of Funds: Cash-on-Hand Proceeds from subject refinance GIFT FUNDS - MINIMUM BORROWER CONTRIBUTION REQUIREMENTS FROM BORROWER S OWN FUNDS: Gifts funds for down payment, closing costs or cash reserves is not allowed on investment loans. Occupancy Units LTV / CLTV / HCLTV Minimum Contribution 1-4 Units < 80% No minimum contribution All funds to complete transaction can come from gift. 1-Unit > 80% No minimum contribution All funds to complete Primary Residence transaction can come from gift. (IF MI REQUIRED, REFER TO MORTGAGE INSURANCE COMPANY GUIDELINES FOR THEIR MINIMUM REQUIREMENTS). 2-4 Units > 80% Minimum 5% No minimum contribution All funds to complete 1-Unit < 80% Second Home transaction can come from gift. 1-Unit > 80% Minimum 5% Investment Property 1-4 Units ALL Gift funds not allowed Minimum Cash Reserves: The reserves calculation for a financed property is based on the monthly housing expense of the financed property. All reserve requirements are based on the definition of reserves (PITIA) as defined below. M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 5 of 13

DEFINITION OF LIQUID FINANCIAL RESERVES: The definition of reserves to include all components of the monthly housing expense (PITIA), including: Principal and interest, Hazard, flood, and mortgage insurance premiums (as applicable), Real estate taxes, Ground rent, Special assessments, any owners association dues (excluding any utility charges that apply to the individual unit), and Any subordinate financing payments on mortgages secured by the subject property. The definition of reserves applies to both manually underwritten mortgage loans and those underwritten through DU. Owner Occupied Minimum Cash Reserves: Reserves Required (PITIA) in Months Primary Residence Transaction # of Units Borrower Will Own 1-4 Financed Properties Borrower Will Own 5-10 Financed Properties 1-Unit * DU: Per DU or * Manual: 0 Months 2-4 Units * DU: Per DU or * Manual: 6 Months on Subject Property However, if the borrower also has a: Current principal residence- Pending Sale Current principal residence- Converting to second home Current principal residence- Converting to investment property DU: Per DU Manual: If 30% equity or more on previous principal residence: 2 months on subject property, and 2 months on previous primary; or If less than 30% equity on previous principal residence: 6 months on subject property, and 6 months on previous principal residence. * DU: Per DU or * Manual: 0 Months * DU: Per DU or * Manual: 6 Months on Subject Property DU: Per DU Manual: If 30% equity or more on previous principal residence: 2 months on subject property, and 2 months on previous primary; or If less than 30% equity on previous principal residence: 6 months on subject property, and 6 months on previous principal residence. REFER TO MI COMPANY CONVERTING CURRENT RESIDENCE CASH RESERVE REQUIREMENTS SECOND HOME AND INVESTMENT PROPERTIES- MINIMUM CASH RESERVES: The amount of required reserves varies depending on whether the subject property is a second home or investment property, and on the number of other financed properties the borrower currently owns. DU is not able to determine the exact number of other financed properties the borrower owns, and as a result, the underwriter must manually apply the reserve requirements to investment property and second home transactions as applicable and is to be clearly condition for on UW Disposition sheet. Cash Reserve amount for other financed properties is to be entered as a negative <-> cash asset on 1003 prior to submitting to DU. Second Home Minimum Cash Reserves: Second Home Transaction # of Units 1-Unit Reserves Required (PITIA) in Months Borrower Will Own 1-4 Financed Properties Borrower Will Own 5-10 Financed Properties * DU - Per DU or * Manual: 2 Months * DU - Per DU or * Manual: 2 Months M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 6 of 13

Other Financed Properties: (Need to Manually Calculate & Condition For): 2 months on each other financed second home or investment property. Investment Property Minimum Cash Reserves: Reserves Required (PITIA) in Months Investment Transaction # of Units 1-4 Units Other Financed Properties: (Need to Manually Calculate and Condition For): 6 months on each other financed second home or investment property. Borrower Will Own 1-4 Financed Properties Borrower Will Own 5-10 Financed Properties * DU - Per DU or * Manual: 6 Months Other Financed Properties: (Need to Manually Calculate & Condition For): 2 months on each other financed second home or investment property. * DU - Per DU or * Manual: 6 Months Other Financed Properties: (Need to Manually Calculate and Condition For): 6 months on each other financed second home or investment property. EMPLOYMENT HISTORY: AUS and/or MI company minimum income verification documentation is required LTV > 80% requires current and prior employment verification Employment gaps greater than 1 month is