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Conventional Underwriting Guidelines Home Savings of America

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					                                      Conventional Underwriting Guidelines




Chapter 1 Loan Eligibility .................................................................................................................... 9
Chapter 2 Documentation ................................................................................................................. 32
Chapter 3 Credit................................................................................................................................. 56
Chapter 4 Employment and Income ................................................................................................. 66
Chapter 5 Assets ............................................................................................................................... 82
Chapter 6 Ratios ................................................................................................................................ 99
Chapter 7 Appraisal and Property .................................................................................................. 106
Chapter 8 Condominium and PUD Projects................................................................................... 145


Chapter 1 Loan Eligibility .................................................................................................................... 9
 1-1 Standards of Quality ..................................................................................................................... 9
   Loan Submissions ........................................................................................................................... 9
 1-2 Loan Limits................................................................................................................................... 9
 1-3 Eligible Borrowers....................................................................................................................... 10
   Eligible Borrowers Defined ............................................................................................................ 10
   First Time Homebuyer ................................................................................................................... 10
 1-4 Ineligible Borrowers .................................................................................................................... 10
   Ineligible Borrowers Defined.......................................................................................................... 10
 1-5 Residency Status ....................................................................................................................... 10
   Permanent Resident Aliens ........................................................................................................... 10
   Non-Permanent Resident Aliens ................................................................................................... 11
   Refugees and Asylees................................................................................................................... 12
   ITIN ............................................................................................................................................... 12
 1-6 Inter-Vivos Revocable Trusts...................................................................................................... 12
   Eligible Trusts................................................................................................................................ 12
   Trust Limitations ............................................................................................................................ 12
 1-7 Arms Length / Non-Arms Length Transactions ........................................................................... 13
 1-8 Co-Borrowers, Guarantors or Co-Signers, and Non-Borrowing Owners ..................................... 14
   Co-Borrowers and Non-Occupying Co-Borrowers ......................................................................... 14
   Guarantors and Co-signers ........................................................................................................... 15
   Non-Borrowing Property Owners................................................................................................... 15
 1-9 Occupancy Requirements .......................................................................................................... 15
   Owner Occupied Purchase............................................................................................................ 15
   Owner Occupied Refinance........................................................................................................... 15
   Owner Occupancy Expectations.................................................................................................... 16
 1-10 Second Homes......................................................................................................................... 16
 1-11 Investment Properties............................................................................................................... 17
 1-12 Down Payment Requirements .................................................................................................. 17
   Minimum Down Payment Requirements........................................................................................ 17
   Gift Funds...................................................................................................................................... 17
   Gift of Equity.................................................................................................................................. 18
 1-13 Purchase Transactions............................................................................................................. 18
   Definition ....................................................................................................................................... 18
   Limitations ..................................................................................................................................... 18
 1-14 Refinance Transactions............................................................................................................ 18
   Definition ....................................................................................................................................... 18
   Continuity of Obligation ................................................................................................................. 18
   Properties Listed for Sale .............................................................................................................. 19
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                                     Conventional Underwriting Guidelines

   Seasoning and LTV/CLTV............................................................................................................. 19
   Rate /Term Refinances (excluding Texas properties) .................................................................... 20
   Subordinate Liens ......................................................................................................................... 21
   Buyout of a Co-Owner ................................................................................................................... 21
   Inherited Property.......................................................................................................................... 21
   Pay off of leasehold estate, converting to fee ownership ............................................................... 21
   Cash out Refinances (excluding Texas properties)........................................................................ 22
   Texas Rate/Term Refinances ........................................................................................................ 22
   Texas Cash Out Refinances.......................................................................................................... 24
 1-15 Value Defined........................................................................................................................... 25
   Purchase....................................................................................................................................... 25
   Refinance ...................................................................................................................................... 26
 1-16 LTV and CLTV.......................................................................................................................... 26
   LTV ............................................................................................................................................... 26
   CLTV............................................................................................................................................. 26
 1-17 Mortgage Insurance.................................................................................................................. 26
 1-18 Subordinate Financing.............................................................................................................. 27
   Requirements................................................................................................................................ 27
   Terms and Disclosure of Subordinate Mortgages .......................................................................... 27
   Graduated or Variable Payment Subordinate Financing ................................................................ 27
   Home Equity Line of Credit Subordinate Financing ....................................................................... 27
   Ineligible Subordinate Financing.................................................................................................... 27
 1-19 Buy-downs................................................................................................................................ 28
   Buydown Defined .......................................................................................................................... 28
   Funds ............................................................................................................................................ 28
   Buydown Plans.............................................................................................................................. 28
   Defaults and Prepayments ............................................................................................................ 28
 1-20 Construction-to-Permanent Financing ...................................................................................... 28
   Construction-to-Perm .................................................................................................................... 28
 1-21 Land Contracts/Contract-for-Deed............................................................................................ 30
 1-22 Lease with Option to Purchase................................................................................................. 30
   Lease-Option Defined.................................................................................................................... 30
   Refinances subject to Lease-Options ............................................................................................ 30
 1-23 Deed Restrictions/ Resale Restrictions..................................................................................... 30
 1-24 Chain of Title ............................................................................................................................ 31
Chapter 2 Documentation ................................................................................................................. 32
 2-1      Minimum Documentation Requirements............................................................................... 32
   Credit Documents.......................................................................................................................... 32
   Compliance Documents ................................................................................................................ 32
 2-2      DU Requirements................................................................................................................. 32
   DU Accepted Findings................................................................................................................... 33
   DU Findings not accepted ............................................................................................................. 33
   DU overlays................................................................................................................................... 33
   DU Version Updates...................................................................................................................... 33
 2-3      UW Decisions and Philosophy.............................................................................................. 33
 2-4      Documentation Age Limitations and Recertification Requirements ....................................... 33
   Requirements................................................................................................................................ 33
   Appraisal ....................................................................................................................................... 34
   Title Commitment/Preliminary Binder ............................................................................................ 34
 2-5 Documentation General Requirements....................................................................................... 34
   Alternative Documentation............................................................................................................. 34
   Electronic Verification.................................................................................................................... 35
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  2-6      Validation Resources and requirements ............................................................................... 35
    Social Security and Medicare Withholdings ................................................................................... 35
    4506-T........................................................................................................................................... 36
    Tax returns and 4506 validation .................................................................................................... 36
    Tax returns filed but not yet validated by IRS ................................................................................ 42
    Self-Employed Documentation Requirements if 2009 returns are not yet filed............................... 42
    Annualizing income sources, income and asset reconciliation....................................................... 43
    Verbal Verification of Employment................................................................................................. 43
    Updated Credit Reports................................................................................................................. 44
    Assets brought to closing .............................................................................................................. 44
  2-7      Desktop Underwriter (DU) .................................................................................................... 44
  2-8      DU Risk Assessment Overviews .......................................................................................... 45
    Risk Factors Evaluated by DU....................................................................................................... 45
    Credit Profile ................................................................................................................................. 45
  2-9      DU Decisions ....................................................................................................................... 46
    Approve/Eligible ............................................................................................................................ 46
    Approve/Ineligible.......................................................................................................................... 46
    Refer/Eligible................................................................................................................................. 46
    Refer/Ineligible .............................................................................................................................. 46
    EA-I, EA-II ..................................................................................................................................... 47
    Out of Scope ................................................................................................................................. 47
  2-10 DU Eligible Loan Types ........................................................................................................ 47
  2-11 DU Underwriting Findings Report ......................................................................................... 48
    Underwriting Findings.................................................................................................................... 48
    Findings......................................................................................................................................... 48
    Verification Message/Approval Conditions..................................................................................... 48
    Observations ................................................................................................................................. 48
    Risk Assessment Messages.......................................................................................................... 48
    Significant Risk Factor Message ................................................................................................... 48
    Layering of Risk Message ............................................................................................................. 48
    Credit Profile Message .................................................................................................................. 48
    Lender Guidance for Use with Applicants ...................................................................................... 49
    Suggestion Message..................................................................................................................... 49
    Risk Assessment Message for Loans with Approve Recommendations ........................................ 49
    Consumer Booklet: A Tool for Lenders and Originators................................................................ 49
  2-12 DU Submission/Resubmission Requirements....................................................................... 49
  2-13 DU Credit Process Requirements......................................................................................... 49
  2-14 DU Credit Documentation..................................................................................................... 50
    Public Records .............................................................................................................................. 50
    Unrated Trade Lines...................................................................................................................... 50
    Unverified Liabilities ...................................................................................................................... 50
    Trade Lines Omitted From the 1003 .............................................................................................. 50
    Possible Non-Applicant Debts ....................................................................................................... 51
    Disputed Tradelines ...................................................................................................................... 51
    Discrepancies between the 1003 and Credit Report ...................................................................... 51
    Updated Credit Reports................................................................................................................. 51
  2-15 DU Income/Employment Process......................................................................................... 51
    Salary or Hourly Wage Earnings ................................................................................................... 51
    Self-Employed Income .................................................................................................................. 52
  2-16 DU Asset Process ................................................................................................................ 52
    Requirements................................................................................................................................ 52
    Verification of Available Assets...................................................................................................... 52
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   Depository Assets ......................................................................................................................... 52
   Non-Liquid Assets ......................................................................................................................... 53
   Gifts............................................................................................................................................... 53
 2-17 DU Appraisal Requirements ................................................................................................. 53
   Forms............................................................................................................................................ 53
   Required Exhibits .......................................................................................................................... 54
   Final Inspection for New Construction ........................................................................................... 54
 2-18 DU Oversights and Helpful Hints .......................................................................................... 54
   Subordinate Financing Piggybacks ............................................................................................. 54
   Changing Terms............................................................................................................................ 54
   Refinances .................................................................................................................................... 54
   Earnings........................................................................................................................................ 54
   System Maintenance..................................................................................................................... 55
 2-19 Condominium and Attached PUDs ....................................................................................... 55
Chapter 3 Credit................................................................................................................................. 56
 3-1 Standards of Quality ................................................................................................................... 56
   Credit Report................................................................................................................................. 56
   Inquiries......................................................................................................................................... 57
   Undisclosed Debt .......................................................................................................................... 57
   Recently Acquired Debt................................................................................................................. 57
   No Credit History ........................................................................................................................... 57
   Non-Traditional Credit Report........................................................................................................ 58
 3-2      Minimum tradelines .............................................................................................................. 58
   Authorized User Accounts ............................................................................................................. 58
 3-3      Credit Scores ....................................................................................................................... 58
   Three-Repository Scores............................................................................................................... 58
   Borrower and File Credit Score determination ............................................................................... 59
   Incomplete Credit Reports............................................................................................................. 59
   DU Loans ...................................................................................................................................... 59
   Credit Score Reason Codes........................................................................................................ 59
 3-4      Minimum Credit Standards ................................................................................................... 60
 3-5      Verification of Credit Requirements ...................................................................................... 60
 3-6      Mortgage References........................................................................................................... 61
 3-7      Landlord References ............................................................................................................ 61
 3-8      Past Due/Adverse Accounts................................................................................................. 61
 3-9      Consumer Credit Counseling Service................................................................................... 62
 3-10 Bankruptcy/Foreclosure........................................................................................................ 62
   Conforming Programs ................................................................................................................... 62
   Required Documentation............................................................................................................... 63
   Re-Established Credit.................................................................................................................... 63
 3-11 Tax Liens.............................................................................................................................. 64
 3-12 Outstanding Collections and Charge offs.............................................................................. 64
 3-13 Identity Theft ........................................................................................................................ 64
Chapter 4 Employment and Income ................................................................................................. 66
 4-1      Standards of Quality............................................................................................................. 66
 4-2      Primary Income .................................................................................................................... 66
   Salaried / Hourly Income ............................................................................................................... 66
   Overtime Income ........................................................................................................................... 68
   Bonus Income ............................................................................................................................... 68
   Commission Income...................................................................................................................... 68
   Self-Employment Income .............................................................................................................. 69
   Significant Increases or Decreases in Income ............................................................................... 70
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                                     Conventional Underwriting Guidelines

   Employment Gaps......................................................................................................................... 70
 4-3      Secondary / Supplemental Income....................................................................................... 71
   Part-Time Employment.................................................................................................................. 71
   Contract Employees ...................................................................................................................... 71
   Alimony and Child Support ............................................................................................................ 71
   Notes or Mortgages Receivables................................................................................................... 71
   Trust Income ................................................................................................................................. 72
   Interest and Dividend Income ........................................................................................................ 72
   Capital Gains and Losses.............................................................................................................. 72
   Mortgage Interest Differential Payments (MID) .............................................................................. 73
   Government Assistance Programs ................................................................................................ 73
   Temporary (Agency) Income ......................................................................................................... 73
   Manufacturing / Piece Work........................................................................................................... 73
   Shift Differential ............................................................................................................................. 73
   Retirement and Pension Income ................................................................................................... 74
   Retirement Income ........................................................................................................................ 74
   Annuity Income.............................................................................................................................. 74
   IRA Distribution ............................................................................................................................. 74
   Royalty Income.............................................................................................................................. 74
   Social Security Benefits................................................................................................................. 75
   Tip Income .................................................................................................................................... 75
   Trailing Spouse/Secondary Wage Earner...................................................................................... 75
   Auto Allowance and Expense Account Payments.......................................................................... 75
   Foster Care Income....................................................................................................................... 76
   Housing Allowance........................................................................................................................ 76
   Clergy............................................................................................................................................ 76
   Non-Taxable.................................................................................................................................. 76
   Non-Employment Income, Inheritance and other Guaranteed Income........................................... 76
   Section 8 Programs....................................................................................................................... 76
   Temporary Disability...................................................................................................................... 77
 4-4      Special Documentation Requirements.................................................................................. 77
   Employed by a Relative, Domestic Partner, Fiancé/ Fiancée, or Family Business......................... 77
   Union Hall Members...................................................................................................................... 77
   Seasonal ....................................................................................................................................... 77
   Worker/Unemployment benefits .................................................................................................... 77
   Military Income .............................................................................................................................. 78
   Teachers ....................................................................................................................................... 78
   Foreign Income ............................................................................................................................. 78
   Future Employment ....................................................................................................................... 78
   Future Income from Raises ........................................................................................................... 78
   Lack of Employment History .......................................................................................................... 79
   Leave of Absence.......................................................................................................................... 79
   Disability Income ........................................................................................................................... 79
 4-5      Rental Income ...................................................................................................................... 79
   Rental Income Qualifying Matrix on Conforming Conventional Loans............................................ 79
 4-6      Unacceptable Sources of Income......................................................................................... 80
Chapter 5 Assets ............................................................................................................................... 82
 5-1Standards of Quality .................................................................................................................... 82
 5-2      Sources of Equity ................................................................................................................. 82
   Assets to Close ............................................................................................................................. 82
   Subordinate Financing................................................................................................................... 82
   Community Seconds ..................................................................................................................... 83
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                                      Conventional Underwriting Guidelines

   Earnest Money Deposits ............................................................................................................... 83
   Bank Deposits ............................................................................................................................... 83
   Gifts............................................................................................................................................... 84
   Down payment Assistance Programs (DAP) ................................................................................. 86
   Publicly Traded Stocks/Stock Options ........................................................................................... 86
   Stock Privately Held Corporation ................................................................................................ 87
   Retirement Accounts ..................................................................................................................... 87
   Employee Savings Plans 401(k)/IRA/Keoghs/Retirement Plans .................................................... 87
   Acceptable value for Stocks, Bonds, Mutual funds and retirement accounts for Reserves............. 88
   Joint Ownership of Depository Accounts ....................................................................................... 88
   Business Funds............................................................................................................................. 88
   Equity From Sale of Real Estate.................................................................................................... 89
   Sale of Other Assets...................................................................................................................... 90
   Tax Refunds.................................................................................................................................. 90
   Loans Secured by Borrower s Financial Assets............................................................................. 90
   Rent Credit from Lease with an Option-to-Purchase...................................................................... 91
   1031 Tax Deferred Exchange........................................................................................................ 91
   Income Tax Refund ....................................................................................................................... 92
   Trade Equity.................................................................................................................................. 92
   Land Equity ................................................................................................................................... 93
   Bridge Loans ................................................................................................................................. 93
   Repayment of Loans ..................................................................................................................... 93
   Credit Card Financing of Certain Costs ......................................................................................... 93
   Life Insurance Cash Value ............................................................................................................ 93
   US Savings Bonds/Government Bonds ......................................................................................... 94
   Cash-on-Hand............................................................................................................................... 94
   SuSu or g mach accounts, Community Savings System ............................................................. 94
   Systematic Future Savings ......................................................................................................... 94
   Inheritance .................................................................................................................................... 94
   Lawsuit or Insurance Settlement ................................................................................................... 95
   Trust Account Distribution ............................................................................................................. 95
   Relocation Benefits ....................................................................................................................... 95
   Disaster Relief Grants/Loans......................................................................................................... 96
   Relocation Equity Buyout .............................................................................................................. 96
   Individual Development Accounts.................................................................................................. 96
 5-3      Cash Reserves..................................................................................................................... 96
 5-4      Contribution Limitations ........................................................................................................ 96
   Defined.......................................................................................................................................... 96
   Seller/Interested Party Contribution ............................................................................................... 96
   Sale Inducements.......................................................................................................................... 97
   Contributors................................................................................................................................... 97
   Maximum Allowable Contributions................................................................................................. 97
 5-5      Unacceptable Sources ......................................................................................................... 98
Chapter 6 Ratios ................................................................................................................................ 99
 6-1      Housing Expense Ratio ........................................................................................................ 99
   Monthly Housing Expense............................................................................................................. 99
   Housing Ratio Limitations.............................................................................................................. 99
 6-2      Monthly Obligation Ratio (DTI) ............................................................................................. 99
   Obligation Expenses to Include in Ratios....................................................................................... 99
   HELOC Payments ....................................................................................................................... 100
   Authorized User accounts ........................................................................................................... 100
   Qualifying Amount for Property Taxes ......................................................................................... 100
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                                     Conventional Underwriting Guidelines

   Open 30-Day Charge Accounts................................................................................................... 100
   Voluntary Recurring Debts........................................................................................................... 100
   Deferred Loans............................................................................................................................ 101
   Demand Loan/Term Note ............................................................................................................ 101
 6-3      Ratio Limitations................................................................................................................. 101
 6-4      Compensating Factors ....................................................................................................... 101
 6-5      Contingent Liabilities .......................................................................................................... 102
   Co-signed or Guaranteed Debts.................................................................................................. 102
   Liabilities Paid by the Business ................................................................................................... 102
   Property Settlement Buy-Out....................................................................................................... 102
   Assumption with release of liability .............................................................................................. 102
   Simple Assumption...................................................................................................................... 103
   Contract for Deed/Land Contract Sales ....................................................................................... 103
   Court-Ordered Assignment of Debt ............................................................................................. 103
   Loans Secured by Borrower s Financial Assets........................................................................... 103
   Other Real Estate Owned Free and Clear ................................................................................... 103
   Swing/Bridge Loans .................................................................................................................... 103
   Payoff/Pay downs........................................................................................................................ 104
 6-6      Non-Occupant Co-borrowers.............................................................................................. 104
 6-7      Calculating Ratios 2nd Homes and Investment Properties .............................................. 104
 6-8      Conversion of Principal Residence ..................................................................................... 104
Chapter 7 Appraisal and Property .................................................................................................. 106
 7-1      Role of Appraiser and Underwriter...................................................................................... 106
   Home Value Code of Conduct ..................................................................................................... 106
   Role of the Appraiser................................................................................................................... 106
   Scope of Work............................................................................................................................. 107
   Role of the Underwriter................................................................................................................ 107
   Compliance ................................................................................................................................. 107
 7-2      Unacceptable Appraisal Practices ...................................................................................... 107
 7-3      Appraisal Documentation ................................................................................................... 108
   Appraisal Forms .......................................................................................................................... 108
   Required Exhibits for URAR FNMA 1004 / FHLMC 70 ................................................................ 109
 7-4      Field Review Requirements................................................................................................ 112
 7-5      Property Types................................................................................................................... 112
   Eligible Property Types................................................................................................................ 112
   Ineligible Property Types ............................................................................................................. 112
   Energy-Efficient Properties.......................................................................................................... 113
   Properties Affected by Environmental Hazards............................................................................ 113
   Rural Properties .......................................................................................................................... 114
   Security Bars............................................................................................................................... 115
   Mixed-Use Properties.................................................................................................................. 115
   Accessory Apartment In-Law Suites ............................................................................................ 116
   Properties in Special Assessment or Community Facilities Districts ............................................ 116
 7-6      Appraisal Analysis .............................................................................................................. 118
   Subject ........................................................................................................................................ 118
   Neighborhood Analysis................................................................................................................ 118
   Location....................................................................................................................................... 119
   Property Values........................................................................................................................... 121
   Demand/Supply and Marketing Time........................................................................................... 121
   Present Land Use........................................................................................................................ 122
   Competitive Properties ................................................................................................................ 122
   Price Range and Predominant Price............................................................................................ 123
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   Age Range and Predominant Age ............................................................................................... 123
   Neighborhood Analysis Rating .................................................................................................... 123
   Site Analysis................................................................................................................................ 124
   The Lot........................................................................................................................................ 124
   Zoning ......................................................................................................................................... 124
   Agricultural Zoning ...................................................................................................................... 125
   Commercial Zoning ..................................................................................................................... 125
   Highest and Best Use.................................................................................................................. 126
   Utilities ........................................................................................................................................ 126
   Off-Site Improvements................................................................................................................. 126
   Flood Hazard Area ...................................................................................................................... 127
   Improvement Analysis ................................................................................................................. 127
   Actual and Effective Ages............................................................................................................ 127
   Foundation .................................................................................................................................. 127
   Infestation, Dampness and Settlement ........................................................................................ 127
   Heating System ........................................................................................................................... 127
   Unit/Room List............................................................................................................................. 128
   Layout and Floor Plans................................................................................................................ 128
   Gross Living Area........................................................................................................................ 128
   Gross Building Area .................................................................................................................... 129
   Insulation and Energy Efficiency.................................................................................................. 129
   Building Permits /Unpermitted Space .......................................................................................... 129
   Property Condition and Appraiser Comments.............................................................................. 130
   Conformity to Neighborhood........................................................................................................ 130
   Cost Approach............................................................................................................................. 131
   Appraiser s Comments and Adjustments..................................................................................... 132
   Comparable Rental Data ............................................................................................................. 132
   Sales Comparison Approach ....................................................................................................... 133
   Comparable Sales - General Appraisal requirements.................................................................. 134
   New construction Projects and Developments - Additional Requirements ................................... 134
   Adjustments to Comparable Sales............................................................................................... 135
   Bracketing ................................................................................................................................... 136
   Unadjusted Units of Comparison ................................................................................................. 136
   Sales Comparison Analysis Adjustment Grid............................................................................... 136
   Income Approach ........................................................................................................................ 138
   Final Reconciliation ..................................................................................................................... 139
   Market Conditions Addendum to the Appraisal Report ................................................................ 139
 7-7       Unacceptable Appraisal Practices ...................................................................................... 140
 7-8       Repair Escrow Procedures................................................................................................. 141
 7-9       Natural Disasters................................................................................................................ 142
   Background ................................................................................................................................. 142
   Procedures.................................................................................................................................. 142
   Inspections .................................................................................................................................. 142
   Appraisal Performed Prior to Declaration of Disaster................................................................... 142
   Appraisal Performed After Declaration of Disaster....................................................................... 143
   Non-Standard Appraisals (Property Valuation Update, PIW, 2075, etc.)...................................... 143
   Non- Standard appraisal forms a................................................................................................. 143
   Written Inspection Certification Statement ................................................................................... 143
   Property Damage ........................................................................................................................ 143
Chapter 8 Condominium and PUD Projects................................................................................... 145
   New Projects ............................................................................................................................... 145
   Established Projects.................................................................................................................... 145
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                                   Conventional Underwriting Guidelines

    Ineligible Projects ........................................................................................................................ 145
    Limited review - attached condominium units .............................................................................. 148
    Limited review - detached/site condo units .................................................................................. 148
    Type E......................................................................................................................................... 152
    Type F......................................................................................................................................... 152
    Hazard Insurance ........................................................................................................................ 153
    HO-6 Endorsement and Replacement Cost Requirements.......................................................... 153
    Flood Insurance........................................................................................................................... 153
    Liability Insurance........................................................................................................................ 154
    Fidelity Insurance ........................................................................................................................ 154




Chapter 1 Loan Eligibility

OVERVIEW

This chapter details loan eligibility requirements established by HSOA to ensure quality loans.
Unless otherwise indicated, all guidelines discussed in this manual will apply to Conforming,
Non-Conforming and Portfolio Loan programs. These are general guidelines; see the individual
Product Summaries for additional restrictions or expansions that may apply.

        1-1 Standards of Quality

Loan Submissions
It is important for all applications to reflect the borrowers complete financial picture at time of
submission. All areas of employment, income, assets, liabilities, real estate owned, etc. determine the
borrower s financial picture. Information should not be withheld on the basis of expecting the borrowers
to qualify with lesser information. Once a loan decision is made based upon the initial application
submission, caution should be used and valid reasons should be documented for reconsidering the
loan with additional information not previously disclosed. Applications should disclose (to the extent of
the documentation style refer to Chapter 3):
     · The borrower s complete employment history and income for two full years prior to the date of
         application. The amount and sources of income must reasonably be expected to continue for at
         least three years. Income levels for reduced documentation loans must also be reasonable and
         consistent for the position, field and length of time receiving that source of income.
     · Current assets.
     · All outstanding liabilities; whether or not they are reported on the credit report.
     · All real estate owned with status and related debts
     · All questions completed in the Declarations section.

