AFN FHA Underwriting Guidelines

Underwriting Guidelines

Table of Contents LOAN APPLICATION... 1 General Loan Application Information... 1 Policy and Scope... 1 Mortgage Loan Application Package... 2 Authorization Requirements... 2 Applications for HUD/FHA Employees... 2 Underwriting Applications from HUD/FHA Employees... 2 Allowable Age of Credit Documents... 3 Appraisals and Appraisal Update Requirements... 3 Appraisal Validity Term... 3 Appraisal Re-Use... 3 Appraisal Extensions... 4 FHA CONNECTION... 5 Appraiser... 5 Appraiser Identification... 5 Case Number Assignments, Cancellations, Transfers... 5 Requesting an FHA Case Number... 5 Canceling a Case Number... 5 Automatic Case Number Cancellations... 6 Reinstatement of Case Numbers... 6 Requirements for the Transferring Lender... 7 Transfer for New Borrower Using Existing Appraisal... 7 Transfer Involving a Rejected Loan... 7 Appraiser Selection in the FHA Connection... 7 FHA MORTGAGE QUALIFICATION... 8 General FHA Information... 8 Purpose of FHA Mortgage Insurance... 8 What FHA Will and Will Not Insure... 8 Occupancy... 8 Title II of the National Housing Act... 9 Section 203(b)... 9 203(b) Maximum Insurable Mortgage for Purchases... 9 Section 203(b) Statutory Loan Limits... 9 Section 203(b) Maximum LTV Ratios... 10 AFN-G_FHAUWManual Rev. 07/30/2015 Page i

FHA UNDERWRITING... 11 Mortgage Credit Analysis... 11 Purpose... 11 Verifying Borrower Credit Information... 11 Verifying Borrower s Financial Position... 11 Required Documents for Mortgage Credit Analysis... 12 Age of Documentation... 12 Additional Topic References... 12 General Credit Analysis Guidelines... 12 Past Credit Performance... 12 Analyzing Credit History... 13 Documenting Analysis of Delinquent Accounts... 13 TOTAL Scorecard Recommendation... 14 Non-Traditional Credit... 14 Credit Report Review... 14 Hierarchy of Credit Review... 14 Rental or Mortgage Payment History... 14 TOTAL Scorecard Recommendation... 15 Recent and/or Undisclosed Debts and Inquiries... 15 TOTAL Scorecard Recommendation... 15 Collections and Judgments... 16 TOTAL Scorecard Recommendation... 16 Paying Off Collections and Judgments... 16 TOTAL Scorecard Recommendation... 17 Previous Mortgage Foreclosure... 18 Chapter 7 Bankruptcy... 19 Chapter 13 Bankruptcy... 19 TOTAL Scorecard Recommendation... 20 Consumer Credit Counseling Payment Plans... 20 TOTAL Scorecard Recommendation... 20 Short Sale... 20 Current at the Time of Short Sale... 21 In Default at the Time of Short Sale... 21 Liabilities: Recurring Obligations... 21 Types of Recurring Obligations... 21 Recurring Obligations in DTI Calculation... 22 Revolving Account Minimum Monthly Payment... 22 Alimony Payments in Qualifying Ratio Calculations... 23 Liabilities: Contingent Liabilities... 23 Definition: Contingent Liability... 23 Application of Contingent Liability Policies... 23 AFN-G_FHAUWManual Rev. 07/30/2015 Page ii

Contingent Liability on Mortgage Assumptions... 23 Exemption from Contingent Liability: Mortgage Assumption... 23 TOTAL Scorecard Recommendation... 24 Contingent Liability on Cosigned Obligations... 24 Documentation Requirements... 24 Liabilities: Projected Obligations and Obligations Not Considered Debt... 25 Projected Obligations... 25 Obligations Not Considered Debts... 25 Borrower Approval or Rejection... 25 Determining Credit-worthiness... 25 Underwriter s Responsibility Upon Loan Approval... 26 Notification to Approved Borrowers... 26 Underwriter s Approval Term... 26 Rejection Based on Credit Report Information... 26 Notification to Rejected Borrowers... 26 Documentation Requirements... 27 Appraisal Documentation... 27 Borrower Authorization for Verification of Information... 27 Signature on Application... 27 Borrower Name Requirements... 28 Evidence of Social Security Number... 28 Employment and Asset Information Sent Via Fax or Internet... 29 Verification of Deposit (VOD)... 30 Investigating for Borrowed Funds... 31 TOTAL Scorecard Recommendation... 31 Verification of Employment (VOE)... 32 TOTAL Scorecard Recommendation... 33 Federal Income Tax Returns... 34 TOTAL Scorecard Recommendation... 34 Electronic Signatures... 35 FHA Policy... 35 AFN Policy... 35 Power of Attorney... 35 Initial Disclosures... 35 Authorized esignature Vendors... 36 Mortgage Eligibility... 36 Underwriting Requirements... 36 The Four C's of Credit... 36 General Credit Policy... 37 Occupancy Restrictions... 37 AFN-G_FHAUWManual Rev. 07/30/2015 Page iii

Maximum Loan Limits, Mortgage Amounts, Terms, LTV Ratios and Other Related Policies... 37 National Housing Act Provisions in Loan Limits... 37 Basic Nationwide Loan Limits... 38 Loan Limits for High Cost Areas... 38 Maximum LTV Ratios... 39 Maximum Mortgage Terms... 39 Escrow Accounts... 40 Escrow Waivers... 40 Escrow Holdbacks... 40 Principal Curtailments (Excessive Loan Amounts)... 41 General Information... 41 Loans that Exceed the Statutory Loan Limit... 41 Loans That Exceed the Maximum Allowable Amount... 42 Lender Advancement of the Principal Loan Reduction... 42 Maximum Insurable Mortgage... 42 Maximum Mortgage Amounts on Purchases... 43 Upfront Mortgage Insurance Premiums... 43 Annual MIP... 43 UFMIP and Annual MIP Exceptions... 44 Calculating Maximum Mortgage Amount for a Purchase... 45 Maximum LTV for Purchase of Proposed/ New Construction... 45 Closing Costs as Required Investment... 45 Payment of Appraisal/ Credit Report... 45 Interested Third Party Contributions... 45 Definition: Third Party Contribution... 45 Limitations... 46 Payment of Real Estate Commission... 46 Amounts Exceeding Contribution Limitation (Reference)... 46 Inducements to Purchase... 46 Payments Considered Inducements to Purchase... 46 Personal Property Inducements... 47 Sales Commission as Inducement to Purchase... 48 Loan Amount Increase for Repair and Improvement... 49 Transactions Affecting Maximum Mortgage Calculations... 49 Types of Transactions Affecting Maximum Mortgage Amount... 49 Identity-of-Interest Transaction... 49 Identity-of-Interest LTV... 50 Non-Occupying Borrower... 51 Non-Occupying Borrower LTV... 51 Non-Occupying Borrower Signature Requirements... 51 AFN-G_FHAUWManual Rev. 07/30/2015 Page iv

Non-Occupying Borrower Restrictions... 51 Non-Occupying Borrower Underwriting Criteria... 52 Three and Four Unit Property Mortgage Limit... 52 Three and Four Unit Property Monthly Payment Calculation... 52 Three and Four Unit Property Net Rental Income Calculation... 53 Three and Four Unit Property Mortgage Reserves... 53 Restriction on Investment Properties for Hotel and Transient Use... 54 Indian Lands... 54 Building on Own Land... 54 Proposed, Under Construction or Existing Less than One Year LTV... 54 Manufactured Home Construction-Permanent Loans... 55 Refinance Transactions... 56 Purpose of a Refinance... 56 Maximum Mortgage... 56 Types of Refinance... 56 Maximum Term... 57 Refinance Authorization Numbers... 57 Maximum LTV/CLTV a n d UFMIP... 57 Skipped Payments... 57 Manufactured Homes... 58 Liens against Subject Property... 58 Occupancy of Former Investment Property Being Refinanced... 58 Three and Four Unit Properties (Reference)... 58 No Cash Out Refinance with an Appraisal... 59 Maximum Mortgage Calculation... 59 Calculating Existing Debt... 59 Subordinate Liens... 61 Refinancing to Buy Out Ex-Spouse or Co-borrower Equity... 61 Mortgage Calculation for a Property Acquired Less Than One Year before Loan Application 61 Short Payoffs... 61 Cash Out Refinance... 62 Eligibility... 62 Acceptable Payment History... 62 Ineligibility of Delinquent Borrowers... 62 Payment History Requirements... 62 Restriction on Addition of Non-Occupant Co-borrower... 62 Subordinate Liens and CLTV Ratios... 63 Type of Subordinate Lien... 63 New Subordinate Financing... 63 Existing Subordinate Financing... 63 Modified Subordinate Financing... 63 Maximum Mortgage Based on Length of Ownership... 63 Cash Out Refinancing for Debt Consolidation... 64 AFN-G_FHAUWManual Rev. 07/30/2015 Page v

Streamline Refinance... 64 Purpose of a Streamline Refinance... 64 Adding / Removing Borrowers... 64 Net Tangible Benefit... 65 Seasoning of the Refinanced Mortgage... 67 Streamline Refinance Without Appraisal... 67 Mortgage Limits... 67 Maximum Mortgage Term... 67 Maximum Insurable Mortgage Calculation... 67 Non-Owner Occupant Properties... 68 Subordinate Financing... 68 Streamline Refinance With Appraisal (No Credit Qualifying)... 69 Maximum Insurable Mortgage... 69 Subordinate Financing... 69 Borrower Cash Back at Closing... 69 Borrower, Co-borrower, and Cosigner Eligibility... 70 Borrower Age Limits... 70 Credit-worthiness and Minimum Credit Score... 70 Borrower and Co-borrower Requirements... 70 Cosigner Requirements... 70 Conditions & Restrictions... 70 Mandatory Rejection of a Borrower... 71 Documenting Borrower Eligibility... 72 Ineligible Parties... 72 Military Personnel Eligibility... 72 Military Personnel / Veteran Documentation Requirements... 72 Non-Borrowing Spouses or Other Parties in Interest... 73 Minimum Decision Credit Score... 73 Ineligibility Due to Delinquent Federal Debts... 73 Waiting Period for Past Delinquency, Default or Claim on FHA Loan... 74 Tax Liens... 74 Payment Arrangement Documentation Required... 74 Citizenship and Immigration Status... 74 Residency Requirements... 74 Lawful Permanent Resident Aliens... 75 Non-Permanent Resident Aliens... 75 EAD Required as Evidence of Work Status... 76 Non-Lawful Residency... 76 Living Trusts... 76 Non-Purchasing Spouse... 76 Valid First Liens... 76 AFN-G_FHAUWManual Rev. 07/30/2015 Page vi

Non-Purchasing Spouse Debt... 77 Credit History... 77 Payment Arrangement Documentation Required... 79 Credit Alert Interactive Voice Response System (CAIVRS)... 79 Description of CAIVRS... 79 Borrower Screening Using CAIVRS... 80 Documenting CAIVRS Authorization... 80 PROPERTY REQUIREMENTS AND RESTRICTIONS... 81 General Property Requirements... 81 Principal Residence... 81 Occupancy... 81 Establishing Owner Occupancy... 81 Investment Properties... 81 Condominium Eligibility... 83 Site Condominium Requirements... 83 EMPLOYMENT & EMPLOYMENT-RELATED INCOME... 84 Income Stability... 84 Effective Income... 84 Employment History... 84 TOTAL Scorecard Recommendation... 84 Analyzing Borrower s Employment Record... 85 Returning to Work After Extended Absence... 85 Salary, Wage, and Other Forms of Income... 86 General Income Analysis Policy... 86 Overtime and Bonus Income... 86 Overtime and Bonus Earning Trend... 86 Part-Time and Seasonal Income... 87 Primary Employment Less Than 40 Hour Work Week... 87 Commission Income... 87 Commission Income Earned for Less Than One Year... 88 Employer Differential Payments... 88 Automobile Allowance and Expense Account... 88 Retirement Income... 89 Social Security Income... 89 Family Owned Business Income... 89 Documentation... 89 Self-Employed Income... 90 AFN-G_FHAUWManual Rev. 07/30/2015 Page vii

Definition: Self-Employed... 90 Types of Business Structures... 90 Self Employed Income Stability... 90 Documentation Requirements... 91 TOTAL Scorecard Recommendation... 91 Establishing an Earning Trend... 91 TOTAL Scorecard Recommendation... 92 Analyzing the Business s Financial Strength... 92 Income Analysis: Individual Tax Returns (IRS Form 1040)... 93 Adjusting Income... 93 Analyzing IRS Form 1040... 93 Income Analysis: Schedule C... 94 Definition: Sole Proprietorship... 94 Analyzing Sole Proprietorship Tax Returns... 94 Income Analysis: Corporate Tax Returns (IRS Form 1120)... 95 Definition: Corporation... 95 Determining Borrower Percentage of Corporate Ownership... 95 Analyzing Corporate Tax Returns... 95 Income Analysis: S Corporation Tax Returns (IRS Form 1120S)... 96 Definition: S Corporation... 96 Analyzing S Corporation Tax Returns... 96 Income Analysis: Partnership Tax Returns (IRS Form 1065)... 96 Definition: Partnership... 96 Analyzing Partnership Tax Returns... 96 NON-EMPLOYMENT RELATED INCOME... 97 Alimony, Child Support and Maintenance Income... 97 Alimony, Child Support and Maintenance Income Criteria... 97 TOTAL Scorecard Recommendation... 98 Investment and Trust Income... 98 Analyzing Interest and Dividends... 98 Trust Income... 98 Notes Receivable Income... 99 Calculating Qualifying Ratios... 99 Military, Government Agency, and Assistance Program Income... 100 Military Income... 100 VA Benefits... 100 Government Assistance Programs... 101 AFN-G_FHAUWManual Rev. 07/30/2015 Page viii

Mortgage Credit Certificates... 101 Section 8 Home Ownership Vouchers... 101 Rental Income... 102 Analyzing Rental Income Stability... 102 Rental Income from Borrower Occupied Property... 103 Income from Roommates in a Single Family Property... 103 Documenting Rental Income... 103 Analyzing IRS Form 1040 Schedule E... 103 Using Current Leases to Analyze Rental Income... 104 Exclusion of Rental Income from Property Being Vacated... 104 Exceptions to the Exclusion of Rental Income... 104 Non-taxable and Projected Income... 105 Types of Non-taxable Income... 105 Grossing Up Non-taxable Income... 106 Analyzing Projected Income... 106 Projected Income for a New Job... 106 QUALIFYING DTI RATIOS... 107 Borrower Qualifying... 107 Mortgage Payment Expense... 107 Borrower Qualifying... 108 Total Fixed Payments... 108 Estimating Real Estate Taxes... 108 Borrower Re-Qualification... 108 Compensating Factors... 108 Documenting Compensating Factors... 108 TOTAL Scorecard Recommendation... 109 Identifying Compensating Factors... 109 BORROWER FUNDS TO CLOSE... 112 Settlement Requirements... 112 Estimating Settlement Requirements... 112 Disclosure of Origination Charges... 112 Prepaid Items... 113 Per Diem Interest... 113 Discount Points... 113 Non-realty or Personal Property... 113 UFMIP Amounts... 114 Repairs and Improvements... 114 AFN-G_FHAUWManual Rev. 07/30/2015 Page ix

Real Estate Broker Fees... 114 Premium Pricing... 114 Seller Credits on the HUD-1 Settlement Statement... 115 Closing Costs as Down Payment... 115 Rejecting Charges and Fees... 115 Per Diem Interest and Interest Credits... 116 Closing Costs and Sources of Funds... 116 Closing Cost and Minimum Cash Investment Requirements... 116 Determining Amount Needed for Closing... 116 Fees and Other Closing Costs... 117 Acceptable Sources of Funds... 117 Earnest Money Deposit... 118 Savings and Checking Accounts... 119 TOTAL Scorecard Recommendation... 119 Cash Saved at Home... 119 Private Savings Clubs... 119 IRAs, Thrift Savings Plans, 401(k), and Keogh Accounts... 119 TOTAL Scorecard Recommendation... 120 Stocks and Bonds... 120 TOTAL Scorecard Recommendation... 120 Savings Bonds... 120 Gift Funds... 120 Who May Provide a Gift... 121 Who May Not Provide a Gift... 121 Verifying Gift Fund Source... 122 Documentation Requirements... 122 TOTAL Scorecard Recommendation... 123 Sale of Personal Property... 124 Documenting Sales of Personal Property... 124 Net Sales Proceeds from Real Property... 124 Real Estate Commission from Sale of the Subject Property... 125 Trade Equity... 125 Trade-In of Manufactured Home... 126 Rent Credit... 126 Equity Credit... 126 Sweat Equity... 127 Paying Off Borrower s Consumer Debt... 127 Collateralized Loans... 127 Who May Provide Collateralized Loans... 127 Who May Not Provide Collateralized Loans... 128 Disaster Relief Grants and Loans... 128 Employer Assistance Plans... 128 Relocation Guaranteed Purchase... 129 Charitable Organizations That Lose or Give Up Their Federal Tax-Exempt Status... 129 AFN-G_FHAUWManual Rev. 07/30/2015 Page x

Down Payment Assistance Programs (DAPs)... 129 Down Payment Assistance Program (DAP) Approval... 129 DAP Provider Eligibility... 130 SECONDARY FINANCING... 131 General Information... 131 Definition of Secondary Financing... 131 Ability to Repay... 131 Documentation Requirements... 131 Providers of Secondary Financing... 132 Private Individuals or Other Organizations... 132 Repayment Terms... 132 Family Members for Purchase Transactions... 132 Terms and Conditions... 133 Borrower as Co-Obligor on Note Securing Borrowed Down payment... 134 Borrowers 60 Years of Age or Older... 135 Government Agency Secondary Financing... 135 Introduction... 135 Government Agencies Holding or Servicing Second Liens... 136 Terms and Conditions... 136 Required Monthly Payments... 137 Mortgage Application Disclosures... 137 Nonprofit Agency Secondary Financing... 137 Introduction... 137 Nonprofit Agency Eligibility... 137 Nonprofit Agency Financial Control... 138 HUD HOC Nonprofit Agency Approval... 138 SPECIAL UNDERWRITING... 139 FHA s TOTAL Mortgage Scorecard... 139 Description of TOTAL... 139 Comparison of TOTAL to AUS... 139 TOTAL Risk Assessments... 139 TOTAL Rescoring and Tolerance Levels... 140 TOTAL Mortgage Scorecard User Guide... 141 Rate Buydown and Construction to Permanent... 141 Temporary Interest Rate Buydown... 141 Construction to Permanent... 141 AFN-G_FHAUWManual Rev. 07/30/2015 Page xi

Manual Underwriting... 141 Loans to Be Manually Underwritten... 141 Additional Reasons for a Manual Downgrade... 141 Federal Eligibility... 142 Credit Issues... 143 Minimum Decision Credit Score... 145 Reserves... 146 Reserves Requirement... 146 Credit Score Below 580 or with Non-traditional or Insufficient Credit... 146 Credit Score of 580 without Compensating Factors... 147 Credit Score of 580 with One Compensating Factor... 147 Credit Score of 580 with Two Compensating Factors... 148 Credit Score of 580 with No Discretionary Debt... 148 Maximum Qualifying Ratio Matrix... 149 Recording Compensating Factors... 150 Documenting Acceptable Compensating Factors... 151 VA Guidance on Residual Income... 153 Calculating Residual Income... 153 Calculating Gross Monthly Income... 154 Calculating Monthly Expenses... 154 Using Residual Income as a Compensating Factor... 154 PROPERTY VALUATION AND APPRAISALS... 156 Appraiser Requirements... 156 General Requirements... 156 Appraiser Competency... 156 Appraiser Selection in the FHA Connection... 159 Communicating with the Appraiser... 159 Property Valuation and Eligibility... 160 Purpose of Property Valuation... 160 Appraisal Review... 160 AFN Responsibility... 160 General Acceptability Requirements... 160 Property Eligibility... 161 Compliance Inspection Requirements... 162 Basis for Determination of MPS and MPR... 163 Property Standards... 163 Site Condition Standards... 165 Lead-Based Paint Standards... 165 Services and Facilities Standards... 165 Access Standards... 165 Restrictions on Non-residential Use... 165 Rejection of "Existing" or Newly Constructed Property... 166 AFN-G_FHAUWManual Rev. 07/30/2015 Page xii

Appraisal Requirements... 166 FHA Policy on Appraisals... 166 Appraisal Reporting Standards... 167 Appraisal Reporting Forms... 167 Appraisal and Inspection Fees... 168 Providing Appraised Value Documentation to the Borrower... 168 Appraisal Transfer and Change of Client Name... 169 Ordering a Second Appraisal When the Borrower Switches Lenders... 169 Appraisal and/or Completion Report Form... 170 Use of the Appraisal Update and/or Completion Report Form... 171 Appraisals in Declining Markets... 171 Description of Declining Market... 171 Comparable Requirements... 172 Comparable Listings / Pending Sales... 172 Specific Requirements for Market Trend Data Sources... 173 Unacceptable Sources... 174 Properties with Defective Conditions... 174 Appraisal Repair Requirements... 174 Types of Repairs... 174 Additional Required Inspections... 175 Satisfying Repair Requirements... 176 FHA Policy... 176 Compliance Inspection Report... 176 Lender Certification... 177 Escrow of Funds for Completion of Construction... 177 AFN Obligation to Complete Improvements Regardless of Escrow Reserves... 177 FLOOD HAZARD AREAS... 178 General Flood Hazard Information... 178 Introduction... 178 Responsibility for Determining Property Eligibility in SFHA... 179 Properties in SFHA Ineligible for FHA Insurance... 179 Eligibility of Proposed and New Construction in SFHAs... 179 Extent of Flood Insurance Coverage Required... 180 Designation of Special Flood Hazard Areas... 180 Availability of Flood Insurance... 180 HUD Instructions for Appraisals... 181 Special Flood Hazard Requirements... 181 Flood Elevation Certificate and/or Flood Insurance... 181 Flood Insurance Requirements for Existing Construction... 182 Flood Insurance for Condominiums... 182 AFN-G_FHAUWManual Rev. 07/30/2015 Page xiii

Flood Insurance for Manufactured Homes... 182 Required Insurance Amount... 183 PROPERTY FLIPPING... 184 Prohibition on Property Flipping... 184 Definition: Property Flipping... 184 Property Flipping New Construction... 184 Seller Must Be Owner of Record... 184 Analyzing Prior Sales of a Property... 184 Restriction on Re-Sales Occurring 90 Days or Less After Acquisition... 185 Second Appraisal Required on Properties Sold Between 91 and 180 Days After Acquisition 185 Resales Occurring Between 91 Days and 12 Months Following Acquisition... 186 Exceptions to the 90 Day Restriction... 186 SELLER CONCESSIONS... 187 Seller Concessions and Verification of Sales... 187 Appraisal Requirements for Sales Concessions... 187 Types of Sales Concessions... 187 AFN Requirements Regarding Sales Concessions... 187 MANUFACTURED HOMES... 189 Manufactured Homes: Property Eligibility... 189 Foundation Requirements... 189 Engineer s Certification on Foundation Compliance... 189 Perimeter Enclosures... 190 Termite Control... 191 Manufactured Homes: Required Inspections... 191 Required Inspections for Newly Constructed Manufactured Homes... 191 References... 192 SPECIAL NEIGHBORHOOD HAZARDS AND NUISANCES... 193 Unacceptable Sites... 193 General Information on Unacceptable Sites... 193 Physical Conditions... 193 Hazards and Nuisances... 194 Topography... 194 Subsidence... 194 AFN-G_FHAUWManual Rev. 07/30/2015 Page xiv

Hazards and Nuisances... 195 High-voltage Transmission Lines... 195 Heavy Traffic... 195 Airport Noise and Hazards... 195 Airport Noise - Existing Properties... 196 Airport Noise - Market Survey... 196 Airport Noise - Continuing Marketability... 197 Airport Noise - Location Analysis... 197 Airport Hazards... 198 Fire and Explosion... 198 Near High Pressure Gas and Liquid Petroleum Pipelines... 199 Air Quality and Offensive Odors... 199 Sewage System Failure... 200 In-Use and Abandoned Oil or Gas Wells... 200 Operating Wells... 200 Abandoned Wells... 201 Special Case - Proposed, Existing, or Abandoned Wells... 201 Slush Pits... 201 Termites... 202 Structural Integrity... 202 Termites: Proposed Construction... 202 Termites: Existing Construction... 202 PROPERTY ANALYSIS... 203 Appraiser s Analysis... 203 Physical Improvements... 203 Site... 203 Highest and Best Use... 203 Excess Land... 203 Topography... 204 Suitability of Soil... 204 Off-Site Improvements... 204 Easements, Restrictions, or Encroachments... 205 Proposed Construction... 205 Cost of Treatment... 205 Existing Dwellings and Dwellings Completed Less than One Year Prior to the Appraisal without HUD or VA Approval and Inspections... 206 Noncompliance with the General Acceptability Criteria... 206 Conditions Requiring Repair... 207 Deferred Maintenance... 207 Replacement Because of Age... 207 Health and Safety... 207 AFN-G_FHAUWManual Rev. 07/30/2015 Page xv

Conditions Not Requiring Repairs... 207 Lead-Based Paint... 208 Adequacy of Functional Components... 209 Code Enforcement for Existing Properties... 210 Certification of Mechanical Equipment... 211 Design... 211 Conformity of Property to Neighborhood... 212 Analysis Of The Elements Of Conformity... 212 Suitability of Use-Type... 212 Appropriate Functional Characteristics... 212 Harmony of Design... 213 Relation of Expense of Ownership to Family Incomes... 214 Economic Life vs. Physical Life... 214 Estimation of Remaining Economic Life... 214 End of Useful Life of Building Improvement... 215 Valuation: Market Approach... 215 Use of Market Price in Valuation... 215 Exclusion of Non-Realty Items... 216 Market Comparisons... 217 Selection of Comparable Properties (Bracketing)... 217 Use of Conventional Sales Data... 218 Evaluation and Use of Market Data... 219 Quantity of Data... 219 Market Price Comparisons... 220 Preliminary Price Comparison... 220 Specific Estimate... 220 Adjustments... 221 Reliability of Sales Data... 221 Valuation: Manufactured (Mobile) Homes... 222 General Information... 222 Manufactured Home Lot Appraisals... 222 Individual Lot Acceptability... 223 Undeveloped Lot... 224 Eligibility... 224 Appraisals... 224 Inspections... 225 VA CRVs... 226 Valuation: Condominiums... 226 General Information... 226 Definitions... 227 Mortgage... 227 Family Unit... 227 Common Areas and Facilities... 227 AFN-G_FHAUWManual Rev. 07/30/2015 Page xvi

Restricted or Limited Common Areas and Facilities... 227 Project... 227 Conversion... 227 Tenant... 227 Bona fide Tenants' Organization... 228 Condominium Fee (Assessment)... 228 Presale Requirements... 228 Owner-occupancy Requirements for Project Approval... 228 Owner-occupancy Requirement... 229 Conversions from Rental Housing to Condominiums... 229 Condominium Document Approval... 229 Completion of Construction... 229 Recertification of Approvals... 230 Approval and Processing Instructions... 230 Proposed Construction (non-operating condo association)... 231 Existing Construction (non-operating condo association)... 231 Existing Construction (operating condo association)... 231 Proposed Construction (operating condo association)... 231 Developments with Buildings Under Construction or Existing Less Than One Year... 232 Loan to Value Ratio (LTV)... 233 Certifications... 233 Construction Inspections... 233 Survey... 234 Construction Warranty... 234 Existing Construction (Non-Operating Condominium Association)... 234 Existing Construction (Operating Condominium Association)... 235 Projects Converted from Rental Housing... 236 Condominium Approvals by the Department of Veterans Affairs... 237 Existing project... 238 Loan to value Ratio... 239 Conversions from Rental Housing... 239 Presale Requirements... 239 Owner-occupancy Requirements... 240 Federal National Mortgage Association (FNMA)... 240 Valuation: Planned Unit Developments (PUDs)... 241 Overview... 241 Property to be Appraised... 241 VA CRV... 241 Required Articles of Incorporation... 242 Required Declaration of Covenants... 242 Valuation: Single Family Cooperative Program... 244 SECTION 203(n)... 244 AFN-G_FHAUWManual Rev. 07/30/2015 Page xvii

Valuation Instructions for Special Problems... 244 General Information... 244 Difficult Market Comparisons... 244 Difficult Physical Problems... 245 Properties in Resort and Recreational Areas... 245 Eligibility Criteria... 245 Market Depth... 246 Rental Properties... 246 Location Analysis... 246 Appraisal of Acquired Properties... 247 Fair Market Value... 247 Best Price Obtainable... 248 Appraiser Recommen-dations... 248 Claims Without Conveyance of Title (CWCOT)... 249 General... 249 Appraisal Procedures... 249 HUD Office Action... 249 Valuation Branch... 250 Properties with Encumbrances... 251 Introduction... 251 Surface and Subsurface Easements... 251 Avigation Easements... 252 Leases of Oil and Mineral Rights... 253 Appraiser Concerns... 253 Property Rights and Instrument Privileges... 253 Hazards... 253 Waiver of Objection... 254 Mortgage Credit Requests for Appraisal... 255 Procedure for the Appraisal... 255 Existing Houses Moved to New Foundations... 255 Eligibility... 255 Applications for Insurance... 256 Architectural/ Valuation Process (All Proposals Except Emergency)... 256 VA CRV... 258 SPECIAL CONSIDERATIONS... 259 General Processing Procedures... 259 General Application... 259 Proposed Construction... 259 Existing Construction... 260 AFN-G_FHAUWManual Rev. 07/30/2015 Page xviii

Unsatisfied Repair Conditions... 260 Mortgage Term... 260 Changes in Value or Mortgage Term... 261 Outstanding Conditional Commitments... 261 Mortgagor Complaints... 261 Application for Operative-Builder Commitments... 261 Finished Flooring in Proposed Construction... 261 Carpeting in Existing Houses... 262 Soil Treatment with Individual Water Systems... 262 Fragmental Properties... 262 Estimate of Value... 262 Value of a Small Area... 262 Property Sold to an Adjacent Owner... 263 Areas Affected by Military Installations... 263 Considerations... 263 Market Considerations... 263 Marginal Situations... 265 Headquarters Referrals... 266 Periodic Re-analysis... 266 Conditions of Application Acceptance... 266 Solar Energy Systems... 267 Introduction... 267 Eligibility... 267 Contribution to Value... 267 Local Market Acceptance and Minimum Property Standards... 268 Limits to Value... 269 Lack of Market Data... 269 FHA Field Office Estimates... 270 Price Extraction Method (Method #1)... 270 Paired Sales Method (Method #2)... 270 Depreciation Factor... 271 Cost Approach to Value... 271 Appraisal... 271 Effect of Value on Mortgage Amount... 271 Weatherization Program... 272 Thermal Protection... 272 Benefits... 272 Home Energy Audit Request... 272 Construction Standards... 274 AFN-G_FHAUWManual Rev. 07/30/2015 Page xix

Water and Sewage Systems... 276 Acceptable System Types... 276 Compliance Guidelines... 277 Documentation Requirements... 278 Proposed Construction Properties... 278 Existing Construction Properties... 279 Suitability of Soil... 280 Eligibility Standards for Shared Wells... 280 Acceptability Guidelines for Well-Sharing Agreements... 282 Earth-Sheltered Housing... 285 General Requirements... 285 Inappropriate Locations... 285 Marketability... 286 Dome Homes... 286 Chemical Hazards... 286 Urea Formaldehyde Foam Insulation... 286 Asbestos... 286 UNDERWRITING REFERENCE MATERIAL... 288 General Information on Underwriting and Underwriters... 288 Importance of the Underwriter... 288 Underwriter Sanctions and Ineligibility... 288 Registering an Underwriter in FHA Connection... 288 Use of an AUS... 288 Underwriting Closing Certifications and Sales Contracts... 289 Lender s Certificate... 289 Policy on Sales Contracts... 290 Amendatory Clause to the Sales Contract... 290 Amendatory Clause Required Language... 291 When the Real Estate Certification Is Not Needed... 292 Underwriter Qualification Criteria and Responsibilities... 292 Underwriter Qualifications... 292 Underwriter Responsibilities... 294 AFN-G_FHAUWManual Rev. 07/30/2015 Page xx

LOAN APPLICATION General Loan Application Information Policy and Scope A loan application must be documented on the following forms: The Uniform Residential Loan Application [Form 1003 or Form 1003(S)] If applicable, a Statement of Assets and Liabilities [Form 1003A or Form 1003A(S)] The initial loan application must include sufficient information for the underwriter to reach an informed decision. The final loan application signed by the borrower must include all income and debts disclosed or identified during the mortgage process. A complete, signed, and dated version of the original and final Form 1003 or Form 1003(S) must be included in the mortgage file. The exception is when a power of attorney is used. Except as provided below, if either the note or the security instrument is executed pursuant to a power of attorney in accordance with this Guide, then the final (but not the original) loan application may also be executed by, if the age of documents the same, power of attorney. When a power of attorney is used, AFN requires the file to include a letter of explanation from the borrower stating why a power of attorney is being used. Refer to the AFN Power of Attorney Checklist and Mortgage Loan Application for more guidance. Note: Any available technology may be used to produce copies of the documents in the mortgage loan file such as a photocopier, facsimile machine, document scanner, or camera. Copies of documents provided by the borrower may be photos or scanned versions of the original documents and can be delivered to the AFN in hardcopy or via email or other electronic means. AFN-G_FHAUWManual Rev. 07/30/2015 Page 1 of 296

General Loan Application Information Mortgage Loan Application Package The mortgage loan application package must contain all documentation that supports AFN's decision to approve the mortgage loan. When standard documentation does not provide enough information to support the approval decision, the underwriter must provide additional explanatory statements that are consistent with information in the application. The explanatory statements must clarify or supplement the documentation submitted by the borrower. Authorization Requirements Applications for HUD/FHA Employees Underwriting Applications from HUD/FHA Employees AFN requires the borrower s signature on a Borrower s Blanket Signature Authorization form and the Borrower s Certification and Authorization Form. These forms are used to obtain information and documentation needed to evaluate the borrower s creditworthiness. These forms must accompany any request for information or documentation from various institutions affiliated with the borrower s application. The jurisdictional Homeownership Center (HOC) is responsible for underwriting and approval of loan applications for HUD/FHA employees or members of their households. Loan applications from HUD/FHA employees or members of their households are not eligible for underwriting by Direct Endorsement (DE) lenders or evaluation by any automated underwriting system, except Streamline Refinances. For a loan application involving a HUD/FHA employee or a member of his or her household, AFN must: Process the loan application; and Submit the complete underwriting loan package, marked "Confidential," to the attention of the Processing and Underwriting Division Director for underwriting, commitment, processing, and approval. Exception: AFN may underwrite a Streamline Refinance for a HUD/FHA employee or a member of his or her household. AFN-G_FHAUWManual Rev. 07/30/2015 Page 2 of 296

Allowable Age of Credit Documents General Requirements At loan closing, all documents in the mortgage loan application may be up to 90 days old unless: A different time frame is specified in this handbook or in other applicable HUD instructions; or The nature of the documents is such that their validity for underwriting purposes is not affected by the prescribed time frame, such as divorce decrees or tax returns. Closing is defined as: The note date for wet funding states; and The date of funding for dry funding states. If the age of documents exceeds the above limits, underwriters must obtain updated written verification of the documentation. Appraisals and Appraisal Update Requirements Appraisal Validity Term The validity period for all appraisals on existing, proposed and under construction properties is 120 days. If the appropriate HOC determines that soft market conditions exist in certain areas or markets, it may shorten the term of appraisals for substantial rehabilitation upon advance notice to lenders. The term of the appraisal begins on the day the home is inspected by the FHA-approved appraiser and this date appears on the URAR. Appraisal Re- Use Appraisals cannot be re-used after the mortgage for which the appraisal was ordered has closed. A new appraisal is required for each refinance transaction requiring an appraisal. Example: An appraisal used for the purchase of a property cannot be used again for a subsequent refinance, even if six months has not passed. AFN-G_FHAUWManual Rev. 07/30/2015 Page 3 of 296

Appraisals and Appraisal Update Requirements Appraisal Extensions If a borrower signs a valid sales contract or is approved for a loan prior to the expiration date of the appraisal, the term of the appraisal may be extended, at the option of the lender, for 30 days to allow for the approval of the borrower and closing of the loan. Approval of the borrower occurs when the lender s DE underwriter signs the HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. AFN-G_FHAUWManual Rev. 07/30/2015 Page 4 of 296

FHA CONNECTION Appraiser Appraiser Identification AFN is responsible for assuring that the appraiser who actually conducted the appraisal is correctly identified in FHA Connection. If AFN fails to assure that the FHA Connection reflects the correct name, AFN will be subject to administrative sanctions. Case Number Assignments, Cancellations, Transfers Requesting an FHA Case Number AFN should request and cancel case numbers in accordance with prudent business practices and HUD guidance, using FHA Connection (FHAC). A case number should be obtained only when AFN has an active loan application for the borrower and subject property in accordance with HUD requirements. Effective April 18, 2011, when requesting a case number, FHA systems will require AFN to: Certify it has an active loan application for the borrower and subject property in accordance with HUD requirements; and Provide the subject borrower s name and social security number for all proposed construction and existing construction less than one year old. AFN may request a case number in FHAC without first having to select an appraiser from the FHA Appraiser Roster and input the appraiser s information in the Case Number Assignment screen. The effective date of the appraisal must be after the case number assignment date. Canceling a Case Number The underwriter assistant will request a cancellation specifying reason for cancellation to the Homeownership Center (HOC) to close an outstanding file and cancel the FHA case number if: An appraisal has not been completed and the borrower will not close the loan as an FHA loan; The FHA mortgage insurance will not be sought; or The appraisal has already expired. AFN-G_FHAUWManual Rev. 07/30/2015 Page 5 of 296

Case Number Assignments, Cancellations, Transfers (Cont d) Automatic Case Number Cancellations Beginning April 18, 2011, FHA s systems will automatically cancel an uninsured case number where there has been no activity for six months since the last action taken, except for: An appraisal update; or Transmission of the Upfront Mortgage Insurance Premium (UFMIP) to FHA. "Last action taken" includes: Case number assigned; Appraisal information entered; Firm commitment issued by FHA; Insurance application received and subsequent updates; and Notice of Return (NOR) and resubmissions. Last action taken does not include updates to borrowers names and/or property addresses. For example, making changes to the number of borrowers on a loan will not reset the six-month timeframe for automatic cancellation. A report on case numbers that will be automatically cancelled the following month may be accessed through FHA Connection/Single Family Origination/Origination Reports. Reinstatement of Case Numbers If a case number has been canceled and FHA insurance will be sought, AFN must fax a request to the appropriate HOC requesting that the case number be reinstated to an active status. Case numbers that were automatically cancelled, including those for condominium units, will not be re-instated unless the lender provides evidence that: The subject loan closed prior to cancellation of the case number, such as a HUD-1 Settlement Statement; or Not reinstating the case number causes an undue hardship to the borrower that is unrelated to recent changes to premiums and underwriting requirements. AFN-G_FHAUWManual Rev. 07/30/2015 Page 6 of 296

Case Number Assignments, Cancellations, Transfers (Cont d) Requirements for the Transferring Lender Transferring lenders are expected to cooperate in the transfer of case numbers. At the borrower s request, AFN must assign the case number to the new lender using the Case Transfer function in FHA Connection (FHAC). Additionally, the transferring lender: Is not entitled to a fee for the transfer of a Streamline Refinance case number, regardless of the current stage of processing for the loan; May be entitled to any lock-in fee collected from the borrower at the time of application; Is required to provide the new lender with the appraisal, but is not required to provide any processing documents. Note: If processing documents are provided, the transferring lender (AFN): Must negotiate the fee with the new lender; and Is not authorized to charge the borrower a separate fee for the transfer of the processing documents. Transfer for New Borrower Using Existing Appraisal Transfer Involving a Rejected Loan If a case number transfer involves a new borrower using an existing appraisal, the new lender: Collects an appraisal fee from the new borrower; and Sends the fee to the original lender, who, in turn, refunds the fee to the original borrower. If the transfer involves a rejected loan, the original lender must complete the Mortgage Credit Reject function in FHAC prior to transferring the loan. Appraiser Selection in the FHA Connection The underwriter should discuss the loan rejection with his/her direct manager prior to entering the MCR in FHAC. Note: The date of the Assignment Letter is the date that the transfer between lenders occurred. AFN is also responsible for assuring that the appraiser who actually conducted the appraisal is correctly identified in FHA Connection. If AFN fails to assure that the FHA Connection reflects the correct name, AFN will be subject to administrative sanctions. AFN-G_FHAUWManual Rev. 07/30/2015 Page 7 of 296

FHA MORTGAGE QUALIFICATION General FHA Information Purpose of FHA Mortgage Insurance What FHA Will and Will Not Insure The Federal Housing Administration (FHA) offers various mortgage insurance programs that insure approved lenders against losses on mortgage loans. FHA-insured mortgages may be used to purchase homes, improve homes, or refinance existing mortgages. FHA s programs differ from one another primarily in terms of the types of eligible properties and financing. Except as otherwise stated in this handbook, FHA s single family programs are limited to one- to four-family properties that are owneroccupied principal residences. FHA insures mortgages secured by: Detached or semi-detached dwellings; Manufactured housing; Townhouses or row houses; or Individual units within FHA-approved condominium projects. FHA will not insure mortgages secured by: Commercial enterprises; Boarding houses; Hotels and motels; Tourist houses; Private clubs; Bed and breakfast establishments; or Fraternity and sorority houses. Occupancy FHA's single family programs are limited to owner-occupied primary residences only. AFN-G_FHAUWManual Rev. 07/30/2015 Page 8 of 296

General FHA Information Title II of the National Housing Act FHA s single family programs are authorized by the enabling legislation of Title II of the National Housing Act (NHA), and each program is generally referred to by its particular section of the Act, such as: Section 203(b), the basic program; Section 251, Adjustable Rate Mortgages (ARM); and Section 234(c) Condominiums. Regulations implementing the individual programs are contained in the Code of Federal Regulations (CFR), Title 24. CFR codifies general and permanent Department of Housing and Urban Development (HUD) rules and is updated by publishing changes to regulations in the Federal Register. Section 203(b) Section 203(b) Home Mortgage Insurance insures lenders against losses on mortgage loans used to: Finance the purchase of proposed, under construction, or existing one- to four-unit family dwellings or manufactured homes; or Refinance indebtedness on existing housing. 203(b) Maximum Insurable Mortgage for Purchases Section 203(b) Statutory Loan Limits The maximum insurable mortgage under Section 203(b) is determined by the lesser of the: Statutory maximum loan limit; or Applicable loan-to-value (LTV) ratio. Refer to Maximum Loan Limits, Mortgage Amounts, and Mortgage Terms for additional information. Statutory loan limits under 203(b) in high-cost areas are based upon the median sales prices in the area. Statutory limits may be higher in Alaska, Hawaii, Guam, and the Virgin Islands. Note: Dollar limitations may be increased by up to 20 percent if the increase is directly attributable to the cost and installation of a solar energy system on the property. Refer to Maximum Loan Limits, Mortgage Amounts, and Mortgage Terms for additional information. AFN-G_FHAUWManual Rev. 07/30/2015 Page 9 of 296

General FHA Information Section 203(b) Maximum LTV Ratios The maximum LTV for a property depends upon the Stage of construction o Proposed o Under construction, or o Existing Appraised value and sales price (for a purchase); and Borrower's decision credit score. Note: Although the upfront mortgage insurance premium (UFMIP) may be financed, the underwriter should not include it when applying the appropriate LTV. AFN-G_FHAUWManual Rev. 07/30/2015 Page 10 of 296

FHA UNDERWRITING Mortgage Credit Analysis Purpose The purpose of the mortgage credit analysis is to determine: A borrower s credit performance; A borrower s capacity to repay the mortgage; Whether or not the borrower has sufficient funds to close; and Limit collection actions or foreclosure. Refer to General Credit Analysis Guidelines for more information. Verifying Borrower Credit Information AFN must obtain and verify a borrower s information with as much care as they would take if the mortgage were entirely dependent on the property as security. The credit report and verification forms cannot pass through the hands of: The borrower A real estate agent, or Any other interested third party. Verifying Borrower s Financial Position AFN must: Verify the borrower s identity; and Ask sufficient questions of the borrower to get a complete picture of the: o Borrower s financial position; o Source of funds for the mortgage transaction; and o Intended use of the property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 11 of 296

Mortgage Credit Analysis Required Documents for Mortgage Credit Analysis General mortgage credit analysis documents; Evidence of social security number; Verification Of Deposit (VOD); Verification of employment (VOE); Alternative employment documentation; TOTAL Scorecard accept/approve and refer feedback for employment verification; Federal income tax returns; Appraisal documentation; and Valid Driver's License or Identification Card. For further guidance regarding the above documentation types, refer to the applicable section of this guide. Age of Documentation Underwriters must obtain the most recent documents required to perform the mortgage credit analysis. Most recent documents are documents dated within 45 days of the application date. Additional Topic References Refer to the following topics for more information: General Credit Analysis Guidelines General Policy on Borrower Income Analysis For more information on acceptable sources of borrower funds, refer to Borrower Funds to Close. General Credit Analysis Guidelines Past Credit Performance Past credit performance is the most useful guide to: Determining a borrower s attitude toward credit obligations; and Predicting a borrower s future actions. AFN-G_FHAUWManual Rev. 07/30/2015 Page 12 of 296

General Credit Analysis Guidelines Past Credit Performance Analyzing Credit History Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan. When analyzing a borrower s credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments. A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred. Documenting Analysis of Delinquent Accounts The lender must document the analysis of delinquent accounts, including whether late payments were based on any of the following: A disregard for financial obligations; An inability to manage debt; or Factors beyond the borrower s control, such as Delayed mail delivery; or Disputes with creditors. Minor derogatory information occurring two or more years in the past does not require an explanation. Major indications of derogatory credit, such as judgments, collections, and other recent credit problems, require sufficient written explanation from the borrower. The explanation must make sense, and be consistent with other credit information in the file. AFN-G_FHAUWManual Rev. 07/30/2015 Page 13 of 296

General Credit Analysis Guidelines Documenting Analysis of Delinquent Accounts TOTAL Scorecard Recommendation If the loan receives an Accept/Approve recommendation from the Technology Open To Approved Lenders (TOTAL) Scorecard, the borrower need not provide an explanation for adverse credit or other derogatory information. There must, however, be evidence of payoffs for any outstanding judgments shown on the credit report. The TOTAL Scorecard Refer recommendation requires the borrower to provide an explanation for major indications of derogatory credit, such as judgments and collections, and any minor indications within the past two years. Non-Traditional Credit At this time we do not offer programs that allow non-traditional credit. Credit Report Review Hierarchy of Credit Review Evaluating credit involves reviewing payment histories in the following order: First: previous housing expenses, including utilities; Second: installment debts; Third: revolving accounts. Generally, a borrower is considered to have an acceptable credit history if he or she does not have late housing or installment debt payments, unless there is major derogatory credit on his/her revolving accounts. Rental or Mortgage Payment History The borrower s housing obligation payment history holds significant importance when evaluating credit. The underwriter must determine the borrower s housing obligation payment history through the: AFN-G_FHAUWManual Rev. 07/30/2015 Page 14 of 296

Credit Report Review Rental or Mortgage Payment History Credit report; Verification of rent received directly from the landlord (for landlords with no identity-of-interest with the borrower); Verification of mortgage received directly from the mortgage servicer; or Review of canceled checks that cover the most recent 12- month period; If the landlord is a private party, a VOR and cancelled checks for the most recent 12 months is required. Note: The underwriter must verify and document the previous 12 months housing history even if the borrower states he or she was living rent-free. TOTAL Scorecard Recommendation If the loan receives an Accept/Approve recommendation from the Technology Open To Approved Lenders (TOTAL) Scorecard, the housing/rental history requirement stated above is waived. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. Recent and/or Undisclosed Debts and Inquiries Underwriters must determine the purpose of any recent debts, as the borrower may have incurred the indebtedness to obtain the required cash investment. A borrower must provide a satisfactory explanation for any significant debt that is shown on the credit report but not listed on the loan application. Written explanation is required for all inquiries shown on the credit report for the last 90 days. TOTAL Scorecard Recommendation Verify the actual monthly payment amount of any undisclosed indebtedness; Include the monthly payment amount and resubmit the loan regardless of the payment amount; AFN-G_FHAUWManual Rev. 07/30/2015 Page 15 of 296

Credit Report Review Recent and/or Undisclosed Debts and Inquiries Collections and Judgments Determine that any funds borrowed were not/will not be used for the borrower s cash investment in the transaction; Explanation is not required for inquiries. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. Collections and judgments indicate a borrower s regard for credit obligations, and must be considered in the creditworthiness analysis. The underwriter must document reasons for approving a mortgage when the borrower has collection accounts or judgments. The borrower must explain, in writing, all collections and judgments, including but not limited to a letter of explanation from the borrower. Note: Compliance with the requirements specified in Paying off Collections and Judgments (below) is applicable to judgments. TOTAL Scorecard Recommendation Collection accounts trigger neither an explanation requirement nor a hypothetical monthly payment to be used in qualifying borrowers. The presence of collection accounts in the borrower s credit history already result in lowering the credit bureau scores used in TOTAL and, thus, no further information need be provided by the borrower. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. Paying Off Collections and Judgments FHA does not require that collection accounts be paid off as a condition of mortgage approval. A capacity analysis of collection accounts is required if the total outstanding balance of all collection accounts for all borrowers is greater than or equal to $2000. Capacity analysis includes: Payoff of the collection account at or before closing; or Payment arrangements and credit report or creditor letter verifying the payment. The payment must be included in the DTI ratio; or AFN-G_FHAUWManual Rev. 07/30/2015 Page 16 of 296

Credit Report Review Paying Off Collections and Judgments If evidence of a payment arrangement is not available, calculate the monthly payment using 5% of the balance, and include the monthly payment in the DTI ratio. However, court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement. Exception: An exception to the payoff of a court-ordered judgment may be made if the borrower has: An agreement with the creditor to make regular and timely payments; and Provided documentation indicating that payments have been made according to the agreement. An agreement has been established and with a minimum of 3 payments made. Note: If a payment arrangement is in place, the payment will be included when calculating a borrower s total debt-to-income ratio for qualifying. Payment Arrangement Documentation Required: Payment Arrangement Agreement with terms of repayment, including minimum payment due; Proof of current balance; and Proof of the most recent 3 payments made (e.g. cancelled checks). TOTAL Scorecard Recommendation FHA does not require collection accounts to be paid off as a condition of mortgage approval. However, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the borrower s ability to repay the mortgage. To mitigate that risk, FHA requires the underwriter to follow the guidelines on collection accounts with an aggregate balance equal to or greater than $2,000, as described below. AFN-G_FHAUWManual Rev. 07/30/2015 Page 17 of 296

Credit Report Review Paying Off Collections and Judgments IF AND THEN the Automated Underwriting System using the TOTAL Mortgage Scorecard rates the mortgage as Accept, the cumulative outstanding balance of all collections of all borrowers is less than $2,000 the cumulative outstanding balance of all collections of all borrowers is equal to or greater than $2,000 the underwriter is not required to consider or evaluate collection accounts. the underwriter must include monthly payments in the borrower s debt-toincome ratio. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. Refer to Non-Purchasing Spouse Debt for additional guidance. Previous Mortgage Foreclosure A borrower is generally not eligible for a new FHA-insured mortgage if, during the previous three years: The borrower's previous principal residence or other real property was foreclosed; or The borrower gave a deed-in-lieu of foreclosure. Exception: AFN may grant an exception to the three-year requirement if foreclosure was the result of documented extenuating circumstances beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure. Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a borrower s loan was current at the time of his/her divorce, the ex-spouse received the property, and the loan was later foreclosed. AFN-G_FHAUWManual Rev. 07/30/2015 Page 18 of 296