to be explained INCOME STABILITY: A member must have a history of receiving stable income from employment or other sources and a reasonable expectation that the income will continue to be received in the foreseeable future (usually for three years). Other sources of income may derive from social security, pension, retirement, child support / alimony, notes receivable, dividend, interest, public assistance, foster care, VA disability, relative boarder income, etc. A salaried or commissioned borrower's income may come from many different sources. Salary and wage income is the easiest to determine and verify. Special consideration may need to be given to income from sources other than wages and salaries, particularly if it is difficult to verify through an independent and knowledgeable source. The specific treatment for these other types of income is discussed in more detail in the FNMA Selling Guide Chapter 4. Income from most sources other than salary and wages can be considered as qualifying income as long as it is properly documented (and the lender is able to determine that it is stable, predictable, and likely to continue). Income received from any source that cannot be verified is not acceptable for the purpose of qualifying a member. Special consideration to regular sources of income that are nontaxable-such as child support payments, social security benefits, disability retirement payments, workers' compensation benefits, certain types of public assistance payments, food stamps, etc. Verify that the particular source of income is nontaxable and that both the income and its tax-exempt status are likely to continue. Documentation that can be used for this verification includes award letters, policy agreements, account statements, or any other documents that address the amount of income and the likelihood of its continuance for at least three years after the date of the loan application. (Nontaxable income status and the related tax savings can also be verified from IRS publications.) If the income is nontaxable and the income and its tax-exempt status are likely to continue, the lender may develop an "adjusted gross income" for the member by adding an amount equal to 25% of the nontaxable income to the member's income. If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the borrower's nontaxable income, may use that amount to develop the "adjusted gross income." This adjusted gross income should be used in calculating the borrower's qualifying ratio. If member is self-employed, minimum length and documentation required by AUS and/or MI-DGU company length is acceptable. APPRAISAL REQUIREMENTS: Automated underwriting system level of property evaluation is acceptable Attached Condominium-PUD projects to meet Fannie Mae and/or MI company minimum project review requirements M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 7 of 13

Manufactured homes to meet investors minimum standards (refer to efanniemae.com for details) Agriculture use of property is not permitted Refinance Transactions: - Underwriter is to pay particular attention to current occupant and prior listing-sales history on refinance transactions. - Valuation inaccuracies are more likely to occur in appraisals used in cash-out refinance transaction. Appraisals in such transactions should be scrutinized with particular care to ensure that the value conclusion is solidly supported by appropriate comparables and related adjustments. Report should include the following: Written and presented in a narrative format or on forms that satisfies all requirements of this section or secondary market minimum appraisal requirements; Sufficiently descriptive to enable the reader to ascertain the estimated market value and the rationale for the estimate; Provide the detail and depth of analysis that reflect the complexity of the real estate appraised; An analysis on current revenues, expenses, and vacancies for property if it is and will continue to be income producing; An analysis on the marketing period for the subject property; An analysis on current market conditions and trends that will affect the value of the subject property; In addition to the certification required by the USPAP, include a statement that the appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan; A legal description of the real estate being appraised; An identification and separate valuation of any personal property, fixtures, or intangibles items that are not real property but included in the appraisal, and discuss the impact to their inclusion or exclusion on the estimate of market value; Demonstrate a reasonable valuation method that addresses the direct sales comparison, income, and cost approaches to market value, reconciles those approaches, and explains the elimination of each approach not used. Underwriter is to pay particular attention to the neighborhood analysis within the appraisal report specifically in the areas of built