        1-2 Loan Limits
Refer to individual Product Summaries for specific minimum or maximum Loan amount limitations.




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                            Conventional Underwriting Guidelines

        1-3 Eligible Borrowers

Eligible Borrowers Defined
A borrower must be a natural person. In certain circumstances, the borrower may hold title in their own
trust, subject to HSOA approval (Refer to Section 1-6 Inter Vivos Revocable Trusts). There is no
maximum age limit for borrowers. The minimum age is the age at which the mortgage Note can be
legally enforced in the jurisdiction where the property is located.


First Time Homebuyer
FTHB is defined as a borrower who has had no ownership interest in a residential property during the
3-year period preceding the date of the subject Note or has had a scheduled mortgage payment history
of less than 12 months.

Refer to individual Product Summaries for limitations or restrictions.

        1-4 Ineligible Borrowers

Ineligible Borrowers Defined
    ·   Legal entities, such as corporations, general partnerships, limited partnerships, and real estate
        syndications

    ·   Foreign Nationals (Non-Resident Aliens) Foreign nationals are non-United States citizens who
        are neither permanent nor non-permanent resident aliens and have neither full nor partial
        diplomatic immunity.
        Foreign nationals are not eligible for financing except as noted below.

        Note: Foreign nationals from Canada and Mexico who are working in the U.S. under the terms
        of NAFTA are eligible. Refer to North American Free Trade Agreement (NAFTA) Workers below
        for more information.

    ·   U.S. Immigration treats the terms alien and foreign national as having the same meaning.

    ·   Borrowers with diplomatic immunity, temporary protected status, deferred enforced departure,
        asylum, refugee or humanitarian parole.

    ·   Life estates, Nominee Trusts, Land Trusts, irrevocable Trusts/


        1-5 Residency Status

Permanent Resident Aliens
Permanent resident aliens are non-United States citizens who hold acceptable evidence of permanent
residency issued by the U.S. Citizenship and Immigration Services (USCIS). Correspondent Lending
will purchase mortgages made to non-U.S. citizens who are lawful, permanent residents of the United
States under the same terms available to U.S. citizens. Permanent resident aliens must have a valid
Social Security Number and any of the following documentation:
     · Permanent Resident Card (USCIS form I-551)



HSOA Underwriting Guidelines 4-15-10                                                                    10
                            Conventional Underwriting Guidelines

        o  May be issued as a conditional right to reside for individuals seeking residency through
           marriage to a U.S. citizen/permanent resident or based on a financial investment in a U.S.
           business.
           § These cards will have an expiration date and are valid for two years.
           § At the end of the two years the individual must apply for an unconditional right to reside
               or risk losing their permanent resident status.
           § Cards that are due to expire within 90 days must be accompanied by a copy of USCIS
               form I-751 (Petition to Remove Conditions on Residence) or USCIS form I-829 (Petition
               by Entrepreneur to Remove Conditions) filing receipt.
        o Cards may be issued without conditions and are valid for ten years.
           § Cards that are due to expire within 6 months must be accompanied with a copy of
               USCIS form I-90 (Application to Replace Permanent Resident Card) filing receipt.
        o There are numerous versions of the I551 card that are no longer issued but are considered
           valid as long as unexpired.
           § Cards that are due to expire within 6 months must be accompanied with a copy of
               USCIS form I-90 (Application to Replace Permanent Resident Card) filing receipt.
    ·   Unexpired Foreign Passport
        o Must contain an unexpired stamp reading Processed for I-551 Temporary Evidence of
           Lawful Admission for Permanent Residence. Valid until mm-dd-yy. Employment authorized.

Note: The evidence obtained must be reviewed and recorded on the Identity Affidavit form (1E671-US)
and included in the permanent loan file. Copies of the documents themselves should not be made.


Non-Permanent Resident Aliens

A non-permanent resident alien is eligible for financing provided the following conditions are met:
   · Must have valid social security number
   · Primary residence or second homes only.
   · Borrower must have a two year history of employment in the United States in sources of income
       expected to continue for an additional three years.
   · Must be a legal resident of the United States as evidenced by acceptable Visa.
   · Must have a valid social security number.

Non-permanent resident aliens are non-United States citizens who are permitted to reside in the United
States on a temporary basis and may have been granted authorization to work in the U. S. by the U. S.
Citizenship & Immigration Services (USCIS). These borrowers follow the non-permanent resident alien
guidelines. These Non-permanent resident aliens must have valid visas or other proof of legal
residency. Acceptable visas include but are not limited to E-1, H-1B, H 2A, H-2B, H-3, L-1, G series and
O-1.

For more information about visas, visit the USCIS website: http://www.uscis.gov/portal/site/uscis

There are no restrictions for non-permanent resident aliens; they should be underwritten using the
same criteria as United States citizens. However, documentation must be provided showing that the
borrower is a legal resident with a U.S. source of income that can be expected to continue for three
years. Obtaining a copy of a valid work permit satisfies both requirements.




HSOA Underwriting Guidelines 4-15-10                                                                   11
                            Conventional Underwriting Guidelines

Refugees and Asylees
Loans to non-citizens who have been granted political asylum require underwriting to non-permanent
resident alien guidelines. Asylees and refugees must provide their Arrival and Departure Records (INS
Form I-94) and copies of their employment authorization documents. A grant of asylum is for an
indefinite period.

ITIN
Borrowers with Individual Tax Identification Number (TIN) are not allowed. All loan documents must
contain the borrower s valid Social Security Number, including all previous years tax returns and W-2s.

    Foreign Nationals from Canada and Mexico
Foreign nationals from Canada and Mexico who are working in the U.S. under the terms of NAFTA are
eligible. Refer to North American Free Trade Agreement (NAFTA) Workers below for more information.

North American Free Trade Agreement (NAFTA) Workers
Canadian and Mexican citizens who are working in the United States under the terms of NAFTA must
be treated as non-permanent resident aliens when determining their eligibility. They must meet the
standard requirements established for non-permanent resident aliens. NAFTA workers must provide a
NAFTA Worker s visa.




        1-6 Inter-Vivos Revocable Trusts
(Guidelines can also be found in the Closing Manual)

Eligible Trusts
In certain circumstances, an eligible borrower(s) may hold title in their own Inter Vivos Revocable Trust,
also referred to as a Living Trust . An Inter Vivos Revocable Trust is a trust an individual or individuals
(our borrower) create during his or her lifetime. It becomes effective during its creator s lifetime and can
be changed or canceled for any reason during that individual s lifetime. A borrower may not hold title in
another person s trust, even if the borrower is a beneficiary of that other trust.

Trust Limitations
Use the HSOA Inter Vivos Trust Agreement Checklist to facilitate the review of the Trust Agreement. In
addition to the criteria in the Checklist, the following must be satisfied:
   · The trust must be established by a written document during the lifetime of the individual
        establishing the trust to be effective during his or her lifetime.
   · The trust must be one in which the individual establishing the trust has reserved to himself or
        herself the right to revoke the trust during his or her lifetime.
   · The primary beneficiary of the trust must be the individual establishing the trust. If more than
        one individual establishes the trust jointly, there may be more than one primary beneficiary as
        long as the income or assets of at least one of the individuals establishing the trust will be used
        to qualify for the mortgage. That individual (or individuals) must occupy the security property
        and sign the mortgage instruments.
   · The trust documents must name one or more trustees to hold legal title to and manage the
        property that has been placed in the trust. The trustees must include either the individual
        establishing the trust (or at least one of the individuals, if there is more than one) or an
        institutional trustee that customarily performs trust functions in (and is authorized to act as
        trustee under the state laws) the relevant state.
HSOA Underwriting Guidelines 4-15-10                                                                     12
                            Conventional Underwriting Guidelines

    ·   The trustee(s) must have the power to mortgage the security property for the purpose of
        securing a loan to the party (or parties) that are the Borrower(s) under the mortgage note.
    ·   Full title to the property must be vested in the trustee(s) of the inter vivos revocable trust; there
        may be no other owners.
    ·   The title insurance policy must assure full title protection and must state that title to the security
        property is vested in the trustee(s) on the trust. It must not list any exceptions with respect to
        the trustee(s) holding title to the security property or to the trust.
    ·   The mortgage must be underwritten as if the individual (or at least one of the individuals if there
        is more than one) were the borrower (or the co-borrower, if there are additional individuals
        whose income or assets will be used to qualify).
    ·   Each trustee and each individual establishing the trust must separately execute the mortgage
        note and any necessary addendum. The trustee(s) of the trust must also execute the security
        instrument and any applicable rider. Each individual establishing the trust whose income or
        assets were used to qualify must acknowledge all of the terms and covenants in the security
        instrument and any necessary rider and agree to be bound thereby placing his or her signature
        after a statement of acknowledgement on such documents.


        1-7 Arms Length / Non-Arms Length Transactions
Arms-Length Transactions
An arms length transaction is a transaction in which the parties involved are entirely independent of
each other and have no reason for collusion.

Non-Arms Length Transactions
Refer to the Product Summary for restrictions. Refer to the Credit Policy Manual for full details on NAL
policy and procedures.

A non-arms length transaction exists whenever the applicant has a personal or business relationship
with the seller, builder, developer, real estate agent, appraiser, lender providing the financing, title
company or any other interested party. These relationships may influence the transaction and should
be reviewed thoroughly. Non-arms length transactions include, but are not limited to affiliates of the
applicant;
    · Family members related by blood or marriage to the seller.
    · Owners, employees or family members of origination lender.
    · Builders or developers.
    · Renters buying from landlord.
    · Trading properties with the seller.
    · Employed by family members.

If borrowers are employed by the submitting mortgage broker, lender or the property seller, exception
approval is required*. Unless allowed by the exception approval, the following restrictions apply:
    · Borrowers must be classified and documented as a self-employed borrower. The DU
        submission must reflect Self-employed .
    · Self Employed Income Analysis Form (Fannie Mae Form 1084) must be completed on every
        transaction and included in the loan file.
    · Borrower must be employed by the current employer (mortgage broker or property seller) for at
        least the length of time DU requires as the self-employment period.
    · Calculate the income from the tax returns as required by DU, or a current pay stub, whichever is
        lower.


HSOA Underwriting Guidelines 4-15-10                                                                        13
                            Conventional Underwriting Guidelines


Review the Product Summary to ensure that non-arms length transactions and/or documentation style
is permitted. If the Product Summary indicates an exception is required for NAL, the branch should
forward the applicable documents to Credit Policy. If the Underwriter approves the loan, include the
following conditions:
     · Appraisal Review. Appraisal reviews are required ONLY if the NAL relationship could influence
         the sales price or appraised value of the subject property (i.e. seller and buyer related), or
         otherwise required by the Product Summary.
If an Underwriter has any concerns about the file, the loan should be forwarded to Quality Assurance
for a full audit.


Transactions with non-family members
Non-arm s length transactions with non-family members will be considered only if they are bona fide
sales transactions and the borrowers will occupy the property as their primary residence.

Transactions with Family Members
Non-arm s length transactions with a family member are generally acceptable if:
   · The family member or relative is the borrowers spouse, child, parent, or any other individual
      related to the borrowers by blood, adoption, or legal guardianship.
   · An executed purchase or sales agreement between the purchaser and the family member is in
      the loan file.
   · Refinance transactions must have at least one borrower from the loan being refinanced on the
      new loan. If no borrower from the existing loan will be a borrower on the new loan, the
      transaction must be underwritten as a purchase.
   · The source and ownership of funds for the down payment, closing costs, and reserves are well
      documented in the loan file.
   · The appraised value of the property is well supported, particularly for gifts of equity or gifts of
      more than 20% of the LTV.
   · Gifts are not allowed for second home and investment properties.
   · Gifts, including gifts of equity, are allowed for owner-occupied transactions if they meet the
      normal gifting guidelines as follows:
      o The borrowers must have 5% of their own funds as a down payment; however, if the
          LTV/CLTV is less than or equal to 80% then the entire down payment may be a gift.*
      o Gifts of equity are acceptable if verified by an appraisal and a signed gift letter is retained in
          the file. The gift of equity must be shown as a credit on the HUD-1 and the dollar amount of
          the gift must match the dollar amount on the gift letter.
      o A signed gift letter and verification of the receipt of the funds are provided.




        1-8 Co-Borrowers, Guarantors or Co-Signers, and Non-Borrowing Owners

Co-Borrowers and Non-Occupying Co-Borrowers
Borrowers and all Co-Borrowers are any and all applicants who will take title, whose income, credit and
assets are considered in the loan decision, and who will sign the Note and Mortgage/Deed of Trust. A
Non-Occupying Co-Borrower is the same as a Co-Borrower, except he/she will not occupy the subject
property.



HSOA Underwriting Guidelines 4-15-10                                                                     14
                            Conventional Underwriting Guidelines

Refer to the Product Summaries and Chapter 6 Ratios for specific eligibility or restrictions when a Non-
Occupying Co-Borrower is on the loan transaction.


Guarantors and Co-signers
Home Savings of America does not accept guarantors or co-signers, defined as Guarantors or co-
signers who do not take title to the subject property.


Non-Borrowing Property Owners
All individuals who hold title to the subject property are required to sign the security instruments (i.e.,
mortgage, deed of trust), but are not required to sign the application or the note unless their income is
used for qualifying purposes. On purchase transactions, all buyers on the purchase contract must, at a
minimum, meet this Non-Borrowing requirement.

In states where spousal interests are recognized, all spousal rights must be insured over by the title
company through whatever means the title company requires.

        1-9 Occupancy Requirements

Time Frame
If a loan is granted as a primary residence or second home transaction, it is imperative that the
borrower occupy the property within 60 days of closing. In addition, the loan may be declared in default
if the borrower makes misrepresentations for any provision of the application, including occupancy.
There are instances (allowances must be considered on a case-by-case basis to determine their
acceptability) in which consideration can be given concerning this timeframe:
     · A short-term leaseback of the subject to the seller.
     · Relocation delayed move.

Owner Occupied Purchase
If a new primary residence financing request is received within one year of the date of a loan previously
originated as a primary residence for the same borrower, the ROC will evaluate whether an exception
will be processed before proceeding with the transaction. The ROC will submit the exception, along
with:
· A copy of the complete/signed 1003.
· A written explanation from the borrower why the existing HSOA loan is no longer owner occupied.
· A written explanation from the borrower of the motivation to occupy the subject property.

A pricing premium may be assessed on the new loan. Exceptions should follow the normal channels
and must be granted prior to the approval of the loan.

Owner Occupied Refinance
Owner occupied refinance transactions will not be considered unless the borrower resides in AND
holds title to the subject at the time of application. Loans will not be made subject to re-
establishing occupancy or transferring title. Continuity of Obligation guidelines must also be
considered.

Loans not meeting these requirements will be treated as either:
   · Investment properties (when the borrower holds title to the property, but does not occupy at time
      of application).

HSOA Underwriting Guidelines 4-15-10                                                                     15
                            Conventional Underwriting Guidelines

    ·   Purchase transactions (when the borrower does not hold title to the property at time of
        application).


Owner Occupancy Expectations
Owner occupied loans are for transactions where the property will be (and, for owner occupied
refinances currently is) the borrower s primary residence. Therefore, borrowers generally may have
only one owner-occupied loan at any time. While this expectation is not intended to prohibit borrowers
from retaining an existing residence as a rental, it is not acceptable for borrowers to build a portfolio of
rental properties through short-term owner-occupancy, nor to not disclose the long term intentions of
any submissions in process.
In addition, borrowers are required to disclose any applications in process for other financing, whether
that is for a property, installment loans or revolving accounts. Failure to disclose such planned events,
or inaccurately addressing credit report inquiries, is grounds for immediate loan denial, or foreclosure (if
such events are discovered after closing.)

Borrowers:
   · Cannot represent owner occupancy on multiple concurrent transactions.
    ·   Must disclose transactions on applications in process, including the occupancy intention for
        each property.
    ·   Who are refinancing their current primary residence with the intent of obtaining cash out to buy
        another primary residence, must reflect the occupancy intention on the refinance as being a
        rental property.
    ·   Borrowers who misrepresented occupancy intentions on a previous purchase transaction are
        not eligible for owner occupied financing through HSOA (example: bought a property 7 months
        ago as an FHA transaction, but 1003 and application package on the present submission do not
        show that address as the borrower s current primary residence).
    ·   Whose existing owner occupied loan is at least one year old, and are intending to convert their
        current primary into a rental property, may do so according to standard guidelines.
    ·   Whose existing owner occupied loan is less than one year old (have made less than 12
        payments), and are intending to convert their current primary into a rental property, may be
        considered according to standard guidelines, subject to exception approval. Consideration will
        include length of ownership, age of existing loan, date of purchase contract, and current investor
        requirements.



        1-10 Second Homes
Refer to the Product Summary for additional restrictions.

A second home is a one-unit property that a borrower occupies in addition to his or her primary
residence. Second homes are eligible for Conforming, Non-Conforming and portfolio programs with the
following restrictions:
     · The property must be in such a location as to function reasonably as a second home. Typically,
        the property should be remote in distance or time travel from the borrower s primary residence;
        be in a resort or vacation area, including snow-bird locales, or be a commuter home .

HSOA Underwriting Guidelines 4-15-10                                                                      16
                            Conventional Underwriting Guidelines

    ·   Must be suitable for year round occupancy.
    ·   Must be available for borrower s exclusive use and enjoyment.
    ·   Cannot be subject to any kind of time-sharing agreement.
    ·   Cannot be subject to any rental pools or agreements that require the borrower to either rent the
        property or give a management firm control over occupancy.
    ·   Rental income cannot be used to qualify the borrower. Allowances may be permitted for
        occasional rental for short terms. Reporting rental income on tax returns does not necessarily
        contradict second home status. Full documentation will be required to properly evaluate second
        home occupancy in the presence of rental income.
    ·   May not be owned for use by other family member; such properties must be considered as
        investment properties, but with no rental income.


        1-11 Investment Properties
An investment property is a property owned by an individual and is suitable for year-round rental and
occupancy. Investment properties are eligible for Conforming and Non-Conforming programs, as
allowed per Product Summaries.

An investment property is typically a property that the borrower does not occupy, regardless of whether
the property generates revenue. In some cases, due to the particular borrower/property circumstances,
it may be necessary to require investment property terms/pricing, even when the borrower intends to
occupy the subject.

The borrower on a loan for an investment property should generally not be affiliated in a NAL
transaction.

See also requirements for income documentation, landlord experience, and rent loss insurance in these
guidelines and the specific Product Summaries.

        1-12 Down Payment Requirements

Minimum Down Payment Requirements
Refer to the Product Summary for specific down payment requirements.
Eligible and ineligible sources of down payment funds are listed and defined in Chapter 7, Assets.


Gift Funds
Refer to the Product Summary for restrictions. The gift donor must be a relative (related by blood,
marriage or adoption, a guardian relationship, fiancée or domestic partner), employer, church,
municipality or non-profit organization. Seller funded gift programs are not allowed.

Gifts are acceptable for owner occupied purchase transactions. The borrower s minimum own funds
requirement is waived when receipt of acceptable gift funds reduces the LTV/CLTV to 80% or less. No
secondary financing may exist.

Gift fund documentation includes:
    · Gift Letter
    · Evidence of donor s capacity to provide the gift
    · Withdrawal of funds from donor s account
    · Transfer of funds into borrower s accounts or a copy of the gift check brought to closing.

HSOA Underwriting Guidelines 4-15-10                                                                    17
                            Conventional Underwriting Guidelines

Gift of Equity
When an applicant is purchasing a primary residence from a relative, the seller/relative may gift equity
in the property for the down payment. The LTV/CLTV (and the percentage of equity gifted) is based on
the lesser of the sales price or appraised value. The seller must complete a gift letter, borrower s
minimum own funds are required if the LTV/CLTV is greater than 80% and no secondary financing may
exist. The equity gift must show on the HUD-1.

        1-13 Purchase Transactions

Definition
A purchase transaction in one in which the proceeds of the loan are used to finance the purchase (or
acquisition through title) of the property. Borrowers have no current title vesting interest in the property.

Limitations
Purchase contracts with sale price revisions solely to provide seller funded closing costs are not
allowed.

Purchase contracts with an assignment of interest to another buyer are not allowed.


        1-14 Refinance Transactions

Definition
A refinance transaction is defined as:
    § The repayment of an existing debt from the proceeds of a new mortgage loan that has as
        borrowers the current legal owners of the property securing the loan
        Or
    § A new mortgage that is obtained on a property that does not already have an existing mortgage
        lien against it or where the proceeds are used to:

            o   Pay off an outstanding balance on a land contract including any documented costs the
                borrower incurred for rehabilitation, renovation, or energy conservation improvements,
                  or
            o   Create a new mortgage by modifying an interim construction loan or term note into
                permanent financing.

Continuity of Obligation
Loans with acceptable continuity of obligation may be underwritten and priced as rate-and-term or cash-out
refinances according to the standard definitions. An acceptable continuity of obligation exists when

    ·   There is at least one borrower obligated on the new loan who was also a borrower obligated on
        the existing loan being refinanced, or
    ·   The borrower has recently inherited or was legally awarded the property (for example. divorce
        or separation), or
    ·   The borrower has been on title and residing in the property for at least 12 months, and has
        either paid the mortgage for the last 12 months or can demonstrate a relationship(relative,
        domestic partner) with the domestic partner) with the current obligor, or

    ·   The loan being refinanced and the title to the property are in the name of a natural person or a
        limited liability company (LLC), provided the borrower(s) have always been the only LLC
HSOA Underwriting Guidelines 4-15-10                                                                         18
                            Conventional Underwriting Guidelines

        member(s) prior to the transfer. If the LLC had multiple members, all members must be
        borrowers on the new loan.

        Note: Title to the new loan must be as individuals or in an eligible Trust. While a transfer from
        an LLC to individuals is allowed as identified above, transfer of ownership from any other form
        of ownership, including corporations or partnerships, does not meet the continuity of obligation
        requirement.



If the borrower is currently on title but is unable to demonstrate an acceptable continuity of obligation, or
there is no outstanding lien against the property, the loan must be underwritten and priced as a cash-
out refinance transaction. Additionally, the following restrictions apply:
    ·   Loans with no outstanding liens:
            -   Property purchased within the past 6 months are not eligible
            -   Property purchased within six to 12 months prior to the application date for the new loan
                transaction: The loan-to-value is based on the lesser of the original sales price or the
                current appraised value.
            -   Property was purchased more than 12 months prior to the application date for new loan
                transaction; the current appraised value is used to calculate the loan-to-value.
            -   Loans with no outstanding liens:
    ·   Loans with outstanding liens but with no continuity of obligation:
            -    At least one borrower must have been on title for at least six months, and the maximum
                loan-to-value (based on the current appraised value) is 50%.



Properties Listed for Sale
Refinances on properties listed for sale are not permitted. Properties listed for sale within the past 6
months are generally restricted to Rate/Term transactions or a maximum 70% LTV/CLTV. Refer to
Product summaries for specifics.


Seasoning and LTV/CLTV
A seasoning requirement may apply in determining whether the LTV/CLTV for a refinance transaction
should be based on the property s appraised value or the acquisition cost, or impose minimum time
periods for eligibility. Refer to the product summary for details. Unless otherwise indicated on the
specific Product summary, the following apply:
· During first year of ownership (ownership date to earliest date of new application documents) use
    the lesser of current value or acquisition cost to calculate LTV/CLTV.
· Cash out refinances during first 6 months of ownership is not allowed (ownership date to earliest
    date of new application documents).
· Borrowers that have taken a cash-out loan on the subject property within the last 6 months (funding
    date to earliest date of new application documents) are ineligible for financing. Taken a cash-out
    loan includes any proceeds that would not qualify as R/T under the guidelines of the proposed
    transaction (example: If the proceeds of that previous refinance were used to pay off a non-
    purchase money second lien, because such activity does not meet conforming conventional


HSOA Underwriting Guidelines 4-15-10                                                                       19
                            Conventional Underwriting Guidelines

    eligibility criteria as a first mortgage, the new proposed loan will be classified as a cash-out
    transaction.


Rate /Term Refinances (excluding Texas properties)
Rate and term refinances are mortgages used to repay an existing debt on a property to secure a more
favorable interest rate or loan term.

Conforming and Portfolio Programs
The mortgage amount for a rate and term refinance is limited to the sum of:
   · The unpaid principal balance of the existing first mortgage.
   · No more than 30 days interest on the payoff loan (must be current at time of closing).
   · Prepayment penalties (if applicable) on the payoff loan.
   · The amount required to satisfy a junior lien (closed-end seconds and HELOCs) used for the
      original purchase the property. If the junior lien is a home equity line of credit (HELOC), the
      current balance may not exceed the initial draw amount used to purchase the home; otherwise,
      it is considered a cash-out refinance. If the only lien of record is a HELOC, the same rules
      apply.
   · All closing costs on the new loan.
   · All prepaid items on the new loan. (DO NOT INCLUDE Delinquent property taxes or HOA dues)

Note: Loan programs may dictate a seasoning requirement since purchase or previous
refinance of loan; check Product Summaries for details.