Credit Report Review Previous Mortgage Foreclosure Chapter 7 Bankruptcy Note: The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance Letters of explanation, alone, do not satisfy exception requirements; documentation to support the letter of explanation is required. A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have: Re-established good credit; or Chosen not to incur new credit obligations. An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower: Can show that the bankruptcy was caused by extenuating circumstances beyond his or her control; and Has since exhibited a documented ability to manage financial affairs in a responsible manner. Note: The underwriter must document that the borrower s current situation indicates that the events which led to the bankruptcy are not likely to recur. Chapter 13 Bankruptcy A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that One year of the pay-out period under the bankruptcy has elapsed; The borrower s payment performance has been satisfactory and all required payments have been made on time; and The borrower has received written permission from bankruptcy court to enter into the mortgage transaction. AFN-G_FHAUWManual Rev. 07/30/2015 Page 19 of 296

Credit Report Review Chapter 13 Bankruptcy TOTAL Scorecard Recommendation Borrower documentation must show two years from the discharge date of a Chapter 13 bankruptcy. If the Chapter 13 bankruptcy has not been discharged for a minimum period of two years, the loan must be downgraded to a Refer and evaluated by a Direct Endorsement (DE) underwriter. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. Consumer Credit Counseling Payment Plans Participating in a consumer credit counseling program does not disqualify a borrower from obtaining an FHA-insured mortgage, provided the lender documents that One year of the pay-out period has elapsed under the plan; The borrower s payment performance 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. TOTAL Scorecard Recommendation The borrower s decision to participate in consumer credit counseling does not trigger a requirement for additional documentation, as the credit scores already reflect the degradation in credit history. No explanation or other documentation is needed. Short Sale TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. A borrower is not eligible for a new FHA-insured mortgage if he or she pursued a short sale agreement on his/her principal residence simply 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. AFN-G_FHAUWManual Rev. 07/30/2015 Page 20 of 296

Credit Report Review Short Sale Current at the Time of Short Sale A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage: All 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. In Default at the Time of Short Sale A borrower in default on his or 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 preforeclosure sale. Note: A borrower who sold property under FHA s preforeclosure sale program is not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale. Exception: AFN may make an exception to this rule for a borrower in default on the mortgage at the time of short sale if: Default was due to circumstances beyond the borrower s control, such as death of primary wage earner or long-term uninsured illness; and A review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower s control that caused the default. Liabilities: Recurring Obligations Types of Recurring Obligations Recurring obligations include: All installment loans; Revolving charge accounts; Real estate loans; Alimony; Child support; and Other continuing obligations. AFN-G_FHAUWManual Rev. 07/30/2015 Page 21 of 296

Liabilities: Recurring Obligations Recurring Obligations in DTI Calculation When computing the debt-to-income (DTI) ratio, the lender must include the following recurring obligations: Monthly housing expense; and Additional recurring charges extending ten months or more, such as: o o o o Payments on installment accounts; Child support or separate maintenance payments; Revolving accounts; and Alimony. Debts lasting less than ten months must be included if the amount of the debt will affect the borrower s ability to pay the mortgage during the months immediately after loan closing, especially if the borrower will have limited or no cash assets after loan closing. Note: Monthly payments on revolving or open-ended accounts, regardless of their balances, are counted as liabilities for qualifying purposes even if the accounts appear likely to be paid off within ten months or less. Reference For more information on calculating ratios, refer to Calculating Qualifying Ratios. Revolving Account Minimum Monthly Payment If the credit report shows a revolving account with an outstanding balance but no specific minimum monthly payment, the payment must be calculated as the greater of: 5% of the outstanding balance; or $10.00 Note: If the actual monthly payment is documented from the creditor or the lender obtains a copy of the current statement reflecting the monthly payment, that amount may be used for qualifying purposes. AFN-G_FHAUWManual Rev. 07/30/2015 Page 22 of 296

Liabilities: Recurring Obligations Alimony Payments in Qualifying Ratio Calculations Since there are tax consequences of alimony payments, the underwriter may choose to treat the monthly alimony obligation as a reduction from the borrower s gross income, rather than treating it as a monthly obligation when calculating qualifying ratios. Liabilities: Contingent Liabilities Definition: Contingent Liability Application of Contingent Liability Policies Contingent Liability on Mortgage Assumptions A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment. The contingent liability policies apply unless the borrower can provide conclusive evidence from the debt holder that there is no possibility that the debt holder will pursue debt collection against him or her should the other party default. The underwriter must consider a contingent liability when the borrower remains obligated on an outstanding FHA-insured, VAguaranteed, or conventional mortgage secured by property that: Has sold or traded within the last 12 months without a release of liability; or Is about to sell on assumption without a release of liability being obtained. Exemption from Contingent Liability: Mortgage Assumption When a mortgage is assumed, contingent liabilities need not be considered if: AFN obtains from the servicer of the assumed loan, a payment history showing that the mortgage has been current during the previous 12 month; or The property value, as established by an appraisal or the sales price on the HUD-1 Settlement Statement from sale of the property, minus upfront mortgage insurance premium (UFMIP), results in a loan-to-value (LTV) ratio of 75% or less. AFN-G_FHAUWManual Rev. 07/30/2015 Page 23 of 296

Liabilities: Contingent Liabilities Contingent Liability on Mortgage Assumptions Contingent Liability on Cosigned Obligations Documentation Requirements TOTAL Scorecard Recommendation If the loan receives an Accept/Approve recommendation from the Technology Open To Approved Lenders (TOTAL) Scorecard, the lender must obtain either A copy of the divorce decree ordering the spouse to make payments; or Assumption agreement and deed showing transfer of title out of the borrower s name. (Note: 12 month history is not required.) TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. Contingent liability applies, and the debt must be included in the underwriting analysis, if an individual applying for an FHAinsured mortgage is a cosigner/co-obligor on a: Car loan; Student loan; Mortgage; or Any other obligation. To determine whether or not a contingent liability may be excluded from a borrower s debt-to-income ratios, the underwriter is required to review the source document such as the note, promissory note, or any other contractual agreement used to secure financing. If the borrower is listed as the primary obligor to this liability, the debt must be included in the qualifying ratios, however, if the borrower is listed as the secondary obligor, the underwriter may exclude the liability from qualifying ratios if the underwriter obtains documented proof that the primary obligor has been making regular payments during the previous 12 months and does not have a history of delinquent payments on the loan during that time. AFN-G_FHAUWManual Rev. 07/30/2015 Page 24 of 296

Liabilities: Projected Obligations and Obligations Not Considered Debt Projected Obligations Obligations Not Considered Debts Debt payments such as a student loan or balloon note scheduled to begin or come due within 12 months of the loan closing must be included by the underwriter as anticipated monthly obligations during the underwriting analysis. Debt payments do not have to be classified as projected obligations if the borrower provides written evidence the debt will be deferred to a period outside the 12-month timeframe. Obligations not considered debt, and therefore not subtracted from gross income, include: Federal, state, and local taxes; Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds); Commuting costs; Union dues; Open accounts with zero balances; Automatic deductions to savings accounts; Child care; and Voluntary deductions. Borrower Approval or Rejection Determining Creditworthiness The Direct Endorsement (DE) underwriter is responsible for determining the creditworthiness of a borrower, which includes analyzing a borrower s overall pattern of credit behavior. For more information on guidelines for analyzing a borrower s credit, refer to Borrower's Credit Analysis AFN-G_FHAUWManual Rev. 07/30/2015 Page 25 of 296

Borrower Approval or Rejection Underwriter s Responsibility Upon Loan Approval When a borrower is approved, the DE underwriter: Records the results of the credit analysis on the HUD-92900- LT, FHA Loan Underwriting and Transmittal Summary; Enters any modification of the mortgage amount or approval conditions under Underwriter Comments on the form; and Approves the borrower and authorizes closing, if the case is a DE case. Notification to Approved Borrowers Underwriter s Approval Term Rejection Based on Credit Report Information Notification to Rejected Borrowers AFN is responsible for notifying the borrower of the approval either in writing or verbally, immediately after receipt of the underwriter s decision. The term of the firm commitment or underwriter s approval of the borrower (page 3 of Form HUD-92900A, HUD/VA Addendum to Uniform Residential Loan Application), is the most recent expiration date of the credit documentation in the file. When a borrower is rejected for unacceptable credit characteristics on the basis of information contained in the credit report, the borrower must be notified and provided with the name, address, and (where available), the telephone number of the credit reporting agency. When a loan is rejected, the underwriter must immediately complete: A rejection notice consistent with the requirements of Regulation B; and When required, an Equal Credit Opportunity Act (ECOA) notice, forwarded to the borrower. At least one credit aspect must be rejected before AFN can issue an overall rejection. The rejection notice must provide specific reasons for the rejection. Delinquent credit accounts need not be listed. The rejection notice must contain all the reasons for denial/ineligibility and any counter proposals to make loan approval, such as reduced mortgage amount. AFN-G_FHAUWManual Rev. 07/30/2015 Page 26 of 296

Documentation Requirements Appraisal Documentation The lender must obtain: Fannie Mae Form 1004MC, Market Conditions Addendum to the Appraisal Report, for all appraisals of properties that are to be security for FHA-insured mortgages; and One of the following Fannie Mae forms, as appropriate, and any attachments and exhibits, completed and dated by the appraiser: o Fannie Mae Form 1004, March 2005, Uniform Residential Appraisal Report required to report the appraisal of a one-unit property, or a one- unit property with an accessory unit; o o o Fannie Mae Form 1004C, March 2005, Manufactured Home Appraisal Report required to report an appraisal of a one-unit manufactured home; Fannie Mae Form 1073, March 2005, Individual Condominium Unit Appraisal Report to report appraisal of a unit in a condominium project, or a condominium unit in a planned unit development (PUD); or Fannie Mae Form 1025, Small Residential Income Property Appraisal Report to report appraisal of a two to four unit property. Exception: This requirement does not apply to Streamline Refinance transactions made without an appraisal. Borrower Authorization for Verification of Information Signature on Application AFN requires the borrower s signature on a Borrower s Blanket Signature Authorization form and the Borrower s Certification and Authorization form. These forms are used to obtain information and documentation needed to evaluate the borrower s creditworthiness. These forms must accompany any request for information or documentation from various institutions affiliated with the borrower s application. Either the initial loan application or the final, if one is used, must contain the signatures of all borrowers. Notes: The initial loan application may not be executed by POA except for military personnel and incapacitated borrowers as indicated in the following table. Refer to AFN Power of Attorney Checklist; POA is not allowed on Cash-out Refinance transactions. AFN-G_FHAUWManual Rev. 07/30/2015 Page 27 of 296

Documentation Requirements PERMISSIBLE USE OF A POWER OF ATTORNEY FOR A LOAN APPLICATION Military personnel Incapacitated borrowers POLICY DESCRIPTION A power of attorney may be used for military personnel on overseas duty or on an unaccompanied tour. AFN should obtain the absent borrower s signature on the application by mail or via fax. A power of attorney may be used for incapacitated borrowers who are unable to sign the mortgage application. AFN must provide evidence that the signer has authority to encumber the property and to obligate the borrower. Acceptable evidence includes a durable power of attorney specifically designed to survive incapacity and avoid the need for court proceedings. The incapacitated individual must occupy the property to be insured, except if it is an eligible investment property. Borrower Name Requirements Evidence of Social Security Number AFN does not close loans in the name of a corporation or partnership of any kind. AFN does not close loans in the name of a trust. AFN closes loans in the name of an individual(s) only. All borrowers, including United States (US) citizens, must have a valid Social Security Number (SSN) and must provide evidence of that SSN to the lender. AFN is responsible to: 1. Document an SSN for each borrower, co-borrower, and/or cosigner on the mortgage; 2. Validate each SSN by: a) Entering the borrower s name, date of birth and SSN in the borrower/address validation screen through the FHA Connection (FHAC) or its functional equivalent; b) Review the borrower pay stubs, W-2s, valid tax returns obtained directly from the Internal Revenue Service (IRS), and other documentation acceptable to FHA; c) If additional validation is required, AFN will process the SSA89 a service provider, including those with direct access to the Social Security Administration (SSA); and AFN-G_FHAUWManual Rev. 07/30/2015 Page 28 of 296

Documentation Requirements Evidence of Social Security Number Employment and Asset Information Sent Via Fax or Internet d) Resolve, if necessary, any inconsistencies or multiple SSNs for individual borrowers that are revealed during loan processing and underwriting. Note: These requirements apply to purchase money loans and all refinances, including Streamline Refinances. Income, employment, or asset documents sent to AFN by fax must clearly identify the: Name of the employer or depository/investment firm and the source of information; and Name and telephone number of the individual at the employer or financial institution responsible for verifying the accuracy of the data. Underwriters are accountable for determining the authenticity of faxed documents by examining information included at the top or banner portion of the fax. Likewise, income/employment or asset documentation from an internet website must clearly identify the employer or depository/investment firm s name, as well as the source of information. Documentation for depository accounts from an internet website must provide the same information as a standard original statement, including: Account holder; Account number; Detailed transaction history; and Account balance. Underwriters must examine portions of printouts downloaded from the internet for authenticity. Printed web pages must: Show the uniform resource locator (URL) address, as well as the date and time the documents were printed; Be derived from a website that has been verified by the underwriter to have existed; and Be placed in the case binder. AFN-G_FHAUWManual Rev. 07/30/2015 Page 29 of 296

Documentation Requirements Verification of Deposit (VOD) Any of the following documentation types may be used to verify the borrower has sufficient funds for closing, down payment, and/or financial reserves: Request for Verification of Deposit [Form 1006 or Form 1006(S)]; o Information must be requested directly from the depository institution, and the complete, signed, and dated document must be sent directly from the depository institution; Note: If a VOD is used to verify assets, the underwriter will review the daily balance vs. the average balance. Increases in the daily balance over the average balance that equal at least 50% of the qualifying income must be explained. This applies to refinance and purchase transactions. Additional conditions (including, but not limited to, bank statements and source documentation) apply. Copies of bank or investment portfolio statements: o Statements must cover account activity for the most recent two-month period (or, if account information is reported on a quarterly basis, for the most recent quarter); o Statement format must: Clearly identify the borrower as the account holder; Include the account number; Include the time period covered by the statement; Include all deposits and withdrawal transactions (for depository accounts); Include all purchase and sale transactions (for financial portfolio accounts); and Include the ending account balance. Copies of retirement account statements: o o Must be the most recent statements; and Must identify the borrower's vested amount and terms. AFN-G_FHAUWManual Rev. 07/30/2015 Page 30 of 296

Documentation Requirements Verification of Deposit (VOD) If the latest bank statement is more than 45 days earlier than the loan application date, the borrower must provide a more recent supplemental bank-generated form that shows the account number, balance, and date. Statements may be computer-generated, including online account or portfolio statements downloaded by the borrower from the internet. Refer to the Allowable Age of Credit Documents in this Guide for more information. Documents that are faxed to AFN or downloaded from the internet must clearly identify the name of the depository or investment institution and the source of information, for example, by including that information in the internet or fax banner at the top of the document. Investigating for Borrowed Funds The underwriter must investigate any indications of borrowed funds. These must be identified differently based upon how the asset account was verified. Note: Monthly bank statements must be dated within 45 days of the initial loan application date. Quarterly bank statements must be dated within 90 days of the initial loan application date, and the underwriter must confirm that the funds in the account have not been transferred to another asset account that is verified with more current documentation. A Verification of Deposit [Form 1006 or Form 1006(S)] can be obtained in place of bank statements. If an account was opened within 90 days of a direct verification and/or reflects a current balance significantly greater than the average balance, document the source of funds. TOTAL Scorecard Recommendation If a written VOD is not obtained, the underwriter may obtain a statement showing the previous month s ending balance for the most recent month. AFN-G_FHAUWManual Rev. 07/30/2015 Page 31 of 296

Documentation Requirements Verification of Deposit (VOD) If the previous month s balance is not shown, the lender must obtain statements for the most recent two months to verify that there are sufficient funds to close. A VOD may not be used alone in any circumstance. Note: TOTAL recommendations do not apply to manually downgraded loans. Additional conditions may apply. Refer to Asset Information for additional guidance. Verification of Employment (VOE) The underwriter must review the Verification of Employment (VOE) and the borrower s most recent pay stub. If a written VOE is used to document income, additional documentation is required: Original pay stub(s) covering most recent 30-day period; and Original IRS W-2 forms from the previous two years. (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.) AFN must also: Verify, by telephone, all current employers; Include in the loan file a certification stating that original documents were examined and the name, title, and telephone number of the person with whom employment was verified; Sign and date the verification; and For all loans processed in this manner, obtain a signed copy of IRS 4506, request for copy of tax form, form IRS 8821, tax information authorization, or a document that is appropriate for obtaining tax returns directly from the IRS. Notes: AFN may also use an electronic retrieval service to obtain W-2 and tax return information. Underwriter must use standard employment documentation if: Employer will not provide telephone confirmation of employment; or W-2(s) and/or pay stub(s) indicates inconsistencies (for example, Federal Insurance Contributions Act (FICA) payments not reflecting earnings). AFN-G_FHAUWManual Rev. 07/30/2015 Page 32 of 296

Documentation Requirements Verification of Employment (VOE) TOTAL Scorecard Recommendation The underwriter must obtain the most recent pay stub showing year-to-date earnings of at least one month, and one of the following to verify current employment: A written VOE verbal verification of employment; or Electronic verification acceptable to FHA. The table below outlines additional requirements based on the TOTAL Scorecard Feedback. Note: TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. TOTAL RECOMMENDATION TOTAL Accept/Approve Recommendation REQUIREMENTS FOR VOE The lender is required to verify the applicant s employment history for the previous two years. However, direct verification is not required if all of the following conditions are met: The current employer confirms a two-year employment history (this may include a pay stub indicating a hiring date); The lender only uses base pay (no overtime or bonus pay) to qualify the borrower; and The borrower signs Form IRS 4506 or Form IRS 8821 for the previous two tax years. Borrower Not Employed with Same Employer: If the borrower was not employed with the same employer for the previous two years, and/or the above conditions cannot be met, the lender must verify the most recent two years of employment history by obtaining: Copies of W-2s; Written VOEs; or Electronic verification acceptable to FHA. If the borrower was not employed with the same employer for the previous two years, and has an employment gap of 30 days or greater, he or she must provide a written explanation for the employment gap. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 33 of 296

Documentation Requirements TOTAL RECOMMENDATION TOTAL Refer Recommendation REQUIREMENTS FOR VOE The lender is required to verify the applicant s employment history for the previous two years. For the most recent two years the lender must obtain: Copies of W-2s; Written VOEs; or Electronic verification acceptable to FHA. Borrower Not Employed with Same Employer AND Has Employment Gap: If the borrower was not employed with the same employer for the previous two years, and has an employment gap of 30 days or greater, he or she must provide a written explanation for the employment gap. Federal Income Tax Returns The underwriter must obtain: Federal income tax returns for the most recent two years, both individual and business, including all applicable schedules, for self-employed borrowers; and Individual federal tax returns for commissioned individuals. The file must include signed forms IRS 4506, IRS 8821, Tax Information Authorization, or whatever form or electronic retrieval service is appropriate for obtaining tax returns directly from the IRS for any loan that requires the borrower s tax returns per AFN policy. TOTAL Scorecard Recommendation Business tax returns are not required if the borrower meets all of the following conditions: Individual federal income tax returns show increasing selfemployed income over the past two years; Business accounts are not the source of funds to close; and The FHA-insured mortgage transaction is not a cash out refinance. AFN-G_FHAUWManual Rev. 07/30/2015 Page 34 of 296

Documentation Requirements Federal Income Tax Returns Note: AFN obtains tax transcripts directly from the IRS or an electronic retrieval service. The loan approval is based on the transcript data. Any discrepancies between the transcripts and the borrower provided tax returns must be resolved prior to loan approval. TOTAL recommendations do not apply to manually downgraded loans. Additional conditions may apply. Electronic Signatures FHA Policy AFN Policy Power of Attorney Initial Disclosures FHA accepts electronic signatures on third party documents for forward mortgages and Home Equity Conversion Mortgages (HECMs), in accordance with the Electronic Signatures in Global and National Commerce Act (ESIGN), and the Uniform Electronic Transactions Act (UETA). AFN's policy on the use of electronic signatures is that for all circumstances that permit Electronic Signatures, the Electronic Signature and Date must be clearly visible. Electronic Signatures are never permitted on any documents that require notarization or witnesses and are not permitted on any final closing documents. Electronic signatures are not allowed for loan transactions utilizing a power of attorney. For FHA loan programs, electronic signatures are permitted on the Initial Form 1003 and Initial Disclosures. Electronic signatures are permitted on real estate sales contracts. The correspondent seller must ensure the sales contract is signed by the correct parties in all required places. Note: The Amendatory Clause and Real Estate Certification are attachments to the Sales Contract, therefore, these documents may be electronically signed and must be signed and dated when the purchase contract is executed AFN-G_FHAUWManual Rev. 07/30/2015 Page 35 of 296

Electronic Signatures Authorized esignature Vendors Authorized e-signature vendors include the following: Alamode CIC Cogent Road, Inc. Digital Delivery, Inc. DocMagic Document Express, Inc. DocuPrep DocuSign DocuTech Ellie Mae Encomia elynx, usign, or Swiftview International Document Services, Inc. (NCS) SutiSoft Wave esignsystems Wolters-Kluwer Xerox Blitzdocs Mortgage Eligibility Underwriting Requirements FHA loans should be underwritten according to AFN guidelines. Refer to the Program Matrices, program specific guidelines and/or overlays for additional information. The purpose of underwriting an FHA mortgage is to: Determine a borrower s ability and willingness to repay a mortgage debt to limit the probability of default and collection actions; and Examine the property offered as security to determine if it is sufficient collateral. The Four C's of Credit When reviewing an FHA loan application, the underwriter evaluates the four C s of credit to determine a borrower s creditworthiness. The four C s of credit consist of a borrower s: Credit history Capacity to repay Cash assets available to close the mortgage, and Collateral. AFN-G_FHAUWManual Rev. 07/30/2015 Page 36 of 296

Mortgage Eligibility General Credit Policy AFN s general credit policy requirements for underwriting a mortgage involve: Considering the type of income the borrower needs in order to qualify; Analyzing the borrower s liabilities to determine creditworthiness; and Reviewing ratios, including debt-to-income, and compensating factors. Occupancy Restrictions FHA s single family programs are limited to owner-occupied principal residences only. Maximum Loan Limits, Mortgage Amounts, Terms, LTV Ratios and Other Related Policies National Housing Act Provisions in Loan Limits The statutory provisions of the National Housing Act establish the maximum loan limits and mortgage amounts for all FHA mortgage insurance programs. Maximum loan limits vary depending upon: Specific program under which a loan is insured; Number of dwelling units in the property (one to four units); and Geographic location of the property. Under most programs, the maximum insurable mortgage is the lesser of: The statutory loan limit for the area; or A percentage of the lesser of o o Appraised value; or Sales price. AFN-G_FHAUWManual Rev. 07/30/2015 Page 37 of 296

Maximum Loan Limits, Mortgage Amounts, Terms, LTV Ratios and Other Related Policies National Housing Act Provisions in Loan Limits Basic Nationwide Loan Limits References For more information on calculating maximum mortgage amounts and maximum loan-to-value (LTV) rates, refer to the following topics in this Guide: Maximum Mortgage Amounts on Purchases Maximum Loan Limits, Mortgage Amounts, Terms, LTV Ratios and Other Related Policies General Information on Streamline Refinances FHA s single family mortgage limits are set by county and are tied to increases in the loan limits established by the Federal Home Loan Mortgage Corporation (Freddie Mac) in accordance with Section 203(b)(2)(A) of the National Housing Act as amended by 12 U.S.C.17091. Under Section 203(b), the nationwide basic mortgage limits (the floor) may not: Exceed 150 percent of Freddie Mac national loan limit; or Be less than 65 percent of the dollar amount limitation of Freddie Mac; AFN policy requires a minimum loan amount of $60k; a loan amount less than $60k requires corporate approval. References Refer to the following topics for more information on calculating maximum mortgage amounts and maximum LTV ratios: Maximum Mortgage Amounts on Purchases Maximum Loan Limits, Mortgage Amounts, Terms, LTV Ratios and Other Related Policies General Information on Streamline Refinances Loan Limits for High Cost Areas Section 203(b)(2)(A) of the National Housing Act states that mortgage limits in high cost areas (the ceiling) may increase to 150 percent of the dollar amount limitation as described under Section 305(a)(2) of Freddie Mac for a residence of applicable size. AFN-G_FHAUWManual Rev. 07/30/2015 Page 38 of 296

Maximum Loan Limits, Mortgage Amounts, Terms, LTV Ratios and Other Related Policies Loan Limits for High Cost Areas In these high cost areas, the loan limit is equal to the lesser of: 115 percent of the area median house price; or The statutory ceiling for the high cost areas. Section 214 of the NHA provides that mortgage limits for Alaska, Hawaii, Guam, and the Virgin Islands may be adjusted up to 150 percent of the new FHA ceilings. Maximum LTV Ratios A mortgage that is to be insured by FHA cannot exceed a certain percentage of property value. The maximum LTV ratios vary depending upon: Type of borrower; Type of transaction (purchase or refinance); and Stage of construction. Refer to Program Matrices for specific guidelines and restrictions. References Refer to the following topics in this Guide for additional information: Maximum Insurable Mortgage on a Purchase Types of Transactions Affecting Maximum Mortgage Amount For maximum mortgage amounts specific to refinance transactions refer to: Maximum Mortgage Calculation Maximum Mortgage Amounts on Streamline Refinances Maximum Mortgage Terms The maximum mortgage term may not exceed 30 years from the date that amortization begins. In the case of adjustable rate mortgages (ARMs), the term must be for 30 years. FHA does not require that loan terms be in five year multiples. Refer to Program Matrices for specific guidelines and restrictions. AFN-G_FHAUWManual Rev. 07/30/2015 Page 39 of 296

Maximum Loan Limits, Mortgage Amounts, Terms, LTV Ratios and Other Related Policies Maximum Mortgage Terms Escrow Accounts Note: Some programs require a shorter term, including certain Streamline Refinances made without appraisals. Refer to Streamline Refinances Made without an Appraisal, and Streamline Refinances Made with an Appraisal. AFN must provide for the deposit of escrow funds to pay as they come due, including taxes, ground rents, premiums for property insurance, and premiums for flood insurance for all FHA loans. Escrow deposits for the payment of premiums for borrower-purchased mortgage insurance (if applicable) are mandatory. Escrow account is not required for property or flood insurance premiums for an individual unit in a condo or PUD when the project in which the unit is located is covered by a blanket insurance policy purchased by the homeowners association. 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. Escrow Waivers AFN requires impound accounts on all FHA loans regardless of program, LTV and/or state requirements. Escrow Holdbacks Escrow holdbacks are generally not allowed. Exceptions will be considered on a case-by-case basis and must be approved by the EVP of Operations. Approved exceptions may include, but are not limited to the following: Weather related repairs repairs are not complete due to harsh weather conditions; REO transactions access to the home prior to closing may not be allowed. Note: If an escrow holdback exception is made, AFN will hold the amount of 1.5 times the amount of the cost of repairs. Repairs must be completed within 5 days of closing or a lock extension is required. Additional conditions may apply. AFN-G_FHAUWManual Rev. 07/30/2015 Page 40 of 296

Principal Curtailments (Excessive Loan Amounts) General Information Loans that Exceed the Statutory Loan Limit A principal curtailment is the application of funds that are used to reduce the unpaid principal balance of the mortgage loan. Certain curtailments prior to loan delivery are allowed, provided the delivery data reflects the curtailment as described below: American Financial Network now allows principal curtailments at closing for no cash-out, limited cash-out and Streamline Refinance transactions. Adhere to the following parameters when applying a principal curtailment on FHA/VA loans: Principal reductions due to overstated loan amount (i.e. borrower making mortgage payment) are limited to the lesser of $1000 or 2% and must be approved by the funding manager; Principal reductions due to the overstated credit for pricing no manager approval required and ok to go to lesser of $1500.or 2%; The approved HUD-1 must show the applied funds as a principal curtailment and document the reason for curtailment; Other than the HUD-1, no loan documents including the Good Faith Estimate (GFE), Truth in Lending (TIL) and 1003, may reflect the applied principal curtailment. If a loan amount exceeds the statutory limit: FHA Connection and/or Computerized Homes Underwriting Management System (FHAC/CHUMS) automatically rejects the case for endorsement; FHA issues a Non-Endorsement Notice, commonly known as a Notice of Rejection (NOR) to AFN; FHA returns the case binder and NOR to AFN with instructions to provide evidence of a principal reduction to an insurable amount; FHA issues the MIC electronically, with the reduced mortgage amount, upon receipt of evidence of the principal reduction; AFN-G_FHAUWManual Rev. 07/30/2015 Page 41 of 296

Principal Curtailments (Excessive Loan Amounts) (Cont d) Loans That Exceed the Statutory Loan Limit Loans That Exceed the Maximum Allowable Amount Note: Depending upon the size of the principal reduction, the monthly principal and interest payment amount on the MIC may or may not match the note. The MIC must not be manually changed to agree with the note. If AFN wants the MIC to match the note, we must re-close the loan or amend it to an insurable amount. If, during the post endorsement technical review (PETR), FHA determines a loan amount exceeds the maximum allowable (but does not exceed the statutory limit), or exceeds the maximum allowable loan to value (LTV) ratio, the appropriate Homeownership Center (HOC) will require AFN to provide, within 30 days of the date of notification, evidence that the principal balance has been paid down to an insurable amount. If AFN does not respond within 30 days (does not return the MIC to FHA for correction), the HOC may take appropriate sanctions. FHA will only consider the existing principal balance and other permissible costs for payment of a claim presented. For more information refer to Underwriter Sanctions. Lender Advancement of the Principal Loan Reduction Maximum Insurable Mortgage If AFN advances the principal loan reduction on behalf of the borrower, AFN cannot require borrower repayment, either in a lump sum or monthly payment, if the payment would jeopardize the borrower s ability to repay the mortgage, and potentially cause a default. The maximum insurable mortgage on a purchase is lesser of: Statutory loan limit for the area (typically a county, or metropolitan statistical area (MSA); or Applicable loan-to-value (LTV) limit, applied to the lesser of: o o Sales price; or Appraised value. The Department of Housing and Urban Development (HUD) issues a Mortgagee Letter (ML) announcing the new mortgage limits every year. AFN-G_FHAUWManual Rev. 07/30/2015 Page 42 of 296

Maximum Mortgage Amounts on Purchases Upfront Mortgage Insurance Premiums Most FHA mortgages require payment of an upfront mortgage insurance premium (UFMIP). Statutory loan amounts and LTV limits discussed in this handbook do not include UFMIP. The table below describes UFMIP to be applied to an FHA mortgage. UPFRONT MORTGAGE INSURANCE PREMIUM (UFMIP) All mortgages: 175 basis points (bps) (1.75%) of the Base Loan Amount. Exceptions: Streamline Refinance and Simple Refinance mortgages used to refinance a previous FHA-endorsed mortgage on or before May 31, 2009; Hawaiian Home Lands (Section 247). Annual MIP FHA mortgages also require the payment of an annual mortgage insurance premium. This premium is a monthly charge and included in the borrower s house payment. The table below describes the annual MIP amount required on a FHA mortgage. Applies to all mortgages except: ANNUAL MORTGAGE INSURANCE PREMIUM (MIP) Streamline Refinance and Simple Refinance mortgages used to refinance a previous FHA endorsed mortgage on or before May 31, 2009; Hawaiian Home Lands (Section 247). Hawaiian Home Lands (Section 247) do not require Annual MIP. Base Loan Amount Less than or equal to $625,500 Greater than $625,500 Mortgage Term of More than 15 Years LTV MIP (bps) Duration 90.00% 80 11 years >90.00% but 95.00% 80 mortgage term >95.00% 85 mortgage term 90.00% 100 11 years >90.00% but 95.00% 100 mortgage term >95.00% 105 mortgage term (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 43 of 296

Maximum Mortgage Amounts on Purchases Base Loan Amount Less than or equal to $625,500 Greater than $625,500 ANNUAL MORTGAGE INSURANCE PREMIUM (MIP) Mortgage Term of Less Than or Equal to 15 Years LTV MIP (bps) Duration 90.00% 45 11 years >90.00% 70 mortgage term 78.00% 45 11 years >78.00% but 90.00% 70 11 years >90.00% 95 mortgage term UFMIP and Annual MIP Exceptions The tables below describe the exceptions to the UFMIP and Annual MIP requirements. STREAMLINE REFINANCE AND SIMPLE REFINANCE FOR REFINANCE OF PREVIOUS MORTGAGE ENDORSED ON OR BEFORE MAY 31, 2009 UFMIP: 1 (BPS) (.01%) ALL MORTGAGES ALL MORTGAGE TERMS Base Loan Amount LTV Annual MIP (bps) Duration All 90.00% 55 11 years >90.00% 55 Mortgage term For mortgages where FHA does not require an appraisal the value from the previous mortgage is used to calculate the LTV. HAWAIIAN HOME LANDS SECTION 247 UPFRONT MIP (UFMIP) Loan Term in Years 18 >18 and 22 >22 and 25 >25 MIP Financed 2.400% 3.000% 3.600% 3.800% MIP not Financed 2.344% 2.913% 3.475% 3.661% Annual MIP is not assessed on Section 247 mortgages. AFN-G_FHAUWManual Rev. 07/30/2015 Page 44 of 296

Maximum Mortgage Amounts on Purchases Calculating Maximum Mortgage Amount for a Purchase The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-tovalue (LTV) factor by the lesser of the property s: Sales price, subject to certain required adjustments; or Appraised value. Maximum LTV for Purchase of Proposed/ New Construction In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property. Reference For the maximum LTV percentage on purchases for proposed and existing construction and borrower minimum cash investment, refer to Closing Costs and Minimum Cash Investment Requirements. For purchase transactions, the maximum LTV is 96.5% percent (the reciprocal of the 3.5% required investment). Special requirements for maximum financing on properties proposed or under construction, or construction existing less than one year are stated at Types of Transactions Affecting Maximum Mortgage Amount. Closing Costs as Required Investment Payment of Appraisal/ Credit Report Closing costs (non-recurring closing costs, pre-paid expenses, and discount points) may not be used to help meet the borrower s minimum required investment. The borrower may use a credit card to pay for the appraisal and credit report. These costs cannot be considered to help meet the required investment. Interested Third Party Contributions Definition: Third Party Contribution A third party contribution is a payment by the seller and/or another interested third party, or a combination of parties toward the borrower s costs to close. AFN-G_FHAUWManual Rev. 07/30/2015 Page 45 of 296

Interested Third Party Contributions Limitations The seller and/or third party may contribute up to six percent of the lesser of the property s sales price or the appraised value toward the buyer s closing costs, prepaid expenses, discount points and other financing concessions. The six percent limit also includes: Third party payment for permanent and temporary interest rate buydowns and other payment supplements; Payments of mortgage interest for fixed rate mortgages; Mortgage payment protection insurance; and Payment of the upfront mortgage insurance premium (UFMIP). Note: Contributions exceeding six percent are considered inducements to purchase. Payment of Real Estate Commission Amounts Exceeding Contribution Limitation (Reference) Payment of real estate commissions or fees, typically paid by the seller under local or state law, or local custom, is not considered an interested third party contribution. Treatment of amounts in excess of the third-party contribution limitation i s discussed in Interested Third Party Contribution Limitation. For maximum loan-to-value (LTV) percentage on purchases for proposed and new construction, refer to Maximum LTV for Purchase of Proposed/ New Construction. Inducements to Purchase Payments Considered Inducements to Purchase Certain expenses paid by the seller and/or another interested third party on behalf of the borrower are considered "inducements to purchase" and result in a dollar-for-dollar reduction to the lesser of the sales price or appraised value of the property before applying the appropriate loan-to-value (LTV) factor. AFN-G_FHAUWManual Rev. 07/30/2015 Page 46 of 296

Inducements to Purchase Payments Considered Inducements to Purchase These expenses include the following: Contributions exceeding 6% of the sales price; Contributions exceeding the actual cost of prepaid expenses, discount points, and other financing concessions; Decorating allowances; Repair allowances; Moving costs; and Other costs as determined by the appropriate Homeownership Center (HOC). Notes: A dollar-for-dollar sales price reduction is also required for: Excess rent credit, as described in Rent Credit; and Gift funds not meeting the requirements described in Gift Funds. Personal Property Inducements Personal property given by a seller and/or another interested third party to consummate the sale of a property results in a reduction in the mortgage amount. The value of the item(s) must be deducted from the lesser of the sales price or appraised value of the property before applying the LTV factor. Depending on local custom or law, certain items may be considered part of the real estate transaction with no adjustment to the sales price or appraised value. The table below describes how to determine if personal property affects the sales price or appraised value. IF PERSONAL PROPERTY ITEM IS A... THEN THE... Boat Car Furniture, or Riding lawn mower Television Lender must deduct the value of the item(s) from the sales price or appraised value before applying the LTV factor. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 47 of 296

Inducements to Purchase IF PERSONAL PROPERTY ITEM IS A... THEN THE... Carpeting Dishwasher Dryer Range Refrigerator Washer Window treatment, or Other items determined appropriate by the hoc HOC determines if the items are considered customary and affect the value of the property before applying the LTV factor. Exception: Replacement of existing equipment or other realty items by the seller before closing, such as carpeting or air conditioners, does not require a value adjustment, provided that a cash allowance is not given to the borrower. Sales Commission as Inducement to Purchase Sales commissions paid by an interested third party on a borrower s present residence can be considered inducements to purchase. The table below describes the conditions under which a sales commission is subtracted from the lesser of the sales price or appraised value before applying the LTV factor. IF THE... THEN THE LENDER SHOULD... Seller and/or interested third party agrees to pay any portion of the borrower s sales commission on the sale of the borrower s present residence Treat the amount paid by the interested third party as an inducement to purchase; and Subtract dollar-for-dollar the amount paid by the seller or other party from the lesser of the sales price or appraised value before applying the LTV factor. Borrower is not paying a real estate commission on the sale of his/her present home; Same real estate broker or agent is involved in both transactions; and Seller of the property being purchased by the buyer is paying a real estate commission that exceeds what is typical for the area Treat the amount of commission paid by the seller that exceeds what is typical for the area as an inducement to purchase; and Deduct that amount, dollar-for-dollar, from the lesser of the sales price or appraised value before applying the LTV factor. AFN-G_FHAUWManual Rev. 07/30/2015 Page 48 of 296

Inducements to Purchase Loan Amount Increase for Repair and Improvement At this time, AFN does not allow for repairs and improvements to be included in the loan amount. AFN does not offer EEM loans at this time. Transactions Affecting Maximum Mortgage Calculations Types of Transactions Affecting Maximum Mortgage Amount Certain types of loan transactions affect the amount of financing available to a borrower and how the maximum mortgage amount is calculated. These transactions include: Identity-of-interest; Properties with non-occupying co-borrowers; Three- and four-unit properties; Properties where a house will be constructed by a borrower; On his or her land; and/or As a licensed general contractor; Payoffs of land contracts; and Transactions involving properties: o o Under construction; or Less than a year old. Identity-of- Interest Transaction An identity of interest transaction is a sale between parties with family or business relationships. A family member is defined as a borrower s: Child (son, stepson, daughter or stepdaughter), parent, or grandparent; Spouse; Legally adopted son or daughter, including a child who is: o o Placed with the borrower by an authorized agency for legal adoption; and Foster child. AFN-G_FHAUWManual Rev. 07/30/2015 Page 49 of 296

Transactions Affecting Maximum Mortgage Calculations Identity-of- Interest LTV The maximum loan-to-value (LTV) factor for identity-of-interest transactions on principal residences is restricted to 85%. Financing above the 85% maximum for identity-of-interest transactions is permitted under certain circumstances, as described in the table below. EXCEPTION Family Member Purchase DESCRIPTION A family member purchases another family member s home as a principal residence. If the property is sold from one family member to another and is the seller s investment property, the maximum mortgage is the lesser of: 85% of the appraised value; or The appropriate LTV factor applied to the sales price, plus or minus required adjustments. Note: The 85% limit may be waived if the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy. Reference: The definition of family member. Builder s Employee Purchase Tenant Purchase An employee of a builder purchases one of the builder s new homes or models as a principal residence. A current tenant, including a family member tenant, purchases the property where he or she has rented for at least six months immediately predating the sales contract. Note: A lease or other written evidence to verify occupancy is required. The maximum mortgage calculation is not affected by a sales transaction between a tenant and a landlord with no identity-ofinterest relationship. Corporate Transfer A corporation: Transfers an employee to another location; Purchases the employee s home; and Sells the home to another employee. AFN-G_FHAUWManual Rev. 07/30/2015 Page 50 of 296

Transactions Affecting Maximum Mortgage Calculations Non-Occupying Borrower Non-Occupying Borrower LTV A non-occupying borrower transaction involves two or more borrowers where one or more of the borrower(s) will not occupy the property as his or her primary residence. When there are two or more borrowers, but one or more will not occupy the property as his/her principal residence, the maximum mortgage is limited to 75% loan-to-value (LTV). However, maximum financing is available for: Borrowers related by blood, marriage, or law; such as: o o o o o o Spouses Parents-children Siblings Stepchildren Aunts-uncles, and Nieces-nephews, or Unrelated individuals who can document evidence of a longstanding, substantial family-type relationship not arising out of the loan transaction. Note: If a parent is selling to a child, the parent cannot be the co-borrower with the child, unless the LTV is 75% or less. Non-Occupying Borrower Signature Requirements Non-Occupying Borrower Restrictions All borrowers, regardless of occupancy status, must sign the security instrument and mortgage note. Note: Cosigners do not execute the security instrument or take title, but they must sign the mortgage note. If the LTV exceeds 75%, a mortgage with non-occupying borrower(s) is limited to a one-unit property. The non-occupying borrower arrangement may not be used to develop a portfolio of rental properties. The financial contribution by the non-occupying borrower and the number of properties owned may indicate that the family members are acting as "straw buyers." AFN-G_FHAUWManual Rev. 07/30/2015 Page 51 of 296

Transactions Affecting Maximum Mortgage Calculations Non-Occupying Borrower Underwriting Criteria FHA does not require that additional underwriting criteria, such as specific qualifying ratios, be met by either: Non-occupying borrowers; or Occupying borrowers with sufficient credit. However, additional FHA underwriting criteria do apply to occupying borrowers with insufficient credit. Lenders must judge each transaction on its merits. For information on underwriting criteria for borrowers with insufficient credit, refer to General Guidelines for Analyzing Borrower Credit. Three and Four Unit Property Mortgage Limit The maximum mortgage amount for three and four unit properties is limited so the ratio of the monthly mortgage payment divided by the monthly net rental income does not exceed 100%, regardless of occupancy status. Form HUD 92561, Borrower s Contract with Respect to Hotel and Transient Use of Property is required at application for all multiunit properties. Note: Calculations described in this topic are in addition to the maximum mortgage calculations described in this guide. Refer to Net Rental Income Calculation for additional information. Three and Four Unit Property Monthly Payment Calculation The monthly mortgage payment calculation for three and four unit properties includes: Principal, Interest, Taxes, and Insurance (PITI); including o o Monthly mortgage insurance; and Hazard insurance; and Homeowners association (HOA) dues computed at the note rate, if applicable. References For more information on the maximum mortgage amounts, refer to Maximum Insurable Mortgage on a Purchase, and Maximum Mortgage Amount For a Purchase. AFN-G_FHAUWManual Rev. 07/30/2015 Page 52 of 296

Transactions Affecting Maximum Mortgage Calculations Three and Four Unit Property Net Rental Income Calculation Net rental income is used to determine the maximum loan amount for three and four unit properties. Net rental income is calculated by: Using the appraiser s estimate of fair market rent from all units, including the unit the borrower chooses for occupancy; and Subtracting the greater of: o o Appraiser s estimate for vacancies; or Vacancy factor used by the jurisdictional Homeownership Center (HOC); Note: HUD Vacancy Factors have been developed and apply to all areas in a HOC jurisdiction: Santa Ana HOC=15% vacancy rate Philadelphia HOC=15% vacancy rate Denver HOC=25% vacancy rate Atlanta HOC=15% vacancy rate The borrower must still qualify for the mortgage based on Income Credit Cash to close, and Projected rents received from remaining units. Projected rent may only be considered as gross income for qualifying purposes. It cannot be used to offset the monthly mortgage payment. Three and Four Unit Property Mortgage Reserves For three and four unit properties, the borrower must have personal reserves equivalent to three months PITI after closing on a purchase transaction. Reserves cannot be derived from a gift. References For more information on mortgage reserves, refer to Projected Income for a New Job and Compensating Factors Benchmark Guidelines. AFN-G_FHAUWManual Rev. 07/30/2015 Page 53 of 296

Transactions Affecting Maximum Mortgage Calculations Restriction on Investment Properties for Hotel and Transient Use Borrowers purchasing multiple unit properties must certify that the property will not be used for hotel or transient purposes, or otherwise rented for periods of less than 30 days, by completing Form HUD-92561, Hotel and Transient Use Certification. This form is required on every application for: A two, three, or four family dwelling; or Single family dwelling that is one of a group of five or more dwellings owned by the same borrower. Indian Lands Building on Own Land AFN does not offer loans for properties on Indian lands. AFN offers the final end loan to pay off the combined construction and land loan. AFN will only pay off a single loan that was used for land purchase and construction financing. Note: Pay off of two separate loans (one for the land purchase and one for the construction financing) is not allowed. Proposed, Under Construction or Existing Less than One Year LTV Properties that are proposed, under construction or existing construction less than one year old are limited to 90% financing, calculated by using the lesser of the: Appraiser s estimate of value; or Sales price, plus or minus required adjustments for o o o Seller contributions; Inducements to purchase; and/or Additions to the mortgage amount. The table below describes the criteria that properties must meet to be eligible for greater than 90% financing, whether or not the property has been previously occupied. One of these criteria must be evidenced in order for the borrower to be eligible for a high ratio mortgage. AFN-G_FHAUWManual Rev. 07/30/2015 Page 54 of 296

Transactions Affecting Maximum Mortgage Calculations CRITERIA Approval of Dwelling Site Plans Local Jurisdiction Building Permit and Certificate of Occupancy DESCRIPTION The dwelling s site plans and materials were approved before construction began by: The Department of Veterans Affairs (VA); An eligible Direct Endorsement (DE) underwriter, through issuance of a(n); Conditional Commitment prior to framing; or Early start letter. The local jurisdiction has issued both a: Building permit or its equivalent prior to construction; and Certificate of Occupancy (CO) or equivalent. Note: This does not apply to condominiums or manufactured housing. These properties have special circumstances for financing approval. Builder s Warranty The dwelling is covered by a builder s ten-year insured warranty plan that is acceptable to HUD. Manufactured Home Construction-Permanent Loans This section intentionally left blank. Reserved for future use. AFN-G_FHAUWManual Rev. 07/30/2015 Page 55 of 296

Refinance Transactions Purpose of a Refinance A refinance transaction is used to pay off an existing real estate debt with the proceeds of a new mortgage for borrower(s) with legal title, and on the same property. Note: The borrower is eligible to refinance the loan as long as he or she has legal title, even if not originally on the loan. Maximum Mortgage The maximum mortgage for a refinance is governed by: The occupancy status of the property; The use of the loan proceeds; and How and when the property was purchased. Generally, the maximum mortgage amount may never exceed the statutory limit, except by the amount of any new upfront mortgage insurance premium (UFMIP). However, the maximum mortgage may exceed the statutory limit on certain specialty products. Note: Most FHA mortgages require payment of an UFMIP. The statutory loan amount and loan-to-value (LTV) limits described in this handbook do not include UFMIP. References For more information on statutory loan limits for purchases, refer to Calculating Maximum Mortgage Amount and Maximum LTV Factors, CLTV Ratios, and UFMIP for Various Types of Refinance Transactions. Types of Refinance FHA insures several different types of refinance transactions, including: Streamline Refinances of existing FHA-insured mortgages made with or without appraisals; No Cash Out Refinances (rate and term) of conventional and FHA-insured mortgages, where all proceeds are used to pay existing liens and costs associated with the transactions; and Cash Out Refinances. Refer to specific sections of this guide for more information. AFN-G_FHAUWManual Rev. 07/30/2015 Page 56 of 296

Refinance Transactions Maximum Term The maximum term of any refinance with an appraisal is 30 years. The maximum term of a Streamline Refinance without an appraisal is limited to the lesser of the remaining term of the existing mortgage, plus 12 years, or 30 years. Refinance Authorization Numbers Maximum LTV/CLTV and UFMIP A lender must obtain a Refinance Authorization Number from the FHA Connection (FHAC), or functional equivalent, for all FHA-to- FHA refinances. The table below lists the maximum loan-to-value (LTV) and combined LTV (CLTV) ratios, and UFMIP for various types of refinance transactions. TYPE OF REFINANCE MAXIMUM LTV MAXIMUM CLTV UFMIP Rate and Term (No Cash Out) FHA-to-FHA Streamline w/appraisal or w/o Appraisal Cash Out Refinance 97.75% 97.75% 175 BPS 97.75% 125% 175 BPS 85% 85% 175 BPS Skipped Payments The borrower must be current on the loan being refinanced for the month due prior to the month in which he or she closes the refinancing, and for the month in which he or she closes. Example: If the borrower is closing on April 8, he or she must have made the March payment within the month of March, and the April payment by closing. The April payment may be included in the payoff amount at closing. AFN does not allow borrowers to skip payments when refinancing. When the new mortgage amount is calculated, FHA does not permit any mortgage payments skipped by the borrower to be included in the new mortgage amount. The borrower must either: Make the payment when it is due; or Bring the monthly mortgage payment check to settlement. AFN-G_FHAUWManual Rev. 07/30/2015 Page 57 of 296

Refinance Transactions Manufactured Homes For a transaction involving a manufactured home to be considered a refinance, the manufactured home must: Have acceptable property status; Be complete; and Have been permanently erected on a site for more than one year (12 months) prior to the date of the application for mortgage insurance. Standard maximum mortgage calculations apply. Liens against Subject Property Occupancy of Former Investment Property Being Refinanced The underwriter must obtain payoff statements for all liens that are to be satisfied from the proceeds of a refinance transaction. For any lien against the subject property that is subject to payments, it is the responsibility of the underwriter to review and ascertain that the lien/loan/mortgage is current for the month due, for both streamline and cash out refinance transactions. Effective with case numbers assigned on or after April 18, 2011, the table below describes the maximum mortgage amount available, for all refinances, to a borrower who re-occupies his/her investment property that is security for the mortgage being refinanced. If the borrower has occupied his/her former investment property for 12 months or more prior to the loan application date of the refinance Fewer than 12 months prior to the loan application date of the refinance Then he or she is eligible for Maximum financing at the same level as an owner-occupant. Rate and term refinancing only, with an LTV not to exceed 85%. Three and Four Unit Properties (Reference) Effective with case numbers assigned on or after April 18, 2011, all refinance transactions of three and four unit properties must comply with the guidance provided in Transactions Involving Three and Four Unit Properties. AFN-G_FHAUWManual Rev. 07/30/2015 Page 58 of 296