up, growth rate, and property values as described below: Built Up Growth Rate Property Values Ensure that the built up or degree of development shows the percentage of available land in the neighborhood that has been improved. The degree of development can indicate whether a particular property is residential in nature. Areas less than 25% developed may not be acceptable for financing. Ensure that rapid, stable, or slow is selected. A stable growth rate is preferred when maximum financing is requested. Ensure that the appraiser indicates whether the property values in the subject neighborhood are "increasing", "stable" or "declining". If property values in the neighborhood are declining, maximum financing is not allowed. Refer to MI Company guidelines concerning declining values TITLE VESTING AND COMMUNITY PROPERTY STATE: Members requesting a mortgage loan with vesting as married, as their separate estate are acceptable. However, additional documentation and non-borrowing spouse signatures are necessary to ensure title to the property is perfected and our mortgage lien interest is protected. Purchase Transactions - Required Documentation / Signatures Necessary document that is acceptable to title company to vest title in applicant s name only Owner Occupied - Non-borrowing spouse to acknowledge deed of trust Refinance Transactions Required Documentation / Signatures Necessary document that is acceptable to title company to vest title in applicant s name only M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 8 of 13

Generally, escrow will not prepare document to vest title in applicant s name only in which case the applicant is responsible to provide the document. Under no circumstances are we to prepare the document for members. Owner Occupied - Non-borrowing spouse to acknowledge deed of trust Owner Occupied - Non-borrowing spouse to sign Truth-in-Lending and three day rescission if property is primary residence of borrower WAIVER OF ESCROW ACCOUNT: An escrow account for taxes, insurance, and special assessments is required when LTV > 80% First Time Home Buyer Flood Insurance is required Private Mortgage Insurance is required Borrower has a blemished credit history Loans identified has a HOEPA Loan with conforming loan rate spread > 1.500% or Jumbo loan rate spread > 2.500% If a special assessment levied against the property was not paid at loan closing, the borrower s payment must include appropriate accruals to ensure that any estimated annual payment toward the assessment will be accumulated by the time it comes due. PURCHASE TRANSACTIONS: 1) Conversion of Current Residence: Applicants who currently own their home typically have three options when they decide to purchase a new principal residence. They can: Sell the current residence and payoff the outstanding mortgage, Convert the property to a second home, assuming they can qualify with both the existing and new mortgage payments, or Convert the property to an investment property and provide documentation that they will rent the property and use the income to offset the mortgage payment. The following is required in order to ensure that applicants can support both the existing financing and the new mortgage being originated. Current principal residence is pending sale but the transaction will not be closed prior to the new transaction: Both the current and the proposed PITIA must be used to qualify, Copy of listing agreement, including delinquency-short sale certification is required FNMA will not require the current principal residence s PITIA to be used in qualifying the borrower as long as 6 months of reserves (or 2 months with 30% documented equity) for both properties are document and the following additional documentation is provided: The executed sale contract for the current residence; and Confirmation that any financing contingencies have been cleared Conversion to a Second Home: Both the current and the proposed mortgage payments must be used to qualify the borrow for the new transaction; and 6 months of PITIA for both properties is required in reserves. 2 months PITIA may be considered if there is documented equity of at least 30 present in the existing principal residence (derived from an appraisal, AVM, or Broker Price Opinion, minus outstanding liens). Conversion to an Investment Property: 75% of the rental income can be used to offset the PITIA in qualifying providing there is documented equity of at least 30 percent in the existing property residence (derived from an appraisal, AVM, or Broker Price Opinion, minus outstanding liens). M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 9 of 13