In order to facilitate the rounding of the loan amount due to overestimated closing costs, incidental cash
back may not exceed the lesser of 2% of the principal amount of the new mortgage or $2,000. DU Refi
Plus loans are limited to $250 cash back.

Texas: Incidental cash back is not allowed on any rate-and-term refinance loan.

In all cases, HSOA does not allow Principal curtailments to correct for excessive cash back amounts.
Loan amounts must be reduced and closing documents re-drawn to meet the cash back limitations.

Non-Conforming Programs
The mortgage amount for a rate and term refinance is limited to the sum of:
   · The unpaid principal balance of the existing first mortgage. (Note if the borrower received cash
      proceeds from the existing first lien, the loan must be at least one year old.)
   · No more than 30 days interest on the payoff loan (must be current at time of closing).
   · Prepayment penalties (if applicable) on the payoff loan.
   · Payoff of a subordinate loan that meets the following requirements:
          Ø The subordinate lien was made more than 12 months ago and is a closed-end second;
             or
          Ø Subordinate lien is a home equity line of credit, the total amount of draws against the line
             during the past 12 months does not exceed an aggregate amount of $2,000, (as
             documented by copies of home equity line statements the one-year seasoning applies
             to the date of the most recent draw); or
          Ø The subordinate lien was made within the last 12 months, is a closed-end second, and
             all of the proceeds were used to acquire the property (as documented by a copy of the
             HUD-1 settlement statement); or
          Ø The subordinate lien was made within the last 12 months, but all the proceeds were
             used to improve the property, and all of the following criteria are met:

HSOA Underwriting Guidelines 4-15-10                                                                    20
                            Conventional Underwriting Guidelines

                    §   The subject property is a 1-unit primary residence or second home; and
                    §   Dollar-for-dollar adjustments for the improvements were not made on the
                        appraisal; and
                    §   Borrower provides copies of home improvement contracts and canceled checks
                        or paid receipts as documentation of the costs of the improvements; and
                    §   Documentation is provided to evidence borrower received no cash at closing;
                        and
                    §   If the subordinate lien is a home equity line of credit, the total amount of
                        additional draws within the past 12 months does not exceed $2,000 (as
                        documented by copies of home equity line statements);

Loans that do not meet all of the above requirements must be processed as a cash out refinance.

In order to facilitate the rounding of the loan amount due to overestimated closing costs, incidental cash
up to a maximum of 1% of the loan amount.


Subordinate Liens
Proceeds of new or re-subordinated financing does not affect the definition of the first mortgage
refinance (e.g., cash disbursed on a second mortgage is not considered in the first mortgage as long as
the proceeds of the first mortgage meet rate and term definition).

Buyout of a Co-Owner
A refinance to buy out a co-borrower, including spouse or domestic partner, may be considered a
rate/term refinance on owner occupied transactions, subject to following conditions:
    · Both parties must have jointly owned the subject property for the 12 months preceding the date
        of the mortgage application.
    · Both parties must be able to demonstrate that they occupied the subject property as their
        primary residence (e.g., driver s license, bank statement, credit card bill, utility bill, etc. that was
        mailed to the individual at the subject property) generally for the 12 months preceding the date
        of mortgage application (on case-by-case basis, for the 12 months preceding the signed written
        agreement, provided the written agreement was recently executed).
    · Both parties must provide a signed written agreement (executed and recorded marital
        settlement agreement or divorce decree involving separated or ex-spouse transactions,
        respectively) that states the terms of the property transfer and the disposition of the proceeds.
    · The borrower who acquires sole ownership of the property may receive no cash out from
        the refinance.
    · The party who is buying out the other party s interest must be able to qualify for the mortgage
        under standard underwriting guidelines.


Inherited Property
Obtain a copy of the will, probate court approval, deed, or other documentation substantiating the
transfer. To be eligible as a Rate/Term transaction, the borrower who will be acquiring sole ownership
must receive no cash out from the transaction.

Pay off of leasehold estate, converting to fee ownership
The payoff of the leasehold estate must occur directly at closing by the escrow or closing agent. Obtain
a copy of the documentation substantiating the purchase of the fee simple interest and its cost. The
payoff must be reflected on the HUD-1.

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                            Conventional Underwriting Guidelines

Cash out Refinances (excluding Texas properties)
Cash out refinance mortgages are loans used to remove equity from a property. There are no
restrictions on the use of the cash proceeds from a cash out refinance mortgage. Product Summaries
will indicate any limits to the amount of cash out allowed.

A loan is considered to be a cash out refinance when the loan proceeds are used for:
    · Payment of revolving debt.
    · Payment of installment debt.
    · Payment of liens that do not meet seasoning guidelines.
    · Buyout of a co-owner not meeting the rate/term requirements.

Additional restrictions for cash out refinances:
   · Non-occupant co-borrowers who are not borrowers on the current mortgage and on title cannot
       be added to an equity refinance transaction as a means to qualify for the loan.
   · Temporary buydowns are not acceptable on cash out refinance transactions.


Texas Rate/Term Refinances
The state of Texas has very specific laws surrounding refinances of a homestead property. A
homestead property is defined as the borrower s primary residence (but, review the title report carefully
for any homestead exemption on second home or investment property). If the borrower owns only one
property in Texas, even if it is a second home or investment property, it may be considered a Texas
homestead. In order to document the property is not the borrower s homestead, all of the following are
required:
    · A copy of the borrower s most recently filed tax return must be provided showing that the
        property has been a second home or investment property for the most recent 12 months.
    · The title company must verify that the property is not considered the borrower s homestead.
    · The borrower must submit an affidavit to that effect.

The following will explain in detail those laws and how they are applied to refinances originated in
Texas.

A rate and term refinance of a primary residence may only include the following costs:
    · Pay off of the old loan plus points.
    · Prepaid items, such as escrow funds and interest.
    · Taxes due.
    · Closing costs not to exceed 5% of the loan amount and must be deemed necessary and
        reasonable . Closing costs that may be included are:

Loan                Underwriting       Processing         Commitment
Origination
Tax Service         Application        Appraisal          Express Mail
Recording           Survey             Credit Report      Flood
                                                          Certification
Escrow Waiver       Title Insurance    Final Inspection   Closing
                    (Lender s
                    Policy)


    ·   Other fees may be financed if necessary to remove any non-standard exceptions on the title
        policy.
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                            Conventional Underwriting Guidelines


Once a loan is originated under Section 50(a)(6), Article XVI of the Texas Constitution, it is considered
a Texas (a)(6) cash out loan and will always be classified as a Texas (a)(6) loan, even if no cash is
taken out from the subsequent refinance transaction. Therefore, no cash out refinance of a Texas
(a)(6) loan is always considered cash out refinance under Texas (a)(6) law and is not eligible for
delivery under rate and term refinance guidelines.

Eligible
Proceeds from a Texas rate and term refinance may pay off only the following:
    · Purchase money loans.
    · Liens for property taxes on the subject property securing the new loan that are not delinquent.
    · Loans to buy out equity ( owelty ) pursuant to court order or agreement of the parties; usually in
        a divorce proceeding or a lawsuit requesting partition of the property among the owners.
    · Home improvement junior liens (see Home Improvement requirements below).
    · When a prepayment penalty fee is assessed on an existing non-(a)(6) loan and is included in
        the payoff amount, the new loan may be a rate and term if the title company agrees and issues
        a new title policy for the full loan amount (including prepayment penalty fees).
    · HOA dues may be paid off if the title company requires them to be paid. If the title company
        does not require them to be paid, the borrower must pay the dues outside of closing and they
        must not be included in the loan amount.
    · The only cash proceeds the borrower may receive are limited to:
        Ø A refund of a previously paid application fee.
        Ø Existing escrow monies in excess of any amounts needed to fund any new escrow account.
        Ø There is no other tolerance for incidental cash back.

Ineligible
Proceeds from a Texas rate and term refinance may not pay off the following:
    · Loan proceeds to pay off an existing (a)(6) loan. Once an (a)(6) always an (a)(6) - see title
        work.
    · Loans to pay off home equity loans.
    · Federal tax debt liens.
    · Liens for delinquent property taxes on the property securing the new loan.
    · Loans with any cash back to the borrower, even incidental cash.
    Guidelines for limited cash out refinances permitting the lesser of 2% of the loan amount or
    $2,000 are not eligible under the rate/ term refinance program in the state of TEXAS. Not
    even one penny.

Texas Home Improvement Loans
Loans for home improvements in Texas secured by the borrower s primary residence (homestead) are
defined by and subject to Article XVI Section 50 (a)(5) of the Texas State Constitution. A refinance
involving the payoff of a home improvement loan must meet certain criteria in order to qualify as a
 Texas (a)(5) home improvement loan. The loan proceeds must go toward either:
    · Construction of new improvements on the homestead property.
        Or
    · Repair or renovation of existing improvements on the homestead property, with the following
        restrictions:
        Ø The borrower must wait five days from the date of the loan application before signing the
            home improvement contract.
        Ø The home improvement contract must provide for a three-day period, beginning on the date
            the owner of the property signs, during which the owner may rescind the contract after
            signing.
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                            Conventional Underwriting Guidelines

        Ø The home improvement contract must be signed in the office of the lender, an attorney or a
          title company.

        Note that the list above is not inclusive of all requirements. Paying off a home improvement
        loan which does not meet Article XVI Section 50 (a)(5) of the Texas State Constitution
        requirements automatically makes the new refinance loan an Article XVI Section 50 (a)(6) of the
        Texas State Constitution cash out loan.


Texas Cash Out Refinances
The state of Texas has very specific laws surrounding refinances of a homestead property. A
homestead property is defined as the borrower s primary residence (but, review the title report carefully
for any homestead exemption on second home or investment property). If the borrower owns only one
property in Texas, even if it is a second home or investment property, it may be considered a Texas
homestead. In order to document the property is not the borrower s homestead, all of the following are
required:
    · A copy of the borrower s most recently filed tax return must be provided showing that the
        property has been a second home or investment property for the most recent 12 months.
    · The title company must verify that the property is not considered the borrower s homestead.
    · The borrower must submit an affidavit to that effect.

The following will explain in detail those laws and how they are applied to refinances originated in
Texas.

Section 50(a)(6), Article XVI of the Texas Constitution provides the laws that dictate home equity
transactions.
    · Any loan that has complied with Section 50(a)(6) is always restricted to the Texas home equity
       laws for all subsequent refinances of that loan. Once a loan is originated as a Texas (a)(6)
       cash out loan, it is always classified as a Texas (a)(6) loan, even if no cash is taken out from the
       subsequent refinance transaction. Therefore, a no cash out refinance of a Texas (a)(6) loan is
       always considered a cash out refinance under Texas (a)(6) law and is not eligible for delivery
       under rate and term refinance guidelines.
    · The total of all charges payable by the borrower may not exceed 3% of the loan amount.
    · There can be only one home equity loan on the property at any given time.
    · There must be at least a one-year interval between home equity loans, even if the prior home
       equity loan has been paid off.
    · Schedule C of the title policy will indicate if the borrower previously removed equity from their
       homestead property via a first or second mortgage.
    · Subordination of existing junior liens is permitted. A subordination agreement MUST be
       executed.
    · New secondary financing is not permitted.
    · Third liens are not permitted.
    · An appraisal is always required, regardless of processing style used.
    · Loan may not close until 12 days after the later of:
       Ø Receipt of the signed and dated loan application by HSOA.
       Ø Receipt of the Notice Concerning Extension of Credit by the customer as evidenced by the
           customer s signature and date.
    · Both spouses must execute the mortgage. However, both spouses are not required to be
       parties on the promissory note.
    · One unit properties only, no 2-4 unit or properties with in law apartments.
    · Maximum 80% LTV
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                            Conventional Underwriting Guidelines

    ·   All borrowers and lender must sign an Acknowledgment of Fair Market Value of Homestead
        Property at closing with an appraisal attached to the Acknowledgment.
    ·   Borrowers must be provided a copy of all documents signed at closing and sign an itemized
        acknowledgment of receipt. The documents may not contain any blank spaces.
    ·   An attorney, title company office or HSOA office must close loan. (No closings by mail or
        phone).
    ·   Inter Vivos Revocable Trusts are not permitted.


Acreage and Property Requirements
The maximum acreage permitted is 10 acres. If an adjacent lot is owned, that acreage must be
included in the property transaction, and still meet all requirements.

Property must be complete. No escrow holdbacks for incomplete improvements. The property must be
located within the boundaries of a municipality or its extraterritorial jurisdiction, or platted separately and
subdivided with full ingress and egress. If the property is composed of multiple lots, they must be
contiguous.

The property must be served by police protection, paid or volunteer fire protection, and with at least
three of the following services provided by a municipality or under contract to a municipality: electric,
natural gas, sewer, storm sewer, and/or water

Title Insurance
The title insurance coverage and policy must adhere to the following requirements:
    · Title insurance coverage must be the T-2 Mortgagee Policy of Title Insurance and include both
        of the following endorsements:
        Ø T-42 Equity Loan Mortgage Endorsement
        Ø T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement
    · The HUD-1 must expressly show the T-42 and T-42.1 endorsements.
    · There may be no exceptions to or deletions from the coverage.
    · Paragraph 1(a) of the Supplemental Coverage Equity Loan Mortgage Endorsement must be
        part of the coverage, which means that the loan must be closed at an office of the title company
        issuing the policy.
Note: If the prior T-2 was issued within the last 7 years, verify that the title company charges the lower
reissue rate for the T-2.

Right to Rescind
All (a)(6) loans are subject to a three-day right to rescind under Texas law in addition to the Federal
right to rescind that may apply under Regulation Z. The Texas right to rescind requires signatures
by all spouses, even if the spouse is not on title; and the right cannot be waived.



        1-15 Value Defined

Purchase
Value in a purchase transaction is defined as the lesser of the purchase price or appraised value.




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                            Conventional Underwriting Guidelines

Refinance
   · If the borrower has owned the property with habitable structure for 12 months or more, the value
      is generally based on the current appraised value (1).

    ·   If the borrower has held title for less than 12 months, the value is generally based on the lesser
        of current appraised value (1) or original sales price plus the value of any documented
        improvements. Evidence that the borrower has owned the property for 12 months or more must
        be provided. Some acceptable forms of evidence are the original HUD-1, transfer of ownership
        documentation such as a warranty deed or a 12-month payment history for the borrower.

(1) If the appraisal shows a substantial increase in value from the original purchase price, the appraiser
should include a description of the improvements made, and provide interior photos showing the
improvements. In addition, borrower should provide documentation and cost of improvements made.

When documenting home improvements, the appraisal of the property should reflect and comment on
the improvements made and be based on the as-completed value of the property. If applicable, the
appraiser should also complete an Appraisal Update and/or Completion Report (Form 1004D/442)
stating that all of the improvements itemized in the contract were completed in a workman like fashion.


        1-16 LTV and CLTV

LTV
The Loan-to-Value (LTV) ratio is calculated dividing the first mortgage original loan amount by the lower
of the appraised value or sales price (sales price in a purchase transaction).

CLTV
The combined loan-to-value (CLTV) ratio is determined by dividing the sum of the original first lien
amount plus the original second lien amount if it is a new second lien mortgage. If an existing second
lien mortgage is being subordinated, the combined loan-to-value ratio is determined by dividing the sum
of the original first lien amount plus the unpaid principal balance of all subordinate mortgages by the
lesser of the sales price or appraised value. For HELOCs, use the maximum line amount to calculate
the CLTV ratio. When subordinating an existing HELOC where the maximum line amount has been
reduced, a modification agreement evidencing the line reduction is required.




Additional Notes:
Calculations must be taken out to 2 decimal places and always rounded up. Example: 80.01%
becomes 81%.


        1-17 Mortgage Insurance
Refer to the Product Summary for required coverage, acceptable mortgage insurers, and payment
options. All mortgages with LTV ratios exceeding 80% require private mortgage insurance (PMI),
unless otherwise specifically excluded by the Product Summary. Where MI is required, loan approval
must include a condition stating both the percentage of coverage required and the insurance company
to be used.


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                            Conventional Underwriting Guidelines

        1-18 Subordinate Financing

Requirements
Subordinate financing is a loan secured by the subject property, other than the primary mortgage. The
subordinate mortgage is also referred to as the second mortgage. The second mortgage must be
clearly subordinate to the HSOA first mortgage and be recorded as such. Mortgages subject to
subordinate financing have terms and disclosures of the second mortgage, as well as guidelines for
LTV/CLTV ratios. Refer to individual Product Summaries for guidelines and additional ineligible
subordinate financing terms. The terms of any subordinate financing must be fully disclosed and
documented in the credit package. For second liens being subordinated, copies of the existing
documents and the subordination agreement are required; for concurrently funded new second liens, a
copy of the documents executed at closing are required.

Terms and Disclosure of Subordinate Mortgages
Subordinate financing must conform to the following:
   · Should require interest at a market rate (no more than 2% below the posted net yield in effect
      for second mortgages at the time of closing for closed end loans).
   · Mortgage cannot have a maturity or call option date of less than five years, unless it is fully
      amortizing.
   · Mortgages with balloon payments due in less than five years are not allowed.
   · Payment of at least interest must begin with the payment of the first mortgage and provide for
      regular monthly payments sufficient to meet the interest due.
   · Monthly payments on subordinate financing must be included in housing and debt ratio analysis.
   · Scheduled payment under the subordinate financing must be due on a regular basis (e.g.,
      monthly, quarterly, or semi-annually), but no less than semi-annually and must be at least
      sufficient to meet the interest due.
   · Mortgage must allow prepayment in full or in part at any time without a prepayment penalty.


Graduated or Variable Payment Subordinate Financing
Payments of the subordinate lien may be graduated or variable, provided:
The payment schedule is structured to fully amortize the total amount of the subordinate financing
within its loan term.
    · The payments must remain constant for each 12-month period over the term of the junior lien.
    · Interest cannot increase by more than 1% per 12-month period.
    · The line of credit is part of a transaction in which the interest rate of the first mortgage is either
         fixed or is an adjustable rate mortgage with a first adjustment no earlier than five years.

Home Equity Line of Credit Subordinate Financing
If subordinate financing is a home equity line of credit, in addition to the previous guidelines, the
following restrictions apply:
     · Required payments must be sufficient to meet the interest due.
     · The greater of 1% of the line amount or the interest only payment of the maximum possible
        equity line of credit is included in the borrower s monthly housing obligations.

Ineligible Subordinate Financing
    · Subordinate mortgages subject to an interest rate buydown plan (Non-Conforming only).
    · Subordinate mortgages that allow negative amortization.
    · Subordinate mortgages that have wraparound terms.
    · Subordinate mortgages that are held by the seller or any other interested party.
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                            Conventional Underwriting Guidelines

    ·   Transactions involving multiple subordinate liens

        1-19 Buy-downs

Buydown Defined
A buydown is money advanced by an interested party (i.e., a builder, seller, lender or borrower) to
reduce the monthly payment on a mortgage loan. The buydown plan may be in effect for an initial
period of years as specified in the buydown agreement. A written agreement between the buydown
provider and the borrower must be included in the loan package. A temporary buydown may not be
used on a cash out refinance.

Funds
Funds involved in buydowns are subject to restrictions of source, disclosure, refunding and amounts:
   · Funds for a buydown can come from any source or combination of sources (e.g., the seller, the
       borrower, the borrower s relative, the borrower s employer or the lender). If from an interested
       party (seller, realtor, etc.) the buydown funds are included in the calculations for
       Seller/Interested party contributions.
   · Buydown funds are generally non-refundable.

Buydown Plans
Refer to the Product Summary for terms, qualifications, LTV/CLTV and/or variances.

The following guidelines apply to temporary buydown plans:
   · Buydown period can not exceed 24 months.
   · The terms of the buydown must be disclosed to the lender, mortgage insurer and appraiser.
   · Buydown funds from an interested party to the transaction are subject to seller contribution
        limitations.
   · The funds cannot reduce the mortgage amount for the purpose of determining the LTV.
   · The terms of the Note cannot be changed.
   · The Buydown Agreement must provide that the borrower is not relieved of the obligation to
        make the monthly payments if the buydown funds are not available.
   · Payments are constant for each 12-month period if the plan provides for graduated payments.
   · A maximum increase in the principal and interest payment of the amount caused by a 1%
        increase in the effective interest rate.


Defaults and Prepayments
   · In the event of default during the buydown period, the laws of the state in which the property is
       located would apply. Upon completion of foreclosure, the buydown funds may be applied to the
       unpaid principal balance and accrued interest on the loan.
   · In the event of prepayment of the mortgage during the buydown period, the buydown funds
       must be returned to the borrower.
   · Lender-funded buydown funds will not be reimbursed in the event of default or prepayment.

        1-20 Construction-to-Permanent Financing


Construction-to-Perm
The borrower may or may not receive cash out. A refinance transaction has no time limitation.

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                            Conventional Underwriting Guidelines

All construction-to-permanent loans must adhere to these requirements:
· The property must be complete at the time of the permanent financing funding.
· A final Certificate of Completion must be obtained.
· Photographs of the completed property are required.
· All construction-to-permanent loans must be secured by owner-occupied primary
    residences.
· The borrower must the primary obligor on the construction financing which is obtained through a
    legitimate financial institution AND the borrower is the owner of the lot on which the residence is
    constructed.
· Detached single family residences only.

These properties are not eligible for construction-to-permanent financing:
· Investment properties.
· Properties in which the borrower has a development interest (for example, if the borrower is also
   the builder).

The LTV depends on how long the borrower has owned the land.
      Ownership of Land                                 Determination of LTV
Borrower owned the land for less LTV is based on the lesser of the:
than 12 months                   · Current appraised value
                                        Or
                                 Sales price of the land plus any documented improvement costs.

Borrower owned the land for at         LTV is based on the current appraised value
least 12 months

The cost of the land acquisition is determined by a certified copy of the closing statement (HUD-1) from
the purchase of the land.
· If the land was purchased more than 2 years prior to the loan, the current land value may be used if
    substantiated by a separate land appraisal.
· If the land was a gift and the value has appreciated, the value based on a current land appraisal
    may be used as the borrower s down payment.

The total acquisition cost is based on:
With a Sales Contract:
· Appraised value of the land, if not included in the contract price and
· Paid receipts and cancelled checks for costs that exceed the contract price.
Without a Sales Contract:
· Current appraised value of the land, and
· Contractor s construction cost breakdown, and
· Paid receipts and cancelled checks for costs that exceed interim financing.

Labor performed by the buyer, also referred to as sweat equity, or the trade of any labor or goods from
the buyer to the builder is not an eligible source of funds.

If the borrowers employ a general contractor, the following documentation is required to verify the cost
of construction:
· Signed construction contract
· Sealed copy of the improvement plans and complete breakdown of construction costs and
     specifications.

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                            Conventional Underwriting Guidelines

·   Copies of canceled checks and receipts of bills for payment of any supplied, materials, labor, or
    funds paid directly to subcontractors by the borrower.

If a general contractor is not used to construct the building, the construction costs must be documented
with copies of receipts or invoices and cancelled checks for materials, supplies and/or labor.


        1-21 Land Contracts/Contract-for-Deed

A land contract, also known as an installment land contract or contract-for-deed, is a real estate
agreement between a buyer and seller, whereby the parties are contractually obligated to fulfill the
terms of the contract and transfer the property. The buyer may use and occupy the property when the
contract is executed, but the grant deed from the seller to the buyer is usually not recorded until all or a
specified part of the sales price is paid. The buyer generally does not obtain the transfer of title until the
land contract is paid (from proceeds of the subject loan). However, if the land contract is recorded, it
should be reflected in the chain of title on the preliminary title report. A copy of the land contract is
required.

Always treated as refinance with standard seasoning requirement.

A land contract differs from a lease with option to purchase. In a land contract, the buyer has an
ownership interest in the property; in a lease with option to purchase, the intent is rent the property and
the lessee may or may not exercise their option to purchase the property.

        1-22 Lease with Option to Purchase

Lease-Option Defined
Lease with option to purchase are always treated as purchases. The lease-option purchase contract
spells out the price and terms of the lease. Document all funds paid to the seller, including any deposits
at time of signing the Lease Option.

If the lease-option contract provides for a credit of a portion of the rent to be applied towards the down
payment, the amount accepted will be the lesser of the amount indicated on the contract, or that portion
of the rent that exceeds the fair market rent for the property, as determined by the appraiser.

Refinances subject to Lease-Options
Refinances to current owners on a property that is subject to a lease-option agreement are not eligible
for financing.

        1-23 Deed Restrictions/ Resale Restrictions

Deed/Resale restrictions, including Inclusionary Zoning, are not permitted. Restrictions include those
that limit the use of all or part of the land on one or any number of owner characteristics or other
requirements, including age, income limits, occupancy, homebuyer status, employment (employer
provided subsidy), or resale price.

Inclusionary Zoning
Any condo project where deed restrictions are placed on a specified number or percentage of the units
as a condition of securing zoning approval, density approval, building permits or conversion approval.
Such deed restrictions may limit the rights of the mortgagee or subject the unit to sale or resale

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                            Conventional Underwriting Guidelines

controls. Properties subjected to such restrictions are restricted units and non-controlled properties are
unrestricted units.



        1-24 Chain of Title

24-month chain of title required, indicating buyers, sellers, price and date. Any increases in value/price
must be justified. The appraisal is not an acceptable source for chain of title information.