No Cash Out Refinance with an Appraisal Maximum Mortgage Calculation The maximum mortgage for a no cash out refinance with an appraisal (credit qualifying) is the lesser of the: 97.75% Loan-To-Value (LTV) factor applied to the appraised value of the property; or Existing debt. The total FHA first mortgage is limited to 100% of the appraised value, including any financed upfront mortgage insurance premium (UFMIP). Most FHA mortgages require payment of an UFMIP. The statutory loan amounts and LTV limits described in this handbook do not include the UFMIP. Generally, the maximum mortgage may never exceed the statutory limit, except by the amount of any new UFMIP. However, the maximum mortgage may exceed the statutory limit on certain specialty products. Note: The borrower must comply with any appraisal requirements, including repairs, before the mortgage is eligible for insurance endorsement. Reference For additional information on UFMIP amounts refer to Upfront Mortgage Insurance Premium (UFMIP) Amount. Calculating Existing Debt The underwriter should follow the steps in the table below to calculate the existing debt. Note: On this type of refinance transaction, the borrower may not receive cash back in excess of $500 at closing. AFN-G_FHAUWManual Rev. 07/30/2015 Page 59 of 296

No Cash Out Refinance with an Appraisal Step Action 1 Determine the amount of the existing first mortgage. The existing first mortgage must be current for the month due and may include: The interest charged by the servicing lender when the payoff will not likely be received on the first day of the month (as is typically assessed on FHAinsured mortgages); Any prepayment penalties assessed on a conventional mortgage or an FHA Title I loan; Late charges; and Escrow shortages; and May not include delinquent interest. 2 Determine the prepaid expenses, which may include: The per diem interest to the end of the month on the new loan; Hazard insurance premium deposits; Monthly mortgage insurance premiums; and Any real estate tax deposits needed to establish the escrow account. 3 Add the following to the existing first mortgage amount: Any purchase money second mortgage; Any junior liens over 12 months old; Closing costs; Prepaid expenses (even if the lender refinancing the loan is the servicer); Borrower-paid repairs required by the appraisal; and Discount points. Note: If the balance or any portion of an equity line of credit in excess of $1000 was advanced within the past 12 months and was for purposes other than repairs and rehabilitation of the property, that portion above and beyond $1,000 of the line of credit is not eligible for inclusion in the new mortgage. 4 Subtract any refund of UFMIP. Result: The resulting figure is the existing debt. AFN-G_FHAUWManual Rev. 07/30/2015 Page 60 of 296

No Cash Out Refinance with an Appraisal Subordinate Liens Refinancing to Buy Out Ex- Spouse or Coborrower Equity Mortgage Calculation for a Property Acquired Less Than One Year before Loan Application A subordinate lien, including a Home Equity Line of Credit (HELOC), regardless of when taken, may remain outstanding (but subordinate to the FHA-insured mortgage), provided the: FHA insured mortgage meets the eligibility criteria for mortgages with secondary financing; and Combined amount of the FHA-insured mortgage and entire subordinate lien does not exceed the applicable FHA LTV. The underwriter must use the maximum accessible credit limit of the existing subordinate lien to calculate the CLTV ratio. When the purpose of the new loan is to refinance an existing mortgage in order to buy out an ex-spouse s or other coborrower s equity, the specified equity to be paid is: Considered property-related indebtedness; and Eligible to be included in the new mortgage calculation. The divorce decree, settlement agreement, or other bona fide equity agreement must be provided to document the equity awarded to the ex-spouse or co-borrower. If the property was acquired less than one year before the loan application, and is not already FHA-insured, the original sales price must be considered in determining the maximum mortgage, in addition to the calculations described previously in this topic. Using conclusive documentation, expenditures for repairs and rehabilitation incurred after the purchase of the property may be added to the original sales price in calculating the mortgage amount. The maximum mortgage amount will be based on the lesser of: Total cost to acquire the property, which includes the original purchase price plus any; Documented costs incurred for rehabilitation, repairs, renovation, or weatherization; Closing costs; and Reasonable discount points; or Current appraised value; or Total of all mortgage liens held against the subject property. Short Payoffs Short payoffs are not eligible for refinancing. AFN-G_FHAUWManual Rev. 07/30/2015 Page 61 of 296

Cash Out Refinance Eligibility Cash out refinance transactions are only permitted on owneroccupied principal residences. Properties owned free and clear may be refinanced as cash out transactions. Acceptable Payment History Ineligibility of Delinquent Borrowers Payment History Requirements Underwriters must verify the borrower has an acceptable payment history. Payment history is acceptable if the borrower: Is current; Has made all payments on the mortgage being refinanced within the month due for the previous 12 months; For mortgages with more than 6 months and less than 12 months of payment history, the mortgagor must have made all payments when due; mortgages with less than 6 months of payment history are not eligible for a Cash-Out Refinance. Borrowers who are delinquent, in arrears, or who have suffered any mortgage delinquencies within the most recent 12-month period under the terms and conditions of their mortgages are not eligible for cash out refinances. If a property is encumbered by a mortgage, the refinancing lender must document the borrower has an acceptable payment history. The payment history is acceptable if the borrower: Is current; and Has made all payments on the mortgage being refinanced within the month due for the previous 12 months. For mortgages with more than six months and fewer than 12 months of payment history, the borrower must have made all payments when due. Mortgages with fewer than six months of payment history are not eligible for cash out refinances. Restriction on Addition of Non-Occupant Co-borrower Non-occupant co-borrowers may not be added in a cash out refinance transaction in order to meet FHA s credit underwriting guidelines for the mortgage. Any co-borrower or cosigner being added to the note must be an occupant of the property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 62 of 296

Cash Out Refinance Subordinate Liens and CLTV Ratios Type of Subordinate Lien The entry below lists the policy requirements regarding subordinate financing and combined loan-to-value (CLTV) requirements on cash out refinances. New Subordinate Financing If new subordinate financing is being offered by the lender or other permitted entity, the CLTV is limited to 85% (the FHAinsured first mortgage and any new junior liens when added together). Existing Subordinate Financing Existing subordinate financing may remain in place, but must be subordinated to the FHA-insured first mortgage, regardless of the total indebtedness or CTLV ratio, provided the borrower qualifies for making scheduled payments on all liens. The lender must use the maximum accessible credit limit of the existing subordinate lien to calculate the CLTV ratio. Modified Subordinate Financing Many subordinate lien holders request modifications to the terms of the lien (typically a reduction in the amount of the lien) in exchange for remaining in a subordinate position. Modifying a subordinate lien in this manner often results in reexecuting the lien at closing, which is acceptable to FHA. In this case, FHA does not consider the lien a new subordinate lien. Maximum Mortgage Based on Length of Ownership The table below describes the maximum mortgage amount calculation for cash out refinance transactions, based on the length of ownership. AFN-G_FHAUWManual Rev. 07/30/2015 Page 63 of 296

Cash Out Refinance If the property has been owned by the borrower as his/her principal residence for 12 months or more preceding the date of the loan application Fewer than 12 months preceding the date of the loan application Then the mortgage Is eligible for the maximum amount of 85% of the appraiser s estimate of value. Is limited to the lesser of 85% of the: Appraiser s estimate of value; or Sales price of the property when acquired. Note: The sales price does not need to be considered if the property was acquired as the result of inheritance and is, or will become, the heir s principal residence. Cash Out Refinancing for Debt Consolidation Cash out refinancing for debt consolidation represents considerable risk, especially if the borrowers have not had a corresponding increase in income. Careful evaluation of this type of transaction is required. Streamline Refinance Purpose of a Streamline Refinance Streamline refinances: Are designed to lower the monthly principal and interest payments on a current FHA-insured mortgage; and Must involve no cash back to the borrower, except for minor adjustments at closing, not to exceed $500. Streamline refinances can be made with or without an appraisal. Adding / Removing Borrowers A credit qualifying Streamline Refinance may be required when a borrower is deleted. Individuals can be deleted from the title on a Streamline Refinance without credit qualifying only under the following circumstances: AFN-G_FHAUWManual Rev. 07/30/2015 Page 64 of 296

Streamline Refinance Adding / Removing Borrowers When an assumption of a mortgage not containing a due-onsale clause occurred more than six months previously and the assumptor can document that he or she has made the mortgage payments during interim period; or Following an assumption of a mortgage in which the transferability restriction (due-on-sale clause) was not triggered, such as in a property transfer resulting from a divorce decree or by devise or descent, and the assumption or quitclaim of interest occurred more than six months previously and the remaining owner-occupant can demonstrate that he or she has made the mortgage payments during this time. Individuals can be deleted from the title on a credit qualifying Streamline Refinance under the following circumstances: When deletion of a borrower or borrowers will trigger the due-on-sale clause; Following an assumption of a mortgage that does not contain restrictions (e.g., due-on-sale clause) limiting assumptions only to creditworthy borrowers and the assumption occurred less than six months previously; Following an assumption of a mortgage in which the transferability restriction (i.e., due-on-sale clause) was not triggered, such as in a property transfer resulting from a divorce decree or by devise or descent and the assumption occurred less than six months previously. Individuals may be added to the title on a Streamline Refinance without credit worthiness review and without triggering due-onsale clauses. Net Tangible Benefit The underwriter must determine that there is a net tangible benefit to the mortgagor as a result of the Streamline Refinance transaction, with or without an appraisal. Net tangible benefit is defined as: A 5 percent reduction to the P&I of the mortgage payment plus the annual MIP; or Refinancing from an Adjustable Rate Mortgage (ARM) to a fixed rate mortgage. AFN-G_FHAUWManual Rev. 07/30/2015 Page 65 of 296

Streamline Refinance Net Tangible Benefit Note: Reducing the term of the mortgage, in and of itself, is not a net tangible benefit. Also, when refinancing to a hybrid ARM, mortgagees must treat the new hybrid ARM as a fixed rate mortgage. The following table defines the permissible minimum thresholds in different refinance situations and outlines what is new and existing guidance. TO FROM FIXED RATE ONE-YEAR ARM HYBRID ARM Fixed Rate Reduction of at least 5 percent of P&I and MIP (new guidance) New interest rate at least 2 percentage points below the current interest rate of the fixed rate mortgage (existing guidance) Reduction of at least 5 percent of P&I and MIP (new guidance) One-Year ARM New interest rate no greater than 2 percentage points above the current interest rate of the ARM (existing guidance) Reduction of at least 5 percent of P&I and MIP (new guidance) New interest rate at least 2 percentage points below the current interest rate of the ARM (existing guidance) Hybrid ARM During Fixed Period Reduction of at least 5 percent of P&I and MIP (new guidance) New interest rate at least 2 percentage points below the current interest rate of the ARM (existing guidance) Reduction of at least 5 percent of P&I and MIP (new guidance) Hybrid ARM During Adjustable Period New interest rate no greater than 2 percentage points above the current interest rate of the Hybrid ARM (existing guidance) Reduction of at least 5 percent of P&I and MIP (new guidance) New interest rate at least 2 percentage points below the current interest rate of the Hybrid ARM (existing guidance) AFN-G_FHAUWManual Rev. 07/30/2015 Page 66 of 296

Streamline Refinance Seasoning of the Refinanced Mortgage On the date of FHA case number assignment: The mortgagor must have made at least six payments on the FHA-insured mortgage that is being refinanced; and At least six full months must have passed since the first payment due date of the refinanced mortgage; and At least 210 days have passed from the closing date of the mortgage being refinanced. Example: If the FHA case number on a mortgage being refinanced was closed on or before December 1, and if mortgagor s first payment on that mortgage is due on January 1, the mortgagee may request assignment of an FHA case number for the refinancing mortgage no earlier than July 1. Streamline Refinance Without Appraisal Mortgage Limits Maximum Mortgage Term Generally, the Streamline Refinance mortgage amount may never exceed the statutory limits, except by the amount of any new upfront mortgage insurance premium (UFMIP). However, the maximum mortgage may exceed the statutory limits on certain specialty products. The Streamline Refinance mortgage term is the lesser of: 30 years; or The remaining term of the mortgage plus 12 years. Maximum Insurable Mortgage Calculation The maximum insurable mortgage for Streamline Refinances without an appraisal cannot exceed the outstanding principal balance Minus the applicable refund of the UFMIP; Plus the new UFMIP that will be charged on the refinance. AFN-G_FHAUWManual Rev. 07/30/2015 Page 67 of 296

Streamline Refinance Without Appraisal Maximum Insurable Mortgage Calculation The outstanding principal balance: May include interest charged by the servicing lender when the payoff is not received on the first day of the month; but May not include delinquent interest, late charges, or escrow shortages. Reference Utilize the Maximum Mortgage Worksheet in Encompass for loan submissions. Non-Owner Occupant Properties Streamline financing by investors or for secondary residences may only be made without an appraisal. Non-owner occupant properties or secondary residences, even if originally acquired as principal residences by the current borrowers, may only be refinanced for the outstanding principal balance. The new security instruments must contain FHA s standard provision permitting acceleration of a mortgage when assumed by an investor, or as a secondary residence. However, FHA does not authorize AFN to exercise the acceleration provision if the investor assumptor is found to be creditworthy. Note: Although property purchased as a principal residence, under certain circumstances as described in the security instruments, may be rented or become a secondary residence, Streamline Refinance without an appraisal does not "convert" the mortgage to one eligible for assumption by an investor. Subordinate Financing A subordinate lien, including a Home Equity Line of Credit (HELOC), regardless of when taken, may remain outstanding, but the entire lien must be subordinated at refinance. If subordinate financing remains in place: Maximum combined loan-to-value (CLTV) is 125%; CLTV is based on original appraised property value; and Maximum CLTV is calculated with the original FHA base loan amount (original principal balance less financed UFMIP), plus all other outstanding financed liens, divided by the appraised value. This calculation may not exceed 125%. Note: Underwriter must use the maximum accessible credit limit of the existing subordinate lien to calculate the CLTV ratio. AFN-G_FHAUWManual Rev. 07/30/2015 Page 68 of 296

Streamline Refinance With Appraisal (No Credit Qualifying) Maximum Insurable Mortgage Effective with case numbers assigned on or after April 18, 2011, the maximum insurable mortgage amount for a Streamline Refinance with an appraisal is limited to the sum of the outstanding principal balance of the loan being refinanced plus the new UFMIP. The underwriter may not use an appraisal to increase the insurable balance, nor add: Closing costs; Discount points; Prepaid items; or Other financing costs. The maximum insurable amount may only be increased through a credit-qualifying refinance with an appraisal. Refer to the AFN Streamline Refinance worksheet for guidance. Subordinate Financing A subordinate lien, including a Home Equity Line of Credit (HELOC), regardless of when taken, may remain outstanding, but the entire lien must be subordinated at refinance. If subordinate financing remains in place, the Maximum combined loan-to-value (CLTV) is 125%; and CLTV is based on the new appraised value. Note: The lender must use the maximum accessible credit limit of the existing subordinate lien to calculate the CLTV ratio. Borrower Cash Back at Closing A Streamline Refinance transaction with an appraisal must involve no cash back to the borrower except for minor adjustments at closing not to exceed $500. AFN-G_FHAUWManual Rev. 07/30/2015 Page 69 of 296

Borrower, Co-borrower, and Cosigner Eligibility Borrower Age Limits There is no maximum age limit for a borrower. The minimum age is the age for which a mortgage note can be legally enforced in the state or other jurisdiction where the property is located. Creditworthiness and Minimum Credit Score When determining the creditworthiness of borrowers, coborrowers, or cosigners, the underwriter considers their: Income Assets; Liabilities; and Credit histories AFN requires a minimum credit score of 580 for each borrower. If AUS approval is received, underwriters should follow AUS feedback. However, when borrower credit scores are between 580-619 and the AUS feedback is a Refer/Eligible or the file is manually downgraded, additional conditions apply. The underwriter should upload the Underwriting Scorecard under the QC-Misc. placeholder. Refer to Manual Underwriting (below) for further guidance. Borrower and Co-borrower Requirements Cosigner Requirements Conditions & Restrictions Both occupying and non-occupying borrowers and co-borrowers: Take title to the property at settlement; Are obligated on the mortgage note; and Must sign all security instruments. Cosigners: Do not hold ownership interest in the property; Are obligated on the mortgage note and have no liability for repaying the obligation; and Must complete and sign all loan documents except the security instruments. For additional cosigner eligibility requirements, refer to Conditions and Restrictions (below). The table below describes additional requirements and conditions for co-borrowers and cosigners. AFN-G_FHAUWManual Rev. 07/30/2015 Page 70 of 296

Borrower, Co-borrower, and Cosigner Eligibility (Cont d) CONDITION/ REQUIREMENT Financial Interest Prohibited Basic Ineligibility for Participation Principal United States (U.S.) Residence DESCRIPTION A party who has a financial interest in the mortgage loan transaction, such as the seller, builder, or real estate agent, may not be a co-borrower or a cosigner. Exception: Exceptions may be granted when the party with financial interest is related to the borrower by blood, marriage, or law. Reference: For more information on identity of interest transactions, refer to HUD 4155.1 2.B.2. An individual signing the loan application must not be otherwise ineligible for participation in the mortgage loan transaction for reasons described in HUD 4155.1 4.C. Note: This applies to all borrowers, regardless of occupancy. Non-occupying co-borrowers or cosigners must have a principal residence in the U.S., unless exempted: Due to military service with overseas assignments, or As U.S. citizens living abroad. Mandatory Rejection of a Borrower A borrower is not eligible to participate in FHA-insured mortgage transactions if he or she is suspended, debarred, or otherwise excluded from participating in HUD programs. AFN must reject a borrower from participation if borrower is on: HUD Limited Denial of Participation (LDP) list; U.S. General Services Administration (GSA) List of Parties Excluded from Federal Procurement or Non-procurement Programs; and/or Credit Alert Interactive Voice Response System (CAIVRS). The HUD LDP list is on the HUD website and the FHA Connection. The GSA List is at http://epls.arnet.gov and FHAC. A borrower must also be rejected if he or she is presently delinquent on any Federal debt or has a lien placed against his/her property for a debt owed the United States Government. AFN-G_FHAUWManual Rev. 07/30/2015 Page 71 of 296

Borrower, Co-borrower, and Cosigner Eligibility (Cont d) Documenting Borrower Eligibility To determine whether a borrower is eligible to participate in an FHA mortgage transaction, the lender must: Examine HUD s LDP list, the GSA List and CAIVRS; and Document the reviews on the HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. Note: AFN policy requires a copy of a valid driver's license or identification card and social security card for all borrowers. For alternative documentation requirements, refer to the appropriate section(s) below. If any borrower cannot meet the borrower identity criteria and provide the appropriate documentation, as described in this guide, the borrower is not eligible for financing. Ineligible Parties A mortgage application is not eligible for FHA mortgage insurance if the name of any of the following parties to the transaction is found on HUD s LDP list or the GSA List: 1) borrower, 2) seller, 3) listing or selling real estate agent, or 4) loan officer. Exception: A seller on the GSA list is exempt if the property being sold is his/her principal residence. Military Personnel Eligibility Military Personnel / Veteran Documentation Requirements Military personnel are considered occupant-owners, and are eligible for maximum financing if a member of the immediate family will occupy the subject property as his/her principal residence, whether or not the military person is stationed elsewhere. A completed Certificate of Veteran Status (CVS) (VA Form 26-8261) issued to a veteran borrower is the only document that may be used for program eligibility. The Department of Veterans Affairs (VA) is solely responsible for determining eligibility for a CVS and its subsequent issuance. Requests for a CVS must be sent on VA Form 26-8261a, Request for Certificate of Veteran Status, along with proof of military service, to the appropriate VA Eligibility Center. VA forms are available at http://www.va.gov/vaforms/. AFN-G_FHAUWManual Rev. 07/30/2015 Page 72 of 296

Borrower, Co-borrower, and Cosigner Eligibility (Cont d) Non-Borrowing Spouses or Other Parties in Interest If two or more parties have an ownership interest in the property, but only one of the parties is applying for the loan (and credit qualifies for the loan on his/her own), it is not required that the non-applicant individual(s) execute the mortgage note and security instrument. AFN is required to ensure a valid and enforceable first lien on the property under applicable state law, which may require execution of a security instrument (but typically not the note) by all parties who have an ownership interest in the property. If the party in question must execute only the security instrument and not the note, he or she is not considered a borrower for FHA purposes, and therefore need not sign the loan application or be considered in credit underwriting. Refer to Non-Purchasing Spouses for additional information. Minimum Decision Credit Score If a credit score is available, it must be used to determine the decision credit score for the application and for eligibility for FHA-insured mortgage financing. A "decision credit score" is determined for each applicant according to the following rule: When three scores are available (one from each repository), the median (middle) value is used; When only two are available, the lesser of the two is chosen; When only one is available that score is used. Ineligibility Due to Delinquent Federal Debts If, after checking public records, credit information or CAIVRS, a borrower is found to be presently delinquent on any Federal debt or has had a lien (including taxes) placed against his or her property for a debt owed to the Federal government, the borrower is not eligible for an FHA mortgage until: The delinquent account is brought current, paid, or otherwise satisfied; or A satisfactory repayment plan is established between the borrower and the Federal agency owed, which is verified in writing; Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA-insured mortgage. AFN-G_FHAUWManual Rev. 07/30/2015 Page 73 of 296

Borrower, Co-borrower, and Cosigner Eligibility (Cont d) Waiting Period for Past Delinquency, Default or Claim on FHA Loan If the borrower has had past delinquencies or has defaulted on an FHA-insured loan, there is a three-year waiting period before he/she 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. Lenders should contact the Homeownership Center (HOC) having jurisdiction over the area where the property subject to default is located for information such as the Date the claim was paid; and Date of the initial default. Tax Liens Tax liens must be paid-off prior to closing unless a payment arrangement has been established and with a minimum of 3 payments made. Note: If a payment arrangement is in place, the payment will be included when calculating a borrower s total debt-to-income ratio for qualifying. Payment Arrangement Documentation Required Payment Arrangement Agreement with terms of repayment, including minimum payment due; Proof of current balance; and Proof of the most recent 3 payments made (e.g. Canceled checks). Citizenship and Immigration Status Residency Requirements US citizenship is not required for mortgage eligibility. The underwriter must determine the residency status of the borrower, based on: Information provided on the loan application; and Other applicable documentation. AFN-G_FHAUWManual Rev. 07/30/2015 Page 74 of 296

Citizenship and Immigration Status Residency Requirements AFN closes loans made to non US citizens who are lawful permanent or non-permanent residents of the United States under the same terms that are available to US citizens. A foreign national is a citizen of a country other than the United States who: Has not become a naturalized citizen of the United States; Receives select immigration benefits; and May be designated a: o o o o Permanent Resident Temporary Resident Other non-immigrant, or Undocumented foreign national. Lawful Permanent Resident Aliens FHA insures mortgages for borrowers with lawful permanent resident alien status, using the same terms and conditions as those for U.S. citizens. Non-Permanent Resident Aliens The mortgage file must: Include evidence of the permanent residency; and Indicate that the borrower is a lawful permanent resident alien on the Uniform Residential Loan Application (URLA). Note: The U.S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security provides evidence of lawful, permanent residency status. FHA insures mortgages made to non-permanent resident aliens provided that the Property will be the borrower s principal residence; Borrower has a valid Social Security Number (SSN); Borrower has a valid, unexpired visa; and Borrower is eligible to work in the United States, as evidenced by an Employment Authorization Document (EAD) issued by the USCIS. AFN-G_FHAUWManual Rev. 07/30/2015 Page 75 of 296

Citizenship and Immigration Status Non-permanent Resident Aliens EAD Required as Evidence of Work Status Note: The Social Security card cannot be used as evidence of work status. Also, work authorizations alone are not acceptable documentation for proof of residency. For more information on the requirement to use the EAD as evidence of work status, refer to EAD Required as Evidence of Work Status (below). Although Social Security cards may indicate work status (such as "not valid for work purposes"), an individual s work status may change without the change being reflected on the actual Social Security card. For this reason, the Social Security card must not be used as evidence of work status, and the EAD must be used instead. If the EAD will expire within one year and a prior history of residency status renewals exists, the lender may assume that continuation will be granted. If there are no prior renewals, the lender must determine the likelihood of renewal, based on information from the USCIS. Note: Borrowers residing in the U.S. by virtue of refugee status granted by the USCIS are automatically eligible to work in this country. An EAD is not required. Non-Lawful Residency Non-U.S. citizens who do not have lawful residency in the U.S. are not eligible for FHA-insured mortgages. Living Trusts Policy At this time, AFN does not close loans in the name of a trust. Non-Purchasing Spouse Valid First Liens If required by state law in order to perfect a valid and enforceable first lien, a non-purchasing spouse may be required to sign either the security instrument or documentation indicating that he or she is relinquishing all rights to the property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 76 of 296

Non-Purchasing Spouse Valid First Liens When the security instrument is executed for this reason, the non-purchasing spouse is: Not considered a borrower; and Not required to sign the loan application. Note: Non-applicant individuals can have an ownership interest in the property at the time of settlement without executing the mortgage note and security instrument, regardless of whether the transaction is a purchase or a refinance. Reference Refer to Title Issues Regarding Non-Borrowing Spouses or Other Parties in Interest Non- Purchasing Spouse Debt Except for obligations specifically excluded by state law, the debts of a non-purchasing spouse are considered if: Borrower resides in a community property state; or Property being insured is located in a community property state. Community property states are as follows: Arizona California Idaho Louisiana Nevada New Mexico Texas Washington Wisconsin Credit History The non-purchasing spouse s credit history is not considered a reason to deny a loan application. However, the non-purchasing spouse s obligations must be considered in the debt-to-income (DTI) ratio unless excluded by state law. AFN-G_FHAUWManual Rev. 07/30/2015 Page 77 of 296

Non-Purchasing Spouse Credit History A credit report that complies with the requirements of Guidelines for Credit Report Review must be provided for the non-purchasing spouse in order to determine the debts that must be counted in the DTI ratio. Note: When a non-purchasing spouse has collections and/or judgments, the underwriter must apply the same policies and guidelines as applied when analyzing the purchasing borrower's credit. Refer to General Guidelines for Analyzing Borrower Credit for additional guidance. This requirement is applicable if the subject property or borrower s principal residence is located in a community property state. Tax liens must be paid-off prior to closing unless a payment arrangement has been established and with a minimum of 3 payments made. If a payment arrangement is in place, the payment will be included when calculating a borrower's total debt-to-income ratio for qualifying. Collection accounts of a non-purchasing spouse in a community property state are included in the total balance calculation. Underwriters must analyze the impact of the borrower s ability to pay all collection accounts, including those of the nonpurchasing spouse (with the exception of obligations excluded by state law.) Medical collections and charge-offs are excluded. TOTAL Mortgage Scorecard Accept/Approve/Refer - Regardless of the Accept/Approve/Refer recommendation by TOTAL Mortgage Scorecard the underwriter must include the payment amount in the calculation of the borrower s debt-to-income ratio. If the loan received an ACCEPT/APPROVE from TOTAL and the cumulative balance is Less than $2000 - the underwriter is not required to evaluate the collection accounts; Equal to or greater than $2000 - The underwriter must include the monthly payments in the DTI calculation if the account will remain open after closing. AFN-G_FHAUWManual Rev. 07/30/2015 Page 78 of 296

Non-Purchasing Spouse Credit History Payment Arrangement Documentation Required Payment Arrangement Agreement with terms of repayment, including minimum payment due; Proof of current balance; and Proof of the most recent 3 payments made (e.g. cancelled checks). Credit Alert Interactive Voice Response System (CAIVRS) Description of CAIVRS The Credit Alert Interactive Voice Response System (CAIVRS) is a Federal government-wide repository of information on those individuals: With delinquent or defaulted Federal debt; and/or For whom the payment of an insurance claim has occurred. AFN-G_FHAUWManual Rev. 07/30/2015 Page 79 of 296

Credit Alert Interactive Voice Response System (CAIVRS) Borrower Screening Using CAIVRS Underwriters must use CAIVRS to screen all borrowers (except those involved in a Streamline Refinance), including nonprofit agencies acting as borrowers. The borrower is not eligible for federally related credit if CAIVRS indicates that he or she: Is presently delinquent on a Federal debt; or Has had a claim paid within the previous three years on a loan made and insured on his/her behalf by HUD. AFN requires a clear CAIVRS for all borrowers. Borrowers may contact HUD or the local HOC to dispute and correct unclear CAIVRs. Documenting CAIVRS Authorization Lenders must write the CAIVRS authorization code for each borrower on form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. Non-FHA lender staff should: Request access from HUD s Internet site at https://entp.hud.gov/caivrs/public/home.html; Select "Registering Lender User ID" from the main menu; and Request at least one Application Coordinator User ID, as well as a Standard User ID for each individual user. AFN-G_FHAUWManual Rev. 07/30/2015 Page 80 of 296

PROPERTY REQUIREMENTS AND RESTRICTIONS General Property Requirements Principal Residence Occupancy Establishing Owner Occupancy A principal residence is a property that will be occupied by the borrower for the majority of the calendar year. FHA s single family programs are limited to owner-occupied principal residences only. At least one borrower must occupy the property and sign the security instrument and the mortgage note in order for the property to be considered owner-occupied. FHA security instruments require a borrower to establish bona fide occupancy in a home as the borrower s principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year. Investment Properties To prevent circumvention of the restrictions on making FHAinsured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment property, even if the subject property will be the only one using FHA mortgage insurance. Any person individually or jointly owning a home covered by an FHA-insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations as listed in the table below. Note: To determine the eligibility of a borrower for one of the exceptions in the table below, the underwriter must consider the: Length of time the previous property was owned by the borrower; and Circumstances that compel the borrower to purchase another residence with an FHA-insured mortgage. AFN-G_FHAUWManual Rev. 07/30/2015 Page 81 of 296

General Property Requirements Investment Properties Important: In all cases other than those listed below, the borrower is not eligible to acquire another FHA-insured mortgage until he or she has either: Paid off FHA-insured mortgage on the previous residence; or Terminated ownership of that residence. POLICY EXCEPTION Relocation ELIGIBILITY REQUIREMENTS A borrower may be eligible to obtain another FHA-insured mortgage without being required to sell an existing property covered by an FHA-insured mortgage if the borrower is Relocating; and Establishing residency in an area outside reasonable commuting distance from his/her current principal residence. If the borrower subsequently returns to the area where he or she owns a property with an FHA-insured mortgage, he or she is not required to re-establish primary residency in that property in order to be eligible for another FHA-insured mortgage. Note: The relocation need not be employer-mandated to qualify for this exception. Increase in family size A borrower may be eligible for another home with an FHA-insured mortgage if the number of his/her legal dependents increases to the point that the present house no longer meets the family s needs. The borrower must provide satisfactory evidence of the increase in dependents and the property s failure to meet family needs; and That the Loan-To-Value (LTV) ratio equals 75% or less, based on the outstanding mortgage balance and a current appraisal. If not, the borrower must pay the loan down to 75% LTV or less. Note: A current residential appraisal must be used to determine LTV compliance. Tax assessments and market analyses by real estate brokers are not acceptable proof of LTV compliance. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 82 of 296

General Property Requirements POLICY EXCEPTION Vacating a jointly owned property ELIGIBILITY REQUIREMENTS A borrower may be eligible for another FHA-insured mortgage if he or she is vacating a residence that will remain occupied by a coborrower. Example: A couple is divorcing and the vacating ex-spouse will purchase a new home. Non-occupying coborrower A borrower may be qualified for an FHA-insured mortgage on his/her own principal residence even if he or she is a non-occupying coborrower with a joint interest in a property being purchased by other family members as their principal residence with an FHA-insured mortgage. Important: Under no circumstances may investors use the exceptions described in the table above to circumvent FHA s ban on loans to private investors and acquire rental properties through purportedly purchasing "principal residences." Condominium Eligibility Site Condominium Requirements FHA must approve condominium projects before a mortgage on an individual condominium unit can be insured. Site Condominiums are single family totally detached dwellings encumbered by a declaration of condominium covenants or condominium form of ownership. They have no shared garages or any other attached buildings. Project approval is not required for site condominiums unless they do not meet this definition. Although processed as Section 203(b) loans, the applicable ADP codes for site condominiums are 731 for Adjustable Rate Mortgages (ARM) and 734 for fixed rate loans. Appraisal data is collected and reported on Fannie Mae form 1004, and the Condominium Rider must be included in the FHA case binder. Note: Manufactured housing condominium projects may not be processed as site condominiums. Reference Refer to Property Valuation and Appraisals for additional guidance. AFN-G_FHAUWManual Rev. 07/30/2015 Page 83 of 296

EMPLOYMENT & EMPLOYMENT-RELATED INCOME Income Stability Effective Income Employment History Income may not be used in calculating the borrower s income ratios if it comes from any source that: Cannot be verified; Is not stable; or Will not continue. To be eligible for a mortgage, FHA does not require a minimum length of time that a borrower must have held a position of employment. However, the lender must verify the borrower s employment for the most recent two full years, and the borrower must: Explain any gaps in employment that span one or more months; and Indicate if he or she was in school or the military during the most recent two full years, providing evidence supporting this claim; such as o o College transcripts; or Discharge papers. Allowances can be made for seasonal employment, typical for the building trades and agriculture, if documented by the lender. TOTAL Scorecard Recommendation If the Technology Open To Approved Lenders (TOTAL) Scorecard returns an Accept/Approve recommendation, the borrower is not required to provide an explanation for gaps in employment of six months or less, during the most recent two years. Note: A borrower with a 25% or greater ownership interest in a business is considered self-employed and will be evaluated as a self-employed borrower for underwriting purposes. AFN-G_FHAUWManual Rev. 07/30/2015 Page 84 of 296

Income Stability Employment History TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. References Refer to Income from Seasonal Employment and General Information on Self-Employed Borrowers and Income Analysis for additional guidance. Analyzing Borrower s Employment Record When analyzing the probability of continued employment, the lender must examine: The borrower s past employment record; Qualifications for the position; Previous training and education; and The employer s confirmation of continued employment. The underwriter should favorably consider a borrower for a mortgage if he or she changes jobs frequently within the same line of work, but continues to advance in income or benefits. In this analysis, income stability takes precedence over job stability. Returning to Work After Extended Absence A borrower s income may be considered effective and stable when recently returning to work after an extended absence if he/she: Is employed in the current job for six months or longer; and Can document a two year work history prior to an absence from employment using: o Traditional employment verifications; and/or o Copies of W-2 forms or pay stubs. Note: An acceptable employment situation includes an individual who took several years off from employment to raise children, then returned to the workforce. Important: Employment situations not meeting the criteria listed above may only be considered as compensating factors. Extended absence is defined as six months. AFN-G_FHAUWManual Rev. 07/30/2015 Page 85 of 296

Salary, Wage, and Other Forms of Income General Income Analysis Policy The underwriter must analyze the income of each borrower who will be obligated for the mortgage debt to determine whether the borrower s income level can be reasonably expected to continue through at least the first three years of the mortgage loan. In most cases, a borrower s income is limited to salaries or wages. Income from other sources can be considered as effective, if properly verified and documented by the lender. Notes: Effective income for a borrower planning to retire during the first three-year period must include the amount of: Documented retirement benefits; Social security payments; or Other payments expected to be received in retirement. Lenders must not ask borrowers about possible future maternity leave. Overtime and Bonus Income Overtime and bonus income can be used to qualify the borrower if he or she has received this income for the past two years, and it will likely continue. If the employment verification states that the overtime and bonus income is unlikely to continue, it may not be used in qualifying. The underwriter must develop an average of bonus or overtime income for the past two years. Periods of overtime and bonus income less than two years may be acceptable, provided the lender can justify and document in writing the reason for using the income for qualifying purposes. Overtime and Bonus Earning Trend The underwriter must establish and document an earnings trend for overtime and bonus income. If either type of income shows a continual decline, the lender must document in writing a sound rationalization for including the income when qualifying the borrower. A period of more than two years must be used in calculating the average overtime and bonus income if the income varies significantly from year to year. AFN-G_FHAUWManual Rev. 07/30/2015 Page 86 of 296

Salary, Wage, and Other Forms of Income Part-Time and Seasonal Income Part-time and seasonal income can be used to qualify the borrower if the underwriter documents that the borrower has worked the part-time job uninterrupted for the past two years, and plans to continue. Many low and moderate income families rely on part-time and seasonal income for day to day needs, and underwriters should not restrict consideration of such income when qualifying these borrowers. Part-time income received for less than two years may be included as effective income, provided that the underwriter justifies and documents that the income is likely to continue. Part-time income not meeting the qualifying requirements may be considered as a compensating factor only. Note: For qualifying purposes, part-time income refers to employment taken to supplement the borrower s income from regular employment; part-time employment is not a primary job and it is worked less than 40 hours. Seasonal income is considered uninterrupted, and may be used to qualify the borrower, if the lender documents that the borrower: Has worked the same job for the past two years; and Expects to be rehired the next season. Seasonal employment includes: Umpiring baseball games in the summer; or Working at a department store during the holiday shopping season. Primary Employment Less Than 40 Hour Work Week Commission Income When a borrower s primary employment is less than a typical 40-hour work week, the underwriter should evaluate the stability of that income as regular, on-going primary employment. Example: A registered nurse may have worked 24 hours per week for the last year. Although this job is less than the 40- hour work week, it is the borrower s primary employment, and should be considered effective income. Commission income must be averaged over the previous two years. To qualify with commission income, the borrower must provide: Copies of signed tax returns for the last two years; and The most recent pay stub. AFN-G_FHAUWManual Rev. 07/30/2015 Page 87 of 296

Salary, Wage, and Other Forms of Income Commission Income Employer Differential Payments Automobile Allowance and Expense Account Commission income showing a decrease from one year to the next requires significant compensating factors before a borrower can be approved. A borrower whose commission income was received for more than one year, but less than two years may be considered favorably if the underwriter can: Document the likelihood that the income will continue; and Soundly rationalize accepting the commission income. Notes: Unreimbursed business expenses must be subtracted from gross income; A commissioned borrower is one who receives more than 25% of his/her annual income from commissions; A tax transcript obtained directly from the Internal Revenue Service (IRS) may be used in lieu of signed tax returns, and the cost of the transcript may be charged to the borrower. Commission Income Earned for Less Than One Year Commission income earned for less than one year is not considered effective income. Exceptions may be made for situations in which the borrower s compensation was changed from salary to commission within a similar position with the same employer. A borrower may also qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the borrower for the mortgage. If the employer subsidizes a borrower s mortgage payment through direct payments, the amount: Is considered gross income; and Cannot be used to offset the mortgage payment directly, even if the employer pays the servicing lender directly. Only the amount by which the borrower s automobile allowance or expense account payments exceed actual expenditures may be considered income. To establish the amount to add to gross income, the borrower must provide: IRS Form 2106, Employee Business Expenses, for the previous two years; and Employer verification the payments will continue. AFN-G_FHAUWManual Rev. 07/30/2015 Page 88 of 296

Salary, Wage, and Other Forms of Income Automobile Allowance and Expense Account Retirement Income Social Security Income If the borrower uses the standard per-mile rate in calculating automobile expenses, as opposed to the actual cost method, the portion that the IRS considers depreciation may be added back to income. Expenses that must be treated as recurring debt include: The borrower s monthly car payment; and Any loss resulting from the calculation of the difference between the actual expenditures and the expense account allowance. Retirement income must be verified from the former employer, or from Federal tax returns. If any retirement income, such as employer pensions or 401(k) distributions, will cease within the first full three years of the mortgage loan, the income may only be considered as a compensating factor. Social Security income must be verified by the Social Security Administration (SSA) or from Federal tax returns. If any benefits expire within the first full three years of the loan, the income may only be considered as a compensating factor. Notes: The underwriter must obtain a complete copy of the current awards letter. Not all Social Security income is for retirement-aged recipients; therefore, documented continuation is required. Some portion of Social Security income may be grossed-up if deemed nontaxable by the IRS. Family Owned Business Income Documentation In addition to normal employment verification, a borrower employed by a family-owned business is required to provide evidence that he or she is not an owner of the business, which may include: Copies of signed personal tax returns; or A signed copy of the corporate tax return showing ownership percentage. AFN-G_FHAUWManual Rev. 07/30/2015 Page 89 of 296

Self-Employed Income Definition: Self- Employed Types of Business Structures A borrower with a 25% or greater ownership interest in a business is considered self-employed for FHA loan underwriting purposes. There are four basic types of business structures. They include: Sole proprietorships Corporations Limited liability or S corporations, and Partnerships. Self Employed Income Stability Income from self-employment is considered stable and effective, if the borrower has been self-employed for two or more years. Due to the high probability of failure during the first few years of business, requirements described in the table below are necessary for borrowers who have been self-employed for less than two years. IF THE PERIOD OF SELF- EMPLOYMENT IS... Between one and two years THEN... The individual must have at least two years of documented previous successful employment in the line of work in which he or she is self-employed, or in a related occupation. Note: A combination of one year of employment and formal education or training in the line of work in which the individual is self-employed or in a related occupation is also acceptable. Less than one year The income from the borrower may not be considered effective income. AFN-G_FHAUWManual Rev. 07/30/2015 Page 90 of 296

Self-Employed Income Documentation Requirements Establishing an Earning Trend Self-employed borrowers must provide: Signed, dated individual tax returns, with all applicable tax schedules for the most recent two years; For a corporation, S corporation, or partnership, signed copies of Federal business income tax returns for the last two years, with all applicable tax schedules; A year-to-date profit and loss (P&L) statement and balance sheet; and A business credit report for corporations and S corporations. TOTAL Scorecard Recommendation If the Technology Open To Approved Lenders (TOTAL) Scorecard returns an Accept/Approve recommendation, the borrower is not required to provide business tax returns if all of the following conditions are met: Individual Federal income tax returns show increasing selfemployed income over the past two years; Funds to close are not coming from business accounts; and The proposed FHA-insured mortgage is not a cash out refinance. Note: A business credit report for a corporation or S corporation is not required if the loan receives a TOTAL Scorecard Accept/Approve. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. When qualifying a self-employed borrower for a mortgage loan, the lender must establish the borrower s earnings trend from the previous two years using the borrower s tax returns. If a borrower: Provides quarterly tax returns, the income analysis may include income through the period covered by tax filings; or Is not subject to quarterly tax returns, or does not file them, then 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. AFN-G_FHAUWManual Rev. 07/30/2015 Page 91 of 296

Self-Employed Income Establishing an Earning Trend Analyzing the Business s Financial Strength If the P&L statements submitted for the current year show an income stream considerably greater than what is supported by the previous year s tax returns, the lender must base the income analysis solely on the income verified through the tax returns. If the borrower s earnings trend for the previous two years is downward and the most recent tax return or P&L is less than the prior year s tax return, the borrower s most recent year s tax return or P&L must be used to calculate his/her income. TOTAL Scorecard Recommendation For the borrower, the TOTAL Scorecard Accept/Approve recommendation does not require a P&L and balance sheet be provided, unless the income used to qualify the borrower exceeds that of the two-year average, based on tax returns. In such a case, either an audited P&L statement, or signed quarterly tax return is used to support the greater income stream. The TOTAL Scorecard Refer recommendation requires a P&L and balance sheet, or income information directly from the IRS if both of the following conditions exist: More than seven months have elapsed since the business tax year s ending date; and Income to the self-employed borrower from each individual business is greater than 5% of his/her stable monthly income. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. To determine if the borrower s business is expected to generate sufficient income for his/her needs, the underwriter must carefully analyze the business s financial strength, including the: Source of the business s income; General economic outlook for similar businesses in the area. Annual earnings that are stable or increasing are acceptable, while businesses that show a significant decline in income over the analysis period are not acceptable, even if the current income and debt ratios meet FHA guidelines. AFN-G_FHAUWManual Rev. 07/30/2015 Page 92 of 296

Income Analysis: Individual Tax Returns (IRS Form 1040) Adjusting Income Analyzing IRS Form 1040 The amount shown on a borrower s Internal Revenue Service (IRS) Form 1040 as adjusted gross income (line 37) must either be increased or decreased based on the lender s analysis of the individual tax return and any related tax schedules. The table below contains guidelines for analyzing IRS Form 1040. IRS FORM 1040 HEADING Wages, Salaries and Tips DESCRIPTION An amount shown under this heading may indicate that the individual: Is a salaried employee of a corporation; or Has other sources of income. This section may also indicate that the spouse is employed, in which case the spouse s income must be subtracted from the borrower s adjusted gross income. Adjustments to Income Adjustments to income may be added back to the adjusted gross income if they are: IRA and Keogh retirement deductions; Penalties on early withdrawal of savings; Health insurance deductions; and Alimony payments. Employee Business Expenses IRA Distributions, Pensions, Annuities, and Social Security Benefits Interest and Dividend Income (Schedule B) Employee business expenses are actual cash expenses that must be deducted from the adjusted gross income. The non-taxable portion of these items may be added back to the adjusted gross income, if the income is expected to continue for the first three years of the mortgage. This taxable/tax-exempt income may be added back to the adjusted gross income only if it: Has been received for the past two years; and Is expected to continue. If the interest-bearing asset will be liquidated as a source of the cash investment, the lender must appropriately adjust the amount. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 93 of 296

Income Analysis: Individual Tax Returns (IRS Form 1040) IRS FORM 1040 HEADING Business Income and Loss (Schedule C) Capital Gain and Losses (Schedule D) Rents, Royalties, Partnerships (Schedule E) Farm Income or Loss (Schedule F) DESCRIPTION Sole proprietorship income calculated on Schedule C is business income. Depreciation or depletion may be added back to the adjusted gross income. Capital gains or losses generally occur only one time, and should not be considered when determining effective income. However, if the individual has a constant turnover of assets resulting in gains or losses, the capital gain or loss must be considered when determining the income. Three years tax returns are required to evaluate an earning trend. If the trend: Results in a gain, it may be added as effective income; or Consistently shows a loss, it must be deducted from the total income. The lender must document anticipated continuation of income through verified assets. Example: A lender can consider the capital gains as income for an individual who purchases old houses, remodels them, and sells them for profit. Any income received from rental properties or royalties may be used as income, after adding back any depreciation shown on Schedule E. Any depreciation shown on Schedule F may be added back to the adjusted gross income. Income Analysis: Schedule C Definition: Sole Proprietorship Analyzing Sole Proprietorship Tax Returns A sole proprietorship is a business run by one natural person; not a corporation. A sole proprietor files IRS Form 1040 including Schedule C. Depreciation or depletion may be added back to the adjusted gross income. AFN-G_FHAUWManual Rev. 07/30/2015 Page 94 of 296

Income Analysis: Corporate Tax Returns (IRS Form 1120) Definition: Corporation Determining Borrower Percentage of Corporate Ownership A corporation is a state-chartered business owned by its stockholders. Corporate compensation to the officers, generally in proportion to the percentage of ownership, is shown on the: Corporate tax return (Internal Revenue Service (IRS) Form 1120); and Individual tax returns. When a borrower s percentage of ownership does not appear on the tax returns, the lender must obtain the information from the corporation s accountant, along with evidence that the borrower has the right to any compensation. Analyzing Corporate Tax Returns In order to determine a self-employed borrower s income from a corporation: The adjusted business income must be determined; and Multiplied by the borrower s percentage of ownership in the business. The table below describes the items found on IRS Form 1120 for which an adjustment must be made in order to determine adjusted business income. ADJUSTMENT ITEM Depreciation and Depletion Taxable Income Fiscal Year vs. Calendar Year Cash Withdrawals DESCRIPTION OF ADJUSTMENT Add the corporation s depreciation and depletion back to the after-tax income. Taxable income is the corporation s net income before Federal taxes. Reduce taxable income by the tax liability. If the corporation operates on a fiscal year that is different from the calendar year, an adjustment must be made to relate corporate income to the individual tax return. The borrower s withdrawal of cash from the corporation may have a severe negative impact on the corporation s ability to continue operating. AFN-G_FHAUWManual Rev. 07/30/2015 Page 95 of 296

Income Analysis: S Corporation Tax Returns (IRS Form 1120S) Definition: S Corporation Analyzing S Corporation Tax Returns An S corporation is generally a small, start-up business, with gains and losses passed to stockholders in proportion to each stockholder s percentage of business ownership. Income for owners of S corporations comes from W-2 wages, and is taxed at the individual rate. The Internal Revenue Service (IRS) Form 1120S, Compensation of Officers line item is transferred to the borrower s individual IRS Form 1040. S corporation depreciation and depletion may be added back to income in proportion to the borrower's share of ownership in the corporation. In addition, the income must also be reduced proportionately by the total obligations payable by the corporation in less than a year. Important: A borrower's withdrawal of cash from the corporation may have a severe negative impact on the corporation's ability to continue operating, and must be considered in the income analysis. Income Analysis: Partnership Tax Returns (IRS Form 1065) Definition: Partnership Analyzing Partnership Tax Returns A Partnership is formed when two or more individuals form a business and share in profits, losses, and responsibility for running the company. Each partner pays taxes on his or her proportionate share of the partnership s net income. Both general and limited partnerships report income on Internal Revenue Service (IRS) Form 1065, and the partners share of income is carried over to Schedule E of IRS Form 1040. The underwriter must review IRS Form 1065 to assess the viability of the business. Both depreciation and depletion may be added back to the income in proportion to the borrower s share of income. Income must also be reduced proportionately by the total obligations payable by the partnership in less than one year. Important: Cash withdrawals from the partnership may have a severe negative impact on the partnership s ability to continue operating, and must be considered in the income analysis. AFN-G_FHAUWManual Rev. 07/30/2015 Page 96 of 296

NON-EMPLOYMENT RELATED INCOME Alimony, Child Support and Maintenance Income Alimony, Child Support and Maintenance Income Criteria Alimony, child support, or maintenance income may be considered effective, if: Payments are likely to be received consistently for the first three years of the mortgage; The borrower provides the required documentation, which includes a copy of the: o o o o Final divorce decree Legal separation agreement Court order Voluntary payment agreement The borrower can provide acceptable evidence that payments have been received during the last 12 months; such as: o o o o Cancelled checks Deposit slips Tax returns, or Court records. Notes: Periods less than 12 months may be acceptable, provided the underwriter can adequately document the payer s ability and willingness to make timely payments. Child support may be "grossed-up" under the same provisions as non-taxable income sources. Reference For more information on grossing-up, refer to HUD 4155.1 4.E.5.a Types of Non-Taxable Income AFN-G_FHAUWManual Rev. 07/30/2015 Page 97 of 296

Alimony, Child Support and Maintenance Income (Cont d) Alimony, Child Support and Maintenance Income Criteria TOTAL Scorecard Recommendation The Technology Open To Approved Lenders (TOTAL) Scorecard Accept/Approve and Refer recommendations for alimony, child support, and maintenance income require evidence Of receipt, using deposits on bank statements or cancelled checks for the most recent three months that support the amount used when qualifying; and That the claimed income will continue for at least three years. For the financial details, the underwriter should use the front and pertinent pages of the divorce decree, settlement agreement and/or court order. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. Investment and Trust Income Analyzing Interest and Dividends Interest and dividend income may be used for qualifying as long as tax returns or account statements support a two-year receipt history. This income must be averaged over two years. The underwriter should subtract any funds derived from these sources that are required for the cash investment, before calculating the projected interest or dividend income. Trust Income Income from trusts may be used for qualifying if guaranteed, constant payments will continue for at least the first three years of the mortgage term. Required trust income documentation includes a copy of the Trust Agreement or other trustee statement, confirming the: Amount of the trust; Frequency of distribution; and Duration of payments. AFN-G_FHAUWManual Rev. 07/30/2015 Page 98 of 296