Rental income must be documented with a copy of the fully executed lease agreement; and the receipt of a security deposit from the tenant and deposit into the member s account. If the 30 percent equity in the current residence cannot be documented, rental income may not be used to offset PITIA. 2) THIRD PARTY CONTRIBUTIONS: The maximum allowable third party contributions are limited to: Occupancy LTV / CLTV Maximum Limit Principal Residence > 90.00% 3% Principal Residence & Second Home 75.01% - 90.00% 6% < 75.00% 9% Investment Property All 2% When contributions exceed these limits or seller is giving buyer something of value (including credit for property improvements), they are considered sales concessions. For underwriting and eligibility purposes, the underwriter must make a downward adjustment to the property s sales price to reflect the amount of any contributions that exceed the maximum limits. The maximum LTV/CLTV ratios must then be calculated using the lesser of the reduced sales price or appraised value. 3) Non-Arms Length Transactions: Non-arm s length transactions are purchase transactions in which there is a relationship or business affiliation between the seller and the buyer of the property. Fannie Mae allows non-arm s length transactions for the purchase of EXISTING properties are acceptable. For purchase of NEWLY Constructed Properties, if the borrower has a relationship or business affiliation (any ownership interest, or employment) with the builder, developer, or seller of the property, Fannie Mae will only purchase if property will be buyer s PRIMARY residence. Second home and investment properties are not allowed. REFINANCE TRANSACTIONS: 1) Continuity of Obligation for Limited Cash-Out and Cash-Out Refinances: This guidance refines the determination of whether continuity exists, and if not, what additional eligibility restrictions are applicable. An acceptable continuity of obligation (assuming that there is an outstanding lien against the property) exists when one of the following exists: At least one borrower obligated on the new loan who was also a borrower obligated on the existing loan being refinanced. The borrower has been on title and residing in the property for at least 12 months and has either paid the mortgage for the last 12 months or can demonstrate a relationship (relative, domestic partner, etc.) with the current obligor. The existing loan being refinanced and the title have been held in the name of a natural person or an LLC as long as the borrower was a member of the LLC prior to transfer. Transfer of ownership from a corporation to an individual does not meet the continuity of obligation requirement. The borrower has recently inherited or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership). Loans with an acceptable continuity of obligation may be underwritten, priced, and delivered as either a limited cash-out refinance or a cash-out refinance based on the standard definitions in the Selling Guide. Fannie Mae will continue to allow buy-outs resulting from divorce settlements or property inheritance as limited cash-out refinances in accordance with the Selling Guide, Part VII, Section 103.02. In addition, the requirements in the M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 10 of 13

Selling Guide, Part VII, Section 103.05: Payoffs of Installment Land Contracts remain in place and are unaffected by these changes. No Acceptable Continuity of Obligation: If the borrower is currently on title but is unable to demonstrate an acceptable continuity of obligation, or there is no outstanding lien against the property, the loan is still eligible for delivery to Fannie Mae but with additional restrictions described in the following table. The loans must be underwritten, priced, and delivered as a cash-out refinance transaction. Outstanding Liens Purchase Date LTV Ratio Requirements No (the property was Within the 6- to 12-month period prior to the purchased for cash, application date for new financing previous mortgages have been paid off, etc.) Yes More than 12 months prior to the application date for the new mortgage The borrower has been on title for at least 6 months The LTV / CLTV / HCLTV ratios must be based on the lesser of the original sales price / acquisition cost (documented by the HUD-1 Settlement Statement) or the current appraised value. The LTV / CLTV / HCLTV ratios must be based on the current appraised value. The maximum LTV / CLTV / HCLTV ratios are limited to 50% based on the current appraised value. 2) Rate Term Refinances: A limited cash-out refinance may consist of the following components: The unpaid principal balance of an existing first mortgage; Closing costs and prepaid escrows The amount required to satisfy any subordinate mortgage liens if the proceeds were used to acquire the property. A copy of the HUD1 Settlement Statement or title Warranty Deed dated same as the date the subordinate lien was opened. Cash back to the member in an amount not more than the lesser of 2% of the balance of the new refinance mortgage or $2000. Owner buy-out will be considered as limited cash-out refinance as long as the following conditions are met: 1. Property must have been jointly owned by all parties for at least the 12 month preceding the date of the loan application. (parties who inherit an interest in the property do not have to satisfy this required); 2. All parties must be able to demonstrate that they occupied the property as their principal residence, by providing an acceptable source of verification such as a driver s license, bank statement, credit card bill, utility bill, etc. that was mailed to the individual at the address of the property. (Parties who inherit an interest in the property do not have to satisfy this requirement). 