Seller must be recorded on title at least 90 days before date on new purchase contract except for
properties being sold by the foreclosing lender.
Extra due diligence is required whenever the seller is an LLC. Desk or field review by Landsafe is
required if the LLC has owned the property less than one year.

Flipping Restrictions apply during the first year of ownership.
Owned <= 90 days: Not eligible unless a foreclosure sale by lending institution:
    · The following applies to all transactions except properties being sold by the foreclosing
       institutional lender: Seller s ownership must be recorded on title, and must have owned the
       property for at least 90 days
    · Date comparison will be from acquisition date to the earliest of the purchase contract, or
       application/origination date.
    · If the recording date of seller s acquisition is delayed beyond normal recording office delays
       (generally more than 45 days), underwriters may require 90 days from recording date, or itional
       documentation to prove the actual date of deed transfer (ex: settlement statement and proof of
       funds being paid).
Owned 91 days-One year:
  · Any price increase greater than 15% must be based on documented detailed improvements
     made to the property. Appraisers should provide itemized details and project costs, and
     pictures of the significant improvements made.




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Chapter 2 Documentation

OVERVIEW

This chapter details the required documentation necessary for Conforming and Non-
Conforming programs, and provides details and insights into Desktop Underwriter (DU). The
documents describe the borrower and the property consideration, as well as requirements
pertaining to the age of documents. A complete Uniform Residential Loan Application (URLA
1003) is always required. DU may allow limited/reduced documentation based on the risk
factors present in a particular transaction. HSOA may require additional documentation as
stated in the Product Summaries.

2-1     Minimum Documentation Requirements

Credit Documents
The following reflect the minimum documents required for a loan to be considered complete, for the
purposes of accepting the submission as an application eligible for underwriting.
   · HSOA Submission form
   · Complete Uniform Residential Loan Application (1003)
   · Borrower authorization form
   · DU Findings
   · Credit Report -Tri-merged with Safescan and Hawk Alerts
   · Credit reconciled and input accurately into DU
   · Adequate credit explanation for derogatory credit and supporting documentation
   · Verification of Employment
           o If applicable recent personal or business federal tax returns, including all schedules
           o Complete Self-employed Income Analysis (when applicable)
   · Verification of Assets
   · Fully executed Sales contract and all addenda for purchase transactions
   · Complete and accurate Good Faith Estimate (broker s GFE)
   · Truth-in-Lending (broker s TIL)
   · Appraisal (on refinance transactions)


Compliance Documents
  · Complete and accurate Good Faith Estimate (HSOA s GFE)
  · Truth-in-Lending (HSOA s TIL)
  · Signature Authorization form completed and signed
  · Product specific disclosures completed and signed
  · State specific disclosures completed and signed
  · Mortgage Broker Fee Agreement, or the state fee agreement for CA, CO, NY, SC, orWI

2-2     DU Requirements
Unless otherwise indicated in the Product Summary, all loans must be submitted through DU, FNMA s
Automated Underwriting System, and receive a findings recommendation required by that specific
product. Currently, manual underwrites will only be considered on HSOA Portfolio loans.

All DU conditions must be followed and satisfied. Failure to do so will result in an unsalable loan.

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DU Accepted Findings
The Product Summaries for all programs that require DU submissions will indicate which findings are
accepted. Generally, they are
   · Approve/Eligible (excluding Expanded Approvals if so indicated)
   · Approve/Eligible or Ineligible (Non-Conforming programs when ineligible is due to the results of
       parameter acceptable under the Product Summary, but the loan amount or program features do
       not meet Conforming Loan requirements)
   · Condominium eligibility for Limited Review.

DU Findings not accepted
The following recommendations are currently not accepted on any HSOA program:
   · Expanded Approvals EA-I -EA-IV.
   · Refer/Eligible or Refer with Caution
   · Out-of-Scope, or otherwise unable to obtain DU findings
   · Non-Conforming programs that do not permit/receive an AUS Approval

DU overlays
In addition to the DU findings and requirements, most Programs have additional requirements above
and beyond those specified by DU, and which also must be followed. Such additional requirements are
listed in each Product Summary

DU Version Updates
From time to time DU updates its operating system. As a consequence, FNMA and HSOA investors
publish time deadlines for acceptance of previous versions. To be eligible for financing, DU findings
must be based on DU versions still accepted.


2-3      UW Decisions and Philosophy
Underwriters are expected to approve loans where the submitted credit file is complete and accurate,
and the transaction request meets the program guidelines. In addition, when loan submissions are not
entirely complete, but the underwriter believes the required documentation and conditions can be met,
the loan should be approved, subject to all required conditions.

Only in transactions where the loan does not meet our requirements, where the outcome is uncertain,
or the submission or transaction intent is not understood, should the loans be suspended or denied.

All loans to be denied require a second review by staff authorized as reviewers, in order to assure
every transaction is considered fairly and appropriately, and given all possible considerations for
acceptance. In addition, in order to allow for a reconsideration process that does not negatively impact
a loan s lock status, all loans to be denied are to be given a Suspense status for at least one week to
allow sufficient time for any re-consideration. After that suspense period has passed, the denial is to be
processed.


2-4     Documentation Age Limitations and Recertification Requirements

Requirements
This section outlines the documentation age and recertification guidelines for appraisal, credit and other
mortgage documents. These documents are subject to age limitations, because property and account
information/values fluctuate.
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                            Conventional Underwriting Guidelines

Appraisal
The age of the appraisal report is determined from the date the appraisal was completed to the date the
loan is purchased by the investor, therefore the eligibility time frames provided in the Product
Summaries allow for 30 days from closing to investor s purchase. Currently, most programs accept
appraisals that are up to 90 days old at closing. If the loan does not close before the appraisal is
considered expired, a new appraisal is required. A recertification of value/appraisal update is not
accepted.

Property Inspection Waiver (PIW)
The Property Inspection Waiver and Property Valuation/Update are valid for 120 days. If the PIW will
be more than 120 days old, the loan must re-qualify for the waiver or exemption.

Credit and Verifications (Assets or Employment)
Documentation used for verification (pay stubs, bank statements, credit reports, etc.) should be no
more than 90 days old at the date of the note.

Updated documents are to be placed directly in front of the original document.

Title Commitment/Preliminary Binder
Title commitments must be dated, and cannot be more than 90 days old at closing.


2-5 Documentation General Requirements
Verification documents cannot contain any alteration (areas may not be blacked out), erasures, and
correction fluid or correction tape. The file must contain legible copies of the originals, and contain all
pages of the document.

Foreign Documents
Documents from a foreign country must be filled out in English or appropriate agency must provide a
translation. Currency amount must be converted to U. S. dollars.

Full/Alt Documentation
Full Documentation refers to agency (FNMA or FHLMC) forms and guidelines to verify employment,
income, assets and liabilities. They must be sent through the U. S. Postal Service and cannot be hand-
carried to their destination or be delivered by the borrower. Alternate - or Alt - Documentation allows
documentation to be obtained directly from the borrower to verify income and asset information.


Alternative Documentation
Alternative Documentation allows documentation to be obtained directly from the borrower to verify
employment, income and asset information.


General Requirements
Alternative Documentation is available for owner-occupied primary residences, second homes, and
investment properties. Refer to the individual loan program guidelines for eligibility.
General requirements are:
    · Single family properties only, including eligible condos and PUDs.
    · Salaried and hourly paid borrowers only. Commissioned or self-employed borrowers are not
       eligible for Alternative documentation.
    · Documentation requirements are identical for conforming and non-conforming loan programs.
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                            Conventional Underwriting Guidelines

    ·   When Alternative documentation requirements are stricter than the individual loan program
        guidelines, the more restrictive guidelines must be used.
    ·   An acceptable credit report is required. Refer to Section 6.01, Credit Scores, for additional
        information.
    ·   The verification of income and payment history must be completed no more than 120 days
        before the date of the Note. The most recent bank statement to verify the source of funds must
        be dated no more than 45 days earlier than the date of the loan application, and not more than
        120 days earlier than the date of the Note.

Electronic Verification
An electronic verification is a computer-generated document, accessed and printed from the Intranet
that may be used to verify information such as the applicant s employment, income or funds on deposit.
This includes on-line bank statements, investment account statements, and employment and/or income
statements. The applicant may provide the verification directly, or the fulfillment associate may obtain it
directly from the employer, depository or other institution.
The borrower may provide verification of income, employment and assets in the form of a photocopy,
facsimile or electronic verification. Documents that are faxed or downloaded from the Internet must
clearly identify:
    ·   Name of depository or investment institution, applicants name and address, account number,
        and type of account
    ·   Employer name, applicant name and address
    ·   Source of the information including the web address or fax banner
    ·   The document should clearly state the dates the document is covering along with appropriate
        detailed history.

Employment and Income
Disclosure and verification of all employment and income sources is required. Refer to Chapter 4 for
details on specific sources of employment/income and documentation. Verification of Employment form
for current employment must be supported by a current paystub showing YTD earnings or a W-2.


Assets
Disclosure and verification of assets is required Refer to Chapter 5 for details. Verification of Deposit
forms must also be supported by a bank statement, or a Verbal Verification of Deposit completed by an
HSOA employee.

Mortgage or Rent Payment History
Verification of mortgage or rent payment history may be required, as indicated by the Product Summary
or underwriter. Verifications are accepted from institutional landlords that are not parties to the
transaction. All other verifications must include copies of cancelled checks or bank statements
documenting the payment histories.


2-6     Validation Resources and requirements

Social Security and Medicare Withholdings
Each year s W-2 must reflect a Social Security wage and deduction not exceeding the amounts listed
below, and Medicare deductions of 1.45% of the Medicare wage. (note: Medicare wages may be

HSOA Underwriting Guidelines 4-15-10                                                                     35
                            Conventional Underwriting Guidelines

greater than Wages in some circumstances, usually by the amounts of some of the box 12
itemizations).

Medicare withholding is 1.45% of wages, with no maximum.

Social Security is 6.2% of wages, up to a specified maximum per year.

For self-employed borrowers, the obligations are double that of wage earners: 2.9% for Medicare and
12.4% for Social Security (same maximum as wage earners)

                                       2006         2007         2008         2009 and 2010

Maximum Social Security
Wages                                  $94,200      $97,500      $102,000     $106,800

Maximum Social Security
Deduction for Wage earners             $5,840.40    $6,045.00    $6,324.00    $6,621.60
(6.2%)

Maximum Social Security
obligation for Self-                   $11,680.80   $12,090.00   $12,648.00   $13.243.20
employed (12.4%)



4506-T
A 4506-T must be executed, with results returned and validated before closing on all conventional
loans:
·      A signed 4506-T is to be included at the time of loan submission and must be processed with
       income validated before closing
·      An additional signed 4506-T must be signed by all borrowers again at closing.

Tax returns and 4506 validation
The following matrix is provided to illustrate how to correlate HSOA requirements for 4506-T validation
with DU requirements for tax returns:

Borrower          Action/Documentation Required
provides
Two years tax returns required by DU

2007 and 2008        Validation: must have both years validated.

                     Qualifying: use 2007 and 2008
                     -Borrower to also provide 2009 P&L and balance sheet; and- after 4-15-2010 -
                     IRS extension request and 2010 YTD P&L and balance sheet.
                     P&Ls should confirm consistency of continued income; though not to be used in
                     qualifying.

                     Taxes paid or estimated as the projected amount on the extension request
                     should be compared to and be consistent with the tax obligations of previous
                     years.
HSOA Underwriting Guidelines 4-15-10                                                                  36
                            Conventional Underwriting Guidelines

2008 and 2009        Validation: must have two years validated. Request validation on both years. If
                     2009 is not validated, request 2007 validation.

                     Qualifying: use 2008 and 2009.
                     Provided that the returns from 2007 is consistent with the tax years used in
                     qualifying, make a notation that the 2007 returns are utilized as supporting
                     documentation, and not used in qualifying. Any material discrepancy or
                     inconsistency in previous years returns must be acceptably documented and
                     explained.

                  Do not require to validate 2009 unless there are material differences in the two
                  years of returns.
One year tax return required by DU

2008                 Validation: must have two years validated. Request validation on 2008 and
                     2009. If 2009 is not validated, request 2007 information

                     Qualifying: use 2008
                     -Borrower to also provide 2009 P&L and balance sheet; and- after 4-15-2010 -
                     IRS extension request and 2010 YTD P&L and balance sheet.
                     P&Ls should confirm consistency of continued income; though not to be used in
                     qualifying.

                     Taxes paid or estimated as the projected amount on the extension request
                     should be compared to and be consistent with the tax obligations of previous
                     years.
2009                 Validation: must have two years validated. Request validation on 2008 and
                     2009. If 2009 is not validated, request 2007 information

                     Qualifying: use 2009.
                     Provided that the returns from the additional previous years are consistent with
                     the tax year used in qualifying, make a notation that the previous years returns
                     are utilized as supporting documentation, and not used in qualifying. Any
                     material discrepancy or inconsistency in previous years returns must be
                     acceptably documented and explained.
Note:
If the tax returns are not validated by the 4506, all individual and business tax returns must be signed
by all applicable borrowers.

Tax returns that are stamped as received by the IRS are not a sufficient indication of acceptance and
completion; rather; an executed 4506-T is required.

IRS 4506-T Policy

             ·   A signed 4506-T is to be included at the time of loan submission and must be
                 processed with income validated before closing. (Loan files received without the
                 signed 4506-T will be underwritten. The Underwriter is to condition for a signed 4506T
                 to be processed with acceptable results PTD.)

             ·   An additional signed 4506-T must be signed by all borrowers again at closing.


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                            Conventional Underwriting Guidelines

The Form 4506-T signed at application must be processed for all borrowers and the IRS transcripts
must be obtained for the most recent two years available, prior to docs. HSOA must request the
transcripts; submitted copies are not acceptable. This requirement applies regardless of the DU
documentation requirements.
When the transcripts are received, they must be evaluated by underwriting to validate that the current
income used to qualify for the loan is reasonable compared to the borrower s prior/current earnings.
Reconciliation of the results must be documented on the Transmittal Summary in the file. The
transcripts must also be retained in the file.


Process Requirements
    1. If the signed 4506T is included in the loan submission package, the transcripts will be ordered at
       Loan Registration. The results will be added to the file for Underwriter review at the time the
       loan is underwritten.
    2. If the signed 4506T is not included in the file at the time of underwriting, the Underwriters will
       include a loan condition requiring the 4506-T to be executed and results validated prior to Docs.
       SLCs will order the 4506-T transcripts upon receipt of the signed authorization. Request
       validation of the most recent 2 years1040s. If an extension is on file for the current year, then
       validate the previous 2 years.
    3. Underwriters to make comments on the 1008 confirming validation of the 4506-T findings, and
       include explanations as per the Validation section below.
    I.      Underwriting Review and Reconciliation

When the transcripts are received, they must be evaluated by underwriting to validate that the current
income used to qualify for the loan is reasonable compared to the borrower s prior/current earnings.
Reconciliation of the results must be documented on the Transmittal Summary in the file. The
transcripts must also be retained in the file.
Summary of the policies:

    1. Follow DU Findings for documentation requirements and income calculations

    2. Obtain 4506-T validation on the most recently available two years tax returns

    3. Reconcile the two sets of documents:

            a. Authenticate Same documents: Where the tax transcripts and submitted documents
               cover the same time period, the information must be the same. File may not proceed
               unless any discrepancies are acceptably resolved.

            b. Same sources, different time periods: When the tax transcripts cover additional years,
               but the income is from the same source, the income changes from year to year must be
               reasonable. If not, they are to be incorporated into the income analysis.

            c. Undisclosed different sources: When the tax transcripts reflect additional (non-
               incidental) income, losses or obligations, each must be carefully scrutinized, and
               incorporated into the underwriting analysis.

    4. Summarize the comparison on the 1008

   Detailed Review Requirements
HSOA Underwriting Guidelines 4-15-10                                                                     38
                            Conventional Underwriting Guidelines

    1. Follow DU Findings
    Obtain documentation as required by DU findings (or in some specific cases as outlined in the
    Product Summary, the HSOA overlay) for documentation requirements and income calculations.
    The documentation received may be, but is not required to be, the same documents that are
    validated by the 4506-T. Example: Borrowers provided 2009 W-2s, but the 4506-T validation
    covered 2007 and 2008.
    Underwrite the loan according to DU documentation requirements. It is not necessary to include
    the validated 4506-T information in the analysis, unless there are significant variations as
    described in the Reconciliation Process.


    2. 4506-T validation
    HSOA requires that the two most recently available years of filed tax returns be validated.
    We should request the most recent two years (2008 and 2009); if you know the borrowers have not
    yet filed 2009 returns, filed an extension request for 2009, or if the 2009 transcript request is not
    validated, request 2007 and 2008.


    Previous year returns not validated
    If the final date (October 15) for filing tax returns has passed, and the 4506-T transcripts do not
    return any returns, the loan is not eligible for financing. We will NOT accept IRS stamped tax
    returns in lieu of the transcripts.
    3. Reconcile
    As indicated above there are 3 reconciliation steps when comparing the submitted loan
    documentation to the 4506 transcripts
            a. Authenticate Same documents: Where the tax transcripts and submitted documents
               cover the same time period, the information must be the same. File may not proceed
               unless any discrepancies are acceptably resolved.
                Examples include differences in:
                          1. different employer, employer ID, company name if self-employed, or
                              different schedules
                          2. number of employers
                          3. amount of income or withholding,
                          4. employee status (W-2 income vs. 1099 or self-employed)

            b. Same sources, different time periods: When the tax transcripts cover additional years,
               but the income is from the same source, the income changes from year to year must be
               reasonable and realistic. If there are large variations from one year to the next - in either
               direction, further analysis and understanding is required. In most cases, this will mean
               re-calculating the income used in qualifying.

            Income reductions from the transcript years to the DU documented year

            For self-employed borrowers, underwriters must determine that the most recent year returns
            reflect a stable income and continuing viable business.

HSOA Underwriting Guidelines 4-15-10                                                                      39
                            Conventional Underwriting Guidelines

            For example: 2008 returns show a net income of $200,000, and $90,000 in 2009. Do not
            automatically deny because of declining income, but even if the borrower qualifies using the
            $90,000, further analysis is required.
            ·   Borrower made $150,000 during the first 9 months, them lost $60,000 in the last 3
                months that transaction is not approvable, because current profitability is negative.
            ·   Borrower s profit and cash flow was relatively stable throughout the year, or perhaps
                stabilized the last half the year after showing declines the first half reasonable to use
                the $90,000 in qualifying
            Income increases from the transcript years to the DU documented years

            1. Less than a 10% increase:

            Generally, an increase of less than 10% may be accepted without in-depth analysis.

            2. Income increases by 10% or more:

            If the income documentation provided by the borrower is 10% greater than the income
            documented on the IRS transcript, the following steps must be taken:
            Wage Earner or Other Income:
            Underwriter should perform an in-depth review to determine if the increase in income is
            reasonable or if additional steps need to be taken. At a minimum, a letter from the borrower
            explaining the difference must be obtained and retained in the loan file. Additional
            documentation to support the explanation or increase should also be requested if deemed
            necessary by the underwriter.
            Self-employed borrowers or borrowers who receive 1099 or commission income
            greater than 25% of their total earnings:
            Underwriter should perform an in-depth review to determine if the increase in income is
            reasonable or if additional steps need to be taken. At a minimum the borrower s explanation
            for the difference must be obtained and retained in the loan file. Additional documentation to
            support the explanation or increase should also be requested if deemed necessary by the
            underwriter. Note: All other current guidelines for analysis of self-employment income must
            also be followed.
            For self-employed borrowers, if DU asked for only one year tax returns, the income
            should be recalculated using a two year average, because of the substantial year-
            over-year increase.
            c. Undisclosed different sources: Review the transcripts to determine if the tax
               transcripts reflect additional (non-incidental) income, losses or obligations. If so, each
               must be carefully scrutinized, and incorporated into the underwriting analysis if
               determined to be material.
            Examples include:
               · Alimony obligations
               · Self-employment income or losses
               · Schedule E income or losses
               · Dividend, interest, or capital gains NOT on tax returns when borrower s
                  documentation shows significant financial assets
               · Undisclosed rental properties

HSOA Underwriting Guidelines 4-15-10                                                                        40
                            Conventional Underwriting Guidelines


            Examples that may be ignored, or considered incidental, include
               ·  Spouse income
               ·  Tax refunds
               ·  Dividend, interest, capital gains or losses (if not used in qualifying)

    4. Summarize the comparison on the 1008

     Underwriters are to make comments on the 1008 confirming validation of the 4506-T findings, and
     include explanations and notations of any variances discovered when comparing transcripts to the
     DU documentation


The following provides a summary table of actions and examples of various scenarios,
      IF the income                            THEN:                              Example
  documentation provided
    by the borrower is:


  Less than the income             Use the income provided by the    DU didn t ask for 2 years W-2; the
  documented on the IRS            borrower to qualify the loan as   additional year(s) show borrower
  transcript                       long as it meets all              had more income in previous
                                   documentation parameters;         years.
                                   and, for self-employed
                                   borrowers, all issues regarding
                                   declining income is acceptably    2009 tax returns were provided for
                                   resolved.                         qualifying (S/E); 2007 and 2008
                                                                     transcripts show more income.
  < 10% greater than the           Use the income provided by the    Increase from the year shown on
  income documented on the         borrower to qualify the loan as   tax transcripts compared to the
  IRS transcript                   long as it meets all              year requested by DU is from
                                   documentation parameters.         $50,000 to $55,000, in base salary.
                                                                     Increases that are attributable to
                                                                     OT, bonus or commission must
                                                                     follow DU requirements for
                                                                     documentation and averaging.
    10% greater than the           Refer to Income Validation        Increase income from $50,000 to
  income documented on the         section below.                    $62,000 in base salary.
  IRS transcript


  From a different source          This is an authentication issue   Borrower claims to be working for
                                   and must be resolved              Hewlett Packard, but the tax
                                                                     transcripts shows a different
                                                                     employer
                                                                     Borrower claims to be a wage
                                                                     earner, but received 1099 income
                                                                     Borrower states 3 years at current
HSOA Underwriting Guidelines 4-15-10                                                                       41
                             Conventional Underwriting Guidelines

                                                                        employer, but tax transcripts shows
                                                                        multiple employers during the tax
                                                                        years.
                                                                        Tax transcripts show rental
                                                                        property or partnership/corporate
                                                                        ownership


  From an additional wage          Notate on Underwriting               Additional W-2 from another
  earner source                    transmittal that borrower has or     employer, for a relatively small
                                   had a part-time job not used in      amount.
                                   qualifying


  From an additional self-         If tax transcripts show a net        Tax returns disclose borrower has
  employed source                  profit, same notation as above       a schedule C income source.
                                   If transcripts report a loss, that
                                   loss must be included in the
                                   income and updated
                                   documentation is required.
  Is shown as tax returns as       Can only use half the income in      Borrower and spouse, not just
  a joint income (and only         qualifying                           borrower, own the neighborhood
  one tax payer is applying                                             Liquor store.
  for a loan)


  Consistent, but the tax          Notate, but ignore in qualifying     Borrower is clearly the liquor store
  transcripts show (non-                                                owner/operator and the spouse is
  borrowing) spouse income                                              employed full time with a different
  or losses                                                             employer and income source)




Tax returns filed but not yet validated by IRS
Applies to all borrowers (self-employed and wage earners)
   1. If borrowers owed money to the IRS, provide evidence of the taxes owed having been paid; if do
       a refund, provide copy of the refund check or its deposit into the borrower s bank accounts.
   2. This does not replace the requirement of having 2 years of taxes being validated by the IRS;
       rather it supports the validity of the tax returns provided as being actually filed with the IRS.


Self-Employed Documentation Requirements if 2009 returns are not yet filed.
The following indicates the time frame and documentation requirements for borrowers who have not yet
filed last year s tax returns. In all cases, the borrower must provide tax returns for the years as required
by DU or the Product Summaries. Use the tax returns for qualifying. The items listed in the table are
the additional documents required to show continuity and consistency of income.

If this additional documentation shows that the income is continuing to be stable or increasing, use the
income calculated from the tax returns. If this additional documentation shows a significant reduction in

HSOA Underwriting Guidelines 4-15-10                                                                           42
                            Conventional Underwriting Guidelines

income, the income stability and trends must be analyzed and understood before calculating any
income.

Required signatures: Tax returns that have been validated through the 4506-T process do not require
borrower signatures, all other returns and forms are to be signed by preparer (if applicable) and
borrower.

Reminder: This list is solely provided to address time tables relative to the IRS filing date requirements;
it does not replace or override the documentation requirements from DU. For example, if DU says two
years of tax returns are required to document partnership returns, borrower s returns must show two
years of partnership income. If 2008 returns show partnership income, but 2007 returns do not, that
means that partnership income cannot be used in qualifying unless and until 2009 returns are
completed and filed.


Loan closes by April       Loan closes after April 15, 2010 but     Loan closes after October 15,
15, 2010                   before October 15, 2010                  2010

2009 YTD P&L and           2009 P&L and balance sheet.              2009 filed returns MUST be
balance sheet, with                                                 provided
ending date that is        IRS extension request, with tax
within 90 days of          estimate consistent with 2008 tax        YTD P&L and balance sheet, with
closing date.              obligations. If borrowers owed           ending date that is within 90 days
                           estimated taxes, provide proof of the    of closing date.
                           estimated taxes having been paid.