Investment and Trust Income Trust Income Notes Receivable Income The borrower may withdraw funds from the trust account to use for the required cash investment if he or she provides adequate documentation that this withdrawal will not negatively affect the amount of trust income the underwriter used to determine repayment ability. In order to include notes receivable income to qualify a borrower, he or she must provide: A copy of the note, to establish the amount and length of payment; and Evidence that these payments have been consistently received for the last 12 months, in the form of: o o o Deposit slips; Cancelled checks; or Tax returns. If the borrower is not the original payee on the note, the lender must establish that the borrower is now a holder in due course, and able to enforce the note. Calculating Qualifying Ratios The underwriter should follow the steps in the table below to calculate an investment property s income or loss, whether the property to be insured is an eligible investment property, or sold through FHA s Real Estate Owned (REO) program. STEP ACTION 1 Subtract the total monthly housing payment of principal, interest, taxes and insurance (PITI) from the monthly net rental income of the subject property. Note: Calculate the monthly net rental by taking the gross rents, and subtracting the 25% reduction, or the applicable Homeownership Center s (HOC) percentage reduction for vacancies and repairs. 2 Does the calculation in Step 1 yield a positive number? If yes, add the number to the borrower s monthly gross income. If no, include the number as a recurring monthly obligation. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 99 of 296

Investment and Trust Income STEP ACTION 3 Calculate the mortgage payment-to-income ratio (top or front-end ratio) by dividing the borrower s current housing expense on his/her principal residence by the monthly gross income. Note: The monthly gross income includes any positive cash flow from the subject investment property. 4 Calculate the total fixed payment-to-income ratio (bottom or back- end ratio) by dividing the borrower s total monthly obligations, including any net loss from the subject investment property, by the borrower s total monthly gross income. Military, Government Agency, and Assistance Program Income Military Income Military personnel receive base pay, and are often entitled to additional forms of pay, such as: Variable housing allowances; Clothing allowances; Flight or hazard pay; Rations; Proficiency pay. These types of additional pay are acceptable when analyzing a borrower s income as long as the probability of such pay to continue is verified in writing. Note: The tax-exempt nature of some of the above payments should also be considered. For information about non-taxable income, refer to Types of Non- Taxable Income. VA Benefits Direct compensation for service-related disabilities from the Department of Veterans Affairs (VA) is acceptable income for qualifying, provided the lender receives documentation from the VA. Education benefits used to offset education expenses are not acceptable. AFN-G_FHAUWManual Rev. 07/30/2015 Page 100 of 296

Military, Government Agency, and Assistance Program Income Government Assistance Programs Income received from government assistance programs is acceptable for qualifying, as long as the paying agency provides documentation indicating that the income is expected to continue for at least three years. If the income will not be received for at least three years, it may be considered as a compensating factor. Unemployment income must be documented for two years, and there must be reasonable assurance that this income will continue. This requirement may apply to seasonal employment. For more information refer to Income from Seasonal Employment. Mortgage Credit Certificates If a government entity subsidizes the mortgage payments either through direct payments or tax rebates, these payments may be considered as acceptable income. Either type of subsidy may be added to gross income, or used directly to offset the mortgage payment, before calculating the qualifying ratios. Section 8 Home Ownership Vouchers A monthly subsidy may be treated as income if a borrower is receiving subsidies under the housing choice voucher home ownership option from a Public Housing Agency. Continuation of the home ownership voucher subsidy beyond the first year is subject to Congressional appropriation, however, FHA has agreed that it will assume, for the purposes of underwriting, that the subsidy will continue for at least three years. If the borrower is receiving the subsidy directly, the amount received is treated as income. The subsidy may also be treated as non-taxable income and grossed up by 25%, which means the amount of subsidy, plus 25% of that subsidy, may be added to borrower s income from employment and/or other sources. AFN-G_FHAUWManual Rev. 07/30/2015 Page 101 of 296

Military, Government Agency, and Assistance Program Income Section 8 Home Ownership Vouchers Underwriters may treat this subsidy as an offset to the monthly mortgage payment (i.e. reduce the monthly mortgage payment by the amount of the home ownership assistance payment before dividing by the monthly income to determine the payment-to-income and debt-to-income ratios). As the subsidy payment must not pass through the borrower s hands, the assistance payment must be paid directly to the servicing lender, or placed in an account that only the servicing lender may access. Note: Assistance payments made directly to the borrower must be treated as income. Rental Income Analyzing Rental Income Stability Rent received for properties owned by the borrower is acceptable income for qualifying as long as the lender can document the stability of the rental income through a(n): Current lease; Agreement to lease; or Rental history over the previous 24 months that is free of unexplained gaps greater than three months (such gaps could be explained by student, seasonal or military renters, or property rehabilitation). A separate schedule of real estate is not required for rental properties as long as all properties are documented on the Uniform Residential Loan Application (URLA). Note: The underwriting analysis may not consider rental income from any property being vacated by the borrower, except under the circumstances described in Exceptions to the Exclusion of Rental Income from a Principal Residence Being Vacated by a Borrower AFN-G_FHAUWManual Rev. 07/30/2015 Page 102 of 296

Rental Income Rental Income from Borrower Occupied Property Income from Roommates in a Single Family Property The rent for multiple unit property where the borrower resides in one or more units and charges rent to tenants of other units may be used for qualifying purposes. Projected rent for the tenant-occupied units may only be considered gross income, after deducting the Homeownership Center s (HOC) vacancy and maintenance factor, and not be used as a direct offset to the mortgage payment. Income from roommates in a single family property occupied as the borrower s primary residence is not acceptable for qualifying. Rental income from boarders, however, 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. Documenting Rental Income Analysis of the following required documentation is necessary to verify all borrower rental income: IRS Form 1040 Schedule E; and Current leases/rental agreements. Analyzing IRS Form 1040 Schedule E Schedule E to the Internal Revenue Service (IRS) Form 1040 is required to verify all rental income. Depreciation shown on Schedule E may be added back to the net income or loss. Positive rental income is considered gross income for qualifying purposes, while negative income must be treated as a recurring monthly liability. AFN-G_FHAUWManual Rev. 07/30/2015 Page 103 of 296

Rental Income Using Current Leases to Analyze Rental Income The borrower can provide a current signed lease or other rental agreement for a property that was acquired since the last income tax filing, which is not shown on Schedule E. In order to calculate the rental income: Reduce the gross rental amount by 25% (or the percentage developed by the jurisdictional HOC) for vacancies and maintenance; Subtract PITI, and any homeowners association (HOA) dues; and Apply the resulting amount to o o Income, if positive; or Recurring debts, if negative. Exclusion of Rental Income from Property Being Vacated Underwriters may not consider any rental income from a borrower s principal residence that is being vacated in favor of another principal residence, except under the conditions described in Exceptions to the Exclusion of Rental Income. Notes: This policy assures that a borrower either has sufficient income to make both mortgage payments without any rental income, or has an equity position which makes it unlikely that he or she will default on the mortgage on the property being vacated. This applies solely to a principal residence being vacated in favor of another principal residence. It does not apply to existing rental properties disclosed on the loan application and confirmed by Schedule E of IRS Form 1040. Exceptions to the Exclusion of Rental Income When a borrower vacates a principal residence in favor of another principal residence, the rental income, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA HOC, may be considered in the underwriting analysis, under the circumstances listed in the table below. AFN-G_FHAUWManual Rev. 07/30/2015 Page 104 of 296

Rental Income EXCEPTION Relocations DESCRIPTION Borrower is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally-recognized commuting distance. Sufficient Equity Vacated Property in A properly executed lease agreement (that is, a lease signed by the borrower and the lessee) of at least one year s duration after the loan is closed is required. Note: FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence that the first month s rent was paid to the lessee. Borrower has a loan-to-value (LTV) ratio of 75% or less, as determined by: A residential appraisal no more than six months old; or Comparing the unpaid principal balance to the original sales price of the property. Note: The appraisal may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, Exterior-Only Inspection Residential Appraisal Report or, for condominium units, form Fannie Mae 1075/Freddie Mac 466, Exterior-Only Inspection Individual Condominium Unit Appraisal Report. Non-taxable and Projected Income Types of Nontaxable Income Certain types of regular income may not be subject to Federal tax, such as: Some portion of Social Security; Some Federal government employee retirement income; Railroad Retirement benefits; Some state government retirement income; Certain types of disability and public assistance payments; Child support; Military allowances; and Other income documented as exempt from Federal income tax. AFN-G_FHAUWManual Rev. 07/30/2015 Page 105 of 296

Non-Taxable and Projected Income Grossing Up Non-taxable Income The amount of continuing tax savings attributed to regular income not subject to Federal taxes may be added to gross income. The percentage of non-taxable income that may be added cannot exceed appropriate tax rate for the income. Additional allowances for dependents are not acceptable. The lender: Must document and support the amount of income grossedup for any non-taxable income source; and Should use the same tax rate the borrower used to calculate his/her income tax from the previous year. Note: If the borrower is not required to file a Federal tax return, the tax rate to use is 25%. Analyzing Projected Income Projected or hypothetical income is not acceptable for qualifying purposes. However, exceptions are permitted for income from: Cost-of-living adjustments, Performance raises, and Bonuses. For the above exceptions to apply, the income must be verified in writing by the employer, and scheduled to begin within 60 days of loan closing. Projected Income for a New Job Projected income is acceptable for qualifying purposes for a borrower scheduled to start a new job within 60 days of loan closing if there is a guaranteed, non-revocable contract for employment. Underwriter must verify that the borrower will have sufficient income or cash reserves to support the mortgage payment and any other obligations between loan closing and the start of employment. The loan is not eligible for endorsement if the loan closes more than 60 days before the borrower starts the new job. To be eligible for endorsement, the lender must obtain from the borrower a pay stub or other acceptable evidence indicating that he or she has started the new job. Examples: A teacher whose contract begins with the new school year, or a physician beginning his/her residency. AFN-G_FHAUWManual Rev. 07/30/2015 Page 106 of 296

QUALIFYING DTI RATIOS Borrower Qualifying DTI Calculations Qualifying ratios are used to determine if the borrower can reasonably be expected to meet the expenses involved in home ownership, and provide for his/her family. In order to make this determination, the lender must calculate: The Mortgage Payment Expense to Effective Income Ratio (below); and The Total Fixed Payment to Effective Income Ratio, as described below. Note: The underwriter must calculate the qualifying ratios for entry into the Automated Underwriting System (AUS) in order to be evaluated by the Technology Open To Approved Lenders (TOTAL) Scorecard. Mortgage Payment Expense The relationship of the mortgage payment to income is considered acceptable if the total mortgage payment does not exceed 31% of the gross effective income. A ratio exceeding 31% may be acceptable only if significant Compensating Factors are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. Note: The total mortgage payment includes: Principal and interest; Escrow deposits for real estate taxes; Hazard insurance; Mortgage insurance premium; Homeowners association dues; Ground rent; Special assessments; and Payments for any acceptable secondary financing. AFN-G_FHAUWManual Rev. 07/30/2015 Page 107 of 296

Borrower Qualifying Total Fixed Payments The relationship of total obligations to income is considered acceptable if the total mortgage payment and all recurring monthly obligations do not exceed 43% of the gross effective income. A ratio exceeding 43% may be acceptable only if significant Compensating Factors are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. Estimating Real Estate Taxes For real estate taxes, underwriters must use accurate estimates of monthly property tax escrows when qualifying borrowers. In new construction cases, property tax estimates must be based on the land and completed improvements, not just on the land value. Reference Refer to AFN Property Tax Calculation Policy and Bulletin 15-006 for additional guidance. Borrower Re- Qualification AFN must re-qualify a borrower if there is any change in the: The interest rate; or Discount points; or Debts. Compensating Factors Documenting Compensating Factors Compensating factors used to justify approval of mortgage loans with ratios that exceed benchmark guidelines must be recorded on the Underwriter Comments section of Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. Any compensating factor used to justify mortgage approval must also be supported by documentation. AFN-G_FHAUWManual Rev. 07/30/2015 Page 108 of 296

Compensating Factors Documenting Compensating Factors Identifying Compensating Factors TOTAL Scorecard Recommendation The Technology Open To Approved Lenders (TOTAL) Scorecard Accept recommendation does not require documented compensating factors, even if qualifying ratios have exceeded FHA benchmark guidelines. TOTAL Recommendations do not apply to manually downgraded loans. Additional conditions may apply. The table below describes the compensating factors that may be used to justify approval of mortgage loans with ratios that exceed FHA benchmark guidelines. COMPENSATING FACTOR Housing Expense Payments Down Payment Accumulated Savings GUIDELINE DESCRIPTION The borrower has successfully demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly housing expenses for the new mortgage over the past 12-24 months. The borrower makes a large down payment of 10% or higher toward the purchase of the property. The borrower has demonstrated: An ability to accumulate savings; and A conservative attitude toward using credit. Previous Credit History Compensation or Income Not Reflected in Effective Income A borrower s previous credit history shows that he or she has the ability to devote a greater portion of income to housing expenses. The borrower receives documented compensation or income that is not reflected in effective income, but directly affects his/her ability to pay the mortgage. This type of income includes food stamps and similar public benefits. Minimal Housing Expense Increase There is only a minimal increase in the borrower s housing expense. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 109 of 296

Compensating Factors COMPENSATING FACTOR Substantial Cash Reserves GUIDELINE DESCRIPTION Borrower has substantial documented cash reserves (at least three months worth) after closing. The lender must judge if the substantial cash reserve asset is liquid or readily convertible to cash, and can be done so absent retirement or job termination, when determining if the asset can be included as cash reserves, or cash to close. Funds and/or assets that are not to be considered as cash reserves include: Equity in other properties; and Proceeds from a cash-out refinance. Substantial Cash Reserves The underwriter may use a portion of a borrower's retirement account, subject to the following conditions. To account for withdrawal penalties and taxes, only 60% of the vested amount of the account may be used. The lender must document 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 under these circumstances, 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. Similarly, any gift funds that remain in the borrower's account following loan closing, subject to proper documentation, may be considered as cash. Note: Reserves from retirement accounts and gifts as described above may be considered as cash reserves when scoring the mortgage application through TOTAL. Reference: For information on acceptable sources of cash reserve funding, refer to General Information on Acceptable Sources of Borrower Funds. Substantial Non- Taxable Income The borrower has substantial non-taxable income. Note: This applies if no adjustment was previously made when computing ratios. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 110 of 296

Compensating Factors COMPENSATING FACTOR Potential for Increased Earnings Primary Wage-Earner Relocation GUIDELINE DESCRIPTION The borrower has a potential for increased earnings, as indicated by job training or education in his/her profession. The home is being purchased because the primary wage-earner is relocating, and the secondary wage-earner Has an established employment history; Is expected to return to work; and Has reasonable prospects for securing employment in a similar occupation in the new area. Note: The underwriter must document the availability of the potential employment. AFN-G_FHAUWManual Rev. 07/30/2015 Page 111 of 296

BORROWER FUNDS TO CLOSE Settlement Requirements Estimating Settlement Requirements For each transaction, the lender must provide the initial Good Faith Estimate (GFE), all revised Good Faith Estimates and a final HUD-1 Settlement Statement, consistent with the Real Estate Settlement Procedures Act (RESPA), to determine the cash required to close the mortgage transaction. In addition to the minimum down payment requirement described in Closing Cost and Minimum Cash Investment Requirements, additional borrower expenses must be included in the total amount of cash the borrower must provide at mortgage settlement. Such additional expenses include, but are not limited to: Closing costs, such as those customary and reasonable costs necessary to close the mortgage loan; Prepaid items; Discount points; Non-realty or personal property; Upfront mortgage insurance premium (UFMIP) amounts; Repairs and improvements; Real estate broker fees; Mortgage broker fees; Premium pricing on FHA-insured mortgages; and Yield spread premiums. Disclosure of Origination Charges AFN must include the sum of all fees and charges from origination-related charges in Box 1 on page 2 of the Good Faith Estimate (GFE). The figure in Box 1 represents all compensation to the lender and/or broker for originating the loan and will most often exceed the specific origination fee caps set for government programs. AFN-G_FHAUWManual Rev. 07/30/2015 Page 112 of 296

Settlement Requirements Disclosure of Origination Charges Prepaid Items The GFE requires that lenders provide an aggregated cost for origination services. Lenders may, however, itemize specific distinct origination fees and charges in the empty 800 lines of the HUD-1 Settlement Statement, to the left of the column, if required by a government program or state law to provide more detailed information on those fees and charges. Prepaid items are collected at closing to cover: Accrued and non-accrued hazard insurance premiums; Mortgage insurance premiums; Taxes; Per diem interest; and Other similar fees and charges. Per Diem Interest AFN must use a minimum of 15 days of per diem interest when estimating prepaid items on the Good Faith Estimate (GFE). To reduce the burden on borrowers whose loans were scheduled to close at the end of the month, but did not due to unforeseen circumstances, AFN and borrowers may agree to credit the per diem interest to the borrower and have the mortgage payments begin the first of the succeeding month. The dollar amount of the per diem interest credit may not be used to reduce the borrower s required cash investment. Discount Points Discount points paid by the borrower: Become part of the total cash required to close; Are not eligible for meeting the minimum down payment requirement; and Must appear on line 10 of page 3 of Form HUD-92900-A, HUD/VA Addendum to Uniform Residential Loan Application. Non-realty or Personal Property Non-realty (chattel) or personal property items that the borrower agrees to pay for separately, including the amount subtracted from the sales price when determining the maximum mortgage, are included in the total cash requirements for the loan. AFN-G_FHAUWManual Rev. 07/30/2015 Page 113 of 296

Settlement Requirements UFMIP Amounts Any upfront mortgage insurance premium (UFMIP) amounts paid in cash are added to the total cash settlement requirements. The UFMIP must be: Entirely financed into the mortgage, except any amount less than $1.00; or Paid entirely in cash and all mortgage amounts rounded down to a multiple of $1.00. Repairs and Improvements Real Estate Broker Fees Repairs and improvements, or any portion paid by the borrower that cannot be financed into the mortgage, are part of the borrower s total cash requirements. If a borrower is represented by a real estate broker and must pay any fee directly to the broker, that expense must: Be included in the total of the borrower s settlement requirements; and Appear on the HUD-1 Settlement Statement. If the seller pays the broker fee as part of the sales commission, it is not considered an inducement to purchase, or part of the seller contributions limitation, as long as the seller is paying only the normal sales commission for that market. Any additional seller-paid commission to the broker is considered an inducement to purchase. To determine if the seller paid a buyer-broker fee in addition to the normal sales commission for the market, the lender must obtain a copy of the original listing agreement, and compare it with the HUD-1 Settlement Statement. Refer to Inducements to Purchase for additional information. Premium Pricing AFN may pay a borrower s closing costs, and/or prepaid items by "premium pricing." Closing costs paid in this manner do not need to be included as part of the seller contribution limitation. The funds derived from a premium priced mortgage: AFN-G_FHAUWManual Rev. 07/30/2015 Page 114 of 296

Settlement Requirements Premium Pricing May never be used to pay any portion of the borrower s down payment; Must be disclosed on the GFE and the HUD-1 Settlement Statement; Must be used to reduce the principal balance if the premium pricing agreement establishes a specific dollar amount for closing costs and prepaid expenses, With any remaining funds in excess of actual costs reverting to the borrower; and May not be used for payment of: o o o o Debts Collection accounts Escrow shortages or missed mortgage payments Judgments Seller Credits on the HUD-1 Settlement Statement RESPA regulations do not require or permit the inclusion or disclosure of seller-paid credits on the GFE. On the HUD-1 Settlement Statement: Charges must be displayed in the borrower s column; and Credit to offset charges must be listed in Section J, Summary of Borrower s Transaction on lines 204-209, with corresponding reduction to the seller s proceeds in Section K, Summary of Seller s Transaction on lines 506-509. When the seller contributes to more than one expense, the seller credit shown on the HUD-1 must reflect the lump sum payment. Closing Costs as Down Payment Rejecting Charges and Fees Closing costs may not be used to help meet the minimum 3.5% down payment requirement. Closing costs are not considered in the mortgage amount or down payment calculation for purchase money mortgages. The appropriate Homeownership Center (HOC) may reject charges based on what is reasonable and customary for the area. AFN-G_FHAUWManual Rev. 07/30/2015 Page 115 of 296

Settlement Requirements Per Diem Interest and Interest Credits AFN may collect interim or per diem interest from the date it disburses, or relinquishes control of the loan proceeds. Interim interest for the period preceding amortization must be computed using a daily factor of 1/365th of the annual rate. In certain circumstances, AFN allows loans to fund in the month following the month loan documents are issued, hence allowing for an interest credit. This is known as, funding into the month. AFN allows FHA loans to fund with a maximum of 7 days interest credit. For example: If we draw docs in April and the loan does not fund until May, this results in an interest credit and we may NOT fund past the 8 th day of May. Note: A per diem interest credit may not result in cash back to the borrower. Closing Costs and Sources of Funds Closing Cost and Minimum Cash Investment Requirements Under most FHA programs, the borrower is required to make a minimum down payment into the transaction of at least 3.5% of the lesser of the property appraised value or the sales price. Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement. Funds used to cover the required minimum down payment, as well as closing costs and fees, must come from acceptable sources and must be verified and properly documented. References: For more information refer to Settlement Requirements; and Acceptable Sources of Borrower Funds. Determining Amount Needed for Closing The amount of cash needed by the borrower to close an FHAinsured mortgage is the difference between the: Total cost to acquire the property, including the expenses listed in HUD 4155.1 5.A.1.a ; and Amount of the mortgage, excluding any UFMIP. Reference: Refer to Settlement Requirements Needed to Close (below) for additional information. AFN-G_FHAUWManual Rev. 07/30/2015 Page 116 of 296

Closing Costs and Sources of Funds Fees and Other Closing Costs AFN may charge and collect from borrowers those customary and reasonable costs necessary to close the mortgage loan. Borrowers may not pay a tax service fee. FHA no longer limits the origination fee to one percent of the mortgage amount for its standard mortgage insurance programs. However, both the Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance programs retain their statutory origination fee caps. AFN may charge and collect: A supplemental origination fee on Section 203(k) rehabilitation mortgages; or Two percent on HECMs. References For more information refer to Collecting Customary and Reasonable Fees; The Supplemental Origination Fee for 203(k) Mortgages; and The HECM Origination Fee. Acceptable Sources of Funds The table below lists the acceptable sources of borrower funds and a reference for locating additional information on each source. ACCEPTABLE SOURCE OF FUNDS Earnest money deposit Savings and checking accounts Cash saved at home Cash accumulated with private savings club Gift Funds REFERENCE Refer to Cash Saved at Home and Savings/Checking Accounts as Acceptable Sources of Funds Refer to Gifts as an Acceptable Source of Funds and Gift Fund Required Documentation (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 117 of 296

Closing Costs and Sources of Funds ACCEPTABLE SOURCE OF FUNDS Savings bonds IRAs 401(k) and Keogh accounts Stocks and Bonds Thrift Savings Plans Sales proceeds Sale of personal property Commissions from sale Trade Equity Rent Credit Sweat Equity Collateralized loans Grants and loans Employer s Guarantee Plans Employer Assistance Plans REFERENCE Refer to Savings Bonds; IRAs, Thrift Savings Plans, 401(k)s, and Keogh Accounts; and Stocks and Bonds. Refer to Property-Related Acceptable Sources of Funds Refer to Loans and Grants as Acceptable Sources of Funds Refer to Employer Assistance Plans. Earnest Money Deposit The lender must verify and document the deposit amount and source of funds, if the amount of the earnest money deposit: Exceeds 2% of the sales price; or Appears excessive based on the borrower s history of accumulating savings. Satisfactory documentation includes: A copy of the borrower s cancelled check certification from the deposit-holder acknowledging receipt of funds; or Separate evidence of the source of funds. Separate evidence includes a verification of deposit (VOD) or bank statement showing that the average balance was sufficient to cover the amount of the earnest money deposit at the time of the deposit. AFN-G_FHAUWManual Rev. 07/30/2015 Page 118 of 296

Closing Costs and Sources of Funds Savings and Checking Accounts A VOD, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account, or the account was recently opened, the underwriter must obtain from the borrower a credible explanation and documentation of the source of the funds. TOTAL Scorecard Recommendation If the loan receives an Accept/Approve or Refer recommendation from the Technology Open To Approved Lenders (TOTAL) Scorecard, the underwriter must Obtain an explanation and documentation for recent large deposits in excess of 2% of the property sales price; and Verify that any recent debts were not incurred to obtain part, or all, of the required cash investment on the property being purchased. Note: TOTAL recommendations do not apply to manually downgraded loans. Additional conditions may apply. Cash Saved at Home Private Savings Clubs IRAs, Thrift Savings Plans, 401(k), and Keogh Accounts Cash saved at home is not allowed. Cash accumulated with private savings clubs is not allowed. 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. AFN-G_FHAUWManual Rev. 07/30/2015 Page 119 of 296

Closing Costs and Sources of Funds IRAs, Thrift Savings Plans, 401(k), and Keogh Accounts Notes: 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 assets not used to meet closing requirements, after adjusting for taxes and penalties, may be counted as reserves. TOTAL Scorecard Recommendation If the loan receives an Accept/Approve or Refer recommendation the lender must document the terms and conditions for withdrawal and/or borrowing, and that the borrower is eligible for these withdrawals. TOTAL recommendations do not apply to manually downgraded loans. Additional conditions may apply. Stocks and Bonds The lender may use the most recent monthly or quarterly statement provided by the stockbroker or financial institution managing the portfolio to verify the value of stocks and bonds. The borrower s actual receipt of funds must be verified and documented. TOTAL Scorecard Recommendation If the loan receives an Accept/Approve recommendation, the lender is not required to provide evidence of liquidation. TOTAL recommendations do not apply to manually downgraded loans. Additional conditions may apply. Savings Bonds Government-issued bonds are counted at the original purchase price, unless eligibility for redemption and the redemption value are confirmed. Note: The actual receipt of funds at redemption must be verified. Gift Funds In order for funds to be considered a gift, there must be no expected or implied repayment of the funds to the donor by the borrower. The portion of the gift not used to meet closing requirements may be counted as reserves. AFN-G_FHAUWManual Rev. 07/30/2015 Page 120 of 296

Closing Costs and Sources of Funds Gift Funds Note: The portion of the gift not used to meet closing requirements may be counted as reserves; however, gifts may not be used for reserves if the subject property is 3 to 4 units. Also, gifts may not be used as reserves for manually underwritten loans. Who May Provide a Gift An outright gift of cash investment is acceptable if the donor is: The borrower s relative; The borrower s employer or labor union; A close friend with a clearly defined and documented interest in the borrower; A charitable organization; A governmental agency or public entity that has a program providing home ownership assistance to: o o Low- and moderate-income families; or First-time homebuyers. Who May Not Provide a Gift The gift donor may not be a person or entity with an interest in the sale of the property, such as: The seller; The real estate agent or broker; The builder; or An associated entity. Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price. Note: This applies to properties where the seller is a government agency selling foreclosed properties, such as the U.S. Department of Veterans Affairs (VA) or Rural Housing Services. Refer to Inducements to Purchase for more information. AFN-G_FHAUWManual Rev. 07/30/2015 Page 121 of 296

Closing Costs and Sources of Funds Gift Funds Verifying Gift Fund Source Regardless of when gift funds are made available to a borrower, the underwriter must be able to determine that the gift funds were not provided by an unacceptable source, and were the donor s own funds. When the transfer occurs at closing, the underwriter is responsible for verifying that the closing agent received the funds from the donor for the amount of the gift, and that the funds were from an acceptable source. As a general rule, FHA is not concerned with how a donor obtains gift funds, provided that the funds are not derived in any manner from a party to the sales transaction. Donors may borrow gift funds from any other acceptable source, provided the mortgage borrowers are not obligors to any note to secure money borrowed to give the gift. Documentation Requirements The lender must document any gift funds through a gift letter, signed by the donor and borrower. The gift letter must: Show the donor s name, address, telephone number; Specify the dollar amount of the gift; and State the nature of the donor s relationship to the borrower and that no repayment is required. The underwriter must document the transfer of gift funds from the donor to the borrower. The table below describes the requirements for the transfer of gift funds. IF THE GIFT FUNDS... THEN THE UNDERWRITER MUST... Are in the borrower s account Obtain: A copy of the withdrawal document showing that the withdrawal was from the donor s account; and The borrower s deposit slip and bank statement showing the deposit. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 122 of 296

Closing Costs and Sources of Funds IF THE GIFT FUNDS... THEN THE UNDERWRITER MUST... Are to be provided at closing, and Are in the form of a certified check from the donor s account 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 the closing agent Are being borrowed by the donor, and documentation from the bank or other savings account is not available Obtain: Bank statement showing the withdrawal from the donor s account; and Copy of the certified check. Have the donor provide a withdrawal document or cancelled check for the amount of the gift, showing that the funds came from the donor s personal account. Have the donor provide documentation of the wire transfer. Note: The lender must obtain and keep the documentation of the wire transfer in its mortgage loan application binder. While the document does not need to be provided in the insurance binder, it must be available for inspection by FHA s Quality Assurance Division (QAD) when that office conducts its onsite review. Have donor provide written evidence the funds were borrowed from an acceptable source, not from a party to the transaction, including the lender. Important: Cash on hand is not an acceptable source of donor gift funds. Gift Funds TOTAL Scorecard Recommendation The borrower must list on the loan application or in a gift letter, for each cash gift received, the: Donor s name, address, telephone number; Donor s relationship to the borrower; and Dollar amount of the gift. If sufficient funds required for closing are not already verified in the borrower s account(s), lender must document the transfer of gift funds to the borrower s account(s), in accordance with instructions provided in Documenting the Transfer of Gift Funds. Note: TOTAL recommendations do not apply to manually downgraded loans. Additional conditions may apply. AFN-G_FHAUWManual Rev. 07/30/2015 Page 123 of 296

Closing Costs and Sources of Funds Sale of Personal Property In order to obtain cash for closing, a borrower may sell various items of personal property, such as: Baseball Card Collections Cars Coins Recreational Vehicles Stamps Documenting Sales of Personal Property If a borrower plans to sell personal property items to obtain funds for closing, he or she must provide A satisfactory estimate of the value of those items; Proof of ownership; and Evidence the items were sold. The estimated value of the items being sold may be in the form of published value estimates issued by organizations, such as: Automobile dealers; or Coin collecting associations/dealers; or A separate written appraisal by a qualified appraiser with no financial interest in the loan transaction. Only the lesser of the estimated value or actual sales price will be considered as assets to close. Net Sales Proceeds from Real Property Net proceeds from an arms-length sale of a currently owned property may be used for the cash investment on a new house. The borrower must provide a fully executed HUD-1 Settlement Statement as satisfactory evidence of accrued cash sale proceeds. If the property has not sold by the time of underwriting, the underwriter must condition the loan approval on verification of the actual proceeds received by the borrower. The underwriter must document the actual sale and sufficiency of the net proceeds required for settlement. AFN-G_FHAUWManual Rev. 07/30/2015 Page 124 of 296

Closing Costs and Sources of Funds Net Sales Proceeds from Real Property Real Estate Commission from Sale of the Subject Property Note: If the property has not sold by the time of the subject settlement, the existing mortgage must be included as a liability for qualifying purposes. If the borrower is a licensed real estate agent entitled to a real estate commission from the sale of the property being purchased, then he or she may use that amount for the cash investment, with no adjustment to the maximum mortgage required. A family member entitled to the commission may also provide it as gift funds to the borrower. Reference Refer to Gifts as an Acceptable Source of Funds for additional guidance. Trade Equity The borrower may agree to trade his/her real property to the seller as part of the cash investment. The amount of the borrower s equity contribution is determined by: Using the lesser of the property s appraised value or sales price; and Subtracting all liens against the property being traded, along with any real estate commission. In order to establish property value, the borrower must provide: A residential appraisal no more than six months old to determine the property s value; and Evidence of ownership. Note: If property being traded has an FHA-insured mortgage, assumption processing requirements and restrictions apply. Reference Refer to Policy on Assumptions for additional guidance. AFN-G_FHAUWManual Rev. 07/30/2015 Page 125 of 296

Closing Costs and Sources of Funds Trade-In of Manufactured Home Rent Credit An acceptable source of borrower cash investment commonly associated with manufactured homes is the sale or trade-in of another manufactured home that is not considered real estate. Trade-ins for cash funds are considered a seller inducement and are not permitted. The cumulative amount of rental payments that exceed the appraiser s estimate of fair market rent may be considered accumulation of the borrower s cash investment. The endorsement package must include the: Rent with option to purchase agreement; and Appraiser s estimate of market rent. Conversely, the underwriter must treat the rent as an inducement to purchase, with an appropriate reduction to the mortgage, if the sales agreement reveals that the borrower: Has been living in the property rent-free; or Has an agreement to occupy the property at a rental amount considerably below fair market value, in anticipation of eventual purchase. Note: When rent credit is considered, the underwriter will use the current market rents (from appraiser's estimate). Although a copy of the executed lease is required, the underwriter will use current market rents in all calculations. Exception: An exception may be granted when a builder: Fails to deliver a property at an agreed-to time; and Permits the borrower to occupy an existing or other unit for less than market rent until construction is complete. Equity Credit Only family members may provide equity credit as a gift on property being sold to other family members. The restrictions on gifts previously discussed in this topic and the restriction on equity credit may be waived by the jurisdictional Homeownership Center (HOC), provided that the seller is contributing to or operating an acceptable affordable housing program. AFN-G_FHAUWManual Rev. 07/30/2015 Page 126 of 296

Closing Costs and Sources of Funds Sweat Equity Paying Off Borrower s Consumer Debt Not allowed. FHA regards the payment of consumer debt by third parties as an inducement to purchase. When someone other than a family member has paid off debts or other expenses on behalf of the borrower: Funds must be treated as an inducement to purchase; and There must be a dollar for dollar reduction to the sales price when calculating the maximum insurable mortgage. Note: The dollar for dollar reduction to the sales price also applies to gift funds not meeting requirements that the gift be: For down payment assistance; and Provided by an acceptable source. Refer to Inducements to Purchase for more information. Collateralized Loans The borrower may obtain a loan for the total required investment, as long as satisfactory evidence is provided that the loan is fully secured by assets such as investment accounts or real property. These assets may include stocks, bonds, and real estate other than the property being purchased. Certain types of loans secured against deposited funds, where repayment may be obtained through extinguishing the asset, do not require consideration of repayment for qualifying purposes. The asset securing the loan may not be included as assets to close, or otherwise considered available to the borrower. The deposited funds can be used for: Signature loans on certificates of deposit; Loans on the cash value of life insurance policies; or Loans secured by 401(k) accounts. Who May Provide Collateralized Loans An independent third party must provide the borrowed funds for collateralized loans. AFN-G_FHAUWManual Rev. 07/30/2015 Page 127 of 296

Closing Costs and Sources of Funds Collateralized Loans Who May Not Provide Collateralized Loans The seller, real estate agent or broker, lender, or other interested party may not provide such funds. Unacceptable borrowed funds include: Unsecured signature loans; Cash advances on credit cards; Borrowing against household goods and furniture; and Other similar unsecured financing. Disaster Relief Grants and Loans Grants or loans from state or Federal agencies, such as the Federal Emergency Management Agency (FEMA), that provide immediate housing assistance to individuals displaced due to a natural disaster, may be used for the borrower s cash investment. Secured or unsecured disaster relief loans administered by the Small Business Association (SBA) may also be used. If the SBA loan will be secured by the property being purchased, it must be clearly subordinate to the FHA-insured mortgage. Note: Any monthly payment arising from this type of loan must be included in the qualifying ratios. Employer Assistance Plans If the employer pays the following to attract or retain valuable employees, the payment is considered employee compensation: Employee s closing costs; Mortgage insurance premiums; or Any portion of the cash investment. An adjustment to the maximum mortgage amount is not required. If the employer provides this benefit after loan settlement, the borrower must provide evidence of sufficient cash for closing. Note: A salary advance cannot be considered as assets to close, since it represents an unsecured loan. AFN-G_FHAUWManual Rev. 07/30/2015 Page 128 of 296

Closing Costs and Sources of Funds Relocation Guaranteed Purchase If the borrower s employer guarantees to purchase the borrower s previous residence as a result of relocation, he or she must submit evidence of the agreement. The net proceeds must also be guaranteed. Charitable Organizations That Lose or Give Up Their Federal Tax- Exempt Status If a charitable organization makes a gift that is to be used for all, or part, of a borrower s down payment, and the organization providing the gift loses or gives up its Federal tax-exempt status, FHA will recognize the gift as an acceptable source of the down payment provided that the: Gift is made to the borrower; Gift is properly documented; and Borrower has entered into a contract of sale (including any amendments to purchase price) on or before the date the internal revenue service (IRS) officially announces that the charitable organization s tax-exempt status is terminated. Down Payment Assistance Programs (DAPs) Down Payment Assistance Program (DAP) Approval FHA does not approve down payment assistance programs administered by charitable organizations, such as nonprofits. FHA also does not allow nonprofit entities to provide gifts to pay off: Installment loans Credit cards Collections Judgments Liens, and Similar debts. Underwriters must ensure that a gift provided by a charitable organization meets the appropriate FHA requirements, and that the transfer of funds is properly documented. AFN-G_FHAUWManual Rev. 07/30/2015 Page 129 of 296

Down Payment Assistance Programs DAP Provider Eligibility AFN is responsible for ensuring that an entity providing down payment assistance is a charitable organization as defined by Section 501(a) of the Internal Revenue Code (IRC) of 1986 pursuant to Section 501(c) (3) of the IRC. One resource for this information is IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, which contains a list of organizations eligible to receive tax-deductible charitable contributions. The IRS has an online version of this list which can be found at http://apps.irs.gov/app/pub78. Use the following instructions to obtain the latest update: 1. Enter search data and click "Search"; 2. Click "Charities & Non-Profits" button in the header row; 3. Click "Search for Charities" under "Charities & Non-Profits Topics" on the left-hand side of the page; 4. Click "Recent Revocations and Deletions from Cumulative List" under the "Additional Information" heading in the middle of the page; and 5. Click the name of the organization if the name appears on the list displayed. All DAPs must be approved by AFN and in good standing with HUD. Refer to the AFN Approved Down Payment Assistance Programs on the Intranet. AFN-G_FHAUWManual Rev. 07/30/2015 Page 130 of 296

SECONDARY FINANCING General Information Definition of Secondary Financing Any financing other than the first mortgage that creates a lien against the property is considered secondary financing. Such financing is not considered a gift, even if it is a "soft" or "silent" second, or has other features forgiving the debt. Note: A "soft" or "silent" second is secondary financing with no monthly repayment provisions. Ability to Repay The required monthly payment on both the FHA-insured first mortgage and the second mortgage or lien plus other housing expenses and all recurring charges cannot exceed the borrower s reasonable ability to repay. Any periodic payments due on the second mortgage must be calculated as an equal monthly payment. Documentation Requirements The loan file must include: Documentation showing the amount of funds provided to the borrower for each transaction; and Copies of the loan instruments. Notes: FHA reserves the right to reject any secondary financing That does not serve the needs of the intended borrower; or Where the costs to the participant outweigh the benefits derived by the borrower. Costs incurred for participating in a down payment assistance secondary financing program may only be included in the amount of the second lien. AFN-G_FHAUWManual Rev. 07/30/2015 Page 131 of 296

Providers of Secondary Financing Private Individuals or Other Organizations Family Members for Purchase Transactions FHA will insure a first mortgage loan on a property that has a second mortgage or lien held by an individual or a company, provided that: The secondary financing is disclosed at the time of application; The required minimum cash investment is not financed; The insured first mortgage does not exceed FHA mortgage limits; The combined loan-to-value (CLTV) ratio of the first and subordinate liens does not exceed the applicable FHA loanto-value (LTV) limit; The borrower can afford the total amount of the payments; Any periodic payments are level and monthly; There is no balloon payment during the first ten years; and There is no prepayment penalty. Repayment Terms Repayment terms for a second mortgage from an organization or a private individual must: Not include a balloon payment before ten years (or other such term acceptable to FHA), unless the property is sold or refinanced; and Permit repayment by the borrower, without penalty, after giving the lender 30 days advance notice. FHA permits lending from family members on a secured or unsecured basis, up to 100% of the borrower s required funds to close. This may include the down payment, closing costs, prepaid expenses, and discount points. If the loan from the family member, whether borrowed from an acceptable source or the family member s own savings, is secured by the subject property, only the family member provider may be the note holder. AFN-G_FHAUWManual Rev. 07/30/2015 Page 132 of 296

Providers of Secondary Financing Family Members for Purchase Transactions FHA will not approve any form of securitization of the note that results in any entity other than the family member being the note holder, whether at loan settlement or at any time during the mortgage life cycle. A family member is defined as a borrower s: Child (son, stepson, daughter, stepdaughter), parent, or grandparent; Spouse; Legally adopted son or daughter, including a child who is placed with the borrower by an authorized agency for legal adoption; Foster child. Terms and Conditions The table below describes additional policies regarding the terms and conditions for FHA-insured loans with secondary financing provided by family members. CATEGORY POLICY DESCRIPTION Maximum insurable mortgage Combined loan-to-value (CLTV) limit on financing The maximum insurable mortgage amount is not affected by loans from family members. The combined loan-to-value (CLTV) limit on financing may not exceed 100% of the: Lesser of the property s o o Appraised value, or Sales price, plus Normal closing costs, prepaid expenses, and discount points. Borrower cash back A family member may lend 100% of the borrower s required funds to close, but cash back to the borrower at closing (beyond the refund of any earnest money deposit) is not permitted. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 133 of 296

Providers of Secondary Financing CATEGORY Secondary financing payments POLICY DESCRIPTION If periodic payments of the secondary financing are required, the combined payments may not exceed the borrower s reasonable ability to repay. Note: The secondary financing payments must be included in the total debt to income ratio (i.e. the back end ratio) for qualifying purposes. Second lien balloon payments Family member supplying borrowed funds The second lien may not provide for a balloon payment within five years from the date of execution. If the family member providing the secondary financing borrows the funds, the lending source may not be an entity with an identity-of-interest in the sale of the property, such as the: Seller Loan officer, or Builder Real estate agent Mortgage companies with retail banking affiliates may have the affiliate loan the funds to the family member. However, the terms and conditions of the loan to the family member cannot be more favorable than they would be for any other borrowers. Example: There may not be any special consideration given between the making of the mortgage, and lending of funds to family members to be used for secondary financing for the purchase of the home. Secondary financing documentation An executed copy of the document(s) describing the terms of the secondary financing must be maintained in the lender s file, and another executed copy provided in the endorsement binder. Borrower as Co-Obligor on Note Securing Borrowed Down payment When funds loaned by the family member are borrowed from an acceptable source, the borrower may not be a co-obligor on the note. Example: A son may not be the co-obligor on the note used to secure the money borrowed by his parents which, in turn, was loaned to the son for the down payment on the property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 134 of 296

Borrowers 60 Years of Age or Older With advance approval, a borrower 60 years of age or older may borrow the required funds to close for the purchase of a principal residence, under the following circumstances: The provider of secondary financing is: o A relative; o A close friend with a clearly defined interest in the borrower; o The borrower s employer; or o An institution established for humanitarian or welfare purposes; The provider of the secondary financing does not have an identity-of-interest in the sale of the property; such as with o A builder or seller; or o Any person/organization associated with the builder or seller; The principal amount of the insured mortgage loan, plus the note or other evidence of indebtedness in connection with the property, does not exceed 100% of the value, plus prepaid expenses; and The note or other evidence of indebtedness for the secondary financing does not bear an interest rate exceeding the interest rate of the insured mortgage. Government Agency Secondary Financing Introduction FHA will insure a first mortgage loan on a property that has a second mortgage or lien held by a federal, state, or local government agency. The monthly payments under the insured mortgage and second lien, plus housing expense and other recurring charges, cannot exceed the borrower s ability to repay. AFN-G_FHAUWManual Rev. 07/30/2015 Page 135 of 296

Government Agency Secondary Financing Introduction Government Agencies Holding or Servicing Second Liens Federal, state, local government, and nonprofit agencies considered instrumentalities of government may provide secondary financing for the borrower s entire amount of required funds to close on a purchase. When secondary financing is provided by a government agency, the secondary lien must be made or held by the eligible government body or instrumentality. Government units cannot use agents, including nonprofit or for-profit enterprises, to make the second lien, regardless of the source of funds. They can, however, be used to service the subordinate lien if regularly scheduled payments are made by the borrower. Example : Even if funds used for secondary financing are from an acceptable source, such as HUD HOME, a government unit, or an eligible nonprofit instrumentality, the subordinate lien must be in the name of the eligible entity, such as the: Terms and Conditions State County City, or Eligible nonprofit instrumentality The FHA-insured first mortgage, when combined with any second mortgage or other junior lien from a government agency or nonprofit agency considered an instrumentality of government, may not result in cash back to the borrower. The FHA-insured first mortgage cannot exceed the FHA statutory limit for the area where the property is located. The combined indebtedness of the mortgages may, however, exceed the FHA statutory limit. The combined loan-to-value (LTV) ratio of all liens cannot exceed 100% of the cost to acquire the property. (Note: The cost to acquire the property is the sales price plus borrower-paid closing costs, discount points, repairs and rehabilitation expenses and prepaid expenses.) AFN-G_FHAUWManual Rev. 07/30/2015 Page 136 of 296

Government Agency Secondary Financing Terms and Conditions The cost to acquire may exceed the appraised value of the property under these types of government assistance programs. Required Monthly Payments Mortgage Application Disclosures The required monthly payments for both the FHA-insured first mortgage and the second mortgage or lien, plus other housing expenses and all recurring charges, cannot exceed the borrower s reasonable ability to repay. The source, amount, and repayment terms must be disclosed in the mortgage application, and the borrower must acknowledge that he or she understands and agrees to the terms. Nonprofit Agency Secondary Financing Introduction With advance approval, FHA will insure a first mortgage loan on a property that has a second mortgage held by an approved nonprofit agency. The monthly payments under the insured mortgage and second lien, plus housing expense and other recurring charges, cannot exceed the borrower s ability to repay. Nonprofit Agency Eligibility Nonprofit agencies may provide secondary financing under the terms outlined in this Guide, provided that they: Meet the Eligibility Requirements for Nonprofit Organizations and State and Government Agencies; and Are considered instrumentalities of the government. Note: To be considered an instrumentality of the government, the nonprofit entity must be "established by a governmental body or with governmental approval or under special law to serve a particular public purpose or designated by law (statute or court opinion)." AFN-G_FHAUWManual Rev. 07/30/2015 Page 137 of 296

Nonprofit Agency Secondary Financing Nonprofit Agency Eligibility Nonprofit agencies that are not considered instrumentalities of government may provide secondary financing under the conditions described below: Agency meets the conditions of HUD and subordinate liens does not exceed the applicable FHA maximum loan-to-value (LTV) limit for the area where the property is located; and FHA-insured first mortgage, when combined with any second mortgage or junior lien from the nonprofit agency, may not result in cash back to the borrower. Note: The jurisdictional HOC is responsible for approving these agencies. Nonprofit Agency Financial Control HUD HOC Nonprofit Agency Approval FHA requires that the unit of government that established the nonprofit must exercise either organizational control, operational control, or financial control of: The nonprofit agency in its entirety; or At a minimum, the specific borrower assistance program that is using FHA s credit enhancement. The appropriate HUD Homeownership Center (HOC) is responsible, based on information submitted by a nonprofit, for: Approving the nonprofit agency; Determining if the agency can be considered an instrumentality of government; and Reviewing applications from nonprofits that purport to be instrumentalities of government. Note: The HOC is also responsible for approving nonprofit agencies that are not considered instrumentalities of government. AFN-G_FHAUWManual Rev. 07/30/2015 Page 138 of 296

SPECIAL UNDERWRITING FHA s TOTAL Mortgage Scorecard Description of TOTAL The acronym "TOTAL" stands for "Technology Open To Approved Lenders." FHA's TOTAL Mortgage Scorecard evaluates the overall creditworthiness of the borrower, based on a number of credit variables and, when combined with the functionalities of the Automated Underwriting System (AUS), indicates a recommended level of underwriting and documentation to determine a loan s eligibility for insurance by the FHA. Comparison of TOTAL to AUS TOTAL is not an AUS; it is a scorecard used within an AUS. To underwrite a loan electronically, a lender must process the request through an AUS that can communicate with TOTAL. TOTAL operates as a system-to-system connection to an AUS. Together, TOTAL and the AUS either conclude that the borrower s credit and capacity for repayment of the mortgage are acceptable or will refer the loan application to a Direct Endorsement (DE) underwriter for further consideration and review. Regardless of the risk assessment provided by TOTAL, AFN remains accountable for compliance with FHA s eligibility requirements. For example, FHA will not be responsible for checking, through TOTAL, AFN compliance with maximum mortgage amounts, computing debt-to-income ratios or other functions typically performed by an AUS. TOTAL provides only an assessment of the borrower s credit and capacity to repay. TOTAL Risk Assessments TOTAL will return a risk assessment of: "Accept" or "Approve" (different AUSs use different wording); or "Refer." The table below describes the underwriter's actions required for each TOTAL recommendation. AFN-G_FHAUWManual Rev. 07/30/2015 Page 139 of 296

FHA s TOTAL Mortgage Scorecard TOTAL ASSESSMENT Accept/Approve Refer LENDER REQUIREMENTS This recommendation means that, based on the analysis of the borrower s credit and capacity to repay, the loan is eligible for FHA insurance, provided that data entered into the AUS is true, complete, properly documented and accurate; and the documentation and other eligibility requirements are met. This recommendation means that the lender must conduct a manual underwriting review, according to FHA requirements. The lender s DE underwriter must determine if the borrower is creditworthy in accordance with FHA standard credit policies and requirements. Important: TOTAL Recommendations apply to loans that do not require a manual downgrade. If a loan is manually downgraded, for any reason, additional conditions may apply. TOTAL Rescoring and Tolerance Levels TOTAL provides a risk assessment based on the specific data entered by the underwriter, such as terms and conditions of the loan, income and assets. Changes in those variables can result in a different risk assessment, and FHA requires that the loan be rescored using the new information. However, where the differences are minor, rescoring is unlikely to trigger a different risk assessment. FHA therefore, provides a degree of tolerance before requiring rescoring. The table below describes the tolerance levels for rescoring when assessing income, assets and qualifying ratios WHEN ASSESSING... Cash reserves Income Qualifying ratios THERE IS NO NEED TO RESCORE IF THE... Cash reserves verified are not more than 10% less than what the borrower reported on the loan application. Verified income is not more than 5% less than what the borrower reported on the loan application. Tax and insurance escrows used at scoring do not result in more than a 2% increase in the payment and debt-to-income ratios. AFN-G_FHAUWManual Rev. 07/30/2015 Page 140 of 296

FHA s TOTAL Mortgage Scorecard TOTAL Mortgage Scorecard User Guide FHA has developed the TOTAL Mortgage Scorecard User Guide, which is a compilation of the specific credit policies and documentation requirements lenders must follow when using The instructions in this Guide pertain only to those mortgage applications that had a TOTAL risk assessment, including those loan applications referred to an underwriter for manual underwriting. Rate Buydown and Construction to Permanent Temporary Interest Rate Buydown Construction to Permanent AFN does not offer Temporary Interest Rate Buydowns at this time. AFN does not offer Construction to Permanent financing at this time. Manual Underwriting Loans to Be Manually Underwritten Manually underwritten loans include: Loans receiving a Refer scoring recommendation from FHA s TOTAL Scorecard; and Loans receiving an Accept scoring recommendation from FHA s TOTAL Scorecard but which have been downgraded to a Refer by the underwriter. Note: When a loan receiving an Accept scoring recommendation is downgraded to a Refer, the loan must be underwritten in accordance with all provisions in this section. Additional Reasons for a Manual Downgrade A manual downgrade becomes necessary if additional information not considered in the AUS/TOTAL decision effects the overall insurability or eligibility of a mortgage otherwise rated as an Accept. AFN-G_FHAUWManual Rev. 07/30/2015 Page 141 of 296