3. All parties must sign a written agreement that states the terms of the property buy-out and the proposed disposition of the proceeds from the refinance transaction. The borrower cannot receive any proceeds from the refinance. 4. The party who is buying out the other party s interest must be able to qualify for the mortgage 3) Cash-Out Refinances: Payoff of Privately Held Contract / Deed of Trust: Loan is ineligible for cash out and is restricted to limited cash out only. Property Ownership Seasoning Requirement: If the property was purchased by the borrower within the 6 months preceding the application for new financing, the borrower is ineligible for cash-out refinance transaction unless the loan meets the delayed financing exception. Refer to the delayed financing exception in the FNMA Selling Guide. Short-Term Refinance: A short-term refinance mortgage loan that combines a first mortgage and a non-purchase money subordinate mortgage into a new first mortgage is considered a cash-out transaction. Any refinance of that loan within 6 months will also be considered a cash-out transaction. Basically, the existing loan that M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 11 of 13

will be paid-off from the new refinance loan needs to be seasoned 6 months or it will be considered short time cash out refinance. Property Listing History for Cash-Out Refinances: Properties listed for sale in the 6 months proceeding the application date are limited to 70% LTV (65% for manufactured homes) for cash-out refinance Properties must be taken off the market prior to application date Documentation Needed: Copy of cancelled listing agreement Letter explaining why members decided not to sell property and certify to their intended use of occupancy (primary, secondary, or investment) of the property Maximum Cash-Out Limitation: No limitation MULTIPLE MORTGAGES TO THE SAME BORROWER: (Announcement 09-02 February 6, 2009) ELIGIBILITY REQUIREMENTS: FIVE TO TEN FINANCED PROPERTIES Transaction Type Second Home Number Of Units Maximum LTV / CLTV / HCLTV Purchase 1 Unit 75% / 75% / 75% Limited Cash Out Refinance 1 Unit 70% / 70% / 70% Cash Out Refinance (Only if delayed financing exception requirements are met-see 601.02) Investment Property Purchase And Limited Cash Out Refinance Cash Out Refinance (Only if delayed financing exception requirements are met-see 601.02) Minimum Credit Score 720 1 Unit 70% / 70% / 70% 720 1 Unit 75% / 75% / 75% 2-4 Units 70% / 70% / 70% 720 1 Unit 65% / 65% / 65% 720 UNDERWRITING AND DELIVERY REQUIREMENTS: The borrower cannot have any history of bankruptcy or foreclosure within the past seven years. The borrower cannot have any delinquencies (30-day or greater) within the past 12 months on any mortgage loans. Rental income on the subject investment property must be fully documented according to the Selling Guide, Part X, 402.24: Rental Income. Rental income from other properties owned by the borrower must be supported by two years federal income tax returns. DU messages permitting reduced rental income documentation must be disregarded and full documentation must be obtained. The borrower must have reserves for the subject property and for other properties currently owned by the borrower (i.e., other financed second home and investment properties) in accordance with the Reserve Requirements for Second Homes, Investment Properties, and Multiple Financed Properties. Lenders must use Special Feature Code 150 when delivering mortgage loans secured by second home and investment properties that meet the five to ten financed property requirements. APPLYING THE MULTIPLE MORTGAGES TO THE SAME BORROWER POLICIES TO DU LOAN CASE FILES: DU is not able to determine the exact number of financed properties the borrower owns but does issue a message on second home and investment property transactions when the borrower appears to have financed properties. This message will be updated with the DU Version 7.1 April Update release to be issued on all second M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 12 of 13

home and investment property transactions in order to remind lenders of the new policies. The lender must apply the eligibility and underwriting requirements manually to DU investment property and second home transactions as applicable. M:\Mortgage Procedures\Program Highlights\FNMA Conforming Guidelines.doc Page 13 of 13