                           YTD P&L and balance sheet, with
                           ending date that is within 90 days of
                           closing date.


Annualizing income sources, income and asset reconciliation
Calculations should be annualized as necessary and appropriate. For example, if bonuses are received
once a year, they should be averaged over the full year. If a borrower earns $1,000 in overtime over
the Christmas retail shopping season and $200 over the remainder of the year, the overtime income is
$100 per month.

Consider the frequency of income distribution relative to verified assets. If a borrower received an
annual bonus three months ago, but now has minimal verified assets, the bonus cannot be used for
income because the cash proceeds of that bonus are no longer available to subsidize the monthly
base income until the next bonus payment date.

Bonus and commission income cannot be used for both income and down payment.

Verbal Verification of Employment

Verbal Verifications of employment must be completed no more than five (5) business days prior to the
funding date.

Verbal VOE requirements for hourly, salary, and commission income:


HSOA Underwriting Guidelines 4-15-10                                                                     43
                            Conventional Underwriting Guidelines

To comply with a Verbal Verification of Employment (or Telephone Confirmation) requirement, the
following steps and documented on the HSOA Telephone Verification of Employment form:
     · Independently obtain a telephone number and address for the borrower s employer and
        document the source. This can be accomplished using a telephone book, intenet, directory
        assistance, 411.com, or by contacting the applicable licensing bureau.
     · Contact the employer. The Employer must be a representative of the Human Resource
        Department, manager, or a person authorized to verify employment. A receptionist, co-worker,
        and other personnel are not acceptable company representatives.
     · Confirm and document the borrower s current employment status, position, and date of hire. If
        the representative states the verification can only be completed by mail or by fax, the form must
        be sent out to the employer to complete.
     · Verify and document the name and title of the person that confirmed the employment and the
        date of the call.
     · The Telephone Verification of Employment must also include the name and title of the HSOA
        employee that performed the verification.
     · The loan cannot fund prior to the completion of the Verbal Verification of Employment.


Note: If a borrower is in the military, a military Leave and Earnings Statement (LES) dated within 30
days of closing is acceptable in lieu of a verbal or written VOE.


Verbal VOE requirements for self-employed income:

HSOA must verify the existence of the borrower's business from a third party, such as a CPA,
regulatory agency, or the applicable licensing bureau, if possible; and by verifying a phone listing and
address for the borrower's business using a telephone book, the internet, or directory assistance.

If the contact is made verbally, HSOA must document the source of the information obtained and the
name and title of the person who obtained the information for HSOA.

Updated Credit Reports
Credit Reports may be replaced/update, when the original credit report is, or is nearing, its expiration
date. They may also be updated if it is due to cleaning up erroneous information, provided the
documentation is provided proving the erroneous information. For example, if a payment history is
updated, a payment history from that creditor is required, not just a letter stating the lates have been
omitted; if due to an identify theft, copies of the police reports detailing the extent and specifying the
affected accounts should be provided.

It is not acceptable to get a new report just because time has improved the score; must be
related to erroneous information (or because the previous credit report is expired).


Assets brought to closing
Assets brought to closing must be from sources and amounts as have been verified. Transfers between
verified assets to consolidate funds into one check must be documented.



2-7     Desktop Underwriter (DU)


HSOA Underwriting Guidelines 4-15-10                                                                         44
                            Conventional Underwriting Guidelines

Desktop Underwriter is an automated underwriting system developed by Fannie Mae. It uses the
borrower s application information and credit report information to determine:
    · If the loan is eligible for sale to Fannie Mae.
    · The ability and likelihood of the borrower making the mortgage payment.
The risk decision is based on a combination of credit, income, assets, ratios and LTV. The DU decision
also offers documentation waivers for income, assets and appraisal (see DU Underwriting Findings
Report). If the loan is sold to Fannie Mae and is documented according to the DU approval decision,
Fannie Mae offers a limited waiver of underwriting representations and warranties.

Refer to the Desktop Underwriting Manual at www.efanniemae.com training materials for step-by-step
instructions on submitting loans to DU.


2-8     DU Risk Assessment Overviews

Risk Factors Evaluated by DU
DU evaluates the same set of risk factors for each loan application in determining whether the borrower
has demonstrated a willingness and ability to manage financial commitments over time and under
various conditions. The risk factors evaluated are:
    · Borrower s Equity / Down Payment / LTV
    · Credit Profile
    · Reserves
    · Loan Purpose
    · Loan Term
    · Amortization type
    · Property Type / Number of Units
    · DTI Ratio
    · Self-employment versus salaried employment
    · Co-borrowers

Credit Profile
DU evaluates specific characteristics within the credit report, instead of relying on the credit score as a
measure of the borrower s creditworthiness. By assessing individual credit characteristics, DU is able
to issue loan-level customized messages to identify aspects of the borrower s credit that are considered
higher risk. The messages serve as a useful tool in providing guidance and counsel to borrowers about
key aspects of their credit history. DU looks at all of the trade line information, public records and
inquiries. It then weighs each of the credit characteristics based on the amount of risk and its
significance to the loan decision. The credit characteristics that DU evaluates are:

Trade lines
   · Length of time the borrower has had established credit
   · Revolving accounts
   · Amount of available credit
   · Utilization of available revolving credit
   · Payment history
   · Severity of delinquency 30, 60, 90+
   · Time since delinquency (recent vs. past)
   · Pattern of delinquency on numerous accounts
   · Mortgage vs. non-mortgage accounts


HSOA Underwriting Guidelines 4-15-10                                                                    45
                            Conventional Underwriting Guidelines

Serious Derogatory Credit Events
   · Existence of public records bankruptcy, foreclosures, judgments
   · Severely past-due accounts turned over to a collection agency
   · Time since serious delinquency (recent vs. past)

Inquiries
Pattern of applying for new or additional credit over an extended period of time.

Duplicate Accounts
DU attempts to identify duplicate accounts when evaluating the credit date and excludes them in the
assessment of the borrower s credit history.

Credit Scores
Credit scores are still required for each borrower in order for DU to underwrite the loan. If the borrower
does not have a credit score, the loan will receive an Out of Scope decision and must be manually
underwritten (if permitted by the loan program).


2-9     DU Decisions

Approve/Eligible
Refer to the Product Summary for use of automated underwriting systems, required findings and use of
documentation waivers.

The loan presents an acceptable level of risk and meets all Fannie Mae eligibility criteria. The
underwriter must comply with all conditions of the Underwriting Findings report and may use all of the
documentation waiver requirements for documenting income, assets and the appraisal. Check the
credit report to make sure DU has taken into consideration all accounts belonging to the borrower.

Approve/Ineligible
Refer to the Product Summary for use of automated underwriting systems, required findings and use of
documentation waivers.

The loan presents an acceptable level of risk, but does not meet Fannie Mae s eligibility criteria. In
order to deliver this loan to Fannie Mae, the underwriter must be certain the ineligibility is based on a
contract variance. The file may still be eligible for use of the documentation waivers for income, assets
and appraisal.

Refer/Eligible
Refer to the Product Summary for use of automated underwriting systems, required findings and use of
documentation waivers.

The loan does not present an acceptable level of risk; however, it does meet all Fannie Mae eligibility
criteria. Check the accuracy of the information supplied to DU and make sure all 1003 information was
submitted accurately, in particular the assets. The file may still be eligible for use of the documentation
waiver requirements for income, assets and the appraisal. The underwriter may need to document
additional compensating factors in order to approve the loan.

Refer/Ineligible
Refer to the Product Summary for use of automated underwriting systems, required findings and use of
documentation waivers.
HSOA Underwriting Guidelines 4-15-10                                                                     46
                            Conventional Underwriting Guidelines


The loan does not present an acceptable level of risk and does not meet Fannie Mae s eligibility
criteria. The underwriter should check the accuracy of the information supplied to DU and make sure
all of your 1003 information was submitted accurately, in particular the assets. In order to deliver this
loan to Fannie Mae, the underwriter must be certain the ineligibility is based on a contract variance.
The file may still be eligible for use of the documentation waiver requirements for income, assets and
the appraisal.

EA-I, EA-II
EA is an abbreviation for Expanded Approval .Based on the data submitted to DU, the loan case file
appears to satisfy DU s credit risk assessment criteria; however, the loan case file does not appear to
meet Fannie Mae s delivery eligibility requirements. Although the loan case file appears to satisfy DU s
credit risk assessment criteria, this recommendation does not take into consideration any additional
credit risk or other factors that might be associated with the reason the loan is ineligible for delivery to
Fannie Mae. The lender must determine if the reason for the ineligibility creates an additional layering
of credit risk that should be considered.

An EA recommendation is automatically generated by DU based on the borrower's credit history and
certain loan casefile characteristics. The EA recommendation constitutes an expansion of DU
underwriting recommendations. As such, there are no data fields in the online loan application to
identify or select the EA option.

Out of Scope
Refer to the Product Summary for use of automated underwriting systems, required findings and use of
documentation waivers.

DU does not contain the rules or models that are necessary in order to underwrite the product,
borrower or type of loan submitted. Borrowers without credit scores and any credit data will also return
and Out of Scope recommendation. Loans that have credit data, yet no credit score will receive a data
error and not an Out of Scope. The underwriter may not follow the documentation waiver
recommendations.


2-10    DU Eligible Loan Types
    ·   1 4 unit properties
    ·   Owner occupied, second homes and investment properties
    ·   Fixed Rate, ARM Plans and Balloon Mortgages
    ·   Interest only mortgages
    ·   Units in condominiums and PUDs
    ·   1 4 borrowers
    ·   Non-occupant co-borrowers
    ·   Purchase, Rate /Term Refinances and Cash out Refinances
    ·   Construction-to-Permanent Financing

NOTE: Loans not eligible for sale to Fannie Mae should be submitted to DU only for a preliminary risk
assessment. Care should be taken that the documentation waivers are not used. Documentation
required for non-DU loans must be obtained. Refer to the Product Summary for specific information
regarding the use of automated underwriting systems.



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2-11    DU Underwriting Findings Report

Underwriting Findings
This section contains messages pertaining to the risk assessment and the underwriting
recommendation of the case. If the case is Ineligible or Out of Scope, the specific eligibility or scope
criteria appear in this section.

Findings
Messages appearing in the Findings section provide additional information about the reasons why the
case was recommended for referral. If the recommendation is Approve or Out of Scope, this section
will be blank.

Verification Message/Approval Conditions
The Verification Messages/Approval Conditions section lists follow-up processing steps the lender must
complete to comply with Du requirements. Income and asset verification requirements and any
required credit verification appear here, as well as the type of appraisal fieldwork that must be
completed. For cases receiving a Refer/Eligible recommendation, this section lists the minimum
documentation requirements for the loan; however, additional documentation can and should be
requested when it supports the lender s decision to approve a referred loan. Additional explanations
related to specific weaknesses may also be requested in this section of the report. These steps apply
to all but Out of Scope loans that must be processed outside of DU.

Observations
Observation messages highlight other factors considered in the underwriting analysis, such as:
   · Derogatory credit listed in the credit report
   · Instances of unverified and undisclosed debt
   · Liabilities omitted from the analysis on the Liabilities Reconciliation Worksheet

The Observation section also lists the income and assets used in the underwriting analysis. For
referred loans, underwriters may want to further investigate any potentially derogatory information
appearing in this section of the report. For loans recommended for approval, the messages in the
Observation section are informational only.

Risk Assessment Messages
Risk Assessment Messages appear for loans not receiving an Approve recommendation and identifies
the risk factors contributing to the evaluation.

Significant Risk Factor Message
DU will identify which risk factors had a significant impact on the decision. This message appears in
the findings sections of the Underwriting Findings Report.

Layering of Risk Message
DU may identify one or more secondary risk factors contributing to the additional layering of risk.
Although they do not carry as much weight, they can make the difference between an Approve or a
Refer decision on a borderline case.

Credit Profile Message
If the credit profile is a significant risk factor, DU identifies the adverse credit characteristics contributing
to the high-risk credit profile.

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Lender Guidance for Use with Applicants
This section provides more detail about the risk factors and each credit profile identified in the findings
message. There may also be suggestion messages identifying areas of the application which may
result in an Approve recommendation if modified.

Suggestion Message
DU will issue messages identifying possible modifications to the loan terms that may result in an
Approve recommendation. The presence of the message does not guarantee an Approve decision.

Risk Assessment Message for Loans with Approve Recommendations
For loans receiving an Approve recommendation, DU identifies the strengths of the application which
contributed to the recommendation. If mortgage insurance had a positive impact on the decision, it is
also identified.

Consumer Booklet: A Tool for Lenders and Originators
In addition to the risk assessment messages, Fannie Mae has created a booklet for lenders and
originators to use with borrowers to help explain DU and all of the risk factors it analyzes when making
the recommendation. This booklet is available on Fannie Mae s website, www.homepath.com or
www.fanniemae.com.


2-12    DU Submission/Resubmission Requirements

Resubmission of a loan to DU is required if:
   · Information on the previous submission was not true, complete or accurate.
   · Any information evaluated by DU changes; unless the change(s) from the previous submission
     involves any of the following:
     Ø Fixed rate loans where the interest rate has decreased from the submission and approved
         rate.
     Ø ARMs where there is an increase in the interest rate that affects the total expense ratio by
         less than 2% or a decrease in the interest rate.
     Ø If the validated income decreases 5% or less of the total qualifying income or if the validated
         income increases.
     Ø If the DTI does not increase more than 2% due to a change in the validated debt or the
         actual taxes and insurance amounts.
     Ø The dollar amount of the verified assets is greater than or equal to the dollar amount
         required by DU.

While the above represents FNMA s requirements, current investor restrictions accept no variances.
The final DU findings must match the transaction details.

2-13 DU Credit Process Requirements
Prior to submitting a case for underwriting in DU, a three-file merged credit report must be requested
and received for all borrowers on the loan. The following rules apply to liabilities processing when
detailed liability information is entered into the 1003.
    · DU will use the debts on the 1003 to calculate the total expense ratio. To ensure that all
        appropriate debts are included in the ratios, DU performs a series of reasonableness tests
        comparing the 1003 balances and payments to the credit report. If the values on the 1003 are
        less than those on the credit report by more than selected tolerances, the discrepancies
        between the two must be justified.

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        NOTE: If individual credit reports are requested for borrowers who have joint credit, reconcile
        any joint debts to ensure that these are not duplicated on the 1003 and included in the ratios
        more than once.
    ·   Duplicate debts or debts not belonging to the borrower that were copied from the credit report
        may be deleted from the 1003. Deleting liabilities from Section VI of the 1003 automatically
        omits the matched debt from the credit report.
    ·   Do not obtain a residential mortgage credit report in addition to the three-file merged credit
        report received through DU if the loan is dependent on a DU approval. DU will not be able to
        evaluate an RMCR.
        NOTE: The option of copying liabilities directly from the credit report to the 1003 is available;
        however, this does not relieve the borrower of the responsibility to fully disclose all existing
        credit obligations. Any liabilities that do not appear on the credit report must be disclosed on the
        1003 prior to final underwriting.


2-14    DU Credit Documentation

Public Records
Items typically appearing in the Public Records section of the credit report (judgments, bankruptcies,
foreclosures, and tax liens) are often duplicated, because the credit agencies do not attempt to merge
items of this severe nature. As a result, these items may also appear in the Underwriting Findings
report in a verification message more than once. If it is clear from the data in the credit report that the
items are duplicates (identical account numbers, date filed, dollar amounts, etc.), the lender can ignore
the duplicates and document the item once. However, if it is unclear from the credit report whether any
of the items are duplicated, the lender should treat each item individually and obtain the required
documentation for each item, as indicated in the verification message.
NOTE: Duplicated items do not affect the risk analysis, because they are typically the result of the
three-file merge. Thus, they do not affect the credit score calculations.

Unrated Trade Lines
Depending on the risk analysis of the case, DU may request verification of the payment history of
unrated trade lines appearing on a credit report.

Unverified Liabilities
   · Approved Loans: Independent verification of credit, balance and payment information is not
      required for approved loans.
   · Referred Loans: Independent verification of creditor balance and payment information is
      required if:
      Ø It is required in the Underwriting Findings report.
      Ø Verification of payment and balance information substantially supports the decision to
          approve the loan.
   · If the balance and payment information is not verified, an explanation must be provided stating
      why the liability is immaterial.

Trade Lines Omitted From the 1003
Documented verification of creditor payment and balance information is required when a credit report
liability with a balance greater than zero is omitted from the underwriting analysis on the Liabilities
Reconciliation Worksheet.



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Possible Non-Applicant Debts
The Underwriting Findings report will list any debts identified as possible non-applicant debts on the
credit report. Investigate the ownership of these debts and determine if they have affected the credit
scores and risk analysis performed by DU.

Disputed Tradelines
Per Desktop Underwriter® (DU®) requirements, disputed accounts may not be ignored; rather, all DU
conditions related to the disputed accounts must be satisfied. DU requires users to verify the accuracy
of the disputed tradeline(s) by determining if the tradeline belongs to the borrower and by confirming
the accuracy of the payment history. To satisfy these conditions:
·   If the tradeline does not belong to the borrower, or the reported payment history is inaccurate,
    written documentation is required to evidence the erroneous information. Under these
    circumstances, when the information is validated, DU may require no further action.

·   If the tradeline does belong to the borrower and the reported payment history is accurate, the
    disputed tradeline(s) must be considered in the credit risk assessment. To ensure the disputed
    tradeline is considered by DU, a new credit report must be obtained with the tradeline no longer
    reported as disputed and resubmitted the loan casefile to DU.

Discrepancies between the 1003 and Credit Report
DU compares the balances and payments of the debts on the credit report with the debts on the 1003.
If DU finds material differences, confirm that all debts from the credit report are included on the 1003
and provide documentation to support the use of payments and balances lower than those on the credit
report or the 1003. Undisclosed debts may be identified in the Underwriting Findings report if they have
a material impact on the case. Add the debt to the 1003 and resubmit the case or provide
documentation that supports the omission from the 1003.

Updated Credit Reports
Updated credit reports are required when the existing credit report is expiring, or when there are
material changes to the reported information. HSOA will NOT accept an updated credit report solely
because the credit score has improved.


2-15 DU Income/Employment Process

Salary or Hourly Wage Earnings
An income verification message will be issued for each current job and will require income to be
documented according to one of the following options:
    · Verbal Verification of Employment (verbal VOE)
    · One paystub
    · One paystub and telephone confirmation, or
    · One paystub, telephone confirmation, and previous year s W-2

Follow-up processing requirements:
    · Any income that is not likely to continue or is not needed to qualify the borrower should not be
       entered into DU for qualifying purposes.


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    ·   If the calculation of monthly income from supporting documentation is materially less than the
        amount on the 1003 used for the initial underwriting recommendation, revised data must be
        entered into the system and the loan must be resubmitted for underwriting.
    ·   Income from any source other than base income should be broken down into its appropriate
        field in Point or DU. If it is lumped together, DU will not be able to send back the appropriate
        verification message.

Self-Employed Income
Depending on the borrower s risk profile, DU will require self-employment income to be documented
according to one of the following options:
   · Verbal Verification of Employment (Verbal VOE).
   · One year of personal federal income tax returns.
   · Two years of personal federal income tax returns.
   · Two years of personal and two years of business federal income tax returns (business tax
       returns do not have to be provided unless the business is a corporation, an S corporation or a
       partnership).

Follow-up processing requirements:
Refer to Chapter 4 Employment/Income for additional guidance with respect to evaluating self-
employed borrowers.

2-16    DU Asset Process

Requirements
DU bases its analysis entirely on the market value of those assets listed on the 1003 that it considers
liquid. The amount and type of documentation required are dependent on the system s analysis of risk
and the type of assets.

Verification of Available Assets
For each liquid asset listed on the application, DU will issue a verification message specifying the
verification for that asset. There will also be a verification message that will indicate the amount of
assets that the lender is required to verify. In some cases, this amount will include only the amount of
funds needed for closing. In other cases, it will include some level of reserves (or all reserves) in
addition to funds needed for closing. For example, assume the closing costs and down payment for a
loan total $8,000 and the following assets are entered on the 1003:
    · Checking Account $ 5,000
    · Retirement Funds $ 7,000
    · Stocks $10,000
DU issues a verification message for each asset, in addition to a message stating Assets totaling
$16,000 must be verified. Based on the risk analysis in this example, the system has required
reserves to be verified in addition to funds needed for closing. To comply with this requirement, the
lender can verify the appropriate assets listed on the application.

NOTE: DU may recommend loans for approval that are marginally short of funds to close. However,
this does not relieve the lender of the requirement to verify all funds needed for closing (as indicated in
a verification message). It is preferable to obtain full borrower disclosure of all available assets before
the case is initially underwritten.

Depository Assets
For each depository asset a verification message will request:

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    · One monthly bank statement
    · Two consecutive monthly bank statements
A verification of deposit must be supported by two monthly bank statements.
In addition to HSOA document age/document expiration requirements, bank statements must be dated
within 45 days of the initial application date.

Follow-up processing requirements:
If the calculation of depository assets amounts to less than the amounts from the 1003 used for the
initial underwriting recommendation, revised data must be entered into the system and the loan must
be resubmitted for underwriting.

Non-Liquid Assets
Non-liquid assets such as automobiles, net worth of business owned and life insurance do not have to
be verified and will not be identified in a verification message.

Gifts
If the verification of a gift amount is different from the amount on the 1003 used for the initial
underwriting recommendation, revised data must be entered into the system and the loan must be re-
underwritten.


2-17    DU Appraisal Requirements

Forms
The following section describes the possible appraisal forms DU may recommend. Refer to specific
Product Summaries for acceptance of any streamlined property appraisal forms.

DU s streamlined property valuation process and appraisal report forms are part of the documentation
flexibility available for mortgages underwritten through the system. As part of its risk analysis, DU amy
recommend the use of one of the different levels of streamlined property appraisal or inspection
documentation for loans processed through the system. The system will recommend one of the
following documentation levels for each eligible one-unit property processed through the system with a
complete property address:
     · Appraisal with exterior-only property inspection on either:
          Ø DU Quantitative Analysis Appraisal Report (Form 2055)
          Ø DU Qualitative Analysis Appraisal Report (Form 2065)
          Ø DU Property Inspection Report (Form 2075)
     · Property Inspection Waiver (PIW)

One-unit investment properties are eligible for streamlined appraisals with exterior-only reported on
Forms 2055 and 2065. One additional Fannie Mae form is required; The Single-Family Comparable
Rent Schedule (Form 1007). Fannie Mae s standard property documentation form, Small Residential
Income Property Appraisal Report (Form 1025) is required for two-to-four unit properties processed
through the system.

When DU recommends Form 2075, Fannie Mae will rely on the property valuation performed by the
system. In such cases, the message generated by DU will acknowledge that the system valued the
property and accepts the sale price for the transaction as the market value of the property. An
appraisal is not required for these transactions as long as the property does not have any apparent
physical deficiencies or conditions, apparent adverse environment conditions or the subject property

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does not have any neighborhood conformity issues. Therefore, the lender is not responsible for the
traditional warranties regarding the valuation of the property that is performed by DU.

Required Exhibits
Refer to Chapter 7 Property/Appraisal for details on required exhibits.

Final Inspection for New Construction
In the case of new construction, DU has no way of knowing that the property is existing or new
construction. Therefore, a final inspection (Form 1004D or 442) and final photos to confirm that the
property is complete per plans and specifications is required.

2-18 DU Oversights and Helpful Hints
Occasionally, errors may be encountered when submitting a loan through DU. Below is a list of
oversights and pointers compiled from actual user errors and misunderstandings.

Subordinate Financing Piggybacks
Purchase money piggybacks and refinances that are utilizing the second mortgage to complete the
transaction are the only home equities to be included in the DU decision, as they are considered funds
for the down payment. They must be listed in the details of transaction as subordinate financing. They
are not to be listed in the REO section as existing liens. If the purchase money is a combination of both
purchase money and line of credit, DU will only underwrite the portion that is purchase money. When
entering secondary financing on the details of transaction, complete all available fields and include a
monthly payment in the proposed housing expense field. If this is not done, DU will generate an error
and no decision will be rendered.

Changing Terms
Be careful when changing the loan purpose, product, loan amount, income, assets or property value.
DU may find additional risk and require more documentation than previously requested. The loan
should be resubmitted to DU if any material loan changes are made.

Refinances
Care should be taken when submitting refinances to DU. There are three basic types:
   · No Cash Out The new loan amount will only pay off the outstanding balance. DU will indicate
       the lo
   · an is ineligible if there is any cash out for closing costs.
   · Rate /Term Refinance The new loan amount will be used for the outstanding balance and the
       closing costs.
   · Cash out Refinance The borrower will receive more than the incidental cash back tolerance
       (the lesser of 2% of the loan amount or $2,000).

When underwriting a Rate /Term Refinance, remember to take into consideration junior liens and the
seasoning requirements outside of DU Findings.

Earnings
Care should be taken when submitting overtime, bonus commission or any income other than base
income. If the income is not broken out of the base pay and listed separately in section 5 of the 1003,
the findings will be incomplete. When corrected, the documentation requirements may change as well
as the decision.