Manual Underwriting Additional Reasons for a Manual Downgrade Federal Eligibility Manual downgrades may be triggered by inaccuracies in credit reporting, eligibility issues, and for other reasons including the unlikely failure of the TOTAL and/or AUS to recognize a derogatory credit reference. Unless specifically permitted to continue to use the Accept documentation class, such as following a favorable resolution of a credit issue due to an error in reporting, the underwriter must document the mortgage loan application as a Refer risk classification. If the AUS the underwriter is using does not provide for a system override for any of the conditions shown below, then the underwriter is required to downgrade the loan to a Refer and forward the mortgage application to a DE underwriter for risk evaluation. If a borrower is determined ineligible due to any of the conditions described below, the underwriter must downgrade the mortgage loan application to a Refer and determine the actions, if any, that will allow the applicant to qualify for the mortgage. If it is discovered that the ineligibility was based on erroneous information, the underwriter may document the file accordingly and proceed as if the mortgage loan application is rated Accept. Delinquent Federal Debt: If a borrower, as revealed by public records, credit information, or HUD s Credit Alert Interactive Voice Response System (CAIVRS), is presently delinquent on any federal debt, the borrower generally is not eligible for a mortgage insured by FHA. The underwriter should downgrade the mortgage loan application to a Refer, continue processing and manually underwrite the loan application. CAIVRS: If CAIVRS indicates a federal delinquency, default, claim payment, or lien, the borrower generally is not eligible for additional federally related credit. The underwriter should downgrade the mortgage loan application to a Refer, continue processing, and manually underwrite the loan application. A check of CAIVRS is not required for Streamline Refinances. AFN requires a clear CAIVRS prior to closing. AFN-G_FHAUWManual Rev. 07/30/2015 Page 142 of 296

Manual Underwriting Federal Eligibility Suspended and Debarred Individuals: A borrower suspended, debarred, or otherwise excluded from participation in the Agency s programs are not eligible for a FHA-insured mortgage. Both the General Services Administration (GSA) List of Parties Excluded from Federal Procurement and Non-Procurement Programs and HUD s Limited Denial of Participation (LDP) list are available through the FHA Connection. The underwriter should downgrade the mortgage loan application to a Refer, continue processing, and manually underwrite the loan application. If the foreclosure was completed at least 3 years prior and the risk classification from TOTAL is an Accept, no further documentation regarding the foreclosure is required. Credit Issues Previous Mortgage Foreclosure: A borrower who suffered a foreclosure or has given a deed-in-lieu of foreclosure within the previous 3 years is generally not eligible for an insured mortgage. The underwriter should downgrade the mortgage loan application to a Refer, continue processing, and manually underwrite the loan application. Refer to the derogatory credit section (link) of this guide for exceptions and additional underwriting requirements for borrowers with a prior foreclosure. If the foreclosure was completed at least 3 years prior and the risk classification from TOTAL is an Accept, no further documentation regarding the foreclosure is required. Bankruptcy: Both Chapter 7 and Chapter 13 bankruptcies discharged less than 2 years from the date of the loan application require the mortgage application to be downgraded to a Refer and provided to a DE underwriter to ensure compliance with the instructions regarding bankruptcies. A borrower whose bankruptcy has been discharged less than 1 year generally is not eligible for FHA mortgage insurance. AFN-G_FHAUWManual Rev. 07/30/2015 Page 143 of 296

Manual Underwriting Credit Issues If the bankruptcy was discharged at least 2 years from the date of the loan application and the risk-classification from TOTAL is an Accept; no further documentation regarding the bankruptcy is required. Late Mortgage Payments for Purchase and Non-Cash Out Refinances: If any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months reflects: o o o o Three or more late payments greater than 30 days; or One or more late payments of 60 days plus one or more 30-day late payments; or One payment greater than 90 days late; The loan application must be referred to a DE underwriter for review. Mortgage Payment History-Less than six months: If any mortgage trade line including mortgage line-of-credit payments reflects less than six months payment history, the loan application must be referred to a DE underwriter for review as a manual underwrite. Disputed Accounts/Collections and Public Records: If the credit report reveals that the borrower is disputing any credit accounts or public records, the mortgage application must be referred to a DE underwriter for review as a manual underwrite unless any of the following circumstances apply: o o o Disputed account has a zero balance; Disputed account is marked "paid in full" or "resolved"; Disputed account is both less than $500, and more than 24 months old. Non-Occupant Co-Borrowers-Cash Out Refinance: A non-occupant co-borrower or cosigner is permitted on a purchase or a rate and term refinance transaction. Nonoccupant co-borrowers may not be added to a newly originated cash-out refinance. Any co-borrower or cosigner being added to the Note must be an occupant of the property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 144 of 296

Manual Underwriting Credit Issues Minimum Decision Credit Score The policy does not apply to non-occupant co-borrowers or cosigners who were on the original transaction. In this situation, the non-occupant co-borrowers or cosigners may be included on the newly originated cash-out refinance and is not required to occupy the property; however, both the occupant co-borrower and non-occupant co-borrower/ cosigner must demonstrate the ability to qualify for the cash-out refinance mortgage amount. Therefore, cash-out refinance transactions with an added non-occupant coborrower must be downgraded to a Refer for manual underwriting consideration and evaluate the non-occupant co-borrowers accordingly. A credit score is required and must be used to determine the decision credit score for the application and for eligibility for FHA-insured mortgage financing. A "decision credit score" is determined for each applicant according to the following rules: 1. When three scores are available (one from each repository), the median (middle) value is used; 2. When only two are available, the lesser of the two is chosen; 3. When only one is available that score is used. When the loan involves multiple borrowers, the underwriter must determine the minimum decision credit score for each borrower and then select the lowest minimum decision credit score for all borrowers. When the loan involves multiple borrowers and one or more of the borrowers do not have a credit score (non-traditional or insufficient credit) underwriters must select the lowest minimum decision credit score of the borrower(s) with credit score(s). Example: The borrower has a minimum decision credit score of 637. One co-borrower has a minimum decision credit score of 619 and the other co-borrower has no credit score. The minimum decision credit score of 619 must be used to determine the maximum ratios. AFN-G_FHAUWManual Rev. 07/30/2015 Page 145 of 296

Manual Underwriting Reserves Reserves are defined as: The sum of verified and documented borrower funds; minus The sum the borrower is required to pay at closing, including cash investment, closing costs, prepaid expenses, any payoffs that are a condition of loan approval, and any other expense required to close the loan; but not including The amount of cash taken at settlement in cash-out transactions or incidental cash received at settlement in other loan transactions, gift funds in excess of the amount required for the cash investment and other expenses, equity in another property, and borrowed funds from any source. Reserves Requirement All manually underwritten loans must meet or exceed the following minimum reserve requirements: One- and Two-Unit Properties, reserves must equal or exceed one total monthly mortgage payment; Three- and Four-Unit Properties, reserves must equal or exceed three total monthly mortgage payments. This new policy replaces the current 2-month minimum reserve requirement for one and two unit properties for borrowers with insufficient credit. Credit Score Below 580 or with Nontraditional or Insufficient Credit The maximum allowable qualifying ratios for borrowers with minimum decision credit scores below 580 or with nontraditional or insufficient credit are as follows: Total monthly mortgage payment may not exceed 31% of gross effective monthly income; and Total monthly fixed payment may not exceed 43% of gross effective monthly income. AFN-G_FHAUWManual Rev. 07/30/2015 Page 146 of 296

Manual Underwriting Credit Score of 580 without Compensating Factors Credit Score of 580 with One Compensating Factor The maximum allowable qualifying ratios for borrowers with minimum decision credit scores of 580 or more and no compensating factors are as follows: Total monthly mortgage payment may not exceed 31% of gross effective monthly income); and Total monthly fixed payment may not exceed 43% of gross effective monthly income. The maximum allowable qualifying ratios for borrowers with minimum decision credit scores of 580 or more provided they meet one of the compensating factors specified below are as follows: Total monthly mortgage payment may not exceed 37% of gross effective monthly income; and Total monthly fixed payment may not exceed 47% of gross effective monthly income. Acceptable compensating factors are limited to the following: Verified and documented cash reserves that equal or exceed three total monthly mortgage payments for one and two units or that six total monthly mortgage payments for three and four units; New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less, and there is a documented twelve month housing payment history with no more than one 30 day late payment; in cash-out transactions all payments on the mortgage being refinanced must have been made within the month due for the previous twelve months. Residual income. AFN-G_FHAUWManual Rev. 07/30/2015 Page 147 of 296

Manual Underwriting Credit Score of 580 with Two Compensating Factors The maximum allowable qualifying ratios for borrowers with minimum decision credit scores of 580 provided they meet two of the compensating factors specified below are as follows: Total monthly mortgage payment may not exceed 40% of gross effective monthly income; and Total monthly fixed payment may not exceed 50% of gross effective monthly income. Acceptable compensating factors are limited to the following: Verified and documented cash reserves that equal or exceed three total monthly mortgage payments (one and two units) or that equal or exceed six total monthly mortgage payments (three and four units); New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less, and there is a documented twelve month housing payment history with no more than one 30 day late payment; in cash-out transactions all payments on mortgage being refinanced must have been made within month due for previous twelve months; Verified and documented significant additional income that is not considered effective income; and Residual income. Credit Score of 580 with No Discretionary Debt The maximum allowable qualifying ratios for borrowers with minimum decision credit scores of 580 or more with established credit lines in their own name open for at least six months who carry no discretionary debt (housing payment is only account with an outstanding balance and borrower can document that revolving credit has been paid off in full monthly for at least the previous six months) are as follows: Total monthly mortgage payment may not exceed 40% of gross effective monthly income; and Total monthly fixed payment may not exceed 40% of gross effective monthly income. For borrowers meeting this criterion no other compensating factors are required. AFN-G_FHAUWManual Rev. 07/30/2015 Page 148 of 296

Manual Underwriting Maximum Qualifying Ratio Matrix The maximum total monthly mortgage payment to gross effective income ratios and total monthly fixed payments to gross effective income ratios applicable to manually underwritten loans are summarized in the table below. LOWEST MIN MAX DECISION CREDIT SCORE QUALIFYING RATIOS (%) ACCEPTABLE COMPENSATING FACTORS 500 579 or Nontraditional/ insufficient credit 580 and above 580 and above 31/43 Not applicable. Borrowers with minimum decision credit scores below 580, or with non-traditional or insufficient credit may not exceed 31/43 ratios. Energy efficient homes may have stretch ratios of 33/45. 31/43 No compensating factors required. Energy efficient homes may have stretch ratios of 33/45. 37/47 One of the following: Verified and documented cash reserves = to at least 3 total monthly mortgage payments for 1-2 units or 6 monthly mortgage payments for 3-4 units. 580 and above 37/47 New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and there is a documented 12 month housing payment history with no more than 1 x 30 day late payment. In cash-out transactions all payments on the mortgage being financed must have been made within the month due for the previous 12 months. Residual income (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 149 of 296

Manual Underwriting LOWEST MIN DECISION CREDIT SCORE MAX QUALIFYING RATIOS (%) ACCEPTABLE COMPENSATING FACTORS 580 and above 40/40 Borrower has established credit lines in his/her own name for at least 6 months but carries no discretionary debt (i.e. monthly total housing payment is only open installment account and borrower can document that revolving credit has been paid off in full monthly for at least the previous six months. 580 and above 40/50 Two of the following: Verified and documented cash reserves = to at least 3 total monthly mortgage payments for 1-2 units or 6 total monthly mortgage payments for 3-4 units New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and there is documented 12 month housing payment history with no more than 1 x 30 day late payment. In cash-out transactions all payments on the mortgage being financed must have been made within the month due for the previous 12 months. Verified and documented significant additional income that is not considered effective income (i.e. part-time or seasonal income verified for more than 1 year but less than 2 years. Residual income. Recording Compensating Factors Compensating factors cited to support the underwriting decision must be recorded in the Underwriter Comments section of Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. Documentation supporting the compensating factors cited must be included in the loan package including, if applicable, a worksheet attached to Form HUD-92900-LT reflecting the calculation of residual income. AFN-G_FHAUWManual Rev. 07/30/2015 Page 150 of 296

Manual Underwriting Documenting Acceptable Compensating Factors The table below describes the compensating factors (and the documentation required to support the compensating factors) that may be used to justify approval of manually underwritten loans with ratios that exceed FHA standard qualifying ratios. DOCUMENTING ACCEPTABLE COMPENSATING FACTORS COMPENSATING FACTOR Cash Reserves (verified and documented) VERIFICATION REQUIREMENTS Verified and documented cash reserves may be cited as a compensating factor subject to the following: Reserves are equal to or exceed 3 total monthly mortgage payments for 1-2 units; or Reserves are equal to or exceed 6 total monthly mortgage payments for 3-4 units Funds and/or assets not considered cash reserves: Gifts Equity of another property Borrowed funds Cash received at closing in a cash-out refinance or incidental cash received at closing in the loan transaction The mortgagee may use a portion of a borrower s retirement (IRA, Thrift Savings Plan, 401k, and Keogh accounts) to calculate cash reserves, 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. The mortgage must document 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 be made only in connection with the borrower s employment termination, retirement or death, the retirement account may not be used to calculate the borrower s 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. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 151 of 296

Manual Underwriting DOCUMENTING ACCEPTABLE COMPENSATING FACTORS COMPENSATING FACTOR Minimal Increase in Housing Payment No Discretionary Debt VERIFICATION REQUIREMENTS A minimal increase in housing payment may be cited as a compensating factor subject to the following: 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 There is a documented 12 month housing payment history with no more than 1 x 30 day late payment. In cash-out transactions, all payments on the mortgage being financed must have been made within the month due for the previous 12 months. If the borrower has no current housing payment mortgagees may not cite this compensating factor. Reference: Refer to HUD Handbook 4155.1, Chapter 1, Section B.2.a. for information on documenting the previous housing payment. No discretionary debt may be cited as a compensating factor subject to the following: 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 lines in the borrower s name open for at least six months; and The borrower can document that these accounts have been paid off in full monthly for at least the past six months. Borrowers who have no established credit other than their housing payment, no other credit lines in their ownname open for at least six months, or who cannot document that all other accounts are paid off in full monthly for at least the past six months, do not qualify under this criterion. Credit lines not in the borrower s name but for which he or she is an authorized user do not qualify under this criterion. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 152 of 296

Manual Underwriting DOCUMENTING ACCEPTABLE COMPENSATING FACTORS COMPENSATING FACTOR Significant Additional Income Not Reflected in Gross Effective Income VERIFICATION REQUIREMENTS Additional income from bonuses, overtime, part-time/seasonal employment that is not reflected in gross effective income can be cited as a compensating factor subject to the following: The mortgagee must verify and document that the borrower has received this income for at least one year, and it will likely continued; and The income, if it were included in gross effective income, is sufficient to reduce the qualifying ratios to not more than 37/47. Income from non-borrowing spouses or other parties not obligated for the mortgage may not be counted under this criterion. This compensating factor may be cited only in conjunction with another compensating factor when qualifying ratios exceed 37/47 but are not more than 40/50. Residual Income Residual income may be cited as a compensating factor provided it can be documented and it is at least equal to the applicable amounts for household size and geographic region found on the Table of Residual Incomes by Region found in the VA Pamphlet 26-7. VA Guidance on Residual Income Calculating Residual Income FHA has modeled the calculation of residual income on underwriting guidance provided by the Department of Veterans Affairs (VA). FHA is also using the tables from the VA guidelines to determine whether the residual income is sufficiently high enough to be considered as a compensating factor. Residual income is calculated in accordance with the following: Calculate the total gross monthly income of all occupying borrowers; Deduct from gross monthly income the following items: o o o o State income taxes; Federal income taxes; Municipal or other income taxes; Retirement or Social Security; AFN-G_FHAUWManual Rev. 07/30/2015 Page 153 of 296

Manual Underwriting Calculating Residual Income o o o Proposed total monthly fixed payment; Estimated maintenance and utilities; and Job related expenses (e.g., child care) Calculating Gross Monthly Income Gross monthly income should be calculated only for occupying borrowers, consistent with the requirements of this guide. Do not include bonus, part-time or seasonal income that does not meet the requirements for effective income; and Do not include income from non-occupying co-borrowers, cosigners, non-borrowing spouses, or other parties not obligated on the mortgage. Because taxes are taken into account in the calculation of residual income, non-taxable income may not be "grossed up." Calculating Monthly Expenses If available, mortgagees must use Federal and state tax returns from the most recent tax year to document state and local taxes, retirement, Social Security and Medicare. If tax returns are not available, mortgagees may rely upon current pay stubs. For estimated maintenance and utilities in all states, mortgagees are to multiply the property living area (square feet) by $0.14. Example: 1,500 square feet x.14 $210.00 per month Using Residual Income as a Compensating Factor To use residual income as a compensating factor, count all members of the household of the occupying borrowers without regard to the nature of their relationship and without regard to whether they are joining on title or the note. Exception: As stated in the VA Guidelines, the underwriter may omit any individuals from "family size" who are fully supported from a source of verified income which is not included in effective income in the loan analysis. These individuals must voluntarily provide sufficient documentation to verify their income to qualify for this exception. AFN-G_FHAUWManual Rev. 07/30/2015 Page 154 of 296

Manual Underwriting Using Residual Income as a Compensating Factor From the table below, select the applicable loan amount, region and household size. If residual income equals or exceeds the corresponding amount on the table, it may be cited as a compensating factor. RESIDUAL INCOMES BY REGION FOR LOAN AMOUNTS $79,999 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 >5 ADD $75 FOR EACH ADDITIONAL MEMBER UP TO A FAMILY OF SEVEN RESIDUAL INCOMES BY REGION FOR LOAN AMOUNTS $80,000 FAMILY SIZE NORTHEAST* MIDWEST* SOUTH* WEST* 1 $450 $441 $441 $491 2 $755 $738 $738 $823 3 $909 $889 $889 $990 4 $1,025 $1,003 $1,003 $1,117 5 $1,062 $1,039 $1,039 $1,158 >5 ADD $80 FOR EACH ADDITIONAL MEMBER UP TO A FAMILY OF SEVEN * States Included in Regions: REGION NORTHEAST MIDWEST SOUTH WEST INCLUDED 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 Note: HUD is adopting this VA guidance solely for the purpose of calculating residual income for use as a compensating factor on manually underwritten loans. Other VA underwriting policies cannot be used in connection with FHA loans, or cited as compensating factors. AFN-G_FHAUWManual Rev. 07/30/2015 Page 155 of 296

PROPERTY VALUATION AND APPRAISALS Appraiser Requirements General Requirements FHA does not require the use of AMCs or other third party organizations for appraisal ordering, but recognizes that some lenders use AMCs and/or other third party organizations to help ensure appraiser independence. FHA-approved lenders must ensure that: FHA Appraisers are not prohibited by the lender, AMC or other third party, from recording the fee the appraiser was paid for the performance of the appraisal in the appraisal report; FHA Roster appraisers are compensated at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised; The fee for the actual completion of an FHA appraisal may not include a fee for management of the appraisal process or any activity other than the performance of the appraisal; Any management fees charged by an AMC or other third party must be for actual services related to ordering, processing or reviewing of appraisals performed for FHA financing; and AMC and other third party fees must not exceed what is customary and reasonable for such services provided in the market area of the property being appraised. Appraiser Competency An appraiser who is primarily experienced in appraising detached, single family dwellings in one market may lack the knowledge, experience and/or resources for obtaining market data that will enable the appraiser to perform quality appraisals on condominiums or manufactured homes in the same market, or on detached, single family homes in another market a short distance away. AFN-G_FHAUWManual Rev. 07/30/2015 Page 156 of 296

Appraiser Requirements Appraiser Competency The valuation principals for appraising all residential properties are essentially the same, no matter the market in which the property is located; however, not all appraisers are knowledgeable and experienced, or have access to sources of data for all markets. AFN must select an appropriate appraiser for every assignment, one who has knowledge of the market area, or geographic competency. AFN must not assume, simply because an appraiser is statecertified, that the appraiser is qualified and knowledgeable in a specific market area or property type. It is incumbent upon the lender to determine whether an appraiser s qualifications, as evidenced by educational training and actual field experience, are sufficient to enable the appraiser to competently perform appraisals before assigning an appraisal to him or her. Preventing Improper Influences on Appraisers In order to help FHA Roster appraisers avoid conflicts of interest or appearance of conflicts of interest, no member of a lender s loan production staff or any person who is compensated on a commission basis tied to the successful completion of a loan, or reports, ultimately, to any officer of the lender not independent of the loan production staff and process, shall have substantive communications with an appraiser relating to or having an impact on valuation, including ordering or managing an appraisal assignment. FHA prohibits lenders from accepting appraisal reports completed by an appraiser selected, retained or compensated, in any manner by real estate agents. To ensure appraiser independence, AFN is prohibited from accepting appraisals prepared by FHA Roster appraisers who are selected, retained, or compensated in any manner by a mortgage broker or any member of AFN s staff who is compensated on a commission basis tied to the successful completion of a loan. AFN-G_FHAUWManual Rev. 07/30/2015 Page 157 of 296

Appraiser Requirements Appraiser Independence Safeguards AFN and third parties working on behalf of AFN prohibited from: Withholding or threatening to withhold timely payment or partial payment for an appraisal report; Withholding or threatening to withhold future business from an appraiser; Demoting or terminating, or threatening to demote or terminate, an appraiser; Expressly or impliedly promising future business, promotions or increased compensation for an appraiser; Conditioning the ordering of an appraisal report or the payment of an appraisal fee, salary or bonus on the opinion, conclusion or valuation to be reached, or on a preliminary value estimate requested from an appraiser; Requesting that an appraiser provide an estimated, predetermined or desired valuation in an appraisal report prior to the completion of that report; Requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser s completion of an appraisal report; Providing to the appraiser an anticipated, estimated, encouraged or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase must be provided; Providing stock or other financial or non-financial benefits to: o o o o The appraiser; The appraisal company; The appraisal management company; or Any entity or person related to the appraiser, appraisal company or management company Allowing the removal of an appraiser from a list of qualified appraisers, or the addition of an appraiser to an exclusionary list of qualified appraisers, used by any entity without prompt written notice to such appraiser, which notice shall include written evidence of the appraiser s: o o Illegal conduct; Violation of the uniform standards of professional appraisal practice (USPAP) standards; AFN-G_FHAUWManual Rev. 07/30/2015 Page 158 of 296

Appraiser Requirements Appraiser Independence Safeguards (continued) o o Violation of state licensing standards; or Improper or unprofessional behavior or other substantive reason for removal; Ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model (AVM) in connection with a mortgage financing transaction unless: o o o There is a reasonable basis to believe that the initial appraisal was flawed or tainted and such appraisal is clearly and appropriately noted in the loan file; Such appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines; and The lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value; or Any other act or practice that impairs or attempts to impair an appraiser s independence, objectivity or impartiality, or violates law or regulation, including, but not limited to the truth in lending act (TILA) and regulation z and USPAP. References Appraiser Selection in the FHA Connection Refer to AFN Responsibilities For Appraisers; and Preventing Improper Influences on Appraisers, for additional information. AFN is also responsible for assuring that the appraiser who actually conducted the appraisal is correctly identified in FHA Connection. If AFN fails to assure that the FHA Connection reflects the correct name, AFN will be subject to administrative sanctions. Communicating with the Appraiser The DE Underwriter who is responsible for the quality of the appraisal report is allowed to communicate with the appraiser, to request clarifications and discuss components of the appraisal that influence its quality. The underwriter bears the primary responsibility for determining the eligibility of a property for FHA insurance. AFN-G_FHAUWManual Rev. 07/30/2015 Page 159 of 296

Property Valuation and Eligibility Purpose of Property Valuation Appraisal Review The purpose of the property valuation process is to: Determine eligibility for mortgage insurance based on the condition and location of a property; and Estimate the value of the property for mortgage insurance purposes; the appraisal is the lender s tool for making this determination. AFN is responsible for properly reviewing appraisals and determining if the appraised value used to determine the mortgage amount is accurate and adequately supports the value conclusion. The property appraisal and underwriting process varies by stage of construction, and type of processing. Reference Refer to FHA Policy on Appraisals for additional guidance. AFN Responsibility AFN is equally responsible, along with the appraiser, for the quality, integrity, accuracy and thoroughness of the appraisal. AFN will be held accountable by HUD if AFN knew, or should have known, that there were problems with the integrity, accuracy, and thoroughness of an appraisal submitted to FHA for mortgage insurance purposes. Appraisals submitted by AFN to HUD that do not meet FHA requirements are subject to the imposition of sanctions by the HUD Mortgagee Review Board. Note: This applies to both sponsor lenders that underwrite loans and loan correspondent lenders that originate loans on behalf of their sponsors. General Acceptability Requirements As the on-site representative for the lender, the appraiser provides preliminary verification that a property meets General Acceptability Standards, which include the Minimum Property Requirements (MPR) or Minimum Property Standards (MPS). The table below outlines the requirements for FHA financing. AFN-G_FHAUWManual Rev. 07/30/2015 Page 160 of 296

Property Valuation and Eligibility TO BE ELIGIBLE FOR FHA FINANCING MUST COMPLY WITH HUD S MINIMUM PROPERTY STANDARDS New construction Existing construction Manufactured homes Including 24 CFR 200.926d. Contained in HUD 4905.1, Requirements for Existing Housing One- to Four-Family Living Units, Appendix D. Contained in HUD 4930.3G, Permanent Foundations Guide for Manufactured Housing. Property Eligibility Only one- to four-unit properties, including a one family unit in a condominium project, are eligible for mortgage insurance, except for mortgage insured under Section 220 of the National Housing Act. The mortgage must be on real estate held in fee simple: On leasehold under a lease for not less than 99 years which is renewable; or Under a lease having a period of not less than 10 years to run beyond the maturity date of the mortgage. For properties processed under the HECM program, the mortgage must be on real estate held in fee simple: On leasehold under a lease for not less than 99 years which is renewable; or Under a lease having a remaining period of not less than 50 years beyond the date of the 100 th birthday of the youngest mortgagor. Reference Refer to Eligible Properties for 203(h) for additional information. AFN-G_FHAUWManual Rev. 07/30/2015 Page 161 of 296

Property Valuation and Eligibility Compliance Inspection Requirements Compliance inspections completed by FHA Roster Inspectors or local authority with jurisdiction may be required for: Proposed construction or properties under construction; Properties undergoing substantial rehabilitation; and Existing properties requiring repairs to major systems (for example, structural, heating, and so on). The number and timing of inspections for new construction depends upon the: Stage of construction (proposed construction, under construction, or new construction less than one year old); Coverage by an acceptable 10 year warranty plan; Issuance of a building permit and certificate of occupancy (co) by the local jurisdiction; Acceptability of inspections by the local community; and The type of construction (stick built, manufactured home, or condominium conversions); modular homes are treated the same as stick built. A clear final inspection or, in certain cases, a Certificate of Occupancy, will be required before FHA will insure the mortgage. Part B, Certificate of Completion, of Fannie Mae Form 1004D/Freddie Mac Form 442 provides for compliance repair and completion inspections for existing and new construction dwellings. References For more information on compliance inspections, refer to HUD 4145.1, Architectural Processing and Inspections for Home Mortgage Insurance, and HUD 4150.2, Valuation Analysis for Single-Family One- to Four-Unit Dwellings. Refer to Required Inspections On Newly Constructed Manufactured Homes for more information. Refer to HUD 4930.3G, Permanent Foundations Guide for Manufactured Housing, and Use of the Appraisal Update and/or Completion Report form. AFN-G_FHAUWManual Rev. 07/30/2015 Page 162 of 296

Property Valuation and Eligibility Basis for Determination of MPS and MPR The application of MPS for new construction is determined by: Construction status (proposed construction, under construction, or existing construction less than one year old); and Construction type (on-site construction or manufactured housing). A property is considered new construction if it was completed less than one year from the date of the Certificate of Occupancy (CO) or its equivalent. The application of MPR for an existing property is determined by the date of the CO or its equivalent. To be considered existing property, it must be over one year from the date of the CO. Property Standards The table below contains the general minimum property standards in order for houses and manufactured homes to be eligible for FHA insurance. Refer to General Acceptability Standards and Property Eligibility for more information. DWELLING TYPE Housing PROPERTY STANDARDS Eligible housing includes: Detached or semi-detached dwellings; Row houses; Multiplex dwellings; and Individual condominium units. Important: If not detached: The dwelling must be separated from an adjoining dwelling by a party or lot line wall extending the full height of the building; and Each living unit must be individually accessible for use and maintenance without trespass on adjoining properties. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 163 of 296

Property Valuation and Eligibility DWELLING TYPE Manufactured Homes PROPERTY STANDARDS A manufactured home is a structure that is: Transportable in one or more sections; Designed and constructed to Federal Manufactured Construction and Safety Standards; and So labeled regarding conformance with the Federal Manufactured Home Construction and Safety Standards (MHCSS). To be eligible for FHA mortgage insurance, the manufactured home must: Have at least 400 square feet as the minimum floor area; Be constructed after June 15, 1976, in conformance with the MHCSS, as evidenced by an affixed certification label; Be classified as real estate (but need not be treated as real estate for purposes of state taxation); Be designed to be used as a dwelling with a permanent foundation built to FHA requirements; Be built and must still be remaining on a permanent chassis; Have a mortgage that: o o Covers both the unit and its site; and Has a term of not more than 30 years from the date of amortization; and Have a finished grade elevation beneath the home (including the basement) at or above the 100 year flood elevation. References: For additional information on manufactured homes, refer to HUD 4145.1, Architectural Processing and Inspections for Home Mortgage Insurance; HUD 4150.2, Valuation Analysis for Single-Family One- to Four-Unit Dwellings; Flood Insurance For Manufactured Homes; Property Eligibility Requirements Specific To Manufactured Homes; and Manufactured Housing Condominium Projects. AFN-G_FHAUWManual Rev. 07/30/2015 Page 164 of 296

Property Valuation and Eligibility Site Condition Standards Lead-Based Paint Standards The site conditions of a property must be free of health and safety hazards. If the property was built before 1978 The seller must disclose known information on lead-based paint and lead- based paint hazards before selling the house; The sales contracts must include a disclosure form about lead-based paint; and The buyers have up to 10 days from the date of the signing of the sales contract to check for lead. FHA may insure a mortgage on a house, even with lead-based paint, if defective paint surfaces are treated. However, FHA will not pay the cost to have the lead-based paint removed, treated, or repaired. Services and Facilities Standards Utilities and other facilities should be independent for each unit and must include: A continuing supply of safe, potable water; Sanitary facilities and a safe method of sewage disposal; Heating adequate for health and comfort; Domestic hot water; and Electricity for lighting and equipment. Access Standards There must be vehicular access to the property by means of an abutting public or private street. If private, there must be a permanent recorded easement and provisions for permanent maintenance. Each property must have access to its rear yard. Restrictions on Non-residential Use Nonresidential use must be subordinate to the property's residential use and character, and it may not exceed 25 percent of the total floor area. The following nonresidential properties are mortgage insurance: ineligible for AFN-G_FHAUWManual Rev. 07/30/2015 Page 165 of 296

Property Valuation and Eligibility Restrictions on Non-residential Use Commercial enterprises Boarding houses Hotels/motels Tourist houses Private clubs Bed and breakfast establishments, and Fraternity/sorority houses. Exception: Exceptions are made for Section 203(k) properties. Rejection of "Existing" or Newly Constructed Property When examination of existing or newly constructed property reveals noncompliance with the General Acceptability Standards, an appropriate specific condition (repair) to correct the deficiency is required, if correction is feasible. If correction is not feasible, and only major repairs or alterations can affect compliance, lender must reject property. Note: The appraiser must note those repairs necessary to make the property comply with FHA s General Acceptability Standards, together with estimated cost to cure. The lender will determine which repairs for existing properties must be made for the property to be eligible for FHA-insured financing. Appraisal Requirements FHA Policy on Appraisals Except for certain Streamline Refinance transactions, FHA requires an appraisal of all properties to establish an estimated value for mortgage insurance purposes. All individual properties, whether proposed construction, under construction, or existing construction, must meet MPS or MPR. References Refer to Refinance Transactions for additional information. For information on appraisal requirements for individual properties, refer to HUD 4150.2, Valuation Analysis for Single-Family Oneto Four-Unit Dwellings. AFN-G_FHAUWManual Rev. 07/30/2015 Page 166 of 296

Appraisal Requirements Appraisal Reporting Standards An appraisal performed for FHA purposes requires the appraiser: Address all sections of the appraisal form; Complete the form in a manner that clearly reflects the thoroughness of the investigation and analysis of the appraisal findings; and Ensure that conclusions about the observed conditions of the property provide rationale for the opinion of market value. The completed appraisal form utilized, together with the required exhibits, constitutes the reporting instrument to HUD for FHA-insured mortgages. Appraisal Reporting Forms The appraisal reporting form used depends on the type of property that is being appraised. The table below lists the appraisal forms used by the appraiser, depending upon the type of property being appraised. Important: Regardless of which form in the table below is used, the Fannie Mae Form 1004MC, Market Conditions Addendum, must be completed along with the appropriate appraisal form. APPRAISAL FORM Uniform Residential Appraisal Report (URAR) Fannie Mae Form 1004, March 2004 Manufactured Home Appraisal Report Fannie Mae Form 1004C, March 2005 Individual Condominium Unit Appraisal Report Fannie Mae Form 1073, March 2005 Small Residential Income Property Appraisal Report Fannie Mae Form 1025 FORM USAGE Required to report an appraisal of: A one unit property, or A one unit property with an accessory unit. Required to report an appraisal of a one-unit manufactured home. Required to report an appraisal of: A unit in a condominium project, or A condominium unit in a planned unit development (PUD). Required to report an appraisal of a two to four unit property. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 167 of 296

Appraisal Requirements APPRAISAL FORM Manufactured Home Appraisal Report Fannie Mae Form 1004C, March 2005 Individual Condominium Unit Appraisal Report Fannie Mae Form 1073 Appraisal Update and / or Completion Report, Fannie Mae Form 1004D / Freddie Mac Form 442 / March 2005 FORM USAGE Required to report an appraisal of a condominium manufactured home. Required as an addendum to the appraisal report if the property is located in a manufactured housing condominium project (MHCP). This is a dual-purpose form. Part A, Summary Appraisal Update Report provides for updates of existing appraisals when the appraiser concurs with the original appraisal report, and updates the appraisal by incorporating the original appraisal report. Part B, Completion Report, provides for compliance repair and completion inspections for existing and new construction dwellings. References: For information on the use of Fannie Mae Form 1004D/Freddie Mac Form 442/March 2005, Appraisal Update and/or Completion Report, refer to HUD 4155.2 4.4.k, HUD 4155.2 4.4.l and HUD 4155.2 4.4.m, and ML 09-51. Other required appraisal forms, refer to HUD 4150.2, Valuation Analysis for Single Family One to Four Unit Dwellings, Appendix D. Appraisal and Inspection Fees AFN is responsible for collecting and promptly paying appraisers and inspectors. Providing Appraised Value Documentation to the Borrower In accordance with the provisions of the National Housing Act, AFN must provide to the borrower a Statement of Appraised Value. AFN accomplishes this by giving the borrower a copy of HUD - 92800.5B, Conditional Commitment DE Statement of Appraised Value, or a copy of the completed appraisal report, at or before loan closing. AFN-G_FHAUWManual Rev. 07/30/2015 Page 168 of 296

Appraisal Requirements Appraisal Transfer and Change of Client Name In cases where a borrower has switched lenders, the first lender must, at the borrower s request, transfer the case to the second lender. FHA does not require that the client name on the appraisal be changed when it is transferred to another lender. Ordering a Second Appraisal When the Borrower Switches Lenders In accordance with the Uniform Standards of Professional Appraisal Practice (USPAP), the second lender is not permitted to request that the appraiser change the name of the client within the appraisal report unless it is a new appraisal assignment. To effect a client name change, the second lender and the original appraiser may engage in a new appraisal assignment wherein the scope of work is limited to the client name change. A new client name should include the name of the client (lender) and HUD. Reference Refer to Transfer for New Borrower Using Existing Appraisal for additional information. FHA prohibits "appraiser shopping" where lenders order additional appraisals in an effort to assure the highest possible value for the property, and/or the least amount of deficiencies or repairs are noted and required by the appraiser. However, in the case where a borrower switches from one FHA lender (first lender) to AFN, and an appraisal was ordered by and completed for the first lender, a second appraisal may be ordered by AFN if the First appraisal contains material deficiencies, as determined by the Direct Endorsement underwriter for the second lender; Appraiser performing the first appraisal is on the second lender s exclusionary list of appraisers; or Failure of first lender to provide a copy of the appraisal to second lender in a timely manner would cause a delay in closing, posing potential harm to the borrower, which includes events outside the borrower s control such as: AFN-G_FHAUWManual Rev. 07/30/2015 Page 169 of 296

Appraisal Requirements Ordering a Second Appraisal When the Borrower Switches Lenders o o o o Loss of interest rate lock; Purchase contract deadline; Foreclosure proceedings; and/or Late fees. For the first two scenarios above, the underwriter must ensure that copies of both appraisals are retained in the case binder. For the third scenario, the appraisal from the first lender must be added to the case binder when it is received. Important: In all cases, AFN must document why a second appraisal was ordered and retain the explanation in the case binder. References Refer to Appraisal Reuse and Appraisal Extensions for additional information. Appraisal and/or Completion Report Form The FHA appraiser should only use Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report under the conditions described in the table below. WHEN AFN THEN THE APPRAISER Needs to extend the validity period of an existing appraisal that is due to expire; and Does not want to order a new appraisal Should use Part A/Appraisal Update. Needs to extend the validity period of an existing appraisal for new construction that is incomplete Needs to report: Should use Part A/Appraisal Update. Should use Part B/Completion Report. Completion of a repair; and/or Satisfaction of requirements and conditions noted on the original appraisal report referenced in the header of the summary appraisal update and/or completion report AFN-G_FHAUWManual Rev. 07/30/2015 Page 170 of 296

Appraisal Requirements Appraisal and/or Completion Report Form The FHA appraiser may not use Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report under the conditions described in the table below. IF... THEN THE APPRAISER... Property has declined in value; Building improvements that contribute value to the property cannot be observed from the street or a public way; or Exterior inspection of the property reveals deficiencies or other significant changes that did not exist as of the effective date of the appraisal report being updated Property is new construction and manufactured housing; and Form HUD-92051, Compliance Inspection Report, is required May not use Part A/Appraisal Update. May not use Part B/Completion Report. Use of the Appraisal Update and/or Completion Report Form The FHA appraiser who performed the original appraisal, if currently in good standing on the FHA Appraiser Roster, may use Part A, Summary Appraisal Update Report, or Part B, Completion Report. Any other FHA appraiser, currently in good standing on the FHA Appraiser Roster, may only use Part B, Completion Report. Appraisals in Declining Markets Description of Declining Market While there is no standard industry definition, for purposes of performing appraisals on properties that are to be collateral for FHA-insured mortgages, a "declining market" is considered to be any neighborhood, market area, or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times. AFN-G_FHAUWManual Rev. 07/30/2015 Page 171 of 296

Appraisals in Declining Markets Description of Declining Market Comparable Requirements Note: A declining trend in the market must be identified by the conclusions of the Fannie Mae 1004MC, Market Conditions Addendum. The appraiser must provide a summary comment and provide support for all conclusions relating to the trend of the current market. In order to show recent market activity, appraisals of properties located in declining markets must include at least two comparable sales that: Closed within 90 days prior to the effective date of the appraisal; and Are as similar as possible to the subject property. Note: In cases where compliance with this requirement is difficult or not possible due to the lack of market data, a detailed explanation is required. Comparable Listings / Pending Sales In order to ensure that FHA receives an accurate and thorough appraisal analysis, the inclusion of comparable listings and/or pending sales is required in appraisals of properties that are located in declining markets. Specifically, the appraiser must: Include a minimum of two active listings or pending sales on the appraisal grid of the applicable appraisal reporting form in comparable 4-6 position or higher (in addition to the three settled sales); Ensure that active listings and pending sales are market tested and have reasonable market exposure to avoid the use of overpriced properties as comparables; (Note: Reasonable market exposure is reflected by typical marketing times for the neighborhood; the comparable listings should be truly comparable and the appraiser should bracket the listings using both dwelling size and sales price whenever possible); Adjust active listings to reflect list to sale price ratios for the market; AFN-G_FHAUWManual Rev. 07/30/2015 Page 172 of 296

Appraisals in Declining Markets Comparable Listings / Pending Sales Adjust pending sales to reflect the contract purchase price whenever possible; or Adjust pending sales to reflect list to sale price ratios; Include the original list price, any revised list prices, and total days on the market (DOM); (Note: Provide an explanation for DOM that do not approximate time frames reported in the Neighborhood section of the appraisal reporting form or that do not coincide with the DOM noted in the Market Conditions Addendum); Reconcile the adjusted values of active listings or pending sales with the adjusted values of the settled sales provided; (Note: If the adjusted values of the settled comparables are higher than the adjusted values of the active listings or pending sales, the appraiser must determine if a market condition adjustment is appropriate. The final value conclusion should not be based solely on the comparable listing or pending sales data.); and Include an absorption rate analysis, which is critical to developing and supporting market trend conclusions, as mandated by the Market Conditions Addendum. (Example: Assuming 36 sales during a six-month period, the absorption rate is 6 sales per month (36/6). Specific Requirements for Market Trend Data Sources Data regarding market trends is available from a number of local and nationwide sources. Appraisers must be diligent in using only impartial sources of data. The appraiser must Verify data via local parties to the transaction; such as o o o o Agents Buyers Sellers, and Lenders, or Use public records or another impartial data source that can be replicated if a sale cannot be verified by a party. AFN-G_FHAUWManual Rev. 07/30/2015 Page 173 of 296

Appraisals in Declining Markets Unacceptable Sources Unacceptable data sources include local and national media and other sources considered not readily verifiable. A Multiple Listing Service (MLS) by itself is not considered a verification source. Notes: Appraisal results should be able to be replicated. Known or reported incentives or sales concessions must be noted in the financing section for any active or pending comparable used. Properties with Defective Conditions Appraisal Repair Requirements Types of Repairs In the performance of an FHA appraisal, the appraiser must: Denote any deficiency in the appropriate section(s) of the appraisal report (site issues in the site section, improvement issues in the improvements section, and so on); and Note the repairs necessary to make the property comply with FHA s MPR or MPS, together with estimated cost to cure. The underwriter determines which repairs for existing properties must be made for the property to be eligible for FHA-insured financing. The types of repairs that may need to be made to a property include: Cosmetic repairs; and Required repairs. The following table describes cosmetic and required repairs. AFN-G_FHAUWManual Rev. 07/30/2015 Page 174 of 296

Properties with Defective Conditions TYPE OF REPAIR Cosmetic repairs Required repairs DESCRIPTION These repairs are not required, however, they must be considered in the overall condition rating and valuation of the property. Such repairs would include surface treatments, beautification or adornment not required for the preservation of the property. Generally, worn floor finishes or carpets, holes in window screens, or a small crack in a windowpane are examples of deferred maintenance that do not rise to the level of a required repair, but must be reported by the appraiser. The physical condition of existing building improvements must be examined at the time of the appraisal to determine whether repairs, alterations or inspection are necessary or essential to eliminating conditions that threaten the continued physical security of the property. Required repairs must be limited to those required to Protect the health and safety of the occupants (Safety); Protect the security of the property (Security); and Correct physical deficiencies or conditions affecting structural integrity (Soundness). Additional Required Inspections Typical conditions that would require further inspection or testing by qualified individuals or entities include: Infestation evidence of termites; Inoperative or inadequate plumbing, heating, or electrical systems; Structural failure in framing members; Leaking or worn-out roofs; Cracked masonry or foundation damage; and Drainage problems. Refer to Compliance Inspection Requirements for more information. AFN-G_FHAUWManual Rev. 07/30/2015 Page 175 of 296

Satisfying Repair Requirements FHA Policy Repair requirements outstanding on the appraisal report must be satisfied before the mortgage is submitted for endorsement. Satisfaction of repair requirements can be submitted by providing: A Compliance Inspection Report (HUD-92051); Part B of Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report; The Mortgagee s Assurance of Completion (HUD-92300) of escrowed repairs; or A certification from a "qualified" professional on their company form or letterhead. Note: A "qualified" professional may be a professionally licensed: Engineer Home inspector, or Trades person. Compliance Inspection Report Form HUD-92051, Compliance Inspection Report, or Part B of Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report, are used to certify that repairs have been completed satisfactorily. Part B of Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report provides for compliance repair and compliance inspections for existing and new construction dwellings. Important: Part B of Fannie Mae Form 1004D/Freddie Mac Form 442 may not be used in lieu of Form HUD-92051, Compliance Inspection Report, for new construction and manufactured housing. These forms must be prepared, as appropriate, by: An appraiser, or FHA fee inspector, for inspections that require architectural expertise (such as structural or basic system repair). Such reports must be reviewed by FHA or the underwriter, as appropriate. AFN-G_FHAUWManual Rev. 07/30/2015 Page 176 of 296

Satisfying Repair Requirements Lender Certification A lender certification HUD-92300, Mortgagee s Assurance of Completion is acceptable in those instances in which the required repair items are minor and uncomplicated. Note: If the borrower could complete the work on his/her own as normal maintenance, FHA considers the work to be "minor." Escrow of Funds for Completion of Construction If adverse weather conditions prevent completion of the repairs, it is not always necessary to complete all new construction items (for example, landscaping) or required repairs (such as exterior painting) before submitting the mortgage for insurance endorsement. In certain situations, funds may be escrowed, and FHA will accept a HUD-92300, Mortgagee s Assurance of Completion at the time of endorsement. An escrow account may only be used when: The dwelling is habitable, safe and essentially complete; The deferred work cannot be acceptably completed prior to loan closing, but will be completed within six months; All other conditions of the appraisal have been satisfied by compliance inspections or by an acceptable Mortgagee s Assurance Of Completion; and The lender has not been denied the privilege of using a Mortgagee s Assurance Of Completion due to poor follow up or non-satisfaction of outstanding escrows. AFN Obligation to Complete Improvements Regardless of Escrow Reserves AFN assumes the obligation to satisfactorily complete improvements, regardless of the adequacy of the funds reserved by escrow or letter of credit. An appraiser or an inspector on FHA s Appraiser Roster or FHA s Panel of Inspectors must confirm that the work was satisfactorily completed. Note: At this time AFN will review and approved these cases, individually, to determine eligibility. AFN-G_FHAUWManual Rev. 07/30/2015 Page 177 of 296

FLOOD HAZARD AREAS General Flood Hazard Information Introduction When a property, including any portion of the site, is located in an area designated as a special flood hazard area, or is otherwise determined to be subject to a flood hazard, the following special conditions are required on the conditional or firm commitment: The borrower(s) must obtain and maintain, where available, National Flood Insurance Program (NFIP) flood insurance coverage on the property during such time as the mortgage is insured. NFIP insurance is required by law under the Flood Disaster Protection Act of 1973 with respect to HUD insured mortgages. However, if the underwriter determines that the improvement on a property is located at such a high elevation that there is no risk of flooding, even though a portion of the property is located within a special flood hazard area, the underwriter may exempt the property from the flood insurance requirement. This determination shall only be made in those cases where the building site grade is substantially above the 100-year frequency water surface elevation, and where it is obvious because of the location of the property in relation to other properties in the designated flood hazard area, that there is no risk of flooding involved. Note: The loan file must include documentation used to determine that the improvement is located in an area with no risk of flooding. Properties should be rejected if they are subject to frequent recurring flooding, or if there is any potential hazard to life or safety, or if escape to high ground would not be feasible during severe flood. AFN-G_FHAUWManual Rev. 07/30/2015 Page 178 of 296

General Flood Hazard Information Responsibility for Determining Property Eligibility in SFHA AFN is responsible for determining the eligibility of properties in special flood hazard areas (SFHA) as designated by the Federal Emergency Management Agency (FEMA). The FHA appraiser is required to review the FEMA Flood Insurance Rate Map, note the FEMA zone designation on the Uniform Residential Appraisal Report (URAR), and, if the property is located in a SFHA, attach a copy of the flood map panel. AFN requires a flood certification independent of any assessment made by the appraiser. AFN must inform borrowers of the requirement to obtain adequate flood insurance as a condition of closing for properties where any portion of the dwelling and related structures and equipment are located in a SFHA. They must require the escrow of flood insurance premiums if escrow is required for other items such as hazard insurance and taxes. Properties in SFHA Ineligible for FHA Insurance Eligibility of Proposed and New Construction in SFHAs A property is not eligible for FHA insurance if a residential building and related improvements to the property are located within a SFHA (Zone A, a Special Flood Zone Area, or Zone V, a Coastal Area), and insurance under the National Flood Insurance Program (NFIP) is not available in the community. If any portion of the property improvements (the dwelling and related structures/equipment essential to the value of the property and subject to flood damage) is located within a SFHA, the property is not eligible for FHA mortgage insurance unless A final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removes the property from the SFHA is obtained from FEMA; or If the property is not removed from the SFHA by a LOMA or LOMR, the lender obtains a FEMA National Flood Insurance Program Elevation Certificate (FEMA form 81-31), prepared by a licensed engineer or surveyor, documenting that the lowest floor (including the basement) of the residential building, and all related improvements/equipment essential to the value of the property, is built at or above the 100- year flood elevation in compliance with the NFIP criteria. AFN-G_FHAUWManual Rev. 07/30/2015 Page 179 of 296

General Flood Hazard Information Eligibility of Proposed and New Construction in SFHAs If a LOMA or LOMR is obtained that removes the property from the SFHA, neither flood insurance nor a flood elevation certificate is required. Insurance under the NFIP is required when a flood elevation certificate documents that the property remains located within a SFHA. Note: The LOMA, LOMR or flood elevation certificate must be submitted with the case for endorsement. Reference For more information on the National Flood Insurance Program criteria, refer to 44 CFR 60.3 60.6. Extent of Flood Insurance Coverage Required The flood insurance to be maintained shall be in an amount at least equal to either: The outstanding balance of the mortgage less estimated land value; or The maximum amount of NFIP insurance available with respect to the property, whichever is less. Designation of Special Flood Hazard Areas The Federal Emergency Management Agency (FEMA) is responsible for determining special flood hazard areas on a nationwide basis. The designation of these areas within a community is accomplished by the issuance by FEMA of a Flood Hazard Boundary Map. An area of special flood hazard may be designated as Zones A, AO, AH, A1-30, AE, A99, VO, or V1-30, VE or V: Only those properties within zones "A" and "V" require flood insurance; Zones "B" or "C" do not require flood insurance because FEMA designates only "A" and "V" zones as "Special Flood Hazard Areas." Availability of Flood Insurance Flood Insurance is available for all eligible buildings located within participating communities. AFN-G_FHAUWManual Rev. 07/30/2015 Page 180 of 296

General Flood Hazard Information HUD Instructions for Appraisals HUD requires appraisers to identify the FEMA-mapped flood hazard area on the appraisal. An Appraisal Report with positive indication of a property location in a flood hazard area will trigger a commitment requirement for flood insurance coverage. The underwriter must condition for flood insurance. Special Flood Hazard Requirements 1) Proposed construction, located or to be located within a Special Flood Hazard area, is unacceptable regardless of whether or not the property is, or will be, covered by Flood Insurance because HUD does not wish to encourage development in such areas unless mitigation measures are adopted. 2) The eligibility of existing properties located in an area designated by FEMA to be a Special Flood Hazard area, will be determined by market attitude and acceptance. Flood insurance will be required of those properties accepted for mortgage insurance within the designated flood hazard areas as determined by FEMA. 3) In a condominium, the Homeowners Association is responsible for maintaining flood insurance on the project as a whole rather than each individual unit owner being responsible for their own unit. Refer to Flood Insurance for Condominiums (below) for additional guidance. 4) Obtaining NFIP Flood Insurance: Persons seeking advice as to the availability of NFIP flood insurance should be directed to any State-licensed property insurance broker or agent in the community, or to the NFIP servicing company at (800) 638-6620. Flood Elevation Certificate and/or Flood Insurance If the underwriter is uncertain about whether a property is located within a SFHA, it may require a flood elevation certificate. In addition, the underwriter has discretion to require national flood insurance even if The residential building and related improvements to the property are not located within the SFHA; but The underwriter has reason to believe that the building and related improvements to the property may be vulnerable to damage from flooding. AFN-G_FHAUWManual Rev. 07/30/2015 Page 181 of 296