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System Maintenance
There are times that Fannie Mae will bring their system down for maintenance. The posted hours of
operations are Monday to Friday 8:00 a.m. to 11:00 p.m. EST as well as Saturday and Sunday 10:00
a.m. to 8:00 p.m. EST. If you submit a loan during the down time, the request may be held in the
queue until the next available up time.


2-19 Condominium and Attached PUDs
Underwriters are required to conduct an Internet search on the project name as well as the project
address to confirm the project has no indications of offerings for nightly or short-term rentals.

In addition, if the project is near water, snow or a recreation area, underwriters are required to review
the bylaws and CC&Rs to confirm the project does not allow short-term rentals, and to review the
budget to confirm it has no hotel-like income or expense items.




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Chapter 3 Credit

OVERVIEW

This chapter details the guidelines for credit documentation and evaluating credit history. An
evaluation of a borrower s credit history is necessary to determine his or her ability and
inclination to repay the mortgage debt.

3-1 Standards of Quality

Credit Evaluation
The borrower s creditworthiness is determined from the overall credit profile, with most weight given to
the past twenty-four months. Credit reputation is instrumental to evaluating the acceptability of the
proposed credit risk and is not limited to a review of only delinquent characteristics. While delinquent
patterns are an important part of the credit profile, depth of credit, age of accounts, balance-to-limits,
and inquiries provide perspective on credit reputation. For example, a profile with most liabilities
recently opened may suggest insufficient experience in financial management or a developing pattern
of overextending debt obligations. A credit profile with high balance-to-limits may suggest the borrower
is making only minimum monthly payments and may be near capacity with debt. Rather than viewing
these elements individually, they should be evaluated in context of the overall profile to determine any
combined or layering of risk.


Credit Report
General Requirements
The following provides the requirements for allowable credit reports. Individual loan programs may have
additional requirements, limitations and/or guidelines. Refer to the individual loan programs for
additional information:
   · Must contain all discovered credit and legal information that is not considered obsolete under
        the Fair Credit Reporting Act
   · Indicate the dates the accounts were last updated with creditors (each account must have been
        checked with 90 days of the credit report)
   · Must not have any evidence of erasures, alterations, correction fluid or correction tape
   · Must be retained in the loan file
   · Be issued by a consumer reporting agency that obtains or verifies all information from sources
        other than the borrower.
   · Present all credit data in a format that is easy to read and free of excessive coding. All codes
        must be clearly defined.
   · Identify the full name, address, and phone number of the consumer reporting agency.
   · Identify who ordered the report and who was billed for it (if different from the party who ordered
        it), unless the billed party has a documented agent or corporate relationship with the lender who
        ordered the report.
   · Be delivered to the office of the requester.
   · Show the names of the national credit repositories from which the information was obtained.
        The consumer reporting agency must contact at least two national credit repositories for each
        area in which the borrower has resided during the most recent two-year period.
   · Include a certification stating that it meets the standards that Fannie Mae, Freddie Mac, the
        FHA, and VA prescribe for an RMCR. Separate credit repository inquiries are necessary when
        co-borrowers have maintained credit individually.
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    ·   List all credit inquiries received within the previous 90 days.
    ·   Show a positive statement that the consumer reporting agency verified the borrower's current
        employment and, if obtainable, income. The report must show the date of verification.
        Verification may be made by telephone. If there has been a change in employment in the past
        two years, the report must also describe the borrower's previous employment and income. In
        cases in which employment was not verified, the report must indicate why it was not.
    ·   Show responsive statements concerning items on the report. For example, the consumer
        reporting agency must report unable to verify or employer refused to verify. The same
        responsive reporting applies to trade and credit history.

    Tri-merged Credit Report Requirements include:
    · Must contain specific information regarding legal items found in public records (judgments,
        foreclosures, tax liens, bankruptcies and all other applicable public records information)
    · Must contain all the information from the three in-file credit reports
    · The report does not need to duplicate information from the in-file credit reports; however, if the
        information is not exactly the same on each report, then the merged report must either:
        o Repeat the information as stated on each report, or
        o Include the most derogatory of the duplicate information that pertains to payment history
            and/or current payment status
    · The report must identify the repositories that were used for the in-file credit reports
    · The report must be clearly identified as not meeting the requirements for an RMCR
    · The report must provide a credit bureau score, accompanied by reason codes, for each
        borrower
    · The report must include all of the information verified by the three repositories
    · Any Social Security number discrepancy must be disclosed by the repositories
    · The report must be the original received electronically
    · Each individual tradeline must identify the primary repository that provided the account
        information

Inquiries
Inquiries within the last 90 days must be investigated to insure that no new accounts have been
opened. The borrower must provide a written statement concerning the reason for all recent inquiries.
DU may not require an explanation; however HSOA may request clarification.

Undisclosed Debt
The borrower must complete all debt obligations on the 1003 before the credit report is obtained. It is
not acceptable for the 1003 Liabilities section to indicate see credit report or any other such
reference. When the credit report reveals significant debt not listed on the application, a written
explanation from the borrower may be required addressing the omission.

Recently Acquired Debt
The purpose of any recently acquired debts must be ascertained as the indebtedness may have been
incurred to obtain part of the required investment for the transaction.

No Credit History
A two-year history is required from standard credit sources that result in an acceptable credit score;
therefore if there is insufficient credit history, a credit score will not be calculated, resulting in being
ineligible for financing



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Non-Traditional Credit Report
Not available at this time.

3-2 Minimum tradelines
Each borrower must have three trade lines, regardless of credit score or AUS findings:
    · One with >= 24 month reporting history.
    · The other two with >= 12 months reporting history.
    · At least one of the three is currently open and has a Last Activity Date within the past 12
       months.
    · Eligible trade lines are standard reporting creditors, and do not include authorized user
       accounts, judgments, collections or charge-offs, non-traditional creditors, or student loans that
       were in deferment status during the required time frame.



Exceptions for borrowers not meeting these minimum trade line requirements (but who meet all other
credit and credit score requirements) will be considered with a documented recent 12 month prompt
rental payment and a housing payment shock not exceeding 50% (example: payment increasing from
$1,000 to $1,500).


Authorized User Accounts
Payments on "Authorized User" accounts should always be included in the debt-to-income ratio unless
written documentation (i.e. 12 months cancelled checks) is provided proving that the owner of the
account is making the payments. If an authorized user's account is used to meet the minimum credit
requirements, provide recent 12 month canceled checks showing borrower has made all payments.
Then the payment history, including any late payments, and the monthly obligation must be considered
in the credit analysis and included in the DTI ratios.



3-3 Credit Scores
Three-Repository Scores
The credit score is an important tool in evaluating a borrower s credit worthiness based on information
included in the credit report. There are minimum requirements that must be met in order to score a
person s credit profile. If these requirements are not available, a score will not be provided. There are
many characteristics that are a part of the scoring model and a person s repayment habit is only one
component of this model. Fair Isaac Co developed the Credit Bureau Score models. While the models
are very similar, each repository uses a different name:
    · TRW uses FICO
    · Equifax uses Beacon
    · Trans Union uses Empirica
HSOA requires all three-repository scores. The credit bureau scores range from 300 to 950. The
higher the score the lower the risk of default. For instance, a score of 725 would indicate that this credit
profile is a better than average risk and therefore, a detailed review of the credit report should not be
necessary. In addition, the score in combination with the dates and severity of the late payments
should be considered before requesting a credit explanation letter from a borrower. The score can be
used as a measure for determining the reasonableness of the request. Generally, the credit scores are
accompanied by reason codes (refer to the table in the Reason codes topic) identifying various factors
affecting the borrower s credit score. The use of reason codes aides in the evaluation of a borrower s
credit reputation.
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If the credit report contains significant inaccurate information that may affect the usefulness of the score
and borrower s eligibility, the borrower must have the reporting corrected by the creditor and the credit
re-scored, and supporting documentation correcting the erroneous information in the loan file. Such
actions may be time-consuming. HSOA does not accept rapid re-scoring , unless it is completed by
the repositories, and HSOA obtains updated an credit report substantiating the corrections and re-
scoring. The loan is not eligible if the Minimum Credit Standards are not met.

Borrower and File Credit Score determination
Although HSOA requires all three-repository scores, there may be instances when all three repositories
are not scoring the borrower. In those cases, the credit report must indicate that all three repositories
were accessed and that the scores were not available (ensure there is not a system function error with
the repository). Each borrower must have at least 2 repositories reporting a credit score. Use the
following formula to determine which credit score to use:
     · If all three repository scores are available, use the mid score. If two of the 3 scores are the
        same, use that score (Note: Mortgage Insurance companies may have different requirements)
     · If only two repository scores are available, use the lower of the two.
     · If only one repository score is available, the loan is not eligible.
     · If there is more than one borrower, use the same formula above for each borrower.
     · File score: Generally, once scores are determined for each borrower, the file score will be the
        lowest among those assigned to all borrowers (refer to the Product Summary for variances).

Incomplete Credit Reports
Credit reports that are incomplete due to frozen credit are not acceptable for AUS underwriting or for
manually underwritten loans. While non-traditional credit reports may be acceptable for manually
underwritten loans, they are not an acceptable alternative to incomplete credit reports due to frozen
credit data.


DU Loans
DU may return the following error message: This case cannot be underwritten because one or more
credit reports have been frozen by the consumer at one or more of the national credit repositories.
The borrower must unfreeze their credit in order for a complete credit report to be obtained. The loan
should be resubmitted to DU with a new credit report after the credit has been unfrozen.
Consumers may contact the following repositories to discuss issues regarding their frozen credit:
   · Experian    (888) 397-3742
   · Equifax     (800) 685-1111
   · Trans Union (800) 888-4213

Credit Score Reason Codes
REASON CODES       DEFINITION
01     A     Current balances on accounts.
02     B     Delinquency reports on accounts.
03     C     Too few bank revolving accounts.
04     D     Too many bank revolving accounts.
05     E     Number of accounts with balances.
06     F     Number of finance company accounts.
07     G     Unable to evaluate recent payment history.
08     H     Number of recent inquiries.
09     J     Number of accounts opened within the last 12 months.
10     K     Proportion of balance to high credit on banking or all revolving accounts.
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11      L       Current balances on revolving accounts.
12      M       Length of revolving account history.
13      N       Length of time (or unknown time) since account delinquent.
14      O       Length of time accounts have been established.
15      P       Insufficient or lack of bank revolving account information.
16      Q       Insufficient or lack of revolving account information.
17      R       No recent (non-mortgage) account balance information.
18      S       Number of delinquent accounts.
19      T       Too few accounts rated current .
20      V       Length of time since legal item filed or collection item reported.
21      W       Amount past due to accounts.
22      X       Replaced with 38, 39, and 40.
24      U       Lack of recently reported balances on revolving/open accounts.
30      Z       Length of time since most recent account established.
32      Y       No recent installment loan information.
33      I       Proportion of current loan balance to original loan amount.
38      X       Serious delinquency and public record or collection filed.
39      X       Serious delinquency.
40      X       Derogatory public record or collection filed.


3-4 Minimum Credit Standards

The Minimum Credit Standards identify what is considered acceptable and unacceptable as relates to a
borrower s credit history. The evaluation of the borrower s credit is based on the entire credit history
demonstrated in the file. More weight should be given to the borrower s payment experience within the
past two years. An acceptable credit history of one borrower does not offset the unacceptable credit
history of another. Factors to be analyzed in reviewing the borrower s credit history include:
    · The type and amount of credit outstanding.
    · How long the borrower has had credit.
    · How often the borrower uses credit.
    · Recent change in the number of open accounts or overall amount of credit outstanding.
    · The payment history of all accounts.
    · Any recent inquiries shown on the credit report.
    · Any public records or collection accounts.
An acceptable credit history is not considered a compensating factor. It is a requirement and essential
to making a quality loan. The lack of a sufficient credit history cannot be offset by capacity or collateral
strengths.
DU
DU eligible loans that received an Approve recommendation are acceptable based upon the AUS
evaluation of credit.

Non-DU
Not available at this time.


3-5 Verification of Credit Requirements
 All accounts (revolving, installment and mortgage) reported by the borrower on the application must be
verified directly by a credit reference or verified on the credit report. The balance, rating and terms of
the account must be verified. If the account has not been updated on the credit report within 90 days of
the date of the credit report, a supplement to the credit report or a separate written verification must be
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obtained. The verification of mortgage, rent or credit must be sent directly to the creditor. The hand
carrying of verifications is strictly prohibited.

3-6 Mortgage References

Refer to the Product Summary for variances.
When a mortgage rating is listed on the credit report dated 60 days old or less and the rating covers a
12-month period, no additional documentation is necessary. If these requirements are not satisfied, the
mortgage rating must be updated via a supplement to the credit report or verification of the mortgage.
A mortgage payment is considered current as long as it is paid within the month due along with any late
charges assessed for payments made beyond the 15-day grace period. A letter of explanation is
required when payments are made beyond the month due.

A loan is not eligible if any mortgage trade line that is currently 30+ days past due. Borrowers may not
bring past due mortgages current prior to closing to circumvent HSOA policy.

If a mortgage has one 60, 90, 120, or 150 day late within the past 12 months, the loan will receive a
Refer recommendation and is therefore ineligible for financing.

Non-Conforming and Portfolio Programs

No 30-day or more delinquencies are permitted within the past 12 months. Previous mortgage histories
must indicate a continuously high regard for paying promptly.

3-7 Landlord References

A 12-month satisfactory landlord reference is required when:
   · DU requires a landlord reference based upon the overall risk assessment.
   · HSOA minimum trade line rules require a housing history.
   · Underwriters determine it is needed to support the overall risk

When the landlord is an interested party to the transaction (i.e., seller, broker, etc.), or a relative or
employer of the borrower, or a private individual, it will be necessary to obtain 12-months canceled
checks reflecting a satisfactory payment history
When the landlord is not an uninterested party to the transaction, and is a property management
company, a satisfactory 12-month reference is required through direct verification or on the credit
report. The underwriter may require 12-months canceled checks reflecting a satisfactory payment
history if the 12-month history is not reported on the credit report or the landlord reference is deemed
inadequate.

3-8 Past Due/Adverse Accounts
Depending on the risk assessment of the case, past due accounts and accounts in collection may be
identified in a verification message. The underwriter can determine if these accounts must be paid by
closing, factoring in the effect this may have on the borrower s ability to make future mortgage
payments. Disputed accounts with supporting documentation and a written explanation from the
borrower can be submitted to the underwriter to make a risk decision.
No explanation of late payments are required if DU approves the loan.




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3-9 Consumer Credit Counseling Service
Loans with Consumer Credit Counseling in their credit profile must adhere to the same guidelines of a
Chapter 13 Bankruptcy. Exceptions may be made on loans with a singular or minimal number of
Consumer Credit Counseling references in their credit profile, and which receive an Approve/Eligible
finding.

3-10 Bankruptcy/Foreclosure
It is imperative that the Bankruptcy and Foreclosure guidelines be reviewed for all borrowers who have
had a previous bankruptcy or foreclosure and must be strictly enforced. If the borrowers do not meet
these guidelines, they are not eligible for a mortgage with HSOA. Refer to the Product Summary for
variances.

Conforming Programs
  Action                                                        Requirements
  Bankruptcy - Chapter 7               4 years from either the discharge or dismissal date of the
  and Chapter 13                       bankruptcy action.

  Exceptions for Extenuating           Not considered
  Circumstances All
  Bankruptcy Actions
  Multiple Bankruptcy Filings          5-year time period from most recent dismissal or discharge date
                                       required for borrowers with more than one bankruptcy filing
                                       within the past 7 years.
  Exceptions for Extenuating           Not considered
  Circumstances Multiple
  Bankruptcy Filings
  Foreclosure                          5-year time period from completion date
                                       Additional requirements that apply after 5 years up to 7 years
                                       following completion date:
                                         The purchase of a principal residence is permitted with a
                                       minimum 10 percent down payment and minimum
                                       representative credit score of 680.
                                         Purchase of a second home or investment property is not
                                       permitted.
                                         Limited cash-out refinances are permitted for all occupancy
                                       types pursuant to the eligibility requirements in effect at that
                                       time.
                                         Cash-out refinances are not permitted for any occupancy type.

  Exceptions for Extenuating           Not considered
  Circumstances
  Foreclosure




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  Deed-in-Lieu of                      Additional requirements that apply after 4 years up to 7 years
  Foreclosure                          following completion date:
                                         Borrower may purchase a property secured by a principal
                                       residence, second home, or investment property with the greater
                                       of 10 percent minimum down payment or the minimum down
                                       payment required for the transaction.
                                         Limited-cash-out and cash-out refinance transactions secured
                                       by a principal residence, second home, or investment property
                                       are permitted pursuant to the eligibility requirements in effect at
                                       that time.
  Exceptions for Extenuating           Not considered
  Circumstances
  Deed-in-Lieu of
  Foreclosure
  Time Period After Pre-               2-year time period from completion date.
  foreclosure Sale                     Additional Requirements: None
                                       Note: No exceptions are permitted to the 2-year time period due


Foreclosure includes, but is not limited to:
          · Deed-in-lieu
          · >=120 days late
          · Notice of default
          · Short sale
          · Foreclosure notations on credit report or title commitment

Foreclosure rules apply to any property owned or occupied by the borrower (except for renting from a
landlord).
Evidence of completion of the foreclosure must be in the loan file. The fact that the credit report is
reporting the completion is not sufficient.
Required Documentation
The key to working with applicants who have experienced a bankruptcy or foreclosure is to document
re-established credit, compensating factors and extenuating circumstances, if applicable, that make
sense based upon the unique situations. The following documentation is required:
    · Copy of the bankruptcy petition, schedule of debts, and certificate of discharge of debts.
    · Written statement from the borrower to explain the circumstances that contributed to the
       bankruptcy or foreclosure.
    · Documentation to support extenuating circumstances must be provided, if applicable.
       Examples include divorce decree, medical reports, job layoff notices, insurance papers, death
       certificate, etc.
    · Evidence indicating all debts not satisfied by the bankruptcy are paid or are being paid.

Re-Established Credit
   · All accounts must be current.
   · Minimum of four new credit references opened after the discharge of bankruptcy or completion
      of foreclosure with at least one being a mortgage or rental reference.
   · Three of the four credit references must have been active in the last 24 months, including the
      mortgage or rental reference. At least one of the accounts must be traditional credit
      (Conforming programs only. Non-Conforming programs require traditional credit).


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    ·   If rental payments were not reported to the credit repositories, copies of bank statements,
        money orders, or canceled checks for the most recent 12-month period must be provided, in
        addition to the rental verification.
    ·   No late payments unless the late occured earlier than the most recent minimum period of
        required elapsed time. (example if the program requires a minimum of 4 years since bankruptcy
        and borrower s bankruptcy was 6 years ago late payments reporting the first 2 years after
        bankruptcy do not disqualify the borrower provide the most recent four years have displayed
        exemplary credit history.
    ·   No new public record items since the date of discharge of bankruptcy or satisfaction of
        foreclosure.

3-11    Tax Liens
Satisfaction of tax liens is a condition of mortgage loan approval. When the credit report or title report
shows liens for federal or state income tax or property taxes, the file will require:
   · A letter of explanation from the borrower.
   · Proof that the lien is paid and acceptable source of funds.
   · Copy of the release of lien.

3-12 Outstanding Collections and Charge offs
Conforming Programs
Follow DU Approve/Eligible requirements

Non-Conforming/Portfolio Programs
Pay off required



3-13 Identity Theft
HSOA does not deny credit or reduce lending limits solely because the applicant was a victim of identity
theft or because information in the credit report is verified to be inaccurate (such as reported accounts
that do not belong to the borrower or derogatory information that was reported in error).
HSOA considers identity theft to have occurred when, at a minimum, the borrower provides a report
that:
    ·   Alleges an identity theft;
    ·   Is a copy of an official, valid report filed by a consumer with an appropriate federal, state, or
        local law enforcement agency, including a properly completed copy of the standardized affidavit
        of identity theft made available by the FTC
        (https://www.ftccomplaintassistant.gov/FTC_Wizard.aspx?Lang=en) or other government
        agency, ITAC (Identity Theft Assistance Center), or a financial institution;
        And
    ·   Subjects the person filing the report to criminal penalties relating to the filing of false information
        if the information in the report is false.

In addition, written explanation from the borrower and a police report evidencing a claim of identity theft
may be required.
.



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If an underwriting decision cannot be made by HSOA as in situations where the credit score has been
reduced significantly, the loan may be considered incomplete until the credit is corrected.

If the consumer has placed a freeze on their credit bureau report due to identity theft, with any of the
three national credit repositories from which credit bureau reports are compiled, sufficient credit history
to decision the loan cannot be obtained.




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Chapter 4 Employment and Income

OVERVIEW

This chapter details the policies and guidelines for performing employment and income
analysis. It includes sections regarding continuity of income, acceptable sources of income,
required documentation and methods for calculating certain types of income.
Some processing styles require less documentation. Processing style documentation
variances take precedence over the documentation discussed in this chapter (Refer to Chapter
2 Documentation for complete information).


4-1       Standards of Quality
      ·   Loan submissions contain full complete and accurate information, with no material omission of
          all borrowers required employment and income information.
      ·   All documentation and explanations to render prudent conclusive decision to document a
          borrower s employment/income history and the likelihood of its continuance is included in the file
          at submission.
      ·   File documents can have no misrepresentations, omissions or altered documents.

4-2       Primary Income

Salaried / Hourly Income
The stable and reliable flow of income will be considered rather than the length of time a borrower is
employed with any one employer. If it can be documented that the borrower has maintained a
consistent level of income and the ability to pay obligations has not been affected despite changes in
the source of that income, it can be presumed that the borrower s income is stable.

Salaried / hourly income may be documented in several ways depending on the DU documentation
recommendation or processing style used for each loan.
       Documentation DU will issue an income verification message for each current job and will
       require income to be documented according to one of the following options:
            o Verbal Verification of Employment (VOE)
            o One paystub
            o One Paystub and telephone confirmation
            o One paystub, previous year s W-2 and telephone confirmation
       When only a verbal verification is required, the income of the borrower that is used to qualify for
       the loan must be reasonable based on the borrower s occupation, tenure and title.



Verbal Verification of Employment (to be completed by HSOA staff)

Verbal VOE Requirements for hourly, salary, and commission income:
For each employed borrower, including second jobs, verbal verification of employment (VOE) must be
obtained as part of the underwriting documentation in each loan file, regardless of the Automated
Underwriting System s (AUS) findings. The phone number and, if possible, an address for the
borrower s employer must be obtained independently by using a telephone book, the internet, directory
assistance or by contacting the applicable licensing bureau. Verbal verifications should be completed
with the borrower s Human Resource, Personnel Department, or supervisor within 5 business days
prior to funding.
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Verbal VOE documentation must include the name, title, and department of the person who confirmed
the employment, the date of the call, and the source of the phone number.
If it is discovered that the borrower is no longer employed, the loan may not fund until the borrower s
new employment and income can be verified and the loan re-evaluated.
Negative comments received from an employer could be a reason to decline the application. However,
prior to doing so, the underwriter must perform a detailed investigation of the comments, arrive at a
precise reason to support the decision and document the decision in writing.


Verbal VOE Requirements for Self-Employed Income:
Independent verification of the existence of the borrower s business within 5 business days of funding
through either:
    · A third party, such as a CPA, regulatory agency, or the applicable licensing bureau, if possible;
       and
    · Verifying the phone listing and address for the borrower s business using a telephone book, the
       internet, or directory assistance.
If the contact is made verbally, the lender must document the source of the information obtained and
the name and title of the lender s employee who obtained the information.

Paystubs
The borrower must provide a current paystub evidencing at least 30 days year-to-date income.
Paystubs must be computer generated (not handwritten or typed). It must clearly identify the borrower
as the employee, indicate the time period covered, and show the borrower s gross earnings for the pay
period and year-to-date. If the borrower is paid hourly, the number of hours must be noted on the
paystub. Paystubs must be dated no earlier than 45 days prior to the loan application. If the employer
does not generate an acceptable paystub, a copy of the payroll ledger or some type of company record
will be acceptable, signed by the appropriate company representative.

Paystubs that are issued electronically, via e-mail or downloaded from the internet are acceptable and
must be accompanied by a Verbal Verification of Employment. The information must also contain
information identifying the place of origin and/or the author of the information all of which should be
verified on the Verbal Verification of Employment.

Year-to-date and past year base pay earnings should be reviewed to be sure that they are in line with
current base pay earnings. The employer must clarify any large discrepancies. The paystub should be
reviewed for any loans that may need to be included in the borrower s monthly debt. If there has been
more than one employer in the current year, the last paystub from each employer may be required to
adequately reflect year-to-date earnings.

W-2 Forms
The most recent W-2 Forms must be provided. Validate the consistency of information between all
documents, as to income, withholdings, employer, and employee information.

Verification of Employment (VOE)
If a Verification of Employment is used, it must be mailed directly to the employer to the attention of the
personnel department. Verifications of Employment should not be mailed to a Post Office Box or to a
particular person s attention. If the borrower indicates this is necessary, the file must contain
verification that the employer was independently contacted and verified this requirement. VOEs on
current employment must be supported by a pay stub.
        Calculation:
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        The paystub and W-2 forms must support all verifications of employment. If a borrower s hours
        fluctuate, the past two years plus year-to-date earnings must be averaged.

Overtime Income
When overtime is used as qualifying income, the borrower must have a two-year consecutive history of
receiving overtime income and the income must be likely to continue for the next three years. The
borrower s overall income should be evaluated using the hourly rate, the number of hours worked, to
develop an average and earnings trend of overtime earned to determine the amount that is most likely
to continue for the next three years. If the annual overtime earnings are level or increasing, the income
is acceptable. If the earnings are declining, the income cannot be considered stable. The loan file must
contain an analysis of the income used to qualify.

The following documentation must be obtained:
   · Written Verification of Employment (VOE) covering two full years (and one pay stub) and
        indicating the overtime is likely to continue
        OR
   · Most recent year-to-date pay stub covering 30 days
   · W s 2 covering the most recent two years
   · The employer must verify that overtime income is likely to continue. This can be verified on
        company letterhead or on with a written VOE.
        o If the employer refuses to provide this information, the loan file and the underwriter s
            analysis must be explicit regarding the inability to obtain this information and the underwriter
            must provide supporting rationale as to why this income is included and expected to
            continue.


Bonus Income
When bonus income is used as qualifying income, the borrower must have a two-year consecutive
history of receiving bonus income. The following documentation must be obtained:
    · Written VOE covering two full years (and one pay stub) and VOE must indicate that bonus
        incomes is expected to continue
        OR
    · Most recent year to date paystub covering 30 days
    · W-2s covering the most recent two years
    · Verification that bonus income is expected to continue either in the written VOE or in a separate
        statement.
    · If a written statement cannot be obtained the file must contain:
        o Evidence of the attempts to obtain written verification
        o An assessment and rationale by the underwriter with supporting comments and sound
            rationalization why continuance is deemed likely.

Bonus must be annualized for qualifying purposes. Unless documentation is provided to show the
consistency, frequency and amount, any YTD earnings must be divided by 12 months. Bonus income
received annually or on another periodic basis is acceptable, even if the amount of the bonus
fluctuates.


Commission Income
Commission income must be both regular and continuous with at least a two-year history of receipt. A
level or upward trend in commission earnings must be established. Any decreases or significant
increases could affect the stability of the borrower s income and would require a satisfactory
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explanation. If a satisfactory explanation cannot be provided, the income will be considered
questionable and should not be used to qualify the borrower.
       Documentation If commission income is less than 25% of the total income, DU will require
       that the previous year be documented with one paystub, or one paystub and W-2.
       If commission income exceeds 25% of total income, personal federal tax returns for the
       previous year or for the past two years (depending on the borrower s risk profile) will be
       required. A minimum of six months of commission income must be reported on the latest tax
       return. In addition, if it is more than 60 days from the date of the latest tax return, obtain a
       current paystub and confirm that current earnings support the income on the tax return.

        A borrower with less than a two year history of commission income should only be considered
        with strong compensating factors. Commission income received less than one year is not
        typically considered effective income.
        Calculation:
        The past two years plus year-to-date earnings should be averaged. If DU require two years tax
        returns but the borrower has been receiving commission income for less than two years,
        monthly income should be calculated based on a 24-month average (divide the total
        commission earnings by 24). Non-reimbursed business expenses found on Schedule A of the
        federal income tax return must be subtracted from the gross income.


Self-Employment Income
An individual who has 25% or greater ownership interest in a business is considered to be self-
employed.

A steady decrease in business income for the previous two or three years may not be acceptable even
if the borrowers' current ratios conform to program requirements unless it can be verified that
profitability has stabilized or if strong compensating factors such as low loan-to-value coupled with far
below maximum debt ratios or substantial liquid assets are present. Particular attention should be
placed on the business earnings trend to ensure income is steady or increasing, and to the source of
that income. Even if income from the self-employed borrower s business is not used for qualification
purposes, the business must still be analyzed to ensure that it will not affect the borrower s personal
income or assets negatively. An analysis of the borrower s experience, income stability, financial
strength of the business, location and nature of the business, and demand for service or product
offered by the business should be performed.


Borrowers must have been self-employed for at least one year and a minimum of six months self-
employed income must be reported on the latest tax return in order to include the income from self-
employment in qualifying income. The borrower must be able to document a reasonable probability of
success based on market feasibility studies and pro forma financial statements for the business. The
following factors must be carefully analyzed:
            o The borrower s training and experience.
            o The location and nature of the business.
            o The demand for that type of business in the area.
Self-employment of less than one year may not be considered for qualifying purposes.

        Documentation Depending on the borrower s risk profile, DU will require self-employed
        income to be documented according to one of the options below:
            o Verbal Verification of Employment - When only a verbal verification is required, the
              income of the borrower that is used to qualify for the loan must be reasonable based on
              the borrower s occupation, tenure and title.
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            o   Filed federal income tax returns for the number of years indicated in the Underwriting
                Findings report (i.e., one or two year s returns).
            o   Filed business income tax returns for the number of years indicated in the
                Underwriting Findings report (except for Sole Proprietorships). Business tax returns may
                be waived when the following conditions are met:
                      § Individual federal income tax returns show an increase in income over the past
                          two years AND
                      § Funds used for down payment and closing costs are not coming from a business
                          account AND
                      § Borrower has been self-employed in the same business for at least five years.
            o   Self-Employed Income Analysis Form (FNMA form 1084). This form is required to
                show how the tax returns to analyzed to arrive at an annual income. Submissions are
                expected to include this form; underwriters are required to affirm its accuracy or prepare
                it, if not previously provided.
            o   The Underwriter may request additional information such as business license, business
                tax returns, Profit-and-Loss Statement and/or balance sheet if it is necessary to further
                support the determination of the stability of the borrower s income.
            o   Prior calendar year Profit and Loss and current year Profit and Loss are required to
                support consistency of income since last returns were filed. The estimated tax obligation
                must be consistent with the income amount represented in the file.

See Section 2-6 for documentation requirements based on closing dates relative to IRS tax filing
deadlines.


When federal income tax returns are required, they should include all W-2 forms, 1099 forms, etc. and
schedules and statements (Schedule A, Schedule E, K-1s, 2106, etc.). In addition, the federal income
tax returns must be signed by the borrower. Tax Information Authorization (IRS Form 4506-T) signed
by the borrower(s) is required for all loans with tax returns. (Refer to Chapter 2, Risk Management for
details.)
        Calculation:
        The number of year s federal income tax returns required by DU must be averaged. If the loan
        application is taken from April 15 October 31, any additional income documentation must be in
        the average.


Significant Increases or Decreases in Income
Decrease in income: When the borrower has experienced a significant decrease in income, the
income cannot be averaged using a previous higher level unless there is documentation of a one-time
occurrence (e.g., injury) that prevented the borrower from working or earning full income for a period of
time and proof that the borrower is back to the income amount that they previously earned. The
underwriter must focus their analysis on the most recent earnings and the income that is most likely to
be received at the level used for qualifying.
Increase in income: When the borrower has experienced a significant increase in income, the higher
income may not be used to qualify the borrower, unless there is sufficient documentation to determine
that the increase is stable and likely to continue at the level used for qualifying (e.g. that the income is
not a one-time incentive payment).


Employment Gaps
Document gaps of more than 30 days on the application and provide an explanation from the borrower.
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A newly employed borrower with less than a two-year employment history should provide
documentation showing that immediately prior to the current job, the borrower was attending school or
in a training program.

If the borrower is re-entering the workforce, obtain documentation to support that the borrower has
been at the current employment for a minimum of six months and documentation to show a previous
work history.

Multiple gaps in employment or frequent changes in employment within the past 24 months should be
carefully reviewed to determine if the borrower s employment is stable and likely to continue. No gaps
of verified employment income may exist for self-employed borrowers.

4-3     Secondary / Supplemental Income

Part-Time Employment
Borrower must have at least a 24-month history on all part-time jobs in order to include the income.
Part-time income received for less than 24 months may be considered a compensating factor only.

Seasonal part-time employment may be acceptable if the borrower has worked at the job for two years.
If income received cannot meet this requirement, then it should only be considered as a compensating
factor (See Seasonal Worker - Special Documentation Requirements).

Contract Employees
Individuals who work on a contractual basis rather than as an employee, are treated as self employed.
Because the individual may be released from employment at any time, or as specified in their contract,
employment history is key in establishing income stability and the likelihood that it will continue.

Alimony and Child Support
Spousal or child support must continue at least three years after the date of the original mortgage loan
application to be considered. HSOA will accept as verification of the award of spousal and/or child
support one of the following documents: a copy of the divorce decree, the formal separation agreement
which has been accepted by the courts and recorded, court records, any other type of legal agreement
or court decree that describes the payment terms, or a copy of any applicable state law that requires
alimony, child support or maintenance payments and specifies the conditions under which the
payments must be made. The document must specify the amount of the award and the period of time
over which it will be received.

The following is the minimum required documentation. Follow DU if it requires more documentation;
follow these requirements even if DU asks for less. The borrowers must provide evidence that the funds
have been received for the last 12 months. A 6- to 12-month documented history of receipt of income is
acceptable providing the income does not exceed 30% of the total gross qualifying income. Acceptable
evidence would be deposit slips, canceled checks, bank statements or signed Federal income tax
returns.

Notes or Mortgages Receivables
Income from notes receivable can be used as qualifying income with proper documentation. All of the
following documentation is required:
     · A copy of the executed note documenting the payment amount and a remaining term of at least three
        years.


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    ·   Proof the borrower has received the payments on a consistent basis for the past 12 months. This proof
        may be bank statements for the last 12 consecutive months reflecting the deposit of the income, or the
        borrower may provide income tax returns.

Trust Income
If the Trust income is <=30% of total qualifying income, borrowers must provide
     · A copy of the trust agreement, or letter from institutional Trustee in lieu of a copy of the
        agreement, stating the amount, frequency, duration of the income, and affirmation of
        irrevocability.
     · Verification of sufficient trust assets to maintain the income for at least 36 months from the loan
        application date.
     · 12 months bank statements showing receipt of income
     · tax returns if required by DU.

If the Trust income is >30% of total qualifying income, borrowers must provide
     · Copies of the trust agreement
     · Tax returns: 1 year signed, dated federal tax return, with supporting schedules, or as required
        by DU, whichever is greater.
     · Certification of sufficient trust assets to maintain the income for at least 36 months from the loan
        application date.
     · 12 months bank statements showing receipt of income

Lump sum distributions made before loan closing may be used for the down payment, mortgage pay
down, or closing costs if they are verified by a copy of the check or the trustee s letter shows the
distribution amount.


Interest and Dividend Income
When Interest and/or dividend income is used to qualify the borrower, documentation must support a
two year consecutive history of receipt and be likely to continue for the next three years. The following
documentation is required:
    · Complete, signed federal tax returns for the most recent two years
    · Proof of sufficient assets to generate dividends and interest after closing for the qualifying
       income to be expected to continue for the next three years

Any assets used for down payment or closing costs must be subtracted from the borrower s total assets
before calculating expected future interest or dividend income.

Capital Gains and Losses
A capital gain or loss is generally a one-time transaction. Therefore, it should not usually be considered
as either a gain or loss in determining income. However, if the borrower s business has a constant
turnover of assets that produces regular gains and losses, the capital gain or loss may be considered.
An example of this is the person who buys old houses, remodels them, and sells them for profit. If the
borrower has operated in this manner over a period of time, an average of the past two years gains or
losses may be developed for consideration in the income calculation. If this source represents a
substantial portion of the borrower s income, tax returns for at least the last three years should be
reviewed to get an accurate picture of the average earnings from this source. For example, an asset
sold during the year might be an income-generating asset, resulting in a reduction in future income after
the sale.



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Mortgage Interest Differential Payments (MID)
Payments received from an employer or government agency to supplement mortgage payments may
be added to qualifying income. However, these payments may not be used to offset the mortgage
payment.

The loan file must contain documentation showing that the payments are pursuant to an established,
ongoing and documented employer program and validate the amount received and the duration of
receipt of payments. The employer must not be an interested party to the transaction and the payment
must be likely to continue for the next three years.

Government Assistance Programs
Unemployment and welfare benefits, workman s compensation, food stamps, etc. may be considered
as acceptable income if letters or exhibits from the paying agency properly document them for the past
2 years. The amount, frequency and likelihood to continue for three years must be established. If an
individual receives unemployment as a regular part of income, copies of tax returns for the past two
years are required to establish a history of receipt.

Temporary (Agency) Income
Temporary employment may be considered when the borrower works through an agency (or agencies)
and has demonstrated this to be a stable form of income. The borrower s work history must be verified
for two years and the borrower must have worked steadily as a temporary employee for a minimum of
18 months.
     · Income will be averaged over the two-year period, but not less than 18 months.
     · Obtain W-2s for the most recent 2 years plus a current paystub documenting at least 30 days of
        income.

Note: No consideration will be given to temporary income of a borrower who is not employed through a
temporary agency and whose sole employer states the borrower s employment is temporary

Manufacturing / Piece Work
An employee may be paid based upon the number of units completed within a given time. If the
borrower has been employed in this line of work (and method of computing income) for at least two
years, the income may be used for qualifying.Obtain the following to document:
    · Most recent year-to-date paystub covering 30 days income
    · W-2s for the most recent two years


Shift Differential
Shift differential is paid as an incentive to employees who work shifts, such as evenings, nights or
weekends. Shift differential that is a permanent component of a borrower s income can be considered
as stable qualifying income without a history of receipt. (For example, a nurse is required to work the
night shift one week per month).
If the shift differential varies periodically, a minimum one-year history is required. The employer must
confirm the borrower will continue to receive the income. Receipt of shift pay must be supported by the
current paystub as well as by the prior year's earnings shown on the Verification of Employment (VOE)
or W-2s.




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Retirement and Pension Income
Retirement and pension income may be verified by a letter from the organization providing the income,
a copy of the retirement award letter, federal income tax returns or 1099 Statement for the prior year or
a copy of the borrower s recent bank statements to confirm the regular deposit of the payments.
Evidence of continuance of corporate, government or military retirement/pension need not be
documented. Continuance for at least three years must be documented for a monthly annuity payment.

For 401K or IRA monthly distributions, use the greater of the IRS required minimum distribution amount
or the amount earned by the investments. Scheduled monthly distributions may be accepted when
borrower has a 12 month history of receiving them and the fund balance will allow for
continuance for three years.


Retirement Income
Income from retirement accounts, retirement benefits and pensions may be used as qualifying income if
the income will continue for at least three years. Documentation must be provided by the entity
providing the income. Acceptable forms of documentation are:
    · Copy of the retirement award letters, or
    · Most recent year s W-2 forms or 1099 forms, or
    · Twelve months most recent bank statements showing receipt of the income.


Annuity Income
Income from a retirement annuity may be used for qualification with proper documentation. A
statement from the financial institution managing the annuity is required to verify the balance in the
annuity, the monthly payments and the term of the payments to be distributed. Payments to the
borrower must continue for a minimum of three years.


IRA Distribution
Regular distributions from IRA and Keogh accounts may be used as qualification income provided the
distributions:
    · will continue for a minimum of three years
    · are documented by a 12 month history of receiving them, or the amount is the required
        minimum distribution.
    · Are verified by a letter from the administrator of the account is required to verify the terms of the
        distributions and the current balance on the account.

Note: Retirement accounts used as income cannot be used to determine interest income.



Royalty Income
To use royalty income for qualifying, the borrower must provide a minimum 12-month history of
receiving royalties on a regular basis and the income must be expected to continue for at least three
years. All of the following documentation is required:
   · Completed signed individual federal tax return for the most recent two years
   · Schedule E (Supplemental Income and Loss)
   · Evidence of 12 months receipt of royalty income.

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Social Security Benefits
Social Security Benefits include any of the following types of payments:
   · Social Security Retirement Benefits
   · Supplemental Security Income
   · Survivor s Benefits (surviving spouse or child payments)

Social Security income can be either taxable or non-taxable. Only the non-taxable income portion, not
the entire amount, can be grossed up 25%, and then provided it is verified as non-taxable, as
evidenced by the borrower s tax returns.
If Social Security income has a defined expiration date (e.g., borrower receiving benefits due to a
disability or on the behalf of a dependent) documentation to insure receipt will continue for at least three
years must be provided. Acceptable documentation for proof of continuance, if required:
    · Awards letter or similar documentation with terms of eligibility

Acceptable documentation for proof of receipt may be any of the following:
   · A copy of the Social Security Administration's award letter
   · Copies of the borrower's previous 12 months bank statements to confirm regular deposit of the
      payment
   · Signed tax returns for the most recent two years
   · Two years 1099 forms.


Tip Income
Tip income may be used to qualify the borrower if the lender verifies that the borrower has received it
for the last two years and the employer indicates that the tip income will in all probability continue. The
file must calculate an average of the past two years' tip income to determine the amount of income that
may be considered in qualifying the borrower.

Trailing Spouse/Secondary Wage Earner
Because trailing secondary wage earner income is based on projected employment and income that a
borrower may earn in the future, trailing secondary wage earner income is no longer accepted

Auto Allowance and Expense Account Payments.
Income from automobile allowances or expense account payments (but not reimbursements) may be
used if the income has been received for at least two years and is properly documented. The
information must be included in an analysis developed from two years IRS Form #2106.

The net expense information is derived from averaging the 2106 forms. Acceptable income
documentation can be written VOE covering two full years, most recent year-to-date paystub covering
at least 30 days of employment or W-2s covering the most recent two years. If the allowance is not
reflected on the VOE or VOE, additional documentation must be obtained from the employer. The
documentation provided must clearly specify the following information:
     · Payment amount
     · Duration and frequency
     · The likelihood of continuing for the next three years

In all cases, the auto loan payment must be included in the recurring debts.
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Foster Care Income
Income received for foster care may be used if received on a regular basis for at least two years and is
expected to continue for the next three years. Obtain a letter from the organization providing income
and:
    · bank statements or deposit slips that support a two year history, or
    · two most recent federal tax returns

Housing Allowance
If housing allowance is being used to qualify the borrower, the following must be obtained to support
housing income:
    · Proof of receipt for the past 12 months
    · Proof of continuance for at least 3 years
    · Copy of employment contract

The allowance may not be used to offset the monthly housing payment.


Clergy
Where a borrower is a member of the clergy, a completed verification of employment, and previous
years' W-2 must be provided. If a 1099 is provided, the borrower must be treated as a self-employed
borrower.

Non-Taxable
Once it has been determined and documented that tax exempt income (including military allowances,
worker s compensation benefits, and disability retirement payments) is likely to continue and remain
untaxed for three years, the underwriter may gross up the income based upon a minimum 25% tax rate
and use it when determining capacity. However, if tax returns are provided in the file and the tax
exempt income shows that any portion of that income is subject to taxation, then the 25% gross up
formula may only be used on the nontaxable portion.

Non-Employment Income, Inheritance and other Guaranteed Income
Ongoing income received from inheritance or other guaranteed sources             such as prize earnings, or
lottery winnings      may be used to qualify provided it can be verified that income is regular and
recurring. Typically, borrower should have a documented history of receiving for at least two-years and
verification that it will continue for at least three more years. A copy of the Award Letter confirming the
amount, frequency, duration of payments, and evidence of receipt for the previous two years is
required. Borrowers who do not have a two-year history of receipt may still be considered contingent
upon the terms of the pay out. For example, if income is guaranteed to continue for the next 20 years
but borrower has only received one payment/ installment.

Section 8 Programs
Section 8 subsidy programs provide housing assistance for low-income families and must be combined
with an underlying eligible FHA loan program. Housing choice vouchers allow these families to
purchase safe, decent and affordable privately owned housing. Section 8 vouchers may be eligible on
certain FHA programs as a source of income when qualifying the borrower. Section 8 programs are
developed and administered by a local Public Housing Agency (PHA). The HUD-approved PHA issues
an award letter to the borrower. When eligible under certain FHA loan programs, only the Single
Payment Option is acceptable for Section 8 payments. With the Single Payment Option, the subsidy is
paid either directly to the borrower or to a limited-access bank account, and the borrower makes one


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payment to the lender. Section 8 payments are not acceptable where the subsidy is paid on behalf of
the borrower through a third-party provider.

Temporary Disability
Not accepted.

4-4     Special Documentation Requirements

DU does not recognize special considerations under Employment or Income. Therefore, the
documentation requested by DU is VOID and must be documented as noted below.


Employed by a Relative, Domestic Partner, Fiancé/ Fiancée, or Family Business
If borrower is employed by a relative, domestic partner, fiancé/fiancée, or closely held family business,
the property seller or real estate broker, the borrower is considered self-employed, and the following
documentation is required:
    · Most recent computer generated paystub documenting 30 days of income
    · W2s covering the most recent 2 years
    · Complete signed individual federal tax returns for the most recent 2 years
    · Written confirmation from the company accountant or legal counsel as to ownership. If borrower
        has any ownership percentage, two years business tax returns are also required.

Borrower must have been employed by the family business for at least two years, as confirmed by the
tax returns.

Union Hall Members
Union hall members may hold several jobs during a year. Verification of income for a union member
requires the following documentation.
   · Verbal Verification of Employment.
   · A current paystub from the present employer. If there has been more than one employer in the
       current year, the last paystub from each employer will be required to adequately reflect year-to-
       date earnings.
   · Complete tax returns for the last two years, with W-2s.

Qualifying income is averaged for the last two years (adjusted for any applicable expenses).

Seasonal

 Worker/Unemployment benefits
Unemployment compensation is acceptable income if it is properly documented by letters or exhibits
from the paying agency and there is a two year history of receipt. The amount, frequency, and duration
must be stated in the documentation. If unemployment compensation cannot be documented as regular
income, it must be deducted from the adjusted gross income.

Unemployment compensation associated with seasonal employment must have been received for at
least two years and be likely to continue for the next three years. In addition, there must be a
reasonable expectation that the borrower will be rehired the next season. Seasonal employment
income and unemployment compensation must be reported on the two most recent year s federal tax
returns. If the borrower is a seasonal worker, proof of current receipt of unemployment cannot be a
substitute for a current paystub to satisfy the AUS requirement. The paystub must be from the
borrower s regular employment. The following documentation is required:
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    ·   Written VOE covering two full years for the seasonal employment (and one paystub)
    ·   Proof of receipt of unemployment compensation for two years, if applicable
        OR
    ·   Year to date paystub or salary voucher for 30 days
    ·   W-2s covering the 2 most recent years
    ·   Proof of receipt of unemployment compensation for two years, if applicable


Military Income
Military income for active duty or Military Reserve income must be documented with the following:

    ·   Written VOE covering two full years
        OR
    ·   Year-to-date LES documenting at last 30 days income , which may include:
        o Flight or hazard pay
        o Rations
        o Clothing Allowance
        o Quarters allowance and proficiency pay
        o W-2s covering most recent two years

Proof that entitlements are expected to continue for 3 years must be obtained. If quarters allowance is
used, a letter from the commanding officer is required indicating that on base housing will not be
provided and quarters pay will continue.


Reservists Called to Active Duty
If one of the borrowers has been called for active duty after the loan application has been made and the
loan is in process the borrower must be qualified using the reservist pay.

Teachers
When a borrower is employed as a teacher, the employer should provide the annual salary. If monthly
or weekly base pay is provided, the employer must verify the number of pay periods per year. Stipends
or supplemental income must be documented as regular and continuous.

Foreign Income
Income derived from a country other than the United States is generally not allowed. Exceptions may
be considered for CONFORMING PROGRAMS on a case by case basis.

Future Employment
Income from future employment may be used under certain circumstances. A borrower who will be
starting a new job (whether or not they are presently working) must be on the job prior to closing, and
provide the pay stub documentation as required by DU.

Future Income from Raises
Under certain circumstances, a borrower may be qualified based upon anticipated income from a raise.
The raise must be documented on pay stubs as required by DU, and be in line with present and past
earnings.




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Lack of Employment History
If the borrower does not meet the employment history requirement of two full years prior to the date of
application and was previously in a school of higher education/training or the military, obtain a copy of
the diploma/transcripts or discharge papers.

Leave of Absence
A borrower not currently earning income cannot provide the documentation required by DU; therefore
the a person on a leave of absence does not have a documented income.

Disability Income
Permanent Disability income may be used if properly documented. The following forms of
documentation are acceptable:
   · Award letters indicating the payment amount and conditions for termination of payment which
      must continue for three years
      Or
   · Documentation from the borrower s insurance carrier or employer that indicates the amount of
      income and likelihood of continuance for at least three years.


4-5     Rental Income

Rental Income Qualifying Matrix on Conforming Conventional Loans

1. Rental Ownership History Requirements
If rental income is required to qualify, borrowers most recent two years personal federal tax returns
must show two complete years of continually owning one or more rental properties. This applies to all
scenarios and transactions, except:
     · Purchase of an Owner Occupied 2-4 unit property
     · Retaining the current primary residence and converting it to a rental property

2. Rental Income Documentation and Income Calculations
When rental income is needed to qualify, the following requirements apply.

Documentation requirements for calculating rental income:
Each property, and the documentation required for calculating income, is to be analyzed individually,
based on the year of acquisition.

               Calendar year during which each rental property was purchased
2008 or earlier 2009                                      2010
Tax returns     Tax returns, if filed. Otherwise, lease   Lease agreement with canceled
                agreement with canceled security          security deposit and rent checks
                deposit and rent checks deposited into    deposited into borrower s account.
                borrower s account.