General Flood Hazard Information Flood Insurance Requirements for Existing Construction Flood Insurance for Condominiums Insurance under the NFIP must be obtained as a condition of closing and maintained for the life of the loan for an existing property when any portion of the residential improvements is determined to be located in a SFHA. If the improvements are subsequently removed from a SFHA by a LOMA or LOMR, flood insurance will no longer be required. The Homeowners Association (HOA), not the individual condominium owner, is responsible for maintaining flood insurance on buildings located within an SFHA. AFN is responsible for ensuring that the HOA obtains and maintains adequate flood insurance if the FHA appraiser reports that buildings in a condominium project are located within a SFHA. The flood insurance coverage must protect the interest of borrowers who hold title to individual units as well as the common areas of the condominium project. A LOMA, LOMR or elevation certificate is acceptable evidence if any part of the property improvements is located within the SFHA. Flood Insurance for Manufactured Homes If any portion of property improvements for both new and existing manufactured home properties are located within a SFHA (Zones A or V), the property is not eligible for FHA mortgage insurance without: A FEMA-issued LOMA or LOMR; or An elevation certificate, prepared by a licensed engineer or surveyor on the finished construction, indicating that the finish grade beneath the dwelling or manufactured home is at or above the 100-year return frequency flood elevation. Note: When utilizing an elevation certificate, the property remains in a SFHA and flood insurance is required. Neither an elevation certificate nor flood insurance is required with LOMA or LOMR that removes the property from the SFHA. Important: For manufactured homes with basements, the grade beneath the basement must be at or above the 100-year flood elevation. AFN-G_FHAUWManual Rev. 07/30/2015 Page 182 of 296

General Flood Hazard Information Required Insurance Amount National flood insurance is required for the term of the loan and must be maintained in an amount equal to the least of the following: The development cost of the property, less estimated land cost; The maximum amount of the NFIP insurance available with respect to the property improvements; or The outstanding principal balance of the loan(s). Reference Refer to HUD 4150.2, Valuation Analysis for Single-Family Oneto Four-Unit Dwellings for more information. AFN-G_FHAUWManual Rev. 07/30/2015 Page 183 of 296

PROPERTY FLIPPING Prohibition on Property Flipping Definition: Property Flipping Property Flipping New Construction Seller Must Be Owner of Record The term property flipping refers to a practice whereby recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender s collusion with an appraiser. The restrictions listed in this topic, and in 24 CFR 203.37a do not apply to a builder selling a newly built home or building a home for a borrower wishing to use FHA-insured financing. To be eligible for a mortgage insured by FHA: A property must be purchased from the owner of record; The transaction may not involve any sale or assignment of the sales contract; and The lender must obtain, and submit in the case binder to HUD, documentation verifying that the seller is the owner or record. Such 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. Note: This requirement applies to all FHA purchase money mortgages, regardless of the time between re-sales. Analyzing Prior Sales of a Property To be in compliance with updated Standard Rule 1-5 of the Uniform Standards of Professional Appraisal Practice (USPAP), appraisers are required to analyze any prior sales of a subject property in the previous three years for one to four family residential properties. AFN-G_FHAUWManual Rev. 07/30/2015 Page 184 of 296

Prohibition on Property Flipping Analyzing Prior Sales of a Property Restriction on Re-Sales Occurring 90 Days or Less After Acquisition Underwriters may rely on the information provided by the appraiser in the Uniform Residential Appraisal Report (URAR) describing the Date, Price and Data for Prior Sales for the subject property within the last three years. If a property is re-sold 90 days or fewer following the date of acquisition by the seller, the property is not eligible for a mortgage insured by FHA. FHA defines the Seller s date of acquisition as the date of settlement on the seller s purchase of that property; and Re-sale date as the date of execution of the sales contract by a buyer intending to finance the property with an FHAinsured loan. Refer to Exceptions to the 90 Day Restriction for additional information. Second Appraisal Required on Properties Sold Between 91 and 180 Days After Acquisition A second appraisal by another appraiser is required if The re-sale date of a property is between 91 and 180 days following the acquisition of the property by the seller; and The resale price is 20 percent or more over the price paid by the seller when the property was acquired. AFN reserves the right to require additional documentation to support the increase in value. Example: If a property is re-sold for $80,000 within six months of the seller s acquisition of that property for $40,000, the lender must obtain a second independent appraisal supporting the $80,000 sales price. Even if the lender provides documentation showing the cost and extent of rehabilitation that went into the property resulting in the increased value, the second appraisal is still required. Note: The cost of the second appraisal may not be charged to the borrower. AFN-G_FHAUWManual Rev. 07/30/2015 Page 185 of 296

Prohibition on Property Flipping Resales Occurring Between 91 Days and 12 Months Following Acquisition FHA reserves the right to require additional documentation from a lender to support the resale value of a property if The resale date is more than 90 days after the date of acquisition by the seller, but before the end of the twelfth month following the date of acquisition; and The resale price is 5 percent or greater than the lowest sale price of the property during the preceding 12 months. At FHA s discretion, such documentation may include, but not be limited to, an appraisal from another appraiser. Exceptions to the 90 Day Restriction The only exceptions to the 90 day resale restriction are for: Properties acquired by an employer or relocation agency in connection with the relocation of an employee; Re-sales by HUD under its Real Estate Owned (REO) program; Sales by other United States Government agencies of single family properties pursuant to programs operated by these agencies; Sales of properties by nonprofits approved to purchase HUD owned single family properties at a discount with resale restrictions; Sales of properties that are acquired by the seller by inheritance; Sales of properties by state and federally-chartered financial institutions and government sponsored enterprises; Sales of properties by local and state government agencies; and Sales of properties within Presidentially Declared Disaster Areas. Any subsequent re-sales of the properties described above must meet the 90 day threshold in order for the mortgage to be eligible as security for FHA insurance. AFN-G_FHAUWManual Rev. 07/30/2015 Page 186 of 296

SELLER CONCESSIONS Seller Concessions and Verification of Sales Appraisal Requirements for Sales Concessions Types of Sales Concessions Sales concessions influence the price paid for real estate. For this reason, FHA requires that appraisers identify and report sales concessions and properly address and/or adjust comparable sale transactions to account for sales concessions in the appraisal of all properties to be security for an FHA-insured loan. Sales concessions may be in the form of any of the following concessions given by the seller or any other party involved in a mortgage transaction: Loan discount points; Loan origination fees; Interest rate buy downs; Closing cost assistance; Payment of condominium fees; Builder incentives; Down payment assistance; Monetary gifts; or Personal property. AFN Requirements Regarding Sales Concessions FHA requires that lenders comply with the requirements listed below with respect to sales concessions: On any real estate purchase transaction, the lender must provide the appraiser with a complete copy of the ratified sales contract, including all addenda, for the subject property that is to be appraised; AFN must provide appraisers with all financing data and sales concessions for the subject property granted by anyone associated with the transaction (Note: Sales concession information must include gifts and/or down payment assistance, which may or may not be included in the contract of sale.); and AFN-G_FHAUWManual Rev. 07/30/2015 Page 187 of 296

Seller Concessions and Verification of Sales AFN Requirements Regarding Sales Concessions If AFN requests a reconsideration of value, AFN must provide the appraiser with any amendments to the contract that occurred after the effective date of the appraisal. Note: Contributions from sellers or other interested third parties to the transaction that exceed 6 percent of the sales price or other financing concessions must be treated as inducements to purchase, thereby reducing the amount of the mortgage. Refer to Inducements to Purchase for additional information. AFN-G_FHAUWManual Rev. 07/30/2015 Page 188 of 296

MANUFACTURED HOMES Manufactured Homes: Property Eligibility Foundation Requirements All manufactured home permanent foundation systems must follow the FHA guidelines in effect at the time of the certification, which are currently published in the Permanent Foundations Guide for Manufactured Housing (PFGMH). For more information on PFGMH, refer to HUD 4930.3G, or www.huduser.org/publications/destech/permfound.html. Engineer s Certification on Foundation Compliance The underwriter must submit an Engineer s Certification on Foundation Compliance, attesting to compliance with the current PFGMH, which must be: Completed by a licensed professional engineer or registered architect, who is licensed/registered in the state where the manufactured home is located; Site-specific; and Included in both the lender s loan file and the insuring binder when submitted to FHA. Note: The certification must contain the engineer s or registered architect s signature, seal, and/or state license/certification number. In states where seals are issued, the seal must be on the certification. Reference For more information on PFGMH, refer to HUD 4930.3G, or www.huduser.org/publications/destech/permfound.html. AFN-G_FHAUWManual Rev. 07/30/2015 Page 189 of 296

Manufactured Homes: Property Eligibility Engineer s Certification on Foundation Compliance A copy of the foundation certification, showing that the foundation met the PFGMH guidelines that were in effect at the time of certification, is acceptable for future FHA loans, provided there are no alterations and/or observable damage to the foundation. A copy of the foundation certification is not required in the loan file or insuring binder for any: FHA-to-FHA transaction, provided that no modifications have been made to the foundation or structure from the date of the effective certification; or FHA/HUD Real Estate Owned (REO) Division sales. Perimeter Enclosures For the space beneath a manufactured home to be properly enclosed, the perimeter enclosure must: Be a continuous wall (whether bearing or non-load bearing); Be adequately secured to the perimeter of the unit; Separate the crawl space from backfill; Keeps out vermin and water; and Allow for proper ventilation of the crawl space. For new construction, the space beneath the home shall be enclosed by a continuous foundation-type construction designed to resist all forces to which it is subjected without transmitting forces to the building superstructure. The enclosure shall be constructed of materials that conform to the PFGMH, and to HUD Minimum Property Standards (MPS), such as concrete, masonry, or treated wood. For existing construction, there must be adequate backing, such as concrete, masonry, or treated wood, to permanently attach and support or reinforce the skirting, if the perimeter enclosure is non-load bearing skirting comprised of lightweight material. Reference For more information on PFGMH, refer to www.huduser.org/publications/destech/permfound.html. AFN-G_FHAUWManual Rev. 07/30/2015 Page 190 of 296

Manufactured Homes: Property Eligibility Termite Control The steel chassis under a newly-constructed manufactured home unit is not an effective termite barrier. Any one, or a combination of the following methods is required for maximum protection against termites, including: Chemical soil treatment; EPA-registered bait treatments; Pressure preservative-treated wood; or Naturally termite-resistant wood. Termite protection policies for existing manufactured homes will be handled in the same manner as stick-built homes. State or local requirements are to be followed. Manufactured Homes: Required Inspections Required Inspections for Newly Constructed Manufactured Homes For newly-constructed manufactured homes, initial and final inspections must be completed in accordance with the requirements in HUD 4145.1, REV-2, CHG-1, Architectural Processing and Inspections for Home Mortgage Insurance; and reported using the Compliance Inspection Report form. The inspections must be performed by: FHA Compliance Inspectors Licensed engineers Registered architects, or Other qualified construction industry professionals, as determined by AFN. The inspector must have a copy of the FHA-required foundation certification and related plans and specifications at the time of the inspection. FHA Roster appraisers may use Part B of Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report, which provides for compliance repair and completion inspections for existing and new construction dwellings. AFN-G_FHAUWManual Rev. 07/30/2015 Page 191 of 296

Manufactured Homes: Required Inspections Required Inspections for Newly Constructed Manufactured Homes References Important: The FNMA form Fannie Mae Form 1004D/Freddie Mac Form 442, Appraisal Update and/or Completion Report may not be used in lieu of Form HUD-92051, Compliance Inspection Report, for new construction and manufactured housing. For more information on inspection requirements, refer to HUD 4145.1, Architectural Processing and Inspections for Home Mortgage Insurance; For more information on the Compliance Inspection Report, refer to Form HUD-92051; and For more information on PFGMH, refer to HUD 4930.3G, or www.huduser.org/publications/destech/permfound.html, AFN-G_FHAUWManual Rev. 07/30/2015 Page 192 of 296

SPECIAL NEIGHBORHOOD HAZARDS AND NUISANCES Unacceptable Sites General Information on Unacceptable Sites The rejection of a location is warranted only in instances where the property being appraised is subject to hazards, noxious odors, offensive sights or excessive noises to the point of endangering the physical improvements or seriously affecting the livability of the property, its marketability or the health and safety of its occupants. Rejection may also be appropriate if the future economic life of the property is so shortened by obvious and compelling pressure to a higher use as to make a fairly long term mortgage loan impractical. These considerations are applicable on an individual case basis, however, taking into account the needs and desires of the user group to which the property will appeal. There is no policy which categorically causes rejection of any property because of proximity to adverse influences. For example, properties should not be rejected simply because they abut commercial use. Some commercial uses may be entirely inoffensive to a specific market segment while other commercial uses may be intolerable. The decision to accept or reject a property affected by any of the above-cited conditions, or any other conditions, must be made on a case-by-case basis by the appraiser who inspects the property and its environment to determine if the property meets the eligibility criteria, the objectives of the MPS, and the location criteria. Physical Conditions The features listed below are analyzed to determine the physical conditions of the neighborhood that affect: Physical improvements; and Health and safety of the occupants; or Influence their pleasure in the appearance of the environment. The elements considered in this analysis are: AFN-G_FHAUWManual Rev. 07/30/2015 Page 193 of 296

Unacceptable Sites Physical Conditions Hazards and Nuisances The features listed below are analyzed to determine the physical conditions of the neighborhood that affect: The physical improvements; and The health and safety of the occupants; or Influence their pleasure in the appearance of the environment. Topography Special hazards are sometimes found to result from the peculiar topography of a neighborhood. Marketability is often adversely affected in hillside areas by the hazards caused by denuded slopes, soil erosion, and land slippages. Earth and mud slides from an adjoining property, falling rocks, etc., are some of the hazards associated with steep grades and must be considered in the evaluation of the site. Subsidence Danger of subsidence is a special hazard that may be encountered under a variety of circumstances. The danger may exist when buildings are constructed on uncontrolled fill or unsuitable soil containing foreign matter such as organic material. It may be present in certain areas where the subsoil is unstable and subject to slippage or expansion. In mining areas consideration must be given to the depth or extent of mining operations, and the location of operating or abandoned shafts or tunnels, in order to reach a conclusion as to whether the danger is imminent, probable, or negligible. Where the danger of subsidence exists, the site will be deemed ineligible unless complete and satisfactory evidence is secured to establish that the threat of subsidence is negligible. AFN-G_FHAUWManual Rev. 07/30/2015 Page 194 of 296

Hazards and Nuisances High-voltage Transmission Lines Heavy Traffic No dwelling or related property improvement may be located within the engineering (designed) fall distance of any pole, tower or support structure of a high-voltage transmission line, radio/tv transmission tower, microwave relay dish or tower or satellite dish (radio, TV cable, etc.). For field analysis, the appraiser may use tower height as the fall distance. Streets having heavy or fast traffic are less desirable due to noise and dangerous conditions that often affect site value. Sites backing to freeways or other thoroughfares that are heavily screened or where traffic is well below grade and a sufficient distance from the property may not be adversely affected. If the appraiser concludes that there is sufficient noise to affect marketability of the property, the property should be rejected and a clear explanation provided. Note: Distance alone is not sufficient to reject the property. Airport Noise and Hazards Sites locations near an airport may be subjected to noise and hazard of low-flying aircraft. Therefore, consideration must be given to the desirability of an affected location in comparison with unaffected locations that are improved by or are appropriate for competitive structures. The table below provides information on noise factors for proposed housing locations and the recommended actions. NOISE FACTOR FOR PROPOSED HOUSING LOCATION Greater than 75 decibels Greater than 65 decibels, but Equal to or less than 75 decibels RECOMMENDED ACTION Site should be rejected and no new residential development should be considered. Site is unacceptable for housing except in cases where appropriate mitigating measures are taken (for example, sound proofing or other suitable treatment). 65 decibels or less Noise level is not a factor for consideration in the site appraisal. AFN-G_FHAUWManual Rev. 07/30/2015 Page 195 of 296

Hazards and Nuisances Airport Noise - Existing Properties Airport Noise - Market Survey Existing properties shall not be rejected solely because of airport influences if there is evidence of acceptance in the market. HUD's position is that since the dwellings are in use and are expected to continue so in the foreseeable future, their marketability should be the strongest indicator of their acceptability. When it appears that significant and substantial changes are occurring, or are likely to occur, in the marketability of properties near an airport, a comprehensive in-depth market survey will be initiated by the Chief Appraiser for the information and guidance of the Director of Housing/Housing Development. This market survey cover such facts and opinions as: Selling prices and rentals of homes, as compared with similar homes in other areas not subject to this influence; Length of time properties sold were on the market, as compared with the exposure of similar properties sold in unaffected areas; Length of time rental properties were unoccupied, as compared with those in unaffected areas; Number of properties for sale or for rent, as compared with other unaffected areas; Increase or decrease in sales since previous survey. This survey should: Tap any informed sources of information; Be recorded block by block; Include opinions of former residents/owners or their legal representative; Utilize HUD Area Economist reports in determining potential market demand created by the airport and related industries. In the event that these market reports indicate adverse changes in market attitudes, one copy of the report of the survey and any supporting data must be forwarded upon completion to Headquarters, Office of Insured Single Family Housing, Valuation and Technical Support Branch, for review, and one copy to the Assistant Regional Administrator. AFN-G_FHAUWManual Rev. 07/30/2015 Page 196 of 296

Hazards and Nuisances Airport Noise - Continuing Marketability Airport Noise - Location Analysis The value of individual properties and their continuing marketability will depend to a great degree upon the type of planes, the frequency and timing of flights, the intensity of noise, and other factors. There will be varying reactions with distance from the airport, and these variances will be recognized in value in accordance with demonstrated market reaction and evidence of trend. Also, there will be wide variances in the attitudes of different communities or localities, since some will be much less sensitive to particular types of disturbance than will others. This is not peculiar since similar attitudes are found with respect to certain industrial plants, types of highway installation, etcetera. After giving consideration to the determinations previously mentioned involving existing construction, the basic principles of location analysis will be applied in accordance with outstanding instructions. Consideration should be given to the following: Plans for future expansion of airport facilities and services; Prospective or probable increases in the number of jet or other flights using the field or specific runways; The timing of the volume of the flights, (day, night, etc.); Other factors that may increase the annoyance in given locations in the future. If such changes are in reasonable prospect, as in the case of plans to lengthen or relocate runways, to enlarge the airport and build new runways, to increase the number of flights or the weight of planes used, etc., the appraisal must anticipate any adverse effect that is likely to result. Each case will be judged on its own merits. The effect of aircraft activity on the desirability of a particular location shall be compared with other locations that are improved with or appropriate for structures which are competitive with those that are typical of the neighborhood of the subject site. AFN-G_FHAUWManual Rev. 07/30/2015 Page 197 of 296

Hazards and Nuisances Airport Hazards HUD will not accept proposed construction cases and existing dwellings less than one year old if the property is located within Runway Clear Zones at Civil Airports, or Clear Zones or Accident Potential Zone I at Military Airfields. Existing dwellings more than one year old are acceptable provided the prospective purchaser acknowledges awareness that the property is located in a Runway Clear Zone/Clear Zone. This acknowledgment "Notice to Prospective Buyers of Properties Located in Runway Clear, Zones and Military Airport Clear Zones" must be used in every instance where applicable and should be used without change. A signed acknowledgment must accompany the application for firm commitment. Applications are not acceptable for existing dwellings if major modernization or rehabilitation is involved. Any project which significantly prolongs the physical life of existing units or increases the density or number of people at the site will render the property unacceptable. Approved appraisers, Direct Endorsement mortgagees, and approved HUD lenders must all be made aware of these requirements and be provided copies of appropriate maps. Appraisers are responsible for identifying properties affected and must condition acceptance on notification being provided to the prospective purchaser. Mortgagees are responsible for inserting the property address and the name of the airport on the Notice. Mortgagees must also ensure that the prospective purchaser receives the notification at the time loan application is initiated. Fire and Explosion The storage or manufacture of volatile or explosive products, and other conditions that constitute extraordinary exposure to the danger of explosion or conflagration from nearby industry, gas lines, or contiguous brush or grass land, are hazards that adversely affect value of the dwellings in the neighborhood. AFN-G_FHAUWManual Rev. 07/30/2015 Page 198 of 296

Hazards and Nuisances Near High Pressure Gas and Liquid Petroleum Pipelines No part of any residential structure shall be located less than ten feet from the outer boundary of the pipeline easement of high pressure gas and liquid petroleum transmission lines. When new construction or subdivision land planning is proposed in areas outside the ten foot limit, but within an area that extends 220 yards on either side of the centerline of such high pressure transmission line, the developer shall be required to comply with the following procedure prior to HUD acceptance of applications for commitment on individual properties. The developer must provide HUD with a statement from an authorized official of a gas pipeline company certifying compliance with each of the following paragraphs of Title 49, Transportation, of the Code of Federal Regulations. 192.607 - Initial determination of class location and confirmation or establishment of maximum allowable operating pressure; 192.609 - Required study for change in class location; 192.611 - Change in class location; confirmation or revision of maximum allowable operating pressure; 192.613 - Continuing surveillance practices (identification and operating methods used by survey team.) For liquid petroleum, certifying that the pipeline complies with CFR-195 and all amendments thereto. Pipeline companies maintain records of the above, per agreement with the Department of Transportation as recorded in Federal Register, Volume 35, Number 161, dated August 19, 1970, which has been previously distributed to all Field Offices. The above statements obtained by the developer shall be retained in the subdivision file. Air Quality and Offensive Odors Excessive smoke, fog, chemical fumes, noxious odors, stagnant ponds or marshes, poor surface drainage and excessive dampness are hazardous to the health of neighborhood occupants and adversely affect the market value of the subject property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 199 of 296

Hazards and Nuisances Sewage System Failure Where individual sewage disposal systems are involved, an analysis of the location must be made to assure the area is free from conditions that adversely affect the operation of the systems. Consideration will be given to the type of systems, topography, depth to ground water, soil permeability, and type of soil to a depth of several feet below the surface. A check of other septic systems in the neighborhood must be made to assure that failures within the neighborhood will not adversely affect the subject property. Whenever there are instances of doubt concerning the operation of sewage disposal systems in a neighborhood, the services of the local health authority should be obtained. Note: More detailed information concerning many of the special hazards and nuisances may be found in HUD Handbooks 1390.2, 1390.4, 24 CFR Part 51 & 24 CFR Part 200.926. In-Use and Abandoned Oil or Gas Wells General Operating Wells Both operating and abandoned oil and gas wells pose several potential hazards to housing. Such hazards include: Fire Spray or other pollution, and Explosion. Accordingly, no dwelling may be located closer than 300 feet from an active or planned drilling site. This applies to the site boundary, not to the actual well location. When operating wells are located in single family subdivisions, no housing may be built within 75 feet of an actual operating well unless mitigation measures are taken. This is to avoid nuisance during maintenance, to diminish noise levels caused by pumping, and to reduce the likelihood of contamination by potential petroleum spills. Field Offices should require that operating wells be fenced and permanently screened by appropriate tall and dense landscaping. AFN-G_FHAUWManual Rev. 07/30/2015 Page 200 of 296

In-Use and Abandoned Oil or Gas Wells Abandoned Wells Most petroleum producing States have specific required well abandonment practices, but some wells were abandoned in the past without the necessary precautionary action. Hazards from improperly abandoned wells include blowout and potential fire. To verify the adequacy or safety of an abandoned well, a letter from the responsible authority within the State government must state that the specific well in question has been safely and permanently abandoned. Where such letter is provided, housing may be located no closer than ten feet from the abandoned well. Where a State does not issue a letter as described above, housing must be located no less than 300 feet from the abandoned well. Special Case - Proposed, Existing, or Abandoned Wells In some geographic areas (e.g., Wyoming) hydrogen sulfide gas may be emitted from petroleum product wells. Hydrogen sulfide gas is highly toxic and a threat to life and health. It is heavier than air and tends to flow down slope, through valleys and canyons and can cause deaths before people become aware of the problem and can escape. Minimum clearances from sour gas wells may be established only after a petroleum engineer's risk assessment and clearance recommendations have been obtained and concurred with by State agencies responsible for petroleum industry regulation and for public health and safety. Slush Pits A slush pit is defined as a basin in which drilling "mud" is mixed and then circulated during drilling to lubricate and cool the drill bit and flush away rock cuttings. Drilling mud normally contains large quantities of bentonite, an expansive soil material that results in significant soil volume change potential that may be very damaging to buildings. The location of old slush pits should be determined when a building is proposed near an active or abandoned well. After the slush pit is located, either: AFN-G_FHAUWManual Rev. 07/30/2015 Page 201 of 296

In-Use and Abandoned Oil or Gas Wells Slush Pits All unstable and toxic materials should be removed and the pit filled with compacted selected materials; or No dwelling construction may be accepted on a lot that includes any part of a slush pit. Termites Structural Integrity Termites: Proposed Construction Termites can cause serious problems in the wood structural components of a home and in many cases go undetected for a long period of time. Because the structural integrity of a building can be seriously affected, and the marketability of an infested home questionable, the Department requires assurance, to the extent possible, that a home is free of any infestation. To protect against decay and termite infestation, builders must follow the requirements in HUD-approved local, state, or CABO building codes. The builder must specify the type of treatment to be used. See USDA Forest Service Home and Garden Bulletin 64, Subterranean Termites-Their Prevention and Control in Buildings. If soil treatment is used, submit Termite Soil Treatment Guarantee as required by the Conditional Commitment/Direct Endorsement Statement of Appraised Value, Form HUD 92800.5B. Termites: Existing Construction In those parts of the country susceptible to termite infestation, appraisers must look at areas of the property that have a potential for termite infestation, such as the bottoms of outside doors and frames, wood siding in contact with the ground, and crawl spaces. They should also look for mud tunnels running from the ground and up the side of the house. If there is any evidence or potential for termite infestation, the appraiser must make a requirement for an inspection by a reputable, licensed termite company. AFN-G_FHAUWManual Rev. 07/30/2015 Page 202 of 296

PROPERTY ANALYSIS Appraiser s Analysis Physical Improvements Site Highest and Best Use Excess Land Analysis of physical improvements result in conclusions as to the desirability, utility, and appropriateness of the physical improvements as factors in the determination of mortgage risk and the ultimate estimate of value. The appraiser must analyze the site to establish the basis for comparing the estimates of market prices of sites in the estimate of replacement cost of the property and to determine suitability for the existing or proposed use. For both proposed and existing construction, the appraiser must determine the present highest and best use for the site disregarding improvements which may exist or which are proposed for the site. The conclusion serves as the basis of comparison for estimating the market price of the land and discloses the extent to which the existing or proposed building improvements are appropriate or inappropriate to the site. The term Excess Land is defined as being that area by which the plot exceeds the area of a readily marketable real estate entity. Excess land occurs when the subject lot is considerably larger than typical lots in the neighborhood, and the excess is capable of separate use. However, in small communities and outlying areas different criteria must be used since the market may readily accept a wide variance in lot sizes due to wide differences in lot use by this segment of the market. When it has been determined that the plot contains excess land, the area of the readily marketable real estate entity, together with the existing or proposed improvements, is delineated and is appraised in the prescribed manner. The excess land is described but is not appraised. A requirement is made that the excess land be excluded from the mortgage security. AFN-G_FHAUWManual Rev. 07/30/2015 Page 203 of 296

Appraiser s Analysis Topography Suitability of Soil Proper topography and site grading can be an important element in preventing wet basements, damp crawl spaces, erosion of soils, and overflowing sewage disposal systems. The appraiser must analyze the relationship of street grades, floor elevations, and lot grades to ensure proper protection. Where foundations or their bearing soils may be affected by seepage or frost, the dwelling is unacceptable unless the surface and subsurface water is diverted from the structures so as to ensure positive drainage away from the foundation. The soil and subsoil conditions of the site must be considered including type and permeability of soil, location of water table, surface drainage conditions, compaction, and the existence of rock formations are among the physical features that affect the value of the site or its suitability for development. Adverse features located on adjoining land must be observed for any effect to the subject property. Off-Site Improvements Consideration must be given to off-site improvements adjoining the subject property. These improvements consist of street surface, curbs, sidewalks, curb cuts, driveways, aprons, etc., that are not contained within the legal boundaries of the site but enhance the market acceptance and the use and livability of the property. Other situations requiring consideration of off-site improvements are: Proposed construction dwellings located in an approved subdivision must comply with off-site improvements as required by HUD Handbook 4135.1 and set forth in the subdivision file; The subject property must be compared with the immediate neighborhood to determine predominate off-site improvements required by the market. Necessary off-site improvements that are not in existence or are proposed to be installed for the subject property must be made a condition of the commitment; AFN-G_FHAUWManual Rev. 07/30/2015 Page 204 of 296

Appraiser s Analysis Off-Site Improvements Any proposals for the installation of off-site improvements and the levying of assessments by the local governing body in the near future will necessitate a commitment condition requiring the installation of improvements and the payment of the assessment prior to insurance endorsement. Easements, Restrictions, or Encroachments Consideration must be given to any easement, restriction or encroachment and its effect on the value. These should be listed on the application. However, such factors are often not discovered until after the appraisal report is complete. The appraiser must inspect the site for any obvious signs of easements, restrictions and encroachments not included in the application. If additional information is needed to fully disclose the nature of an easement, restriction or encroachment, the application should be returned to the mortgagee for further information. Factors considered in the value estimate must be recorded in the Uniform Residential Appraisal Report. Proposed Construction Cost of Treatment Where unusual cuts, fills, retaining walls, etc., are necessary in preparing the site for the proposed building improvements, the appraiser must make an estimate of the amount by which the cost of the work exceeds the cost of preparing typical sites for similar structures from the Marshall and Swift Cost Handbook. This estimate is supplemental to the estimate of replacement cost of building improvements. When estimating the market price of a site where unusual site characteristics must be corrected, comparisons are made under the assumption that the site is in the condition which will exist after completion of the corrective work. The cost of the treatment is disregarded, but the value of the improved site is used in the estimate of replacement cost of the property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 205 of 296

Appraiser s Analysis Cost of Treatment The appraiser uses the supplemental cost estimate to determine the extent to which the replacement cost of the property will exceed the cost of a substitute property produced by constructing identical building improvements on a typical site. It is also used as an indication of the extent to which value may be less than replacement cost for that part of the cost in excess of the cost of preparing the typical site. Existing Dwellings and Dwellings Completed Less than One Year Prior to the Appraisal without HUD or VA Approval and Inspections The cost of treating unusual site characteristics must not be included in the Estimate of Replacement Cost of Building Improvements. This is necessary to avoid including both the effect of site treatment and the cost of work in the Estimate of Replacement Cost of the Property. The condition of existing building improvements is examined at the time of appraisal to determine whether repairs, alterations, or additions are necessary. If so they should be those items essential to eliminate conditions threatening the continued physical security of the property. Required repairs will be limited to those necessary to preserve the continued marketability of the property and to protect the health and safety of the occupants. Although existing dwellings are inspected by the appraiser, the appraiser may request the assistance of the Architectural Section as the need arises. The appraiser will then determine whether to accept the property as is, reject it, or determine the extent of repairs, necessary to make the property acceptable for HUD mortgage insurance. Noncompliance with the General Acceptability Criteria When examination of existing construction reveals noncompliance with the General Acceptability Criteria (HUD Handbook 4905.1), an appropriate specific condition to correct the deficiency is required in the report if correction is feasible. If correction is not feasible, and compliance can be effected only by major repairs or alterations, the property shall be rejected and the reasons explained in the report. In such cases, the appraiser provides an "as is" value, which is an estimate of the market value of the property if major repairs were not needed, less the estimated cost of needed repairs. AFN-G_FHAUWManual Rev. 07/30/2015 Page 206 of 296

Appraiser s Analysis Conditions Requiring Repair Typical conditions requiring repair or replacement are: Termite damage; damaged, inoperative or inadequate plumbing; Heating or electrical systems; broken or missing fixtures; Rotten or worn out counter tops; Any structural failure in framing members; Leaking or worn out roofs; Defective paint surfaces (See "Lead Based Paint" below.); Masonry and foundation damage; Drainage problems; Wood floors worn through the finish; Broken plaster or sheetrock; and Requirements to meet the code but only in certain HUD programs requiring code compliance. Deferred Maintenance Replacement Because of Age Health and Safety Conditions Not Requiring Repairs Any element which, while still operable or useful, will have reached the end of its useful life within a period estimated not to exceed two years, should also be replaced. With respect to such deferred maintenance items, good judgment must be exercised. No Replacement of an element simply because of its age and for no other reason, shall be made if the element is still functioning well. Where there is doubt because of age, but the element or system appears satisfactory, a certification as to its condition may be required. The appraiser shall make such other requirements as are essential to the health and safety of the occupants. Conditions that do not ordinarily require repair include any surface treatment, beautification or adornment which is not connected to work required for the preservation of the property, its continued physical soundness or marketability, or the health and safety of its occupants. AFN-G_FHAUWManual Rev. 07/30/2015 Page 207 of 296

Appraiser s Analysis Conditions Not Requiring Repairs Some examples are: A wood floor whose finish has been worn off to expose the bare wood must be sanded and refinished, but a wood floor that has darkened with age but has an acceptable finish does not need polishing or refinishing; Peeling interior paint and broken or seriously cracked plaster or sheetrock require repair and repainting, but paint that is adequate though not fresh need not be redone; Missing shrubbery or dead grass on an existing property need not be replaced; Cleaning or removal of carpets is required only when they are so badly soiled as to affect the livability and/or marketability of the property; Installation of paved driveways or aprons should not be required if an otherwise acceptable surface is present; Installation of curbs, gutters or partial paving of a street is not required unless assessment for the same is imminent; Complete replacement of tile floors is not necessary because some tiles do not match, etc. Note: Unnecessary requirements should be avoided because they increase the cost of housing without adding any basic amenities to the property. Lead-Based Paint For all homes built before 1978, the appraisal should note the condition and location of all defective paint in the home. All interior and exterior surfaces - walls, stairs, deck porch, railing, windows and doors - must note the defective paint (chipping, flaking or peeling). Exterior surfaces include those surfaces on fences, detached garages, storage sheds, and other outbuildings and appurtenant structures. For condominium units, the appraiser needs to inspect only the exterior surfaces and appurtenant structures of the unit being appraised and address the overall condition, maintenance, and appearance of the condominium project. AFN-G_FHAUWManual Rev. 07/30/2015 Page 208 of 296

Appraiser s Analysis Lead-Based Paint If an area of paint on the property is defective, the commitment must contain the requirement that the surface to be treated must be thoroughly washed, sanded (but not machine sanded), scraped, or wire brushed so as to remove all defective paint before repainting. The surface must receive, as a minimum, two coats of a suitable non-lead based paint. The defective paint on applicable surfaces must be removed or covered with materials such as hardboard, plywood, plaster, or other suitable materials. Escrows for the treatment of defective paint conditions affecting the exterior portion of the house as well as appurtenances are allowed only during periods of adverse weather conditions, typical for the area, which preclude the satisfactory completion of the work or in connection with 203(k) Rehabilitation. The mortgagor must request the establishment of the escrow and acknowledge the existence of the defective paint surfaces. Escrows for interior defective paint surfaces other than the 203k Program are not acceptable. The lead-based paint requirements do apply to refinance transactions that require an appraisal, but do not apply to refinance transactions that do not require an appraisal. Persons buying homes built before 1978 must receive the consumer information pamphlet on lead-based paint poisoning. Adequacy of Functional Components The appraiser must consider not only the condition of the property and its equipment but also the functional adequacy of those components under conditions typically expected. Inferior quality roofing, plumbing, and heating equipment, undersized hot water heaters, and bottom of the line appliances are items which must be of concern to the appraiser in estimating value. AFN-G_FHAUWManual Rev. 07/30/2015 Page 209 of 296

Appraiser s Analysis Code Enforcement for Existing Properties Local housing code standards are designed by local municipalities. Accordingly, enforcement of such housing standards rests with the local authority. HUD has neither the authority nor responsibility for making such inspections or enforcing laws of the municipality. The only HUD program in which code enforcement is required by statute is Section 221(d)(2) of the National Housing Act which states "and meeting the requirements of all State laws, or local ordinances or regulations relating to the health or safety, zoning, or otherwise, which may be applicable thereto" Accordingly, at the time of closing, all mortgages on existing construction dwellings insured under Section 221(d)(2), must be supported by evidence in the form of a letter from the local code enforcement agency that the dwelling conforms to the standards of local housing codes, regardless of whether such codes are regularly enforced at the time of sale or whether the community has a program of active code enforcement. There are two exceptions to this requirement: 1. If a local community has no codes containing standards which can be applied to existing dwellings, a copy of a letter from an authorized official of the local community or an appropriate local authority stating that no codes exist, must be placed in the file. 2. The homebuyer may employ a home inspection company to perform a home inspection, to include code conformance, and provide a certificate, signed by a local official that the property meets local codes. The cost of such inspection may be included in the buyer's closing costs up to a maximum of two hundred dollars. The cost of making code repairs will not necessarily increase the value of the property by the same amount but must be measured by market reactions. HUD repair requirements may be the same or may differ from those required by the code inspection depending on the particular case. AFN-G_FHAUWManual Rev. 07/30/2015 Page 210 of 296

Appraiser s Analysis Certification of Mechanical Equipment The appraiser should require a certification only when unable to determine the condition of certain components of the home. A re-inspection to examine systems not in operation at the time of the appraisal should be required except where the system is new, or nearly new, and raises no questions as to its adequacy and condition. Any plumbing, heating, air conditioning, roofing or electrical certifications required by the appraiser will be ordered by the mortgagee. Certifications will be accepted only from reputable, independent, licensed (where licensing exists) contractors or qualified home inspectors. Contractors selected for any specific certification shall not have any identity of interest with any firm or person connected with the specific transaction nor may they perform any recommended repairs. It shall be the responsibility of the Field Office to notify mortgagees of undesirable firms if a review of their performance indicates inadequate, inaccurate or otherwise poor certification reports. The cost of any repairs found to be necessary may be borne by the seller, buyer or any other party. Design Design is the cohesive element that blends the structural, functional and decorative elements of a property into a whole. With good design the property's parts will be in harmony--(each part with all the other parts). The whole property, in turn, will be in harmony with its immediate site and environment. Because good design is recognized and desired, the economic life of properties and neighborhoods will be extended and prices obtainable will typically exceed those that can be obtained for properties offering the same number of rooms and area but lacking in elements of good design. This competitive advantage, usually continues through the entire economic life of the property. It is this demonstrable price differential that must be recognized by the appraiser and reflected in his or her comparative adjustments of market data and final finding of value. AFN-G_FHAUWManual Rev. 07/30/2015 Page 211 of 296

Appraiser s Analysis Conformity of Property to Neighborhood Analysis Of The Elements Of Conformity Suitability of Use-Type A residential property of good physical characteristics may not necessarily be good security for a mortgage loan, even though situated in a good location. It may be that the property would be entirely appropriate at another location, but not in its actual location. The property may be displeasing when viewed in relation to its surroundings, and it may not conform in other respects to the use which would be most marketable in the particular neighborhood. Elements other than similarity of physical characteristics must be considered in determining the effect of property-neighborhood relationships to marketability. Analysis of Conformity requires consideration of Suitability of Use-Type, Appropriateness of Functional Characteristics, Harmony of Design, and Relation of Expense of Ownership to Family Income Levels. The term Use-Type refers to the use for which a dwelling is designed single-family, two-family, and so forth. In most neighborhoods only one use-type is suitable. In some neighborhoods, however, because of their heterogeneous development several use-types may be found suitable. The marketability of a dwelling designed for single family use is usually restricted if it is located in a neighborhood of multiplefamily buildings. When the highest and best use is for multiplefamily structures, land cost may be too great for single-family dwellings and economic life is shortened. In apartment house areas amenities customarily desired by purchasers of single-family homes are reduced and restricted and densities are greater than those considered acceptable by the single family home market. Additionally, neighborhood associations that protect occupants of single family neighborhoods are not usually found. Appropriate Functional Characteristics Functional Characteristics refer to the living facilities provided in a residential property. They relate to site use and to arrangement, number, and size of rooms. Usually well-defined neighborhood market preferences are observable. AFN-G_FHAUWManual Rev. 07/30/2015 Page 212 of 296

Appraiser s Analysis Appropriate Functional Characteristics Nonconformity may be present because of the placement of the house upon the site. Deviation from the accustomed or accepted placement should be carefully considered to determine whether it adversely affects desirability. Side, front and rear yards should conform to conditions found to be appropriate to the neighborhood if desirability is to be maintained. If a site is substantially smaller than the size typical in the neighborhood marketability may be restricted. Similar effects on marketability may result where the shape or topography of a particular lot makes it less desirable than those typical of the area. The number, arrangement and size of rooms frequently conform to definite preferences in given neighborhoods. In some localities where one-story dwellings predominate, a two-story dwelling may meet with considerable market resistance. Similarly, a dwelling with small rooms might be restricted in marketability in neighborhoods where dwellings with large rooms are preferred. Harmony of Design Conformity of the exterior design of a structure with those of other structures in the immediate neighborhood is not important except where it contrasts inharmoniously with them. There may be considerable variety in the exterior design of dwellings in a neighborhood and yet each may present a pleasing appearance when viewed in relation to its surroundings. On the other hand, a dwelling may be without any architectural faults and yet clash so violently with the design of neighboring properties that marketability may be seriously restricted. Example: If a two-story Colonial residence were erected in a neighborhood characterized by one-story Spanish bungalows, it would probably be unattractive to prospective occupants irrespective of the excellence of its individual design. AFN-G_FHAUWManual Rev. 07/30/2015 Page 213 of 296

Appraiser s Analysis Relation of Expense of Ownership to Family Incomes Families usually select homes in neighborhoods where typical occupants have financial means similar to their own. Because of this tendency the expense of owning or renting a home must be in proper relation to the incomes of prospective purchasers or renters to whom the location appeals as a place of residence. home that is too costly for these families to purchase or maintain will have limited marketability. Economic Life vs. Physical Life The period between the time of completion of the building and the time when it is no longer fit or safe for use, or when it is no longer practicable to maintain it in safe usable condition, is its total physical life. The total economic life of a structure is the period of time between the completion of the building and the disappearance of its ability to produce services or net returns over and above a return on the land value. Economic life can never be greater than physical life, but may be and frequently is less. A structure may be sound and in good physical condition with a number of years of physical life remaining and yet have reached the end of its economic life, if its remaining years of physical usefulness will not be profitable. Estimation of Remaining Economic Life In predicting the remaining economic life of a building, six factors are considered: 1. Economic background of the community or region and the need for accommodations of the type represented; 2. Relationship between the property and the immediate environment; 3. Architectural design, style, and utility from the functional point of view and the likelihood of obsolescence attributable to new inventions, new materials, and changes in tastes; 4. Trend and rate of changes of characteristics of the neighborhood and their effect upon land values; 5. Workmanship and durability of construction, and the rapidity with which natural forces cause physical deterioration; and AFN-G_FHAUWManual Rev. 07/30/2015 Page 214 of 296

Appraiser s Analysis Estimation of Remaining Economic Life End of Useful Life of Building Improvement 6. Physical condition and probable cost of maintenance and repair, the policy of owners and occupants with respect to maintenance, and the use or abuse to which structures are subjected. The useful life of a building has come to an end when the building is incapable of producing an annual income or services sufficient to offset the expense of maintenance, insurance and taxes to produce returns upon the value of the land and rehabilitation would not be feasible. The improvements upon the lot at the time possess no more value than the amount which can be obtained from a purchaser who will buy them and remove them from the site. Valuation: Market Approach Use of Market Price in Valuation Estimates of market price are not necessarily equal to estimates of value for long term use. Market price indicates the price at which a property was currently bought or sold, and that value may exist in an equivalent amount. The relationship of value to estimated market price must be determined through analysis of all circumstances affecting the property and the transaction. In a reasonably balanced market, with comparatively stable economic conditions prevailing and sufficient relevant sales and listings available, the market approach is the most reliable method of estimating value. Like all other estimates, it must be considered and weighed with good judgment and compared with conclusions of value arrived at through other methods of estimation. The importance and reliability of sales, listings, and offers as indicators of value decrease in periods of rapidly changing price levels, or in periods when housing supply and demand are clearly not in balance. During such abnormal periods, adjustment must be made not only for the differences in the properties, but also to reflect the amount attributable to the unusual conditions existing in the market. AFN-G_FHAUWManual Rev. 07/30/2015 Page 215 of 296

Valuation: Market Approach Exclusion of Non-Realty Items The selling or contract price is the total amount received by the seller from the buyer. Closing costs and items of prepaid expenses are not included in the Estimated Market Value. It is the practice in some instances as an inducement to buyers, to offer and to sell properties at a price which includes items in addition to the real estate such as personal property items not acceptable as mortgage security. Therefore market data used in estimating the market value must be studied to determine that the do not include amounts for items of this nature which are typically paid by the buyer in addition to the contract price. In some areas of the country, items such as stoves and refrigerators are considered part of the real estate. In other areas, these items are considered personal property and are not included in the sales price. Therefore, the appraiser should view these items in accordance with local custom. If such items are included in the contract in an area where they are not customarily included, the appraiser must estimate the value of the items, deduct their total value from the total reconciled value, and explain in comments section of the URAR. Use of market data concerning buydowns and incentives to buy. The sales price of properties which offer the purchaser a cash refund by means of a monthly payment reduction plan (buydown or similar arrangement) is not to be used as comparable sales data unless the worth of the total refund is deducted from the sales price to reflect the true all cash payment to the seller. Appraisers must take a dollar for dollar adjustment to comparables where the seller's contribution exceeds limits established by HUD, currently six percent. Seller buydowns are payments for discount points, any type of interest payments, or seller payment of closing costs normally (under local market practice) paid by the buyer (including the one percent loan origination fee). The sales price of the comparable is selected as the base for making the adjustment in order to simplify the process. To the extent possible appraisers should select comparable sales from properties that sold without the benefit of various seller buydowns in excess of six percent. AFN-G_FHAUWManual Rev. 07/30/2015 Page 216 of 296

Valuation: Market Approach Exclusion of Non-Realty Items When comparables are not available without these types of incentives, adjustments must be made to the sales price of the comparable to better reflect the cash equivalent value of the property. The instructions above, particularly the six percent allowance, relate to seller buydowns as defined. Where sellers use other known incentives such as trips, non-realty items, monthly payments to principal, homeowner association or condominium association fees, and similar gifts as inducements to purchase, reductions in the sales price of the comparable must be made on a dollar-for-dollar basis from the first dollar, without regard to the six percent allowance. These instructions apply both to new construction and sales of existing properties. The appraiser will be responsible for making appropriate notations on the URAR explaining all adjustments made. Market Comparisons Selection of Comparable Properties (Bracketing) In order to make the estimate of market value it is necessary to thoroughly explore the market to determine the price at which competitive properties are being offered and sold. It is necessary to consider data from competing neighborhoods within the area as well as data from the neighborhood. This data will serve to indicate a range within which the market price of an equivalent property will fall. In the selection of properties for comparison it is desirable to choose some that are equivalent and some that are nearly equivalent to the subject property. For properties to be equivalent they must provide equal accommodations, approximately the same number of square feet, the same total number of rooms and the same number of bedrooms, bathrooms, and so forth, and must be equally desirable to the same group of occupants. Nearly equivalent properties should include some better than the subject property and some not as good, to establish a market price bracket for an equivalent property, in order that comparisons can be made within the bracket. AFN-G_FHAUWManual Rev. 07/30/2015 Page 217 of 296

Valuation: Market Approach Selection of Comparable Properties (Bracketing) Use of Conventional Sales Data The properties selected for comparison should furnish accommodations, livability, and amenities within a range of similarity to the subject property and within a price range that would be acceptable to typical purchasers. For instance, a prospective purchaser may desire a 3-bedroom, 2-bath ranch-type house in an outlying neighborhood readily available to rapid transportation to the downtown area. This purchaser may be willing to accept a 3-bedroom, 1-bath house in a similar location, or he/she may accept a 2-story, 3 or 4- bedroom house in a relatively close-in location. He/she will ultimately purchase the property containing the greatest number of elements desired, for the lowest price, limited of course by ability to pay. In selecting the comparative properties utility is the initial basis for selecting comparables; price is secondary. When using conventional sales data, the appraiser must be aware of the terms of the sale and adjust the conventional sales price to reflect any unusually favorable terms. In the case of a property sold with two or three mortgages or trusts, the going rate of discount must be determined for the second and/or third and the sales price reduced by the amount of the discount. It is better to avoid such transactions if single mortgages, trust, or all cash conventional sales are available. Sales made by contracts for deed (land contracts) shall not be used as conventional data due to the difficulty of determining discount rates and unusual term arrangements. When using sales data in appraising inner-city properties, the appraiser must exercise extreme care to ensure that the property selected for comparison is as nearly like the subject property as possible. The appraiser should examine the comparable information carefully to determine the terms of sale and the condition of the comparable, visually verify the description of the property, and note any advantages or disadvantages found in the neighborhood. The appraiser should carefully adjust the sale to reflect conditions found. AFN-G_FHAUWManual Rev. 07/30/2015 Page 218 of 296

Valuation: Market Approach Evaluation and Use of Market Data In evaluating market data, the appraiser determines: If a sale, whether the price resulted from a normal transaction under free and competitive conditions where the buyer and seller acted intelligently and without duress, and were not motivated by unusual or capricious desires; or If a listing, whether the price quoted is at or near the price at which the property may be expected to sell rather than a price to "test the market" or a price that would induce the owner to sell although he has no particular desire to sell; or That the data are factual and reflect the current market reaction to pertinent factors of supply and demand. Generally speaking, however, listings are not acceptable as comparables since they represent the highest price for which a property is likely to sell; listings may be shown on an addendum to indicate the asking prices in a neighborhood, but only in extremely unusual circumstances, such as an area in which there has been virtually no activity for some time may they be used; o In those cases, the appraiser must verify all information and discount as necessary to make a judgment as to the amount for which the property is anticipated to sell. When a listing or listings are used, the Reviewer must check data to verify that there have been no sales in that area for some time. Quantity of Data There must be a sufficient number of transactions used for comparison to firmly establish the present market attitude toward the subject property. A limited number of sales or listings may be sufficient when appraising a property of a design that is typically constructed in comparative neighborhoods. A property of unusual design will present a more difficult appraisal problem and may require an extensive list of comparisons. AFN-G_FHAUWManual Rev. 07/30/2015 Page 219 of 296

Valuation: Market Approach Market Price Comparisons The existence of rapidly rising or declining prices of residential properties, as indicated by data, must be recognized in the appraisal. The appraiser will analyze the data and determine the rate of increase or decrease in residential prices. The rate of increase or decrease from the date of the sale of the comparable to the date of the appraisal will have an effect on the value of a property and must be considered. The appraiser will adjust the sales price of the comparables by the rate of increase or decrease for the appropriate time, (three months or more) to determine a range of indicated value that is relevant to the current market. It is not appropriate to adjust listings for any applicable rate of increase. Market price comparisons are made using sales and listings of competitive properties as guides in estimating the amount likely to be paid for the property under appraisal. Experienced appraisers familiar with the market in the community rely on their experience and comprehensive knowledge of current sales and listings to make a preliminary estimate of the price range in which the property under appraisal is likely to fall. Thus, sales and listing data should cover the broad range of the market including FHA, VA, and conventional transactions. Preliminary Price Comparison Specific Estimate Each appraisal report will contain at least one conventional comparable, if available, and be so designated on the appraisal form. The data should include comparable sales in competing neighborhoods and should not necessarily be limited to the subject neighborhood or subdivision or block. Sizes, accommodations, locations and date of sale are considered in this preliminary process of establishing a price range. A more specific estimate of the market price must be made somewhere between the upper and lower limits of the preliminary price range. This is done by a more detailed comparison of the subject property with those selected as comparable. This refining or pin-pointing process includes making lump sum allowances for plus or minus features. AFN-G_FHAUWManual Rev. 07/30/2015 Page 220 of 296

Valuation: Market Approach Adjustments In making adjustments to equalize comparable properties to the subject property, the appraiser should adjust only where the reason for the adjustment has a substantial effect on value. "Site/view" for example is not usually adjusted in an urban or suburban area because there is not usually much difference between site size or view. In most neighborhoods sites are of typical size and may range from 50 by 100 feet to 60 by 100 feet, or 50 feet by 100 feet to 50 feet by 120 feet. Size alone is not necessarily a reason for adjustment. Topography is of far greater importance. If a lot is much larger than others, it may be far less desirable if it has a steep slope or is of unusual shape, such as a triangle. With respect to "view," most urban and suburban dwellers see only the streets and homes surrounding them, so it is difficult to justify a difference in "view." One instance in which an adjustment for "view" is justified is if within a neighborhood, one side of a street may overlook a city or picturesque valley and is sufficiently pleasing to warrant greater desirability, thereby increasing its value. Site adjustments are also very seldom justified. If the comparable is within a reasonable distance from the subject, as it should be, and is in the same typical surroundings and environment, there should be no reason for an adjustment. In summary, if the appraiser has selected similar properties within a reasonable distance from the subject property, there should be only a minimal number of adjustments to equalize the comparables to the subject property. Reliability of Sales Data Consideration must be given to factors surrounding the sale of a comparable property such as date and terms of the sales transaction. In some instances the price paid may have resulted from necessity or non-typical points of view of an individual purchaser. The bargaining process between a buyer and seller or their representatives may affect the amount paid resulting in a sales price above or below the general market level for such a property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 221 of 296

Valuation: Market Approach Reliability of Sales Data Sales data are reliable to the degree that they embrace information which accounts for the prices paid including: The motives of the buyer and the seller; Relative skill and intelligence of the buyer and seller in negotiating the sale. Valuation: Manufactured (Mobile) Homes General Information HUD's terminology for Mobile home has been changed to "Manufactured Home" but does not include Modular construction which is also a factory built home but is treated the same as stick-built housing, even though it too contains a manufacturer's label. Appraisals of manufactured home lots are the responsibility of fee panel appraisers. Under Title I, the manufactured home units themselves are not appraised in the field. A lot appraisal may be requested to establish value for determining the maximum loan proceeds allowable for a manufactured home lot loan or a combination loan (home and lot). A lot appraisal may also be requested in order to establish a value for claim purposes on a foreclosed lot or home-and-lot combination. Manufactured Home Lot Appraisals A manufactured home lot may consist of platted or unplatted land, a lot in a recorded or unrecorded subdivision (including a planned unit development), or an improved area of such subdivision. A manufactured home lot may also consist of an interest in a manufactured home condominium project (including an undivided interest in the common areas) or a share in a cooperative association which owns and operates a manufactured home park. AFN-G_FHAUWManual Rev. 07/30/2015 Page 222 of 296

Valuation: Manufactured (Mobile) Homes Individual Lot Acceptability HUD requires the lender to obtain certifications by the appropriate government officials that the individual lot offered for sale meets the following criteria: The lot complies with local zoning ordinances and regulations. However, the absence of zoning requirements shall not in itself necessitate rejection. Adequate vehicular access from a public right-of-the-way is available to the lot. Adequate water supply and sewage disposal facilities are either available to or on the lot. The lot shall be served by adequate public or community water and sewage systems, unless appropriate local officials certify that either or both systems are unavailable to provide an adequate level of service to the manufactured home site. If either or both such systems are not available, the lot shall comply with local or State minimum lot area requirements for the provision of on-site water supply and/sewage disposal. Any other minimum local standards and requirements for site suitability are met. Where minimum local standards for water supply and sewage disposal are not established or enforced, the lender shall obtain a certification from a registered civil engineer that the lot meets minimum standards for water supply and sewage disposal as prescribed by the Secretary. The site must have adequate electric service; gas service is optional. The requirement: "Anchoring devices shall be installed as recommended for the hazard zone of the site and the manufactured home being placed thereon," shall be placed on each Statement of Appraised Value, Form HUD-92801A. A final inspection shall be made by the original appraiser on all lots requiring site preparation in order to insure compliance with requirements set forth in the Statement of Appraised Value, Form HUD-92801A. Final Inspection Reports shall be issued when site preparations are acceptably completed. AFN-G_FHAUWManual Rev. 07/30/2015 Page 223 of 296

Valuation: Manufactured (Mobile) Homes Individual Lot Acceptability No manufactured home loan shall be eligible for insurance if the property securing repayment of the loan is located in an area that has been identified by the Federal Emergency Management Agency (FEMA) as having special flood hazards, unless the community in which the area is situated is participating in the National Flood Insurance Program, and flood insurance on the property is obtained by the borrower in compliance with section 102(a) of the Flood Disaster Protection Act of 1973 (42 USC 4012(a)). The amount of such insurance need not exceed the unpaid balance of the loan, but the insurance shall be maintained by the borrower and a current policy retained by the lender for the full term of the loan or until the property is repossessed or foreclosed by the lender, and the lender shall be named as a loss payee of insurance benefits. Undeveloped Lot Only those improvements that are necessary to make the lot suitable for placement of a manufactured home may be financed (i.e., concrete pad, permanent foundation, appropriate driveway, provision for anchoring, on-lot water and utility connections, sanitary facilities, lot improvements and landscaping). Excluded are items such as swimming or wading pools, barbecue pits and other ancillary facilities. Costs of necessary improvements will be arrived at by the appraiser on the basis of costs set forth in either a contract or proposal from the builder, together with a complete itemization of materials and labor. Eligibility To be eligible for FHA mortgage insurance under Title II, a property with a manufactured (mobile) home must comply with requirements set forth in HUD Handbook 4145.1, Chapter 3. Appraisals Appraisers should use normal single family residential appraisal techniques when appraising manufactured housing. AFN-G_FHAUWManual Rev. 07/30/2015 Page 224 of 296

Valuation: Manufactured (Mobile) Homes Appraisals Other factory built housing may provide the most similar comparables so every effort should be made to obtain such comparables even though their distance from the subject may be greater than normally desirable. In situations where there is no other factory built housing within a reasonable distance from the subject property, conventionally built homes may be used with appropriate adjustments made for size, location, construction materials, quality, etc. Sales data for manufactured homes can usually be found in local transactions records; For proposed construction, Marshall and Swift cost data may be used as a guide; It will be the appraiser's responsibility to confirm that the manufactured home under appraisal meets requirements for acceptance of manufactured housing as evidenced by an affixed certification label; Since manufactured housing is usually located in outlying areas, the appraiser must also determine the market acceptability of the property, which should be noted in the appraisal report and reflected in the appraised value. Inspections Fee appraisers making appraisals or inspections of existing manufactured homes may have difficulty in determining compliance with the requirements in HUD Handbook 4145.1: In some cases, visual inspection is adequate to determine compliance. In other cases, it may be practical to examine the builder's site and foundation plans and Description of Materials and then determine from visual inspection whether the construction appears to be in compliance and secure a certification of compliance from the builder; During appraisals and inspections, it is generally infeasible to determine whether a proposed unit or an existing unit permanently erected on a site for less than one year prior to the date of application for mortgage insurance was properly stiffened and braced during transportation; AFN-G_FHAUWManual Rev. 07/30/2015 Page 225 of 296

Valuation: Manufactured (Mobile) Homes Inspections Appraisers and inspectors should examine dwellings to assure that there is no obvious damage or loosening of fastenings that may have occurred during transportation. For proposed construction, the builder must warrant the property against such damage, which should protect the Federal interest; Lot evaluation determinations related to potential flooding shall be based upon information shown on National Flood Insurance Program Flood Insurance Rate Maps, where available. In all other cases, they should be based upon recommendations of the Regional Civil Engineering staff; The builder of the manufactured home property, for proposed construction, shall submit with the application for insured financing design calculations, details and drawings for the installation, anchorage and construction of the permanent foundation as set forth in HUD Handbook 4930.3 certified by a professional, licensed engineer. Also, the perimeter enclosure to be used should be included (See HUD Handbook 4145.1). VA CRVs Because the Department of Veterans Affairs accepts manufactured housing regardless of age or prior occupancy or other HUD eligibility requirements, VA CRVs are not acceptable for conversion to HUD commitments for insurance. Valuation: Condominiums General Information Section 234(c) of the National Housing Act provides authority to insure any mortgage covering a one-family unit in a project coupled with an undivided interest in the common areas and facilities which serve the project. The project may include dwelling units in detached, semi-detached, row, garden-type, low or high rise structures. Regulations governing this program are contained in Chapter II of Title 24 of the Code of Federal Regulations under Section 234. Also see HUD Handbook 4265.1. AFN-G_FHAUWManual Rev. 07/30/2015 Page 226 of 296

Valuation: Condominiums Definitions Mortgage A first lien covering a fee interest or eligible leasehold interest in a one-family unit in a project, together, with an undivided interest in the common areas and facilities serving the project. Family Unit A one-family unit including the undivided interest in the common areas and facilities and such restricted common areas and facilities as may be designated. Common Areas and Facilities Areas that are for the use and enjoyment of the owners of family units located in the project. The areas may include the land, roof, main walls, elevators, staircases, lobbies, halls, parking spaces and community and commercial facilities. Restricted or Limited Common Areas and Facilities Those areas and facilities restricted for use by a particular family unit or number of family units. Project A structure or structures containing four or more units. Conversion The creation of the condominium as of the date on which all the documents necessary to create a condominium regime have been recorded in accordance with State and/or local law. Tenant The occupant named in the lease or rental agreement of a housing unit in a project as of the date the condominium conversion documents are properly filed for the project, or as of the date on which the occupants are notified by management of intent to convert the project to condominium, whichever is earlier. AFN-G_FHAUWManual Rev. 07/30/2015 Page 227 of 296

Valuation: Condominiums Definitions Bona fide Tenants' Organization An association formed by the tenants to promote their interest in a particular project, with membership in the association open to each tenant and all requirements of the association applying equally to each tenant. Condominium Fee (Assessment) The apportionment of common expenses that are to be charged to a unit owner in a manner to be determined in the declaration or by-laws. The charge may include costs for utilities on individual units and on common use buildings, security requirements, salaries for employees of the association and repairs to common facilities. Presale Requirements In order to assess the marketability of the units, the Field Office will require that 70 percent of the total units be sold before endorsement of any unit mortgage. The presale could be reduced to as low as 51 percent with the approval of the Field Office if there is an active market for the units. Generally, presales apply to proposed or newly constructed projects. However, in an existing project where the developer is still marketing units, the same presale requirement will apply. This includes properties converted from rental projects. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan. A mortgagee may certify that this requirement has been met. Owneroccupancy Requirements for Project Approval At least 51 percent of the units of a project must be occupied by the owners or sold to owners who intend to occupy the units. Field Offices have the option to increase the percentage to as high as 70 percent depending upon the market conditions in the area. If the owner-occupancy ratio includes presales, we require an executed sales agreement, evidence that a lender is willing to make the loan and the buyer intends to occupy the unit. A mortgagee may certify that this requirement has been met. AFN-G_FHAUWManual Rev. 07/30/2015 Page 228 of 296

Valuation: Condominiums Owneroccupancy Requirements for Project Approval Owneroccupancy Requirement Conversions from Rental Housing to Condominiums Condominium Document Approval Completion of Construction Note: Both the owner-occupancy and presale requirements may be certified at the time the case is submitted for endorsement. Individual applicants may be processed through firm commitment or borrower approval by a Direct Endorsement underwriter; however, no mortgage will be insured until these requirements have been satisfied. Once a project is approved, at least 80 percent of the units on which there are HUD insured mortgages must be owner occupied. Units in any project converted from rental housing to condominium ownership are not eligible for insurance and HUD will not process the project unless: The conversion occurred more than one year before the application for mortgagor approval; or The mortgagor or co-mortgagor was a tenant of that rental project; or The conversion of the property is sponsored by a bona fide tenants organization representing a majority of the households; The project must also meet all other requirements for approval. An attorney must certify that all condominium legal documents meet HUD guidelines, (HUD Handbook 4265.1, Appendix 24) and state and local condominium laws. Approval of documents as evidenced by VA letter FL 26-619 or FNMA form 1028 may be accepted in lieu of an attorney's certification. In all cases, a copy of the documents must be obtained for the Field Office file. Since HUD is insuring a mortgage on a unit and an undivided interest in the common elements, the entire condominium project, including the common facilities, should be complete before any mortgage is insured. If, however, the project is being constructed in legal phases, mortgages may be insured on a phase by phase basis provided: AFN-G_FHAUWManual Rev. 07/30/2015 Page 229 of 296

Valuation: Condominiums Completion of Construction The developer submits a development plan which shows the total number of units and all planned community facilities; There is reasonable expectation that the developer will complete the project as planned; Community facilities (for the project) are completed or escrowed at 150 percent before insuring mortgages in the initial phase; In projects where the community facilities are substantial, the developer will pay a proportional share of cost related to the community facilities based on the percentage attributable to each "unit/space" which has not been conveyed to a condominium owner; and Each phase meets the presale and owner-occupancy requirements. Recertification of Approvals Approvals of condominium projects should be recertified periodically to determine that the project is still in compliance with HUD's owner-occupancy requirement and that no conditions currently exist which would present an unacceptable risk to the insurance fund. It is not necessary for the HUD Field Office to automatically review all projects on its approved list. However, when an application for mortgage insurance is received for a project which was approved or recertified more than two years ago, or if the HUD office becomes aware of any adverse conditions, the project should be evaluated. Based upon the individual circumstances, if serious problems exist, the approval could be withdrawn. Approval and Processing Instructions Approval of condominium projects consists of: (1) acceptability of the structure (four or more units), site, and location; and (2) acceptability of the condominium organization and operations. The documents required and processing steps will vary depending upon the individual project and the state of construction. The categories are as follows: AFN-G_FHAUWManual Rev. 07/30/2015 Page 230 of 296

Valuation: Condominiums Approval and Processing Instructions Proposed Construction (non-operating condo association) A new development where no construction has started. There is no insured project mortgage and no insurance of advances. Developments with buildings under construction or existing less than one year. The project is currently under development and may contain buildings in various stages of construction. Existing Construction (non-operating condo association) The construction of the building(s) has been completed over one year, however, original units remain unsold and the developer/sponsor is still in control. Existing Construction (operating condo association) All units have been completed over one year and the developer has relinquished control of the association to the homeowners. Proposed Construction (operating condo association) New development and no construction has been started. The mortgagee may request appraisals, either for individual units or through the MCC/MAR procedure, and the sponsor may request an "early start" for construction. The fee appraiser will not be required to prepare a replacement cost estimate. For buildings containing 12 units or less and no more than three stories of living units, the sponsor/builder submits a certification that the units were constructed in accordance with local codes and applicable HUD requirements. A fee inspector is required to make inspection according to type of structure; Single family type - no living units over or under any other living units - three inspections are required; Multifamily type - living units over or under other units - inspections must be made at various stages of construction (minimum of eight hours per month). Inspection fee is the same as for multifamily projects; For buildings containing 13 units or more, or over three stories of living units in height, an Architect's certification of the construction of the building is required. AFN-G_FHAUWManual Rev. 07/30/2015 Page 231 of 296

Valuation: Condominiums Developments with Buildings Under Construction or Existing Less Than One Year Building(s) may already be built, under construction or proposed. Unless there is a 10 year insured warranty for the property, any building which is under construction or existing less than one year will be limited to a 90 percent loan-to-value ratio. Buildings within the development which are proposed and will be inspected during construction as described in Proposed Construction, above, are eligible for the maximum loan-to-value ratio. The mortgagee/sponsor submits the following to the Field Office: Letter requesting approval which contains description of the project indicating type of condominium structure, number of units and common facilities; Location map; Recorded project plat, map and/or air lot survey which adequately identifies units; Developer's general plan and schedule for development; All condominium legal documents (with attorney's certifications); Proposed condominium association budget; Management agreement or proposed management plan; Current financial statement of the condominium project (including reserves); and Minutes of last two association meetings if operational. The Valuation Branch assigns a control number and notifies the mortgagee/sponsor of the project number. The Field Office reviews the exhibits and makes an on-site inspection to determine acceptability of the site and location of the project. Refer to Appendix 22, Handbook 4265.1 for an example of a check list which can be used for project approval. If the documents and the location are acceptable, the mortgagee/sponsor will be notified that appraisals may be requested. AFN-G_FHAUWManual Rev. 07/30/2015 Page 232 of 296

Valuation: Condominiums Developments with Buildings Under Construction or Existing Less Than One Year Loan to Value Ratio (LTV) Certifications Construction Inspections Mortgagee may request appraisals for individual units or may use the MCC/MAR procedure for buildings that are proposed or have an insured 10-year warranty. The fee appraiser is not required to prepare a replacement cost estimate. The MCC/MAR or conditional commitment/statement of appraised value will contain presale and owner-occupancy requirements. The LTV on individual buildings is based on the following: Maximum Loan-to-value Ratio (97/95 percent): o The building is proposed and will be inspected during construction by a HUD fee inspector or an approved architect; or o The building is covered by a HUD accepted insured 10- year warranty plan (certification of completion is required); or o The construction of the building was completed over one year ago. Low Loan-to-value Ratio (90 percent): o o The building is under construction and will not be covered by a 10-year protection plan; or The construction of the building was completed less than one year ago and is not covered by a 10-year protection plan. Note: To obtain a high ratio loan on buildings within the Development where no construction has started, procedures for certification of plans and specifications and inspections under proposed construction must be followed. For buildings under construction, the developer must submit one set of the construction documents to HUD. Same as proposed construction. Proposed building same as proposed construction. Under construction or completed less than one year: Single family type - final inspection by fee inspector/ appraiser; Multifamily type - final inspection of unit by appraiser. AFN-G_FHAUWManual Rev. 07/30/2015 Page 233 of 296

Valuation: Condominiums Survey Same as proposed construction. Construction Warranty Existing Construction (Non-Operating Condominium Association) Same as proposed construction. Buildings were constructed as a condominium and construction has been completed over one year; however, original units remain unsold and the developer/sponsor may not have relinquished control of the condominium to the homeowners. The project must not be subject to future expansion at the option of the developer. If the condominium documents or the development plan indicate that additional units may be added to the condominium, follow the processing instructions under paragraph 11-6. 1. The mortgagee/sponsor submits the following to the Field Office: Letter requesting approval which contains a description of the project; Location map; Recorded project plat, map and/or air lot survey which adequately identifies units; Condominium documents (with attorney's certifications); Condominium association budget; Management agreement; Current financial statement of the condominium project (including reserves); Minutes of last two association meetings if applicable; and operational; Evidence of the completion of the project (including the common elements by final municipal approval and occupancy authorization. 2. The Valuation Branch assigns a control number and notifies mortgagee/sponsor of project number. AFN-G_FHAUWManual Rev. 07/30/2015 Page 234 of 296

Valuation: Condominiums Existing Construction (Non-Operating Condominium Association) 3. The Field Office reviews and makes an on-site inspection to determine acceptability of the site and location of the project. If the documents and the location are acceptable, the mortgagee/sponsor will be notified that appraisals may be requested. 4. The mortgagee may request appraisals for individuals units only. 5. The Loan to Value Ratio. Since the construction of the building(s) is over one year, the units are considered eligible for the maximum ratio loan. 6. A presale will be required and established by the local HUD office. The presale is especially important in a completed project whether the developer has been actively conducting a sales campaign and a large percentage of units remain unsold. 7. The marketability of the project should be carefully assessed especially in projects two or three years old. Appraisals should include comparables from competing projects and value should not be based solely on sales by the developer. Existing Construction (Operating Condominium Association) All units and all common elements and improvements have been completed and have been committed to a plan of condominium ownership for at least one year prior to application for approval. The developer has relinquished control of the association to the homeowners. The condominium association may request approval for the project. The mortgagee or Condominium Association submits the following to the Field Office: Letter requesting approval which contains a description of the project; All condominium legal documents (with attorney's certification), Recorded plat, plan, survey, or map, including amendments, of project; AFN-G_FHAUWManual Rev. 07/30/2015 Page 235 of 296

Valuation: Condominiums Existing Construction (Operating Condominium Association) The project's annual income, expenses, and budget. The reserve funds for commonly owned replacements must be sufficient to meet current costs; Minutes of last two meetings of the homeowners association; A report from management company, if applicable; and Certification from the association that the project meets the owner-occupancy requirements established by the HUD office. (Must not be lower than 51 percent.) The project should not be approved if circumstances or conditions exist that have a substantial adverse effect upon the project or will be a contributing cause for the unit mortgage to become delinquent. These circumstances or conditions include: Defects in construction; Substantial disputes, or dissatisfaction among the unit owners concerning the operation, maintenance or management of the project or the associations; Disputes over the unit owner's respective rights, privileges and obligations; Insufficient reserves and/or unrealistic operating budget. Projects Converted from Rental Housing Processing will follow the instructions for Existing Constructions (Non-operating Condominium Association). Units in a rental project that was converted to condominiums may not be insured until the project has been converted over one year. Conversion takes place when all the legal documents establishing the condominium have been recorded. The one year restriction does not apply to: Rental projects in which the conversion was sponsored by a bona fide tenants organization representing a majority of the households in the project; Non-rental properties such as a school, church, or warehouse converted to condominium; or A unit being sold to a purchaser who was a tenant in the project at the time of the conversion. AFN-G_FHAUWManual Rev. 07/30/2015 Page 236 of 296

Valuation: Condominiums Projects Converted from Rental Housing Instructions for processing a converted project will follow either the Existing Construction, Operating Condominium Association, or Existing Construction, Non-operating Condominium Association, depending on whether the developer/sponsor still has unsold units in the project. No project should be accepted for processing unless the units in that project are eligible for FHA insurance. Eligibility is determined as follows: Condominium documents have been recorded over one year. The project may be processed for approval and any buyer is eligible to apply for an FHA-insured mortgage. Condominium documents have not been recorded over one year. If the conversion is sponsored by a bona fide tenant organization, the project may be processed and any buyer would be eligible to apply for an FHA insured mortgage. If a former tenant wishes to purchase a unit, the project may be processed subject to the following: o o o Only the former tenant is eligible to apply, other purchasers may apply after the one year limitation; The project must meet the presale and owneroccupancy requirements before the former tenant's mortgage may be insured; The tenant need not buy the same unit they currently rent; o If neither applies, the project should not be processed until the documents have been recorded over one year. Condominium Approvals by the Department of Veterans Affairs Projects which have been approved by the Department of Veterans Affairs (VA) will require limited HUD review to verify that the project is in compliance with statutes, regulations and policies. The following instructions apply for an approval letter, a Certificate of Reasonable Value (CRV) or a Master Certificate of Reasonable Value (MCRV): AFN-G_FHAUWManual Rev. 07/30/2015 Page 237 of 296

Valuation: Condominiums Condominium Approvals by the Department of Veterans Affairs VA Letter 26-619 or VA project approval letter is required, whenever possible. (An approval letter may no longer be available for projects which have been approved for a substantial period of time.) Any appropriate conditions required by VA must be included as conditions of our conditional commitment, firm commitment or DE approval. Note: If the approval letter does not indicate the type of project, a brief description of the project is also required, i.e., proposed, existing, conversion and number of units. A copy of the recorded legal documents establishing the condominium (declaration, by-laws, amendments, etc.) must be obtained for your files. No review is necessary. Additional documents will be required as follows: o o o o o Proposed or newly constructed projects: The recorded project plat or map; The proposed operating budget of the homeowners association; The developer's general plan and schedule for development; An Affirmative Fair Housing Marketing Plan for projects consisting of five or more units. Existing project The current financial statement and operating budget of the condominium association; and The minutes of the last two meetings of the association. Perform an on-site visit to determine the acceptability of the project and location. The extent of the review will be determined by the Field Office based upon the individual circumstances. For instance, older projects and conversions, the overall maintenance, number of vacancies and adequacy of mechanical equipment as well as location would be important considerations. For projects which are proposed construction and an MCRV has been issued, the review could be limited to determining the acceptability of the location. AFN-G_FHAUWManual Rev. 07/30/2015 Page 238 of 296

Valuation: Condominiums Condominium Approvals by the Department of Veterans Affairs An on-site visit is optional for projects where the Field Office receives the MCRV and the accompanying committee appraisal (narrative appraisal). The Field Office would review the narrative appraisal to determine if there are any environmental problems which are inconsistent with our policies or regulations. If there are no environmental problems noted in the narrative appraisal, no on-site review is required. The information in the narrative appraisal may also be used to establish whether the units in the project will qualify for 97/95 percent loan-to-value ratio or will be limited to the 90 percent loan-to-value ratio. Loan to value Ratio CRVs or MCRVs issued for properties which are proposed construction are eligible for the maximum loan-to-value ratio only if the CRV is issued prior to start of construction and the property is inspected during construction by the VA or the property is covered by a HUD accepted 10-year insured protection plan. Properties with a 10-year insured plan require only a final inspection. CRVs or MCRVs issued for properties that are under construction or less than one year old and not covered by a 10- year warranty will be limited to a 90 percent LTV. Conversions from Rental Housing No approval letter, CRV or MCRV will be accepted for a project which has been converted from rental housing for less than one year unless converted by a tenants organization. An individual application for mortgage insurance, however, could be processed if the CRV had been issued to a former tenant and the project had met the presale and owner-occupancy requirements. Presale Requirements Projects which are proposed or under construction must meet HUD presale requirements. In an existing project where the developer is still marketing units, evidence of presales is also required. AFN-G_FHAUWManual Rev. 07/30/2015 Page 239 of 296

Valuation: Condominiums Condominium Approvals by the Department of Veterans Affairs Owner-occupancy Requirements All projects must meet HUD's owner-occupancy requirement. Any project comprising less than four units will not be accepted. A CRV issued for a property in a two or three unit condominium project will be rejected. An FHA project number will be assigned to all VA approved projects which are accepted and the project will be added to the approved list. This list must be provided to the Direct Endorsement lenders and fee appraisers. Once a MCRV has been issued by the VA, HUD will not make "spot appraisals" or issue a Master Appraisal Report (MAR) or Master Conditional Commitment (MCC) on any units(s) covered by the MCRV. Federal National Mortgage Association (FNMA) Proposed or newly constructed projects which have been approved by FNMA may be accepted based upon HUD's review of the approval documents. The developer submits copies of the following documents: FNMA Form 1026 Application for Project Acceptance and the supporting documents; FNMA Form 1027, Conditional Project Acceptance (if FNMA placed any conditions on the project); and FNMA Form 1028, Final Project Acceptance; The Field Office reviews the information submitted and determines whether any adverse conditions are noted. An on-site review is optional and will depend on information contained in the Field Office review of the documents and knowledge of local conditions. The loan-to-value ratio will be limited to 90 percent unless the project is covered by a HUD accepted 10-year insured protection plan. If covered by an approved insured 10-year protection plan, a final inspection of the unit by an FHA fee inspector will be required. AFN-G_FHAUWManual Rev. 07/30/2015 Page 240 of 296

Valuation: Planned Unit Developments (PUDs) Overview Property to be Appraised A residential development shall be processed as a planned unit development (PUD) if it contains, within the overall boundary of the subdivision, common areas and facilities owned by a homeowners association to which all homeowners must belong and to which they must pay lien-supported assessments. The organization, preliminary planning, land lisps, and processing through the issuance of the preconstruction analysis letter (HUD Form 92258) and Conditional Commitments for planned unit developments are described in HUD Handbook 4140.2. Unique valuation problems are presented by this type of development. It is composed partly of dwellings on individuallyowned lots and partly of commonly-owned elements of the development. Property to be appraised consists of the fee title to the real estate represented by the lot and the improvements thereon plus benefits arising from ownership of an interest in the homeowners association. Benefits accruing from commonlyowned areas and facilities will be reflected in the valuation of the individual lot/home. Each property owner automatically becomes a member of the association and the property is subject to assessment by the association for maintenance of the common areas and for other stipulated purposes which may include maintenance of the structural exterior and grounds. In PUDs, individual yard areas may be reduced to permit more common areas which are owned and maintained by property owners or homes association. Examples of commonly-owned elements are an internal park network abutting home sites in a townhouse-on-the-green superblock, or a cluster arrangement of lots with adjoining commonly-owned areas. VA CRV Requests for conversion of VA CRVs in PUDs should be accepted and processed without Departmental review of the legal documents. However, HUD must independently assure compliance with environmental issues. AFN-G_FHAUWManual Rev. 07/30/2015 Page 241 of 296

Valuation: Planned Unit Developments (PUDs) VA CRV Required Articles of Incorporation Moreover, if the Department of Veterans Affairs has issued an MCRV or CRV for a PUD whose documents do not comply with HUD requirements, and this discrepancy comes to HUD's attention, HUD is not obliged to give recognition to the CRV and may require the matter to be resolved before approving an application with respect to a property in that PUD. 1. Every person or entity who is a record owner of any lot is entitled to membership and voting rights in the association. Membership is appurtenant to, and inseparable from, ownership of the lot. 2. If the association is dissolved, the assets shall be dedicated to a public body, or conveyed to a nonprofit organization with similar purposes. 3. Amendment of the Articles of Incorporation requires the approval of at least 2/3 vote of the lot owners. 4. Annexation of additional properties, mergers and consolidations, mortgaging of Common Area, dissolution and amendment of the Articles, requires prior approval of HUD/VA as long as there is a Class B membership. Required Declaration of Covenants 1. A legal description of the Planned Unit Development is contained. 2. All lots in the Planned Unit Development are subject to the covenants. 3. Every owner has a right and easement of enjoyment to the common area, which is appurtenant to the title to the lot. 4. The lien of any assessment is subordinate to the lien of any first mortgage. 5. Mortgagees are not required to collect assessments. 6. Annexation of additional properties, dedication of Common Area, and amendment of this Declaration of Covenants, Conditions and restriction, requires HUD/VA prior approval as long as there is a Class B membership. AFN-G_FHAUWManual Rev. 07/30/2015 Page 242 of 296

Valuation: Planned Unit Developments (PUDs) Required Declaration of Covenants 7. Failure to pay assessments does not constitute a default under an insured mortgage. 8. The covenants assure lot owners of automatic membership and voting rights in the association. 9. Each lot owner is empowered to enforce the covenants. 10.The approval of at least 2/3 of the lot owners is required to amend the covenants. 11.The common area cannot be mortgaged or conveyed without the consent of at least 2/3 of the lot owners (excluding the developer). 12.If ingress or egress to any residence is through the common area, any conveyance or encumbrance of such area is subject to lot owner's easement. 13.There is no provision in the covenants which conflicts with the HUD requirement that the common area shall be conveyed to the association free and clear of all encumbrances before HUD insures the first mortgage in the Planned Unit Development. 14.Absolute liability is not imposed on lot owners for damage to common area or lots in the Planned Unit Development. 15.The Class R membership (Declarant's weighted vote) ceases and converts to Class A membership upon the earlier of the following: 75% of the units are deeded to homeowners. On, 20. Required By- Laws 1. The By-Laws are consistent with the Articles of Incorporation and Declaration of Covenants. 2. HUD/VA has the right to veto amendments while there is a Class B membership. AFN-G_FHAUWManual Rev. 07/30/2015 Page 243 of 296

Valuation: Single Family Cooperative Program SECTION 203(n) This program is available to assist a purchaser in acquiring a Corporate Certificate (stock certificate or membership certificate), in a cooperative housing project which is covered by a blanket mortgage insured under the National Housing Act. The purchaser assumes the responsibility for the monthly charges due the cooperative which are attributable to the dwelling unit the owner of the Corporate Certificate is entitled to occupy, and can finance a portion of the seller's equity with an insured mortgage. The seller's equity is the difference between the outstanding principal balance on the project mortgage attributable to the dwelling unit the owner of the Corporate Certificate is entitled to occupy and the fair market value of the dwelling unit, assuming it was being sold on the open market. As in the other single family mortgage insurance programs, the equity financing loan will be funded by a HUD-approved mortgagee, and the mortgage will be insured by the Department. Processing instructions are found in HUD Handbook 4240.3. Valuation Instructions for Special Problems General Information Difficult Market Comparisons The purpose of this section is to promulgate instructions to assist the appraiser in the solving of special problems. It also contains valuation information relating to HUD policy that requires unusual or special processing methods. HUD Form 92019 Estimate of Market price by Comparison, provides a format that permits an orderly graphic analysis of the complex market data. The form will be used at the discretion and direction of the chief appraiser in the analysis of disputed appraisals and the training of both staff and fee panel appraisers in the use of the comparison approach to value. AFN-G_FHAUWManual Rev. 07/30/2015 Page 244 of 296

Valuation Instructions for Special Problems Difficult Physical Problems Properties in Resort and Recreational Areas Eligibility Criteria A structural, sanitary engineering, or similar complex problem that requires a specialized examination may be returned to the Field Office or to the Direct Endorsement mortgagee with a memorandum that explains the condition which precludes completion of the processing. The appraiser may telephone the Field Office to discuss the problem and to request guidance when the matter in question can be handled by phone. An appraiser shall not be required to process any case without assistance when, in his/her judgment, assistance from the Field Office is required in order to assure quality processing. The constant increase in the formation and growth of resort areas throughout the country and the increase in use of residential properties in such areas for all year use (or for more than seasonal use) has made the application of proper valuation considerations in such communities increasingly more important. It is possible that the term "resort and recreational areas" often leads to general and incorrect assumptions. The fact that an area contains natural attributes that contribute to recreation or vacation purposes does not necessarily remove such areas from use and desirability by homeowners or multifamily tenants who are interested in year round occupancy. Obviously, certain kinds of resort areas and certain types of housing are not acceptable for mortgage insurance consideration. For instance, a vacation or resort area that can only be used for a particular season or for a particular type of recreation and is largely abandoned at other times would not be acceptable. Properties not suitable for year round occupancy, regardless of the area, are not acceptable. Areas and communities that have year round amenities and use are not ineligible merely because they have a seasonal influx of vacationers. Homes or apartments may be acceptable if they are livable the year round even though many such homes are occupied seasonally by their owners or tenants. AFN-G_FHAUWManual Rev. 07/30/2015 Page 245 of 296

Valuation Instructions for Special Problems Eligibility Criteria Market Depth Rental Properties Location Analysis Favorable consideration should be given to proposals involving primary or secondary homes of permanent character in localities where residents are both year round and seasonal. Community facilities, utilities, shopping and other necessities and amenities must be present as required, to produce an acceptable rating of location. Such homes must be readily marketable for year round occupancy. There should be no requirement as to the minimum length of occupancy by the owner or tenant any more than such requirements would be imposed in non-resort areas. The important criteria would be suitability for year round use, purchase or rental demand on that basis, and individual ability to pay. In an area having all year amenities and use, the Area Economist should be requested to determine not only the market associated with the normal growth, but also the demand on a year round basis which is affected by seasonal occupancy. Where it can be determined that a portion of this demand has sufficient stable characteristics to warrant its inclusion in the total market projection, then to this extent, it should be considered in the underwriting process. In appraisals requiring gross rental income capitalization the customary projection of the monthly rentals obtainable on an annual lease should be used. No difficulty should be encountered here or in finding and applying either the applicable gross rent multiplier or rates. Rentals for "seasons" are considered only for their influence upon rates for annual occupancy. The unit which is susceptible to this seasonal subletting may produce a higher annual gross than another equal property that has no seasonal demand. The higher rental will have its effect upon value. Those features that affect the marketability and desirability of sites, as set forth in the location analysis, must be objectively analyzed notwithstanding any resort or recreational aspects commonly associated with the area but not exclusive of such characteristics. AFN-G_FHAUWManual Rev. 07/30/2015 Page 246 of 296

Valuation Instructions for Special Problems Location Analysis Predominantly commercial or business locations, present or prospective, or locations subject to noise or other influences adversely affecting the use and enjoyment of the typical owner or occupant should be avoided, with due consideration of the levels of acceptance typical of the area. The site must be compared with all locations in the housing market area that are improved with, or appropriate for, structures that offer accommodations and amenities similar to the dwelling under consideration. Comparisons are not limited to other locations with seasonal or semi-permanent attributes but would include all competitive sites within the housing market area that offer all or many of the same amenities. The Location Analysis must reflect accurately the attitude of the typical purchaser toward the environmental influence surrounding the resort area site. Appraisal of Acquired Properties When requested by the Housing Management Division, the Valuation Branch will assign a fee panel or staff appraiser to prepare an appraisal report setting forth the value and condition of property to assure the most expedient, orderly disposal of a P.D. property. If a fee panel appraiser is used, the Housing Management Division will be responsible for payment of the appraiser's fee. Fair Market Value Value to be reported will be the Fair Market Value "as-is." In addition, the appraiser will identify and estimate the costs of the repairs needed to bring the property up to the Minimum Property Standard (MPS) for Existing Housing - One to Four Family Living Units (HUD Handbook 4905.1); The appraiser will prepare list of repairs, including cost estimates and the total costs of repairs. Cosmetic and other non-mps repairs will be excluded from this list; Value will represent the best price obtainable free and clear of any assessments, liens, or encumbrances within a reasonable time if properly exposed to the market. It contemplates the willing, fully informed, and able purchaserseller relationship with complete absence of duress. AFN-G_FHAUWManual Rev. 07/30/2015 Page 247 of 296

Valuation Instructions for Special Problems Best Price Obtainable Appraiser Recommendations "Best price obtainable" is the price that will contribute to orderly turnover at as rapid a rate as is compatible with the market generally prevailing in the community. The price should produce a sale within a reasonable time assuming the property will be suitably exposed to the market. This, of course, does not imply that the price found will enable the liquidation of a large group of properties within an unreasonably short period of time. The appraiser should be fully aware that in completing the appraisal report he or she is recommending the best program to follow to bring maximum recovery within a reasonable period of time. The repairs or rehabilitation, the best estimate of the cost of repairs, and the estimate of value "as is" will all be part of the recommendations. If the appraiser determines that the property is not eligible for an insured mortgage, he/she should recommend only those repairs which are necessary to protect the property from further deterioration until such time as an "as is" sale for all cash or on strong terms can be consummated. If the property is in good condition for ready sale the appraiser may value the property "as is," in its present condition subject only to cleaning, clearing debris, trimming lawns, checking the plumbing, etc. The appraiser will, under those conditions, always assume a reasonable expenditure for these minor items. In such a case the appraiser would recommend it be sold with HUD mortgage insurance; If a property should need $3,000 or less in repairs in order to meet the Minimum Property Standards for Existing Housing, the appraiser should recommend that the property be sold with HUD mortgage insurance along with a repair escrow established to ensure completion of the repairs; If a property which, in its present condition, fails to qualify for either of the foregoing, the appraiser should recommend that it be offered for sale without mortgage insurance or rehabilitated under Section 203(k). AFN-G_FHAUWManual Rev. 07/30/2015 Page 248 of 296

Claims Without Conveyance of Title (CWCOT) General Appraisal Procedures For all mortgages for which a conditional commitment to insure was issued, or under the Direct Endorsement program where the property appraisal report was signed by the Underwriter on or after November 30, 1983, mortgagees may file claims for insurance benefits on these mortgages without conveying title to HUD. Mortgagees may also utilize these procedures for mortgages insured prior to the above dates at their option. Where the residence is vacant or non-owner occupied, mortgagees shall identify vacant homes and non-occupant owner(s) through sources such as loan origination files, property inspections and collector reports. Presuming that these conditions exist, the lender must take the following steps to obtain an appraisal report: Call the Valuation Branch Assignment Clerk in the local HUD Office which has jurisdiction over the property to obtain the name of a fee appraiser or HUD staff person, if available, to perform the appraisal. Forward to the fee appraiser a completed Application for Property Appraisal and Commitment, Form HUD-92800, and a Uniform Residential Appraisal Report (URAR). The mortgagee must stamp the top of the Form HUD-92800, "PROPERTY IN FORECLOSURE." This statement will serve as a "flag" to the appraiser as well as the local HUD office as to the disposition of the appraisal report. HUD Office Action When the mortgagee calls the local HUD Office for assignment of a fee appraiser from the panel of approved fee appraisers, or HUD staff, if available, the Valuation Branch must: Make an exception for these properties in foreclosure by accepting telephone assignments if the Field Office normally requires mortgagees to submit written requests for assignments of appraisers and case numbers. Determine whether to use HUD staff or assign a fee appraiser; and AFN-G_FHAUWManual Rev. 07/30/2015 Page 249 of 296

Claims Without Conveyance of Title (CWCOT) HUD Office Action Provide the name of a fee appraiser or HUD staff person, if available, to perform the appraisal. If the mortgagee has any problem in promptly arranging for the appraisal, it will call the local HUD Office, Valuation Branch. If necessary, HUD may assign another appraiser. Note: In areas where a pre-foreclosure appraisal must be made by an independent appraiser such as one employed by the Sheriff's Office, the mortgages shall submit the appraisal, if it is obtainable, along with the HUD-91022 in lieu of requesting a HUD-approved fee appraiser. Valuation Branch 1. When the mortgagee calls for an appraiser assignment, the Receiving/Assignment Clerk will assign the case into CHUMS with its old case number and assign an appraiser from the panel of approved fee appraisers or use a HUD staff person if available. Field Offices should use their staff appraisers when available since this presents an opportunity to maintain staff appraisal skills and for purposes of cost efficiency. 2. In the event that the appraiser is unable to enter the property, the best estimate of value possible will be made, based upon an exterior review, tax records, a comparison of comparable properties and other available information. The estimate of value should reflect the property in its "As Is" condition. If appropriate, the appraiser must indicate in the report that the property could not be entered and identify the sources employed in making the estimate of value. 3. Upon completion of the appraisal or estimate of value, the appraiser will send the report to the Valuation Branch where it will be date stamped, logged into CHUMS and desk reviewed. The desk review will be conducted by Valuation staff. The Valuation Branch will then immediately hand carry the appraisal report to the Single Family Loan Management Branch. Expeditious handling of the appraisal report must be maintained to insure the success of the CWCOT process. AFN-G_FHAUWManual Rev. 07/30/2015 Page 250 of 296

Claims Without Conveyance of Title (CWCOT) Valuation Branch 4. Should the mortgagee wish to cancel the appraisal request before the appraisal is done, the mortgagee will notify both the Valuation Branch and the appraiser of the cancellation. The Valuation Branch will enter the cancellation into CHUMS. Also the mortgagee shall confirm such action via letter to the SF Loan Management Branch which will cancel further processing of the Form HUD-91022. 5. 5) Those appraisals or estimates of value are good for six months. If a new or updated appraisal or estimate of value is needed, the mortgagee will again contact the Valuation Branch for a new appraiser assignment following the same time requirements. 6. If the mortgagor reinstates the mortgage after foreclosure has been instituted, the mortgagee will: Contact the fee appraiser to cancel the appraisal, or if "HUD staff" was assigned, notify the HUD Valuation Branch; and 2) Advise the local HUD office SF Loan Management Branch by telephone and follow up with a letter verifying such action. The SF Loan Management Branch must file this letter with the HUD-91022. Properties with Encumbrances Introduction Surface and Subsurface Easements When the property to be purchased is encumbered by covenants running with the land, easements, restrictions, or reservations, the effect on the value resulting from these limitations must be ascertained. This is the term applied to a right or privilege that one person has in the land of another. Basically, easements are a means of providing convenient use for others, without excessive dilution of the property rights of the owner. Those most commonly encountered in residential transactions involve joint driveways, access to water supply, drainage, pipelines for gasoline and natural gas, and public or private utilities. AFN-G_FHAUWManual Rev. 07/30/2015 Page 251 of 296

Properties with Encumbrances Surface and Subsurface Easements The appraiser must deal with property so encumbered on an individual basis. The estimation of the amount the property burdened by the easement will suffer must be based on the degree and quantity of the rights released. Customs, attitudes, and prevalent practices in a community have direct bearing on the monetary importance to be attached to easements by the appraisers. It is possible that a property by reason of an easement may be subject to being used by persons other than the owner to such an extent and in such a manner that its value as a residential property is seriously affected. Under such conditions determination must be made whether the property is eligible as security. Avigation Easements The general increased volume of air travel has made the problem of noise in take-off and landing zones and its effect on residential properties located therein more significant. 1) An avigation easement grants the rights to use and/or control air space above property to someone other than the owner of the land. It impairs full use and enjoyment by the fee owner of his property and in effect is little different from a surface or sub-surface easement. The appraisal must reflect the decline, if any, in value in the market attributable to the effect of such encumbrance. Each case must be considered and analyzed on its own merits. 2) The avigation easement will deprive the fee owner of the right to permit structures, trees, poles, or any other impediments to extend above a specified plane above the property and will convey to the grantee certain prescribed rights to the use of the air above this height. The distance agreed upon above the ground may or may not vary. This plane may be parallel to the ground or may be at a tangent. The closer to the ground that this plane is drawn, the greater will be its adverse effect on the value of the fee. 3) Properties subject to avigation easements must be checked to ascertain their eligibility under outstanding noise guidelines. AFN-G_FHAUWManual Rev. 07/30/2015 Page 252 of 296

Leases of Oil and Mineral Rights Appraiser Concerns The appraiser need not be concerned with the fact that ownership of the fee is separated from ownership of oil or mineral deposits since the valuation of the property is based entirely upon the benefits which will accrue to the typical purchaser for residential uses. The degree to which the residential benefits may be impaired or the property damaged by the exercise of the rights set forth in the oil or mineral lease as well as those applicable to neighboring properties must be considered. Property Rights and Instrument Privileges Consideration should be given to: The infringement on the property rights of the fee owner caused by the rights granted by the reservation or lease; The hazards, nuisances, or damages that arise there from; The hazards, nuisances, or damages which may accrue to the subject property from exercise of reservation or lease privileges on neighboring properties. The extent to which the property rights of the owner of the fee is affected by a mineral or oil reservation or a lease of subsurface areas will vary in accordance with the privileges reserved in the instrument. In one instance the privileges may be only to remove subsurface deposits by directional exploration from some area outside of the subject plot. In another instance the privilege may be complete ingress and egress, to explore from any surface area of the plot, to store equipment, or make installation thereon. In the former case, depending on the proximity of exploration area and the attitude of the local market, it is possible that there would be little or no adverse effect on value. In the latter case, the effect on the property rights of the owner of the fee is such that the value of the property for residential use may be destroyed. Hazards In mineral areas the problem may be one of subsidence from directional mining. The extent of the hazard is determined by the past history of such operations, a knowledge of the extent of the mining, and the depth and the subsurface soil structure. AFN-G_FHAUWManual Rev. 07/30/2015 Page 253 of 296

Leases of Oil and Mineral Rights Hazards In oil-producing areas, the hazards and nuisances may arise from the drilling operation, ingress and egress, storage, pipeline transportation, danger of fire or explosion and danger from gusher wells. The effect of such nuisances, hazards, or damages on the subject property would be determined by their proximity and their intensity and attitude of the local market. In an oilproducing area, a situation may be acceptable which would not be acceptable in an area where gas oil exploration was a minor factor in the area's economy. In the case of new subdivision proposals it may be possible to suggest certain restrictions to the developer-owner of the fee that will materially lessen risk if he desires to retain the mineral or oil rights. Where a mineral, oil, or gas reservation is retained, an agreement may be obtained limiting the exploration area to one undeveloped part of the tract, providing for directional drilling, and restricting against ingress and egress across individual residential lots. In some cases it may be necessary to modify outstanding covenants or obtain protective covenants on neighboring land uses. Waiver of Objection Easements, reservations or restrictions such as discussed in this section may be involved in mortgagees' requests for waiver of objection to title to the mortgaged premises. Such requests are processed as outlined in HUD Handbook 4170.1. The granting of a waiver of objection to title appears to imply also a waiver of objection to the physical condition of any property resulting from the exercise of the rights created by the encumbrance. Consequently, the possibility of any hazards, nuisances or damages emanating from that source should be carefully evaluated before granting the waiver. AFN-G_FHAUWManual Rev. 07/30/2015 Page 254 of 296

Mortgage Credit Requests for Appraisal Procedure for the Appraisal The Mortgage Credit Section may request an estimate of value on property which is being accepted by the seller as part of the purchase price. This is done in order to establish the equivalent amount of cash which is being paid for the property on which a commitment is to be issued. With the request, the Mortgage Credit Section will furnish the trade-in price that is allowed for the property by the seller. Such requests will be treated as informal appraisal assignments. A complete appraisal report is not required; a memorandum type report will suffice. In such a case, a detailed description of property and neighborhood, ratings, operation expense data, supporting sales data, and replacement cost estimates will not be required. Only the following need be furnished: Address of property (including city or town); Number of rooms, bedrooms, and baths; Garage or carport facilities; Brief statement as to conformity or any major deficiency having a bearing on value; Estimate of Market Price Obtainable (without Closing Costs). Closing Costs will not be added at any point. Although the report may be kept to the briefest terms, the appraiser will make an estimate and draw sufficient comparisons with comparable properties to reach a valid conclusion. Existing Houses Moved to New Foundations Eligibility Three types of properties are eligible: 1. Emergency moves of properties already covered by HUD insurance. The move can be made at the risk of the mortgagee without prior approval of HUD. 2. Non-emergency moves of properties covered by HUD insurance requiring prior approval by HUD. 3. Non-emergency moves of properties not insured by HUD but seeking such insurance and requiring prior approval. AFN-G_FHAUWManual Rev. 07/30/2015 Page 255 of 296

Existing Houses Moved to New Foundations Applications for Insurance Applications for insurance may be submitted under any home mortgage section of the National Housing Act. On properties already insured, the request for non-emergency moving of structures is made in the form of a letter of proposal from the mortgagee setting forth conditions and reasons for the move. Application for insurance or letter of proposal after insurance must clearly outline all aspects of the proposed transaction, including the present address or location of the dwelling to be moved, and the location of the site to which the dwelling will be moved. No Builder's Warranty will be required. Architectural/ Valuation Process (All Proposals Except Emergency) The following steps will be followed: 1. Exhibits shall be submitted with each application and will be reviewed by the Architectural section. Exhibits for the new location shall include a plot plan showing proposed location of the house, garage, terraces, stoops, walks, driveways, utilities, etc., as well as footings, inundations, and slab details. Drawings of the existing structure are necessary only to the extent required to show any proposed alterations or repairs. If pertinent, subdivision exhibits and exhibits required for individual water supply and sewage disposal systems shall be submitted. 2. Form HUD-92005, Description of Materials, completed to the extent necessary, shall be submitted to describe any features of the new construction which cannot be shown on the drawings. 3. Proposed on-site improvements, e.g., footings, foundations, walks, etc., shall comply with or exceed all applicable Minimum Property Standards in 24 CFR 200.926d (HUD Handbook 4910.1, Appendix K). Existing construction, including repairs, alterations, and additions thereto, shall comply with the General Acceptability Criteria of the Minimum Property Standards as shown in the beginning of this chapter and the stated objectives of all other applicable standards. AFN-G_FHAUWManual Rev. 07/30/2015 Page 256 of 296