Calculating income:
Follow DU instructions for the number of years of tax returns to review, unless there are significant
compelling reasons to include the previous tax return in the analysis.



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If there is a significant income difference from one year to the next, the difference must be acceptably
explained and documented. Otherwise,
     · if the most recent year is an income increase, average over 2 years
     · if a decrease, do not accept any income until a level, stable income amount can be
         documented.

Borrower has owned the property for the full calendar year
Complete the Self-employment analysis, FNMA Form 1084 section for Schedule E income; use one
form for each property reflected on the tax return.

Partial year ownership - for properties purchased or sold during the calendar year
Calculating monthly income off tax returns:
   a. Property purchased during the year:
           · If net income is positive, divide the income by 12 months
           · If net income is negative, divide the loss by the number of months owned

    b. Property no longer owed: remove that property s income/loss from the calculations.
          · If the tax returns reflect the property as having been sold, no further documentation is
              required.
          · If the property was sold after the last tax returns, provide HUD-1 to document proof of
              sale.

Lease Agreements
When lease agreements are accepted, 75% of the rental income may be used to offset the mortgage
payment in qualifying.

The rental income must be documented with:
· a copy of the fully executed lease agreement; and
· The receipt of a security deposit and rent checks from the tenant and deposit into the borrower s
   account.

Documentation Consistency in all Scenarios
Documents in the file must be consistent. When the loan file contains operating income statement, the
income approach on the appraisal and/or copies of the present lease(s), they must support the net
rental income used to qualify the borrower.

3. Purchase of an Owner-Occupied 2-4 unit
Lease agreement with canceled security deposit and rent checks deposited into borrower s account.
75% of the monthly lease amount can be added to borrower s income. Note: as indicated above,
borrower does not need a two-year history of owning rental properties in order to use rent from the
other units in an owner-occupied 2-4 unit property.

Land Leases
The income or loss derived from a land lease should be treated the same as Other Real Estate Owned
above when determining the acceptability of the income, the required documentation, and the required
calculation.

4-6     Unacceptable Sources of Income

Income from the following sources is not acceptable for purposes of qualifying the borrower:
    · Depletion of Assets/Capital withdrawals

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    ·   Expense reimbursement
    ·   Income from Mortgage Credit Certificates
    ·   Illegal Income
    ·   Educational benefits, such as VA benefits or scholarships
    ·   Gifts, regardless of duration or amount
    ·   Lump sum payments such as inheritances or lawsuit settlements (may be verified as assets to
        close)
    ·   Payments that are received for purchase or reimbursement of specified items
    ·   Retained earnings
    ·   Secondary income that will continue for less than three years
    ·   Taxable forms of income that the borrower does not declare on federal income tax returns
    ·   Unverifiable income
    ·   Value of a company furnished automobile
    ·   Value of employment benefit packages that are not received as cash wages
    ·   Lump sum payments of lottery earnings that are not ongoing
    ·   Non-borrower spouse income
    ·   Student loans/grants
    ·   Allowance income (for example, an allowance received from a family member)
    ·   Stock options
    ·   Room and board received, unless specifically allowed per the product or program under which
        the loan was submitted.
    ·   Income based on future earnings
    ·   Draw income
    ·   Severance Pay
    ·   Trailing wage earner income




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Chapter 5 Assets

OVERVIEW
This chapter details assets to cover down payment, prepaid items, closing costs and cash reserves. All
sources for funds must be verified and documented from acceptable original sources. Typical sources of
funds are discussed in this chapter. Some processing styles require less documentation and take
precedence over the documentation discussed in this chapter. Refer to Chapter 2 Documentation for
complete information.



5-1Standards of Quality
    ·   Loan submissions contain full complete and accurate information, with no material omission of
        all borrowers required asset information.
    ·   All documentation and explanations to render prudent conclusive decision to document a
        borrower s available assets is included in the file at submission.
    ·   File documents can have no misrepresentations, omissions or altered documents.

5-2 Sources of Equity



Assets to Close
Assets used for down payment must be documented to show that they are from borrower s own funds.
The loan application should provide an accurate reflection of the funds required from the borrower to
close the transaction. The application must clearly state the source of the funds for down payment and
closing costs, and cannot state other or any vague description. This applies to all loan applications. The
funds required to close are the difference between the funds needed to complete the transaction and
the mortgage amount. When a borrower will be paying off debts, adequate funds should be
documented to complete the debt payoff, in addition to the funds required to close the transaction and
any required cash reserves.
Premium pricing may be allowed and can be used to cover certain closing costs and prepaid items
depending on the loan purpose. It is not considered a concession; therefore, it is not included in the
amount subject to contribution limitations.
Closing costs, prepaids and reserves must be borrower s own funds at all LTVs.
Seller contributions cannot be used for down payment.
The borrower must use his or her own personal assets for the minimum cash down payment of 5% on
loans greater than 80% LTV or CLTV. For primary residences the entire down payment may be from a
gift when the LTV/CLTV is 80% or less.
Gifts from family members may be used to payoff installment debt.

For applications with occupant and non-occupant co-borrowers when the LTV is greater than 80%, the
minimum required contribution must come from the occupant borrower.

Subordinate Financing
Refer to the Product Summary for restrictions.



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Subordinate financing is any lien secured by the subject property other than the first mortgage. The
lien created by the subordinate financing must be clearly subordinate to the first mortgage. A
Subordination Agreement must be recorded for an existing subordinate lien that will remain against the
property when providing a new first mortgage. All subordinate liens must be included in the CLTV
calculation. The monthly payment on the subordinate lien must be included in the PITI of the subject
property when calculating ratios. For more details, refer to Chapter 1for Loan Eligibility and
Subordinate Financing.

Community Seconds
Community Seconds are not accepted on conventional financing transactions

Earnest Money Deposits
The source of any earnest money deposits must be verified using the following documentation:
   · Copy of the borrower s cancelled check
   · Copy of the borrower s deposit check and proof that it was cashed (a bank statement from the
       account in which the deposit check was drawn).
.
Note: Large earnest money deposits that exceed the customary amount must be closely evaluated.

Bank Deposits
Bank deposits include funds on deposit in savings accounts, checking accounts, certificates of
deposits, money market accounts, and individual retirement accounts (IRAs). Bank deposits may be
documented in several ways depending on the AUS or the processing style.

DU eligible loans will receive one of these verification options, along with a Verification of deposit as an
option:
    · One monthly bank statement.
    · Two consecutive monthly bank statements.


Bank Statements
Bank statements must be current and may not pre-date the application by more than:
     · 45 days for monthly statements.
     · 90 days for quarterly statements.
If a quarterly statement is provided, confirmation/documentation must also be provided to verify the
funds in the account have not been transferred to another verified asset account with more current
documentation.

If there is a recently opened account (within six months) with a substantial balance or the current
balance is derived from a substantial deposit(s) within the past 6 months, the source of the original
funds must be documented and verified.

Bank statements must clearly identify the depository institution, the account holder(s), the account
number, the time period covered by the statement, all the deposit and withdrawal transactions, and the
beginning and ending account balances. If a supplemental statement is necessary, any bank-
generated forms (such as deposit or withdrawal slips) that show a machine-printed account number,
balance and date are acceptable. If the supplemental information is not on a bank form indicating the
name of the bank or on bank letterhead, a bank representative must sign it (and clearly show name and
title). The supplemental statements may be computer-generated forms, including on-line account or
portfolio statements that the borrower obtained from the Internet. Statements retrieved on-line must
include:

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    ·   Identify the borrower as the account holder.
    ·   Internet URL addresses identifying the source of the information.
    ·   Name of the depository or investment institution.
    ·   Account number.
    ·   Time period covered by the statement.
    ·   All deposits and withdrawal transactions for depository account or all purchase and sale
        transactions for a financial portfolio account.
    ·   Beginning and ending account balance.

Documenting the source is generally required when non-payroll deposits exceed $1,000, either
individually or in aggregate, over one month s statement.

Verification of Deposit (VOD)
The VOD should provide the following for each account listed:
   · All account owners
   · Type of account (checking, savings
   · Account number.
   · Date opened.
   · Current balance.
   · Average balance (supporting current balance).

All VODs must be supported by either one month bank statement or a verbal VOD completed by HSOA
staff, confirming with the depository that the information provided is consistent with their records

In cases where average balances are not provided or discrepancies between the average and current
balances exist, the most recent two months banks statements prior to the completion date of the VOD
are to be provided. If there is a recently opened account (within six months) with a substantial balance
or the current balance is derived from a substantial deposit(s), the source of the original funds must be
explained and verified by the borrower and determined to be acceptable by the underwriter.

The VOD must be mailed directly to the depository and should not be mailed to a Post Office box or to
a particular person s attention. If the borrower indicates this is necessary, the file must contain
verification that HSOA independently contacted the depository and verified this requirement. The hand
carrying of verification is strictly prohibited.

Gifts
Refer to the individual Product Summary for variances.

Gifts are allowed on owner occupied purchase and R/T transactions

A borrower, purchasing or refinancing, may receive a gift to be used towards the down payment,
prepaid items, closing costs, and financing costs unless otherwise specified. Gift funds are acceptable
as reserves only if the product or program specifically states in the applicable product or program
guidelines.

For primary residences the borrower must use his or her own personal assets for the minimum cash
down payment of 5% (or minimum cash down payment for the program) on loans greater than 80%
LTV or CLTV. For primary residences, the entire down payment may be from a gift when the LTV/CLTV
is 80% or less.

Gift from Relative

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A gift must be from the borrower s spouse, parent, child or dependent or any other individual related to
the borrower by blood, marriage, adoption or legal guardianship or from a domestic partner, fiancé or
fiancée. A gift must be evidenced by a letter that is signed by the donor. The gift letter must be
maintained in the file and must:
  State that the funds are given by a relative and specify the relationship to the borrower
  State that repayment is not expected or required
  Be signed by the relative (donor)
  Include the donor s mailing address and telephone number
  State the dollar amount of the gift
  Include the subject property address

The loan file must contain written evidence of the transfer of funds from the donor to the borrower.
Documentation to show the transfer of the gift funds may be verified by any of the following:
 Copy of the donor s withdrawal slip and the borrower s deposit slip in the amount of the gift
 Copy of the donor s canceled check and the borrower s deposit slip in the amount of the gift
 Copy of a cashier s, certified or official check in the amount of the gift that clearly identifies the donor s
name

When the funds are not transferred prior to settlement, follow DU findings instructions. For manual
underwritten loans if gifts are accepted, written evidence must be provided to verify that sufficient funds
(to cover a gift) are in the donor s account. A certified, cashiers or official check for the amount of the
gift with the donor s name identified on the check must be provided with a copy included in the loan file.

Gift from Employer, Municipality, Public Agency, Nonprofit Organization or Church
Owner-occupant borrowers may use gifts from acceptable entities to pay or supplement part of the
closing costs or part of the financial reserves. Acceptable entities include churches, municipalities,
nonprofit organizations (excluding credit unions), and public agencies.

Documentation must be maintained in the mortgage file that:
   · Establishes the funds were provided by an entity that has a formal gift program. Examples may
     include copies of the program materials, award letters or terms and conditions provided to the
     borrower
   · Establishes the funds are a gift that does not have to be repaid
   · Identifies the donor s mailing address

The gift must be shown on the HUD-1 closing statement.

Note: Gifts from nonprofit organizations that receive funds from property sellers or builders are not
allowed.

DU Loans
The following gift/grant information must be provided on the loan application:
   · Amount of the gift.
   · Donor s name, address, telephone number, and relationship to the borrower.
   · Property being purchased with use of the gift/grant funds.

Gift Letter
A gift letter must be included in the loan file and provide:
    · Amount of the gift.
    · Donor s name, address, telephone number, and relationship to the borrower.
    · Source of the donor s funds.
    · State that repayment is not expected.
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    ·   Property being purchased with use of the gift/grant funds.
    ·   Signed by the donor.
    ·   Signed by the borrower.

Receipt of Gift
If gift funds have already been transferred to the borrower s account or will be used in the transaction,
evidence of the transfer of funds from the donor to the borrower must be provided. Acceptable
evidence includes a copy of the donor s bank statement verifying the withdrawal and a copy of the gift
check (or a copy of the donor s canceled check) along with a copy of the borrower s statement verifying
the deposit of the same gift funds amount. The verified transfer amount must match the gift letter
amount.

Gift of Equity
The borrower may receive a gift of equity from the seller of the subject property, provided the seller is a
relative. When there is a gift of equity, there is no transfer of funds involved, but the file must contain a
completed Gift Letter to state that repayment is not expected. The gift will be reflected as a credit on
the HUD-1 Statement and must be clearly labeled as a gift of equity. The donor must have sufficient
equity in the property to cover the gift and the HUD-1 Statement will satisfy donor s ability and receipt of
gift verification. A gift of equity is not considered a seller contribution.

Wedding Gifts
When funds are obtained from wedding gifts, the following must be provided:
  · Recent marriage certificate not more than six months old.
  · Verification of receipt of the funds via bank statements/deposit slip. The date of the deposit and
      the date on the marriage certificate must be within a reasonable time frame of each other.

Down payment Assistance Programs (DAP)
Down payment assistance programs funded by federal, state, county, or city municipalities are
acceptable sources of funds for Conforming programs, as allowed by the Product Summary. These
programs must be approved through Credit Policy. Seller funded programs (such as AmeriDream,
Nehemiah, etc.) are not eligible for any Conventional programs.

Publicly Traded Stocks/Stock Options
Assets that are traded on an exchange or marketplace generally available to the public (such as the
NYSE, NASDAQ, Midwest SE, CBOT, or OTC) can be used as funds for down payment, closing costs
and reserves provided the value of the funds or securities can be readily verified through financial
publications and is documented in the file.
These assets may be documented by providing stock/securities account statements which:
     · Identifies the issuing institution or administrator, as applicable
     · Identifies the account owner
     · Identifies the account number
     · Shows all transactions
     · Shows the period covered and ending balance
     · Shows any outstanding loans
     · If the asset is a securities account, identifies the stocks/securities
If the borrower does not receive a stocks/securities account statement:
     · Include a document in the Mortgage file attesting that the originator saw the stock certificates
        and which lists the identification numbers of the stock(s), type and amount of stock and states:
        o That the borrower is the owner
            Include current stock prices from a published source


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Note: If the assets are required for closing, proof of liquidation is required. If used for reserves, use
60% of the stock value.

Vested stock options are an acceptable source of funds down payment and closing costs if they are
immediately available to the borrower. The value of stock options can be documented by:
   · Referencing a statement that lists the number of options and the option price, and
   · Using the current stock price to determine the gain that would be realized from exercise of an
       option and the sale of the optioned stock.
The calculated value must be discounted by 30% to account for estimated taxes.

Stock options and non-vested restricted stock are NOT an acceptable source of funds for reserves.

Stock Privately Held Corporation
When the stock of a privately held (not publicly traded) corporation will be used as funds for down
payment and/or settlement costs, the price per share must be validated by a CPA for the corporation.
A copy of the Buy/Sell Agreement is also required. Verification of liquidation and receipt of the funds
from the sale of the stock is required.

In the situation where the privately held corporation is a source of the borrower s income, the above
documentation will be required together with verification from the accountant that sale of the stock will
not have an adverse affect on the business or reduce the borrower s current income level.


Retirement Accounts
Funds from individual retirement accounts (IRA, Keogh accounts) and tax-favored retirement savings
accounts (401K accounts) may be used as the source of funds for the down payment, closing costs or
cash reserves. When funds from these sources are used for the down payment or settlement costs,
30% must be subtracted from the vested amount to account for any applicable withdrawal penalties or
income tax so that only the net withdrawal is counted. When funds from these sources are used to
support the cash reserve requirement, it is not required that the funds actually be withdrawn from the
account(s).

However, 401K, Keogh accounts, and other employer-sponsored retirement accounts can only be used
to the extent that the borrower is vested in the account, and are fully accessible. Terms and conditions
for withdrawal must be documented.


Employee Savings Plans 401(k)/IRA/Keoghs/Retirement Plans
Funds from an individual retirement account (IRA/Keogh) and/or tax-favored retirement savings
account (401k) may be used for the down payment, closing costs, and reserves provided the borrower
has access to the fund(s). However, because there are severe penalties for early withdrawal (before
retirement age), only the net value, after any withdrawal and/or tax penalties are deducted, may be
considered.

Funds held in a 401(k) and other eligible retirement plans may be included in the calculation.
Satisfactory verification of the 401(k) account and the amount of borrower's "vesting" should be
provided. For IRA accounts, the current balance minus any early withdrawal penalties should be used
to calculate available reserves.

No more than 60% of the face value should be used to calculate the amount of funds available. A copy
of the latest statement reflecting vested balance and cash available for withdrawal should be used to

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determine face value of the account. CitiMortgage must verify the ownership of the account and verify
the borrower's actual receipt of the funds realized from the sale or liquidation of the assets if needed to
complete the transaction.

NOTE: Stock options and non-vested restricted stocks options are not eligible for use as reserves.

Exception: One hundred percent of the face value can be used only if it can be verified the borrower will
not be subject to any penalties or taxes. (E.g., if the borrower has already withdrawn the funds and it
can be verified in a bank account, or if a statement is obtained from the borrower's CPA or accountant.)
Statements must identify the borrower's vested amount and the terms and conditions for funds'
withdrawal or loans. Evidence of liquidation is not required.

Retirement Accounts must be verified by the following:
    ·   Most recent two months statements reflecting the vested balance or percentage of vesting, any
        outstanding loans, the ending balance of the account and terms of the withdrawal/loans.
             o Be computer generated or typed (not handwritten)
             o Identify the employer
             o Identify the account owner (borrower)
             o Identify the stocks, securities and/or other specific type of assets held in the account
             o Show the period covered and ending balance
    ·   Any outstanding loans must be subtracted prior to determining the vested balance.
    ·   If the assets are required for closing, proof of liquidation is required.


Acceptable value for Stocks, Bonds, Mutual funds and retirement accounts for Reserves

Determining the value of the asset when used for reserves:
Stocks, bonds, and mutual funds: 70% of the value may be used.
Retirement accounts: 60% of the vested value may be used.
Stock options and non-vested restricted stock are not eligible for use as reserves.

As a reminder, HSOA must verify the ownership of the accounts, and verify the borrower's actual
receipt of the funds realized from the sale or liquidation of the assets if needed to complete the
transaction.

DU: The amount entered into DU should be the respective 70% or 60% of balances.

Joint Ownership of Depository Accounts
Joint accounts with non-borrowing spouses are accepted. All other accounts held jointly with another
party will be accepted if all the following are met:
    · Account holder address on bank statement is the same as the borrower s
    · Depository confirms the SSN of record belongs to the borrower
    · Other account holder affirms borrower s rights to full access on the account


Business Funds
Business funds/Corporate accounts are not an acceptable source of funds for down payment, closing
costs and reserves. Any transfers from business to personal accounts cannot have occurred on any of
the bank statements included in the loan file.

 Bank Account Holder s                 Eligibility
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 names
 Personal                              Accepted without restriction

 Personal and a business               Allowed, subject to:
 name                                      · Exception approval
                                           · tax returns are filed as a Sole Proprietor using Schedule C
                                           · borrower is the sole owner of the business
                                           · Two year financial review is made of the business tax returns.
                                           · Determination is made that the withdrawal of the funds will not
                                              negatively impact the business. If the tax returns were
                                              professionally prepared, a CPA letter is required as part of this
                                              determination.

 Business name                         Not accepted



Equity From Sale of Real Estate

Anticipated Proceeds
The net proceeds that will be generated from the sale of an existing property must be established. If
the Final HUD-1 is not available at time of underwriting and will be provided as a prior to funding
condition, then either an estimated HUD-1 or a copy of the executed contract for sale must be
obtained. To determine the amount of equity the borrower holds in a property, use the following
formula:
                               Sales price sales cost all liens = equity.

If a sales price has not been established, anticipated equity may be calculated with the following:
                      List price 10% of list price for sales costs all liens = equity.

The 10% sales cost factor may need to be adjusted upward depending on market conditions in the area
of sale. True net equity must be verified upon sale of the property, regardless of the adjustment factor
used.

Verifying Proceeds at upon sale
Proceeds from the sale of a currently owned home or real estate are an acceptable source for the down
payment and closing costs of a new house. Proceeds from the sale must be documented with:
   · A certified copy of the final fully executed HUD-1 or equivalent closing statement as required by
       specific state laws with verified supporting documentation in the loan file,
       Or
   · Executed buy-out agreement and accompanying settlement statement from an employer
       relocation plan where the employer /relocation company takes responsibility for the outstanding
       mortgages.

HUD-1 or settlement statement must meet the following requirements:
  · Be computer generated
  · Identify the borrower as the seller of the property
  · Identify the property sold
  · Show the proceeds to the property seller
  · Show disposition of all liens against the property
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    ·   Be signed by the buyer/seller, or authorized agents

In escrow states, an estimated HUD-1 must be received prior to funding or simultaneous closings.

Sale of Other Assets
Proceeds received from the sale of a borrower s assets, including personal property, will be acceptable
source of funds for the down payment, closing costs, and reserves provided the individual purchasing
the asset is not a party to the sale transaction or the mortgage financing transaction and as long as the
borrower can provide all of the following:
    · Evidence of ownership of the asset (for example, copy of car title, insurance policy, or appraisal)
    · Documentation that supports the value of the asset, such as published value or estimates or an
       appraisal by a qualified appraiser
    · Conclusive evidence the items have been sold and ownership transferred, such as a bill of sale
       or a statement from the purchaser
    · Evidence of receipt of the purchase proceeds, such as a deposit slip or bank statement
    · Evidence to support liens paid in full or transferred to the purchaser of the asset, a copy of
       which must be included in the loan file
Only the lesser of the documented value or actual sales price may be considered as funds to close.
The item(s) in question must be sold to a party outside of the loan transaction.


Tax Refunds
To utilize tax refunds for closing, all of the following documentation will be required:
   · Copy of the filed tax return together with any documentation reflecting an EZ or Rapid refund,
         signed and dated by borrower
   · A copy of the deposit slip or certified printout indicating deposit of the tax refund (source of
         funds documentation)

Loans Secured by Borrower s Financial Assets
Borrowed funds that are secured by an asset represent a return of equity and may be used for the
transaction. Assets can include certificates of deposit, savings accounts, stocks, bonds, motor vehicles,
real estate, personal property, 401(k) accounts and life insurance policies. The underwriter must verify
both the items of the loan and the fact that it is a secured loan.
Verify the terms of the loan and the fact that it is a secured loan. In addition, verify that the party who is
providing the secured loan is not a the broker, developer, property seller, real estate professional or a
lender who is otherwise connected with subject transactions, and must confirm that the funds were
transferred to the borrower.
Monthly payments on this loan must be included in the total debt ratio, unless secured by one of the
assets listed below. When the loan does not require monthly payments, the lender should calculate an
equivalent amount and consider it as a debt.
Borrowed funds may not be used to purchase investment properties

Refer to Chapter 6 Ratios, Monthly Obligations, and Contingent Liabilities topic for details about Loans
Secured by Borrower s Financial Assets .

Documentation of the following is required:
   · Terms of the secured loan
   · Evidence that the party providing the secured loan is not a party to the sale or financing of the
     property
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    ·   Evidence that the funds have been transferred to the borrower

Monthly payments for loans that are secured by the following financial assets need not be included in
the calculation of debt ratios:
    · 401(k) accounts
    · Savings accounts
    · Certificates of Deposit
    · Life Insurance policies
A copy of the loan document showing the asset as collateral must be provided.

Rent Credit from Lease with an Option-to-Purchase
Rent credit is defined as the excess amount from the difference between the actual rent paid by the
borrower and the fair market rent for comparable properties in the same market area, as developed by
the appraiser, and provided the initial terms of the contract provided for a rent credit.

Rent credit will be accepted provided all of the following are met:
   · The minimum term of the original lease was at least 12 months, and borrower must have made
       at least 12 payments.
   · Transaction is a purchase of a primary residence.

The credit package must contain the following:
   · Copy of the rental/purchase agreement, which must spell out the terms of any rent credit.
   · Provide canceled rent checks or bank statements to document rental payments, and any initial
       deposits.
   · Fair Market Rents verified by the appraisal.

The amount of rent credit accepted will be the lesser of the amount stipulated by the contract or the
rental amount minus the appraiser s estimate of fair market rent.

If the requirements above are not met, the rental payments over and above fair market rent may not be
included toward the borrower s funds. NOTE: In all cases, if the borrower s actual rent payments are
below fair market rents, the aggregate difference must be considered a Sales Concession and
deducted from the purchase price/appraised value.

1031 Tax Deferred Exchange
The 1031 tax deferred exchange provides the borrower with an additional means for providing down
payment funds. It allows the borrower to exchange like-kind property as long as the acquired one- to
four-unit property is of greater or equal value to the relinquished property.

Reverse exchanges are not allowed. This occurs when the borrower acquires the subject property
through an exchange accommodator titleholder prior to transferring the property to be
relinquished.Borrowers should consult with their tax advisor, attorney and/or qualified exchange
intermediary/accommodator for all 1031 tax deferred exchange eligibility requirements.

A 1031 tax deferred exchange is an acceptable source of down payment for an investment property
purchase transactions. Second home and primary residence transactions are not permitted

The following documentation is required in the loan file for both properties of a 1031 tax deferred
exchange transaction closing simultaneously:
   