Existing Houses Moved to New Foundations Architectural/ Valuation Process (All Proposals Except Emergency) Repairs, alterations, or additions not started or completed at the time of commitment for insurance or at the time of issuance of HUD letter of approval to move a structure already insured, shall be done in accordance with the specified standards wherever practicable. 4. Field inspection of the existing property prior to moving should be made concurrently by an appraiser and inspector. The local building authority will require a moved house to be brought up to the present building code. Such requirements are reflected in the cost of repairs and are made a specific condition of the commitment. This will assure HUD that all items of repair or replacement necessary to bring the property into good saleable and eligible condition have been discovered and the repairs required as a condition of the commitment. The inspector should note structural defects which might be aggravated by the move and which need special commitment requirements for correction. 5. After inspecting the proposed new location the appraiser will appraise the property as it will exist at the completion of the move assuming compliance with all requirements. The Uniform Residential Appraisal Report (URAR) will be used in the usual manner. 6. Except in those instances where the complexity of the case warrants or when requested by the Director of Housing/Housing Development, cost estimates, including any involving alterations, additions or repairs, will be prepared by the appraiser. The URAR will be completed by the appraiser as in the case of any existing property. 7. When examination of the structure reveals noncompliance with the objectives of the Minimum Property Standards and correction is feasible, an appropriate specific condition is recommended in the report. Where no correction is feasible and compliance can be effected only by excessive major repairs, rejection is indicated, and the reasons clearly explained in the report. AFN-G_FHAUWManual Rev. 07/30/2015 Page 257 of 296

Existing Houses Moved to New Foundations Architectural/ Valuation Process (All Proposals Except Emergency) VA CRV 8. Requirements for compliance inspections will be made on all new work (footings, foundation walls, grading, etc.) as well as proposed or required alterations, additions, or repairs. The mortgagee shall notify HUD 48 hours prior to start of construction of proposed improvements and shall notify HUD of the date the house is to be placed on the new foundation. 9. The appraiser shall require an architectural inspection of the foundation before the house is placed on the new foundation. A second inspection shall be required before the covering of any structural elements or major components (electrical, plumbing, etc.) when new additions or major alterations are proposed. A final inspection is always required upon the completion of the dwelling. 10. In cases involving proposed individual water supply and/or sewage disposal systems, necessary requirements will be made pursuant to outstanding instructions. The Certificate of Reasonable Value (CRV) issued by the Department of Veterans Affairs shall be accepted by the Field Offices as the basis for establishing value, mortgage term, and specific conditions in issuing commitments in cases involving a known borrower subject to the restrictions and processing instructions shown below. Field Offices shall accept CRVs for both existing and proposed construction at face value. No CRV shall be rejected unless there is evidence in the office of unacceptability in which case it may be rejected, but the Field Office is to send a copy of the Rejection notice to the Single Family Valuation and Technical Support Branch in FHA Headquarters for informational purposes. AFN-G_FHAUWManual Rev. 07/30/2015 Page 258 of 296

SPECIAL CONSIDERATIONS General Processing Procedures General Application Proposed Construction The mortgagee's application must involve a known borrower, include completed Form HUD-92800 and 92900 with all required exhibits (except those normally required to establish value), the CRV (VA Form 26-1843), and evidence of compliance with any requirements established by VA that have been satisfied before the application is submitted. The mortgagee must submit a Builder Certification of compliance with HUD regulations and the exhibit requirements in HUD Handbook 4145.1, and ensure that the builder has attached the proper certification on the front page of each set of plans prior to submitting an application. It is not necessary for mortgagees to review the plans. On individual proposed VA CRVs, a certification must be attached to each case. On Master VA CRVs, a value for each model to be converted must be submitted. Plans need not accompany VA CRV conversion requests. In the case of a master CRV, the value of the basic house is shown on an attached list and the first page of the master CRV shows the value of available alternates. When the application is accompanied by such a master CRV, the alternates included in the property covered by the application must be circled. In these cases, the value of the basic house and the value of included alternates will be added and the sum will indicate the Value of Property. If no alternates are circled, the mortgage credit (examiner will assume that no alternates are included and will record the value of the basic house as Value of Property. (These cases are the sole exception to the requirement that any change in value be made by VA. If value was determined on the basis of a master CRV without considering alternates and the mortgagee later submits evidence that alternates should have been included, the Field Office may adjust the HUD Value accordingly without reference to VA.) AFN-G_FHAUWManual Rev. 07/30/2015 Page 259 of 296

General Processing Procedures Proposed Construction Existing Construction Closing costs and other information necessary for mortgage credit processing will be taken from the form entitled "Mortgagee Request for Conversion - VA CRV" to be provided by the mortgagee. When necessary for mortgage credit processing, the estimate of monthly rent will be provided by the Valuation Branch from data available in the office. Upon receipt of the entire application by the Valuation Branch, the case is immediately assigned to an appropriate staff member for review of the documents and other items such as flood hazard area, etc., and then forwarded to the Mortgage, Credit Branch. An expired CRV is unacceptable unless evidence is provided that a sales contract had been executed prior to its expiration. Unsatisfied Repair Conditions Any repair conditions listed on the CRV shall be transferred to the Firm Commitment and may not be modified except by VA. Evidence must be submitted at insurance endorsement that all specific conditions requiring inspection by other than the mortgagee have been met to the satisfaction of VA which is responsible for making any necessary inspections of proposed construction properties and for resolving any construction complaints. When the application involves an existing property and the CRV requires repairs, VA must be asked to clear them. A mortgagee's certification that the repairs have been completed is acceptable if so stated on the CRV. Mortgage Term The term of the mortgage will be calculated from the Remaining Economic Life entry on the CRV. HUD will make no change in the estimate of economic life shown by VA and will assume the VA estimate to be correct, even though this may result in a shortened mortgage term. Mortgagees questioning the VA estimate should be directed to that agency for relief. AFN-G_FHAUWManual Rev. 07/30/2015 Page 260 of 296

General Processing Procedures Existing Construction Changes in Value or Mortgage Term Any request for changes in value or mortgage term must be submitted by the mortgagee to the Department of Veterans Affairs and may be used by the Field Office only if VA issues an amended CRV. When value and mortgage term are based on a CRV, the Director of Housing Development does not have the prerogative of making changes in either item during the life of the original, unextended commitment. Outstanding Conditional Commitments HUD will not knowingly accept a CRV application for conversion when there is an outstanding HUD conditional commitment involving the same property. If the HUD conditional commitment is returned for cancellation in connection with the CRV conversion transaction, the resultant HUD commitment may not exceed the value shown on the cancelled commitment. Mortgagor Complaints Complaints received by the Field Office regarding VA inspection procedures, the appraisal made by VA, a lack of specific repairs on the CRV, etc., are to be referred to the local VA office for handling. Application for Operative-Builder Commitments Finished Flooring in Proposed Construction HUD allows carpeting as well as hardwood or other types of flooring as a finished floor. The value to be attributed to carpeting is set forth in the Marshall and Swift Cost Handbook. In the event that the carpeting is installed over another type of finished floor, both the finished floor and the carpeting are to be included in value. It is therefore important that the appraiser make a visual inspection of the subfloor by lifting a small corner of the installed carpeting and examining the underlayment regardless of what is stated in the specifications. AFN-G_FHAUWManual Rev. 07/30/2015 Page 261 of 296

Application for Operative-Builder Commitments (Cont d) Finished Flooring in Proposed Construction Carpeting in bathrooms and kitchens is not permitted as a finished floor in proposed construction cases unless a waterresistant (linoleum or tile) finish is placed on the subfloor prior to installing the carpet. Carpeting in Existing Houses In existing cases, carpeting in kitchens and bathrooms may be accepted as a finished floor provided that a statement is obtained from the purchaser acknowledging this fact. It is not to be considered in value. Acceptable but worn carpeting in other rooms shall be evaluated separately to determine its influence on the value of the property being appraised. The value of the acceptable carpeting is to be included in the value found for the property. Soil Treatment with Individual Water Systems Where termite infestation is found or suspected in existing dwellings using individual water supply systems, precaution must be taken in the type of exterminating treatment to be required in order to prevent the possibility of infiltrating and endangering water supply. Soil poisoning in such cases is an unacceptable treatment method unless satisfactory assurance is provided that the construction and location of the water supply system meets the specific requirements of 24 CFR Part 200.926d. Fragmental Properties Estimate of Value Value of a Small Area Cases arise in which mortgagees may request consent to the release of a portion of a property which is subject to an insured mortgage. A special Valuation Report is required in connection with these cases. Frequently the area involved in the release is small and unusable by itself. Because of its lack of utility taken by itself, it might appear logical to assign no value to it, but this would be incorrect. If a small area contributes something to the utility of the whole property, it must have some value even though it may be nominal. AFN-G_FHAUWManual Rev. 07/30/2015 Page 262 of 296

Fragmental Properties Property Sold to an Adjacent Owner The release of a portion of the property from the mortgage may be sought so that it may be sold to the owner of an adjacent property. Under these circumstances the purchase price is a guide to the estimate of value though it often may greatly exceed a plausible valuation. Because of matters such as the presence of necessity or extraordinary motivation on the part of the buyer. Areas Affected by Military Installations Considerations Field Offices may have situations in which HUD mortgage insurance may not be proper because of the housing demand attributable to military installations in the area. Such situations arise when the permanence and stability of the demand for housing to serve these installations are not evident. The phrase "military-connected civilian personnel" means civilian employees of military installations, and of contractors and subcontractors directly associated with the military. Market Considerations All considerations respecting the use of HUD insurance in military-impacted areas must recognize that the permanency of the "permanent" military installation is by no means assured. Changing world conditions and technological advances can materially affect the activities and assigned personnel strength of military installations. Further, a rapid turnover of personnel in these areas may be anticipated. Current housing needs, therefore, may not provide the basis for long-term support of either the sales or rental market, or both. Even though housing can meet sales prices or rent ranges commensurate with the capacity of military and militaryconnected civilian personnel and be within the commuting radius authorized for personnel of the installation, the following considerations will continue to be paramount in determinations with respect to mortgage insurance: AFN-G_FHAUWManual Rev. 07/30/2015 Page 263 of 296

Areas Affected by Military Installations Market Considerations The type and mission of installation, its historical stability, and the projected continued necessity for this type of activity or a logical replacement; Stability in the assigned strength (military and civilian) of the installation and the prospective maintenance of this strength over a long term; The magnitude of the total current housing requirements for installation personnel relative to the total housing needs (i.e., occupied housing units) of the support area. These factors cannot always be determined with a high degree of certainty. For some areas, however, the situation is practically self-evident and there is no need for a thorough examination of the basic considerations. For example, in localities with an economic background that will clearly assure absorption and the continued marketability of additional housing, despite substantial or complete curtailment of military activity, mortgage insurance is permissible for military personnel as well as civilian employees of the installation. Any large metropolitan area in which the number of military and military-connected civilian personnel is minor, compared with the number constituting continued demand from other sources, would fall in this classification; In such areas, however, locations within a military reservation (or near such a reservation, but inconveniently situated with respect to any other source of employment) will be ineligible for mortgage insurance; As an opposite example, in any small community where the demand for housing from military and military-connected civilian personnel is clearly predominant, compared with the number constituting continued demand from other sources, mortgage insurance is not to be utilized in the satisfaction of military-oriented demand; AFN-G_FHAUWManual Rev. 07/30/2015 Page 264 of 296

Areas Affected by Military Installations Market Considerations Between these two extremes there is a wide diversity of military impact. In those areas of military impact in which use of mortgage insurance is considered marginal, (after carefully considering the historic economic background of the community and the continuing marketability of additional units in the event of a change in mission or a significant decline in strength, i.e., 20 percent or more) a request through the Regional Administrator to the Assistant Secretary for Housing for consideration shall be made for Field Office guidance on operating procedure. (Refer to HUD Handbook 4010.1.) Marginal Situations In the interest of consistency among Field Offices, marginal situations will be deemed to include all areas in which either or both of the following conditions exist: The Secretary of Defense, or his designee, shall have certified to the Commissioner that the housing is necessary to provide adequate housing for civilians employed in connection with a research or development installation of one of the military departments of the United States, or a contractor thereof, and that there is no present intention to substantially curtail the number of the civilian personnel assigned or to be assigned to such installation. The certificate shall be conclusive evidence to the Commissioner of the need for such housing; Annual volume of residential construction in the housing market area, either has increased during the last 12 months or is expected to increase 50 percent or more as a result of recent or prospective military expansion; Military and military-connected civilian personnel currently occupy 25 percent or more of all occupied residential units (permanent and temporary type) in the housing market area, including housing on the military reservation. AFN-G_FHAUWManual Rev. 07/30/2015 Page 265 of 296

Areas Affected by Military Installations Marginal Situations Headquarters Referrals Periodic Reanalysis Note: The Field Office Economic and Market Analysis Division should be consulted for information and recommendations concerning marginal situations. Where questions arise concerning the conditions, intensity, and duration of characteristics of housing markets, the Area EMAD will undertake any appropriate market studies that are necessary to (1) describe the severity and problems of the housing market and (2) to formulate specific recommendations to the Office Manager for coping with these problems. The referral of these marginal situations to Headquarters will include the data accumulated by the Field Office during its analysis of the matter plus comments and recommendations. Periodic re-analysis of military impacted areas must be made by the Field Office because with increases in population, and expanded patterns of growth around metropolitan areas, changes in demand from other sources can occur rapidly. When demand from other sources becomes predominant or can be accurately predicted, requests for changes in the office's policy will be forwarded through the Regional Administrator to the Assistant Secretary for Housing. Conditions of Application Acceptance Home Mortgage Applications can be accepted for individual conditional commitments in all military impacted areas when a buyer is known and a bona fide sales contract is submitted by the mortgagee. These commitments are limited to prospective owner-occupants. All mortgagors including military connected mortgagors as defined above are eligible. The mortgagor must meet the criteria for the Section of the Act under which application is made. AFN-G_FHAUWManual Rev. 07/30/2015 Page 266 of 296

Solar Energy Systems Introduction Eligibility Contribution to Value To encourage the use of solar energy in homes, HUD will insure a mortgage up to 20 percent above the maximum allowable insurable amount in a geographical area if such increase is necessary to account for the increased cost of the residence due to the installation of a solar energy system which may not exceed 20 percent of the value of the property. HUD programs eligible for this allowance are 203(b), 203(k), 203(n), 233, 244, 245, 809 and 203(i). While Section 234 is not included as an eligible program for an increased mortgage amount, there is no reason that solar energy may not be included in a condominium with added value for the system provided that the mortgage amount does not exceed the maximum insurable amount for the geographical area in which it is located. Applicable mortgage amounts for two-, three- and four-unit dwellings are appropriately affected. Proper documentation of the Homeowners Association acceptance and a hold harmless covenant executed by the mortgagor(s) must be submitted with an application for a condominium unit. An eligible solar energy system is defined as any addition, alteration, or improvement to an existing or new structure which is designed to utilize wind or solar energy to reduce energy requirements obtained from other sources. Solar heating and domestic hot water systems are not acceptable without operational 100 percent back-up conventional systems. Active and passive solar energy systems are permitted in this program. The systems must comply with HUD Handbook 4930.2, Intermediate Minimum Property Standards for Solar Heating and Domestic Hot Water Systems. Descriptions of various types of active and passive solar systems are included in Appendix C of these standards. The solar energy system's contribution to value will be limited by its replacement cost or by its effect on the market price of the dwelling. AFN-G_FHAUWManual Rev. 07/30/2015 Page 267 of 296

Solar Energy Systems Contribution to Value VA CRV In the event that market data is not available to indicate the additional amount which would be paid for a property containing a solar energy system, the amount of increase would be the lesser of the actual cost of the solar system installed in the subject house or 20 percent of the market value of the property. The difference in added value contributed by the solar system in comparison to the conventional system must represent a reasonable proportion of the total value of the property and may never exceed 20 percent of the market value of the property without a solar energy system. If a Veterans Administration Certificate of Reasonable Value for existing construction is involved, and a solar system is included, the value established on the CRV will reflect the presence of the solar system. If the mortgagee requests a mortgage based on the solar system which exceeds the maximum mortgage amount for the area, it is the responsibility of the mortgagee to secure from the local VA office a copy of the uniform Residential Appraisal Report on the property, URAR, and submit it with the VA CRV. This form will enable the local HUD Office to determine the incremental increase in the value of the property added by the solar system. Once the increase has been identified by the HUD Office, the aforementioned procedure for determining the maximum mortgage amount would govern. It is appropriate to note that in arriving at the VA established reasonable value of a property with a solar system, the amount by which the solar system increases the value is based on market comparisons and not on the actual cost of the solar system. Local Market Acceptance and Minimum Property Standards The appraiser shall reflect in value the local market acceptance of solar heating equipment. Solar heating and hot water systems are not acceptable without operational 100 percent backup conventional systems. Solar collectors must be located where they will be free from natural or man-made obstructions to the sun. AFN-G_FHAUWManual Rev. 07/30/2015 Page 268 of 296

Solar Energy Systems Local Market Acceptance and Minimum Property Standards When such systems are proposed for installation, they shall comply with the provisions of Handbook 4930.2, Intermediate Minimum Property Standards Supplement for Solar Heating and Domestic Hot Water Systems. When such a system is already installed in an existing home, the appraiser may request an inspection of the system by the person responsible for the architectural or engineering aspects of the solar energy program in that Field Office for recommendations as to acceptability. Limits to Value The solar heating or hot water system's contribution to value will be limited by its replacement cost and by its effect on the market price of the dwelling. In completing the estimate of value by market comparison between a subject property that has a solar heating system, and a recently sold comparable property with a fossil fuel system only, the sale price of the comparable is increased by the amount typically paid in the market for the solar heating system in order to arrive at the indicated market price of subject property. Lack of Market Data In the event that market data is not available to indicate the additional amount that would be paid for a property which does include solar heating or hot water system, then the amount of the increase shall be the difference in cost between all heating equipment including solar installed in the subject house less the cost of all heating equipment installed in the comparable property without a solar installation. However, in making this adjustment based on differences in cost, the appraiser shall consider the ratio between the value added by a solar heating system and the value of the property with a conventional heating system only, to ensure that the contribution of a solar heating system to total value represents a reasonable proportion of the total value of the property. AFN-G_FHAUWManual Rev. 07/30/2015 Page 269 of 296

Solar Energy Systems FHA Field Office Estimates The FHA Field Office will consider the costs of acceptable solar energy systems for homes of several sizes, and shall consider the market prices of typical homes of these several sizes (without solar energy systems) in order to set a limit on the amount which a solar energy system can add to the estimated value of the subject property. This limit shall be expressed as a percentage of the market value of the subject property (before consideration of the solar energy system) and this limit shall not exceed 20 percent of the market value of the subject property (without a solar energy system). Price Extraction Method (Method #1) Market data may be collected in two ways. The Field Office may use either or both methods with the understanding that method #1 be considered more reliable and method #2 will require additional consideration during analysis. The Valuation Branch surveys builders of new subdivisions or custom homes to determine the price of solar water systems when sold to new home buyers as an add-on or alternate feature. These incremental price. increases should be expressed as a percentage of value by dividing the price of the solar application by the total sales price. There should be at least ten such data indicators from which to develop an overall value percentage for the Market Value Guide. DO NOT AVERAGE! Use of a median or mode (typical) is preferred to averaging. If this type of data is not available to the Field Office, then the Paired Sales Method may be used. Paired Sales Method (Method #2) The Valuation Branch develops a number of paired sales, which will compare existing homes with solar water heating systems against similar sold properties without solar water heating. Since this is a crude measurement, the difference in adjusted values should be expressed as a percent of value of the home with solar. Since this method measures the relative market value of existing solar applications in used or unknown condition, a depreciation factor can be applied by the appraiser in order to approximate the market value of a new system. AFN-G_FHAUWManual Rev. 07/30/2015 Page 270 of 296

Solar Energy Systems Depreciation Factor Cost Approach to Value The Depreciation Factor should be selected by the Valuation Branch, based on "straight line" applied to the typical (prevalent) age of solar heaters used for the sample. For example, based on a 20 year life and assuming straight line depreciation or 5 percent per year, if the comparable solar systems are mostly 4-6 years old - then, the depreciation factor of 25 percent could be selected (for 5 years.). This factor should be expressed as 125 percent (one hundred added). When the Field Office determines the market approach is not appropriate for use because of inadequate market data, then the cost approach to value will be used. Cost will be calculated by Regional Offices of Housing for all Regional-accepted solar water heating systems, and will be included as part of the Regional Utility Engineers' written acceptance of each system. If there are system size differences more than one cost will be shown. Regional Offices will also furnish locality adjustment factors to Field Offices on an annual basis, if applicable. Appraisal Effect of Value on Mortgage Amount After the reconsideration of value action is completed using an addendum worksheet, the resulting new value should be entered on the original URAR Appraisal as the new (amended) market value and re-dated and signed. A comment should be made in the last comments section of the URAR "See Solar Value Worksheet or Addendum, attached." The full value of the appraised solar water heating system will be allowed when determined by the methods outlined in these instructions, with an allowable maximum of $4,000 per unit. The maximum mortgage limits for 1- to 4-unit properties may be exceeded by the value of the solar water heating system where needed to provide for the allowable costs or value of such installations. The maximum mortgage limits for condominium units (Section 234) may not be exceeded under any circumstances. AFN-G_FHAUWManual Rev. 07/30/2015 Page 271 of 296

Weatherization Program Thermal Protection The purpose of this program is to assist the homeowner in reducing the heating and cooling expense of maintaining a home. Mortgagees and real estate brokers should be encouraged to inform prospective purchasers of the fact that thermal protection improvements are considered in each appraisal and that they should consider having a home energy audit performed by their local utility company. The following types of energy-saving improvements may be included: Thermostats; Insulation wrap for water heaters; Insulation of ducts and pipes in unheated spaces of heating/cooling systems; Attic insulation; Insulation for floors and foundation walls; Installation of weather stripping/caulking; Installation of storm windows/doors. The installation of thermal improvements usually makes them cost-effective. The Department is committed to encouraging the installation of thermal improvements to conserve energy whenever possible. Benefits Home Energy Audit Request Mortgagees should emphasize the benefits of the trade-off between energy conserving capital costs and subsequent operating expenses in underwriting single family housing. Utility schedules require constant updating to reflect current utility costs in properties having similar thermal protection improvements. The utility costs after installation of thermal improvements should be lower and therefore should offset some of the cost due to the installation of energy saving devices. Conditional commitments/statements of appraised value (Form HUD 928OO-5B) issued on existing construction contain a recommendation that homebuyers contact their local utility company for a home energy audit. AFN-G_FHAUWManual Rev. 07/30/2015 Page 272 of 296

Weatherization Program Home Energy Audit Requests If estimated value and the mortgage amount are to be increased, as stated subsequently herein, the improvements must follow the procedure prescribed below: 1. The value of the property, as recorded by the appraiser on the Uniform Residential Appraisal Report will not include recommended thermal protection improvements. The estimated value may later be increased by the Mortgage Credit Branch or by a Direct Endorsement Mortgagee Underwriter by the amount of the cost of improvements when such improvements have been made and a request is received for an increase in value and mortgage amount based upon those improvements; This increase shall be made by one of the following methods if such improvements have been made and money has been expended for weatherization and/or energy conservation improvements to the property. A contractor's statement of cost of work completed or buyer/seller's copy of a statement showing the cost of materials used must be submitted. 2. $2,000 or less without a separate value determination. Submission of a contract for the work to be done. 3. From $2,001 to $3,500 if supported by a value determination made by a HUD review appraiser, staff appraiser, or Direct Endorsement Mortgagee Underwriter. This is based upon submission of a contract or firm bid for the work to be done; The value determination is normally made by the desk reviewer in house; however, some value determinations may require a field inspection of the property; The review appraiser shall make this inspection if necessary. AFN-G_FHAUWManual Rev. 07/30/2015 Page 273 of 296

Weatherization Program Home Energy Audit Requests Construction Standards 4. $3,501 or more subject to an inspection made by a HUDapproved fee appraiser/inspector or DE staff appraiser. The lender will mail all proposals submitted by the homeowner concerning the addition of thermal protection improvements to the Field Office or the Direct Endorsement Mortgagee Underwriter for review. The appraiser/inspector must review the expense involved in adding the thermal improvements and determine what effect the improvements will have on value. This will be done by an on-site inspection. 5. In addition, appraisers should estimate any expected utility cost savings resulting from energy-related improvements. 6. The appraiser/inspector will bill the lender for the inspection, but the fee charged cannot exceed those charged for inspections in the geographical area. The lender is responsible for paying the fee appraiser/inspector for this service. The following standards must be observed: Thermal protection for glazing shall be provided for all habitable heated areas in locations having more than 1001 heating degree days annually for electric resistance heat and for 3501 or more heating degree days for all other fuels. This should be effected through the installation of storm sash, inserts or insulating glass. Storm doors should be provided for exterior doors in locations having more than 1001 annual heating degree days for electric resistance heat and for 3501 or more heating degree days for all other fuels. Material and installation may be the most economical locally acceptable. Recommendations for storm doors need not be made for double front doors, double French doors, sliding glass doors or any other door, the dimensions of which require custom manufacturing which is not generally available or the cost of which would be excessive. AFN-G_FHAUWManual Rev. 07/30/2015 Page 274 of 296

Weatherization Program Construction Standards Casement, awning windows, and other types of sash having discontinued sizes or unusual opening configurations for which no storm inserts are manufactured and for which the cost of custom manufacturing would be excessive shall not be included. Heating winter degree days and summer cooling hours for various cities will be found in the "NAHB Insulating Manual for Homes and Apartments." Data for cities and towns not shown may be estimated by comparison or interpolation, or may be obtained from the local Weather Bureau. Ceiling insulation equal to the following R values shall be recommended for all habitable heated and cooled areas as follows: Additional insulation shall not be recommended unless the recommended level is approximately 3 inches greater than the existing insulation; Exemption of the ceiling insulation recommendation will be made for dwellings having flat roofs or other ceiling areas when installation is determined to be impractical; Doors and windows shall be weather stripped to reduce infiltration of air; when weather stripping is inadequate or nonexistent; additional weather stripping is not required when openings are protected by storm doors or storm windows; Caulk, gasket, or otherwise seal all openings, cracks, or joints in exterior walls when existing materials are inadequate; In all instances, the adequacy of attic ventilation must be ascertained; Crawl space insulation of R-11 or R-19 value should be placed beneath all habitable heated areas in locations having more than 2500 annual heating degree days when electric resistance heating is used and for areas of more than 3500 heating degree days for all other fuels. It is also very important that a vapor barrier be placed on the ground; AFN-G_FHAUWManual Rev. 07/30/2015 Page 275 of 296

Weatherization Program Construction Standards Upon receipt of a firm application where thermal protection recommendations have been met or are anticipated to be met, the mortgagee submits paid bills or invoices indicating the cost to the homeowner for weatherization and/or energy conservation improvements to be installed on the property; the Mortgage Credit examiner or DE underwriter shall add the appropriate cost to the value of the property in accordance with the limitations cited abovel a new mortgage amount will then be calculated. The firm commitment will reflect the new mortgage amount; The improvements need not be inspected by HUD. The commitment will be conditioned that a mortgagee certification must be received to assure HUD that the thermal protection devices have been properly installed; In the event the improvements are not completed and inspected prior to firm commitment (but will be made later), a firm contract bid by the installer must be presented to the Mortgage Credit examiner or DE underwriter for consideration of the contract amount prior to issuing the firm commitment. The firm contract price shall also serve as the amount to escrow should there be any delay in completing the conservation requirements between firm commitment and insurance endorsement. Form HUD-92300, Mortgagee's Assurance of Completion, shall be used where an escrow is required. If the improvements are not completed within a reasonable amount of time, the escrow will be applied to reduce the loan principal. Water and Sewage Systems Acceptable System Types There are three types of water and sewer systems which may be acceptable to serve a dwelling: 1. Public system that is owned, operated, and maintained by the city, county, or local unit of government with power of taxation or assessment; this system is most preferred for safety and reliability. AFN-G_FHAUWManual Rev. 07/30/2015 Page 276 of 296

Water and Sewage Systems Acceptable System Types 2. Community system, that is a central system, owned, operated, and maintained by a private corporation or a non-profit property owners association. 3. Individual systems that are owned and maintained by the homeowner. Compliance Guidelines For both proposed and existing construction, community water systems must: Have a current water supply permit from the local Health Department with evidence that the water supply o o Meets State Drinking Water Standards for quality; and Provides sufficient quantity to supply peak demands in the development; Be in compliance with requirements of the local or state health authority; o Deficiencies in the water system should not adversely affect the health of consumers, the acceptability of the quality of the water for all household purposes, nor provide for less than the quantity of water required in the development; Have organizational documents providing for ownership and operation that meet requirements of HUD Handbook 4075.12 Rev. to assure continuity of service at reasonable rates. Private systems operated for profit must: Be under jurisdiction of State Public Utility Commission; or Have a Trust Deed of Third Party Beneficiary Agreement per HUD Handbook 4075.12 Rev. A Community Sewer System must: Be in compliance with requirements of the Health Authority having jurisdiction for satisfactory operation of the sewage treatment plant and discharge of treated wastes; AFN-G_FHAUWManual Rev. 07/30/2015 Page 277 of 296

Water and Sewage Systems Compliance Guidelines Have capacity in the sewage collection system and treatment plant to adequately serve the properties in the development; Have organizational documents which assure continuity of service at reasonable rates as required in HUD Handbook 4075.12 Rev.; If a private system operated for profit, it must o o Be regulated by the State Public Utility Commission; or Have a Trust Deed of Third Party Beneficiary Agreement as specified in HUD Handbook 4075.12 Rev. Farmers Home Administration approval of water and/or sewage systems is sufficient for eligibility on individual cases where both agencies are involved. Documentation Requirements Articles of Incorporation and By-Laws for water and sewerage systems owned by property owner associations or cooperatively owned systems will also be acceptable for assuring continued service and reasonable rates if approved by the Farmers Home Administration. Whenever public or community facilities are within a reasonable distance from the property, a connection must be made to these utilities. However, if the cost to connect to it would cause a financial hardship, this requirement may be waived. Individual systems are owned and maintained by the homeowner but are subject to compliance with requirements of the local or State health authority having jurisdiction. Proposed Construction Properties Individual water supply systems may be acceptable when connection to a satisfactory public or community system is not feasible and there is assurance of a continuing adequate supply of safe potable water for domestic needs and for auxiliary uses, such as lawn and garden maintenance. Possible sources of pollution of the water from the subject and adjoining properties must be considered. AFN-G_FHAUWManual Rev. 07/30/2015 Page 278 of 296

Water and Sewage Systems Proposed Construction Properties Existing Construction Properties Individual sewage disposal systems may be acceptable when connection to a public or community system is not feasible and the site conditions are such that the individual system can be expected to function satisfactorily. Examination of neighborhood conditions is necessary to assist in this determination. Local health department approval is required. Individual wells should be checked to ascertain the distance from the septic system, ease of maintenance and repair of the well, and adequacy of the water pressure. The distance from the well to the septic system must be in accordance with 24 CFR 200.926d (HUD Handbook 4910.1, Appendix K). A well located within the foundation walls of a dwelling is not acceptable except in arctic or subarctic regions. The appraiser should turn on several cold water faucets in the house to check water pressure and flow, letting the system run during the time of the inspection. Flushing a toilet at the same time will also reveal any weakness in water pressure. Individual sewerage systems may be acceptable where soil conditions are satisfactory for proper installation and absorption of the effluent. After checking the interior of the house and water pressure, the appraiser should then check the outside area for any evidence of subsurface sewage failure, and/or evidence of failures in the surrounding neighborhood. Failure of individual sewerage systems on adjoining properties may be cause for rejection of the subject property due to the health hazards involved. If either system in the subject property is failing, the property should be rejected with a requirement for a repair proposal acceptable to local and State authorities and HUD. If the home is not occupied and the systems have not been in use for several months, an inspection of the sewerage system must be made by a State licensed sanitation or civil engineer, a State licensed contractor for sewage disposal systems, or a member of a qualified inspection service. AFN-G_FHAUWManual Rev. 07/30/2015 Page 279 of 296

Water and Sewage Systems Existing Construction Properties The inspector must determine if the sewage disposal system was operating in a satisfactory manner at the time of inspection and if the sewerage system is considered adequate to dispose of all domestic wastes in a manner which will not create a nuisance or endanger public health. (If the system has not been in use for thirty days, a dye test is recommended.) There must also be an inspection of the water system and a certificate from a local health authority or a State EPA-approved laboratory to determine if the system was operating in a satisfactory manner at the time of inspection, and if the quality of water supply meets the local health or State drinking water standards based on results of bacteriological analysis of the water supply source, and chemical analysis of the water supply source where there is a history of ground water contamination in the area. Note: Only the laboratory may perform the sampling. A third party is not acceptable. Well construction must meet requirements of the health authority. Suitability of Soil Eligibility Standards for Shared Wells The soil and subsoil conditions of the site must be considered. The type and permeability of the soil, the location of the water table, surface drainage conditions, compaction, and the existence of rock formations are among the physical features that are important in the analysis of the site. Effects of the adverse features of the adjoining land must also be observed. To be eligible for consideration for mortgage insurance, any shared well must Serve existing properties which cannot feasibly be connected to an acceptable public or community water supply system; Serve proposed construction only if o It is infeasible to serve the housing by an acceptable public or community water system; and AFN-G_FHAUWManual Rev. 07/30/2015 Page 280 of 296

Water and Sewage Systems Eligibility Standard for Shared Wells o The housing is located other than in an area where local officials have certified that installation of public or adequate community water and sewer systems are economically feasible; Be capable of providing a continuing supply of water to involved dwelling units so that each existing property simultaneously will be assured at least three gallons per minute (five gallons per minute for proposed construction) over a continuous four-hour period; o The well itself may have a lesser yield if pressurized storage is provided in an amount that will make 720 gallons of water available to each connected existing dwelling or 1,200 gallons of water available to each proposed dwelling during a continuous four-hour period; the shared well system yield should be demonstrated by a certified pumping test or other means acceptable to all agreeing parties; Provide safe and potable water evidenced by a letter from the health authority having jurisdiction or, in the absence of local health department standards, by a certified water quality analysis demonstrating that the well water complies with the US Environmental Protection Agency's National Interim Primary Drinking Water Regulations; Have a valve on each dwelling service line as it leaves the well so that water may be shut off to each served dwelling without interrupting service to other properties; Serve no more than four living units or properties; o If more than four properties will be served by one well, one of the ownership and organizational alternatives identified in HUD Handbook 4075.12 Rev, paragraph 3b, shall be implemented instead of a shared well agreement; Be directly connected to the pumping energy source (not through a dwelling) and energy used for pumping must be separately metered; AFN-G_FHAUWManual Rev. 07/30/2015 Page 281 of 296

Water and Sewage Systems Eligibility Standard for Shared Wells Be covered by an acceptable well-sharing agreement; such an agreement must o Be binding upon signatory parties and their successors in title; o o o Be recorded in local deed records; When executed and recorded, reflect joinder by any mortgages holding a mortgage on any property connected to the shared well; and Comply with guidance provided in the itemized list below. Acceptability Guidelines for Well-Sharing Agreements The same agreement provisions are essential regardless of whether the well will serve existing or proposed properties. Provisions that should be reflected in any acceptable wellsharing agreement include the following: 1. Shall permit well water sampling and testing by a responsible local authority at any time at the request of any party; 2. Shall require that corrective measures be implemented if testing reveals a significant water quality deficiency, but only with the consent of a majority of all parties; 3. Shall assure continuity of water service to "supplied" parties if the "supplying" party has no further need for the shared well system. ("Supplied" parties normally should assume all costs for their continuing water supply;) 4. Shall prohibit well water usage by any party for other than bona fide domestic purposes; 5. Shall prohibit connection of any additional living unit to the shared well system without: a. The consent of all parties; b. Appropriate amendment of the agreement; and c. Compliance with above requirements. AFN-G_FHAUWManual Rev. 07/30/2015 Page 282 of 296

Water and Sewage Systems Acceptability Guidelines for Well-Sharing Agreements 6. Shall prohibit any party from locating or relocating any element of an individual sewage disposal system within 50 feet (100 feet for proposed construction) of the shared well. 7. Shall establish easements for all elements of the system, assuring access and necessary working space for system operation, maintenance, replacement, improvement, inspection, and testing. 8. Shall specify that no party may install landscaping or improvements that will impair use of the easements. 9. Shall specify that any removal and replacement of preexisting site improvements, necessary for system operation, maintenance, replacement, improvement, inspection or testing, will be at the cost of their owner, except that costs to remove and replace common boundary fencing or walls shall be shared equally between or among parties. 10. Shall establish the right of any party to act to correct an emergency situation in the absence on-site of the other parties. An emergency situation shall be defined as failure of any shared portion of the system to deliver water upon demand. 11. Shall permit agreement amendment to assure equitable readjustment of shared costs when there may be significant changes in well pump energy rates or the occupancy or use of an involved property. 12. Shall require the consent of a majority of all parties upon cost sharing, except in emergency situations, before actions are taken for system maintenance, replacement or improvement. 13. Shall require that any necessary replacement or improvement of a system element(s) will at least restore original system performance. AFN-G_FHAUWManual Rev. 07/30/2015 Page 283 of 296

Water and Sewage Systems Acceptability Guidelines for Well-Sharing Agreements 14. Shall specify required cost sharing for: a. The energy supply for the well pump; b. System maintenance including repairs, testing, inspection and disinfection; c. System component replacement due to wear, obsolescence, incrustation or corrosion; and d. System improvement to increase the service life of material or component, to restore well yield, or to provide necessary system protection. 15. Shall specify that no party shall be responsible for unilaterally incurred shared well debts of another party, except for correction of emergency situations. Emergency situation correction costs shall be equally shared. 16. Shall require that each party be responsible for a. Prompt repair of any detected leak in his water service line or plumbing system; b. Repair costs to correct system damage caused by a resident or guest at his property; and c. Necessary repair or replacement of the service line connecting the system to his dwelling. 17. Shall require equal sharing of repair costs for system damage caused by persons other than a resident or guest at a property sharing the well. 18. Shall assure equal sharing of costs for abandoning all or part of the shared system so that contamination of ground water or other hazards will be avoided. 19. Shall assure prompt collection from all parties and prompt payment of system operation, maintenance, replacement, or improvement costs. AFN-G_FHAUWManual Rev. 07/30/2015 Page 284 of 296

Water and Sewage Systems Acceptability Guidelines for Well-Sharing Agreements 20. Shall specify that the recorded agreement may not be amended during the term of a Federally insured or guaranteed mortgage on any property served, except as provided in items 5 and 11, above. 21. Shall provide for binding arbitration of any dispute or impasse between parties with regard to the system or terms of agreement. Binding arbitration shall be through the American Arbitration Association or a similar body and may be initiated at any time by any party to the agreement. Arbitration costs shall be equally shared by parties to the agreement. Earth-Sheltered Housing General Requirements Earth sheltered housing can be built under Title 11 to conform to Minimum Property Standards (MPS). For proposed construction, see HUD Handbook 4151.1. Typically such housing is built on sloped sites or in rolling terrain. Designs which include judicious relations between buildings and grades should permit easy access to existing or proposed streets and convenient access for deliveries, maintenance, fire equipment and car parking. Foundation walls and roofs retaining or supporting earth, must be designed for the imposed loads. They must resist the penetration of moisture. Since a major national goal is the conservation of energy, every consideration must be given to housing which provides the possibility that energy use will be reduced. In addition to reduced energy costs, there is considerable interest in earth sheltered housing in areas subject to tornados. Inappropriate Locations Earth sheltered housing in some locations is obviously inappropriate: In coastal areas where wind driven seas would prove a flood hazard; AFN-G_FHAUWManual Rev. 07/30/2015 Page 285 of 296

Earth-Sheltered Housing Inappropriate Locations In flood prone areas; In areas having high water tables; In any area where hydrostatic or other forces would make earth sheltered homes hazardous to life safety; In any area where it is not homogeneous with other homes in the neighborhood and is not sited in such a manner which will lead to its attractiveness and marketability. Marketability Dome Homes Earth sheltered housing proposals present a problem in determining marketability and value. Generally speaking, a well-designed, attractive, and well sited proposal that provides amenities commensurate with conventionally built housing and with an approximately similar replacement cost should, pending the development of market comparable data, have an estimated value at least approximating that of conventionally built new housing. The same considerations apply to dome homes as earth sheltered homes insofar as location is concerned. In order for such a property to be fully marketable it must be located in an area of other similar types of construction and blend in with the landscape. Chemical Hazards Urea Formaldehyde Foam Insulation Asbestos Since the Consumer Product Safety Commission has been unable to determine any absolute safe level of formaldehyde exposure, the Department does not prohibit the use or presence of urea formaldehyde insulation in single family residential buildings. Although asbestos has been used in many products in the past, it is not an easily recognized material. This material may be found anywhere in a home but may not be obvious to an appraiser. AFN-G_FHAUWManual Rev. 07/30/2015 Page 286 of 296

Chemical Hazards Asbestos While an appraiser may recognize an asbestos shingle roof or asbestos siding on a house, asbestos used in this manner does not pose a danger as would be if the material were deteriorating within the confines of a home. Where it is used as an insulation wrap for hot water pipes, it is usually covered and poses no danger. When the material is deteriorating into a fine powder and can be inhaled, it may pose a danger to one's health. Also it could be in hidden areas to which the appraiser has no access. Asbestos wrapping around hot water pipes in the basement of a dwelling is usually found only in very old homes. If an appraiser notices this, he or she should make a note on the appraisal report that there appears to be asbestos insulation wrapped around the hot water pipes. If there is no obvious deterioration of the asbestos such as punctures or other damage, it should be left alone. If there is obvious damage, the appraiser should require that the pipes be wrapped with heavy plastic or other appropriate material. The appraiser should not require that the asbestos be removed unless it is in such a deteriorated condition as to pose a serious health threat. In such a case an asbestos expert must be employed to remove it. AFN-G_FHAUWManual Rev. 07/30/2015 Page 287 of 296

UNDERWRITING REFERENCE MATERIAL General Information on Underwriting and Underwriters Importance of the Underwriter The underwriter s role and responsibilities are critical elements of the Direct Endorsement (DE) Program, and FHA looks to the underwriter as its focal point. To participate in the DE Program, a lender must have a qualified underwriter on staff. Underwriter Sanctions and Ineligibility The mortgage lender is responsible for ensuring that no sanctions exist against its underwriter. Likewise, the underwriter cannot have any delinquent Federal debt, and may not be listed on FHA Credit Alert Interactive Voice Response System (CAIVRS). Registering an Underwriter in FHA Connection AFN must register each of its underwriters in FHA Connection (FHAC). By registering an underwriter in FHAC, AFN certifies that he or she meets the necessary qualifications, and is not ineligible due to any criteria described in this guide. Use of an AUS AFN will use an Automated Underwriting System (AUS) that employs the FHA Technology Open To Approved Lenders (TOTAL) Mortgage Scorecard. These systems evaluate loan application elements, including information on the applicant s: Income Credit history Cash reserves, and Mortgage loan. AUS data is used to provide an underwriting recommendation that either the: Borrower s credit and capacity are acceptable; or AFN-G_FHAUWManual Rev. 07/30/2015 Page 288 of 296

General Information on Underwriting and Underwriters Use of an AUS Loan application must be referred to an individual underwriter. Important: An AUS does not evaluate property acceptability; for this, an individual underwriter must review the appraisal. Underwriting Closing Certifications and Sales Contracts Lender s Certificate By signing the Lender s Certificate on page 4 of form HUD- 92900-A, Addendum to the Uniform Residential Loan Application, AFN is stating that Statements made in the application for insurance and the Certificate are true and correct; Conditions listed or appearing in any outstanding commitment issued under the case number have been fulfilled; Complete disbursement of the loan was made to the borrower, or his/her creditors for his/her account and with his/her consent; The security instrument has been recorded, and is a good and valid first lien on the property; No charge has been made to or paid by the borrower, except as permitted under FHA regulations; Copies of the credit and security instruments that are submitted herewith are true and exact copies as executed and filed for record; and No one has paid any kickbacks, fee or consideration of any type, directly or indirectly, to any party connected with the transaction, except as permitted under FHA regulations and administrative instructions. AFN s representative also certifies that, at the time of closing the mortgage loan, he or she has personally reviewed the mortgage loan documents, closing statements, application for insurance endorsement, and all accompanying documents. AFN-G_FHAUWManual Rev. 07/30/2015 Page 289 of 296

Underwriting Closing Certifications and Sales Contracts Policy on Sales Contracts Except for houses sold by FHA under the REO program, FHA is not a party to the sales agreement. When a sales contract contains conditions that, if performed, would violate FHA s requirements, AFN must obtain an addendum or modification to the purchase agreement that allows conformance to those requirements. Nevertheless, failure to perform a condition of the sales contract is not grounds for denying loan endorsement, provided the loan closes in compliance with all regulations and policies. Example: The sales contract may require the seller to pay an amount in excess of present seller contribution limitations. Amendatory Clause to the Sales Contract An amendatory clause must be included in the sales contract when the borrower has not been informed of the appraised value by receiving a copy of HUD-92800.5B, Conditional Commitment/DE Statement of Appraised Value or VA-NOV before signing the sales contract. The amendatory clause is not required on HUD REO sales; FHA s 203(k) loan program; Sales in which the seller is o Fannie Mae; o Freddie Mac; o The Department of Veterans Affairs (VA); o Rural Housing Services; o Other federal, state, and local government agencies; o A lender disposing of REO assets; or o A seller at a foreclosure sale; and o Those sales in which the borrower will not be an owner-occupant (for example, sales to nonprofit agencies). AFN-G_FHAUWManual Rev. 07/30/2015 Page 290 of 296

Underwriting Closing Certifications and Sales Contracts Amendatory Clause Required Language When an amendatory clause to the sales contract is required, as indicated in HUD 4155.2 6.A.5.d, the clause must contain the following language: It is expressly agreed that notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise, unless the purchaser has been given, in accordance with HUD/FHA or VA requirements, a written statement by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $. The purchaser shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation. The appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or condition of the property. The purchaser should satisfy himself/herself that the price and condition of the property are acceptable. The actual dollar amount to be inserted in the amendatory clause is the sales price stated in the contract. If the borrower and seller agree to adjust the sales price in response to an appraised value that is less than the sales price, a new amendatory clause is not required. However, the loan application package must include the original sales contract with the same price as shown in the amendatory clause, along with the revised or amended sales contract. The borrower, seller, and the selling real estate agent or broker involved in the sales transaction must certify that The terms and conditions of the sales contract are true, to the best of their knowledge and belief; and Any other agreement entered into by any parties in connection with the real estate transaction is part of, or attached to, the sales agreement. For additional information refer to When the Real Estate Certification Is Not Needed (below). AFN-G_FHAUWManual Rev. 07/30/2015 Page 291 of 296

Underwriting Closing Certifications and Sales Contracts When the Real Estate Certification Is Not Needed The certification described in Lender's Certification is not needed if: The sales contract contains a provision that o There are no other agreements between parties; and o The terms constitute the entire agreement between the parties; and All parties are signatories to the sales contract submitted at the time of underwriting. Underwriter Qualification Criteria and Responsibilities Underwriter Qualifications The table below describes the qualifications necessary for a lender s staff underwriter to be approved by HUD/FHA. QUALIFICATION General DESCRIPTION The underwriter must be a full time employee of the lender and must be A corporate officer with signatory authority (or otherwise authorized to bind the mortgage lender in matters involving origination of mortgage loans); and Employed by only one lender. Note: The originating lender may not contract out the underwriting function. Character The underwriter must be a reliable and responsible professional who is Skilled in mortgage evaluation; and Able to demonstrate knowledge and experience regarding principals of mortgage underwriting. Location FHA has no requirement regarding the location of an underwriter (for example, the main office or a branch office). (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 292 of 296

Underwriter Qualification Criteria and Responsibilities QUALIFICATION Experience DESCRIPTION The underwriter must have a minimum of three years full time recent experience (or equivalent) reviewing both credit applications and one- to four-unit property appraisals. This experience should have been with an Institutional investor originating for its own portfolio or purchasing these types of mortgage loans; or Originator selling these types of mortgage loans to investors. Notes: Experience related solely to either mortgage credit or appraisal review counts for one half of the total requirement. Other experience may include quality control reviews for investors or similar experiences. Ineligibility under HFSH Act The underwriter may not be subject to any actions or restrictions. AFN-G_FHAUWManual Rev. 07/30/2015 Page 293 of 296

Underwriter Qualification Criteria and Responsibilities Underwriter Responsibilities The table below outlines the responsibilities assumed by the underwriter. RESPONSIBILITY Familiarity with Underwriting Procedures Coordination and Compliance Verification of Information DESCRIPTION The lender is responsible for ensuring the underwriter s familiarity with: The underwriting procedures discussed in principal underwriting handbooks; HUD 4155.1, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Family Properties; and HUD 4155.2, Lender s Guide to the Single Family Mortgage Insurance Process; The appraisal procedures discussed in valuation handbooks; HUD 4145.1, Architectural Processing and Inspections for Home Mortgage Insurance; HUD 4150.1, Valuation Analysis for Home Mortgage Insurance; and HUD 4150.2, Valuation Analysis for Single Family One- to Four- Unit Dwellings; HUD 4905.1, Requirements for Existing Housing, One-to-Four- Family Living Units; and HUD 4910.1, Minimum Property Standards for Housing; and All applicable FHA Mortgagee Letters that affect appraisals and credit underwriting. The underwriter is responsible for: Coordinating all phases of the loan underwriting process, and Ensuring compliance with all FHA requirements and prudent underwriting procedures. The underwriter must ensure that information is obtained and verified with at least the same care that would be exercised if originating a mortgage in which AFN would be entirely dependent on the property as security to protect its investment. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 294 of 296

Underwriter Qualification Criteria and Responsibilities RESPONSIBILITY Appraisal Review and Credit Analysis DESCRIPTION The underwriter must ensure reasonable conclusions, sound reports, and compliance with FHA requirements by Reviewing appraisal reports and compliance inspections; and Documenting all credit analyses performed and/or obtained by fee and staff personnel. Loan Acceptability The underwriter is responsible for making decisions with due diligence and in a prudent manner, regarding the Acceptability of the appraisal; Inspections; and Borrower s capacity to repay the mortgage; and Overall acceptability of the mortgage loan for FHA insurance. Personnel Performance Detection of Warning Signs The underwriter must monitor and evaluate the performance of fee and staff personnel used for the Direct Endorsement (DE) Program. The underwriter must be Attuned to the warning signs that may indicate any irregularities; and Alert and able to detect fraud. Certification Page 3, Form HUD- 92900-A By executing page 3 of Form HUD-92900-A, HUD/VA Addendum to Uniform Residential Loan Application, the underwriter certifies that he or she Has personally reviewed all application documents; Finds compliance with the applicable requirements; and Is approving the loan for closing. (Table continued) AFN-G_FHAUWManual Rev. 07/30/2015 Page 295 of 296

Underwriter Qualification Criteria and Responsibilities RESPONSIBILITY Closing Review and Certification DESCRIPTION The underwriter (or the lender or lender s closing department) must: Review all closing documents; o Certifications on the closing statements; and o Legal instruments and other documents executed at closing; and Certify on page 4 of Form HUD-92900-A, HUD/VA Addendum to Uniform Residential Loan Application; that the o Transaction and loan meet statutory and regulatory requirements of the FHA and National Housing Act; and o Loan has been closed in accordance with terms and sales price specified in the sales contract that includes the Amendatory Clause signed and dated when the purchase contract was executed. AFN-G_FHAUWManual Rev. 07/30/2015 Page 296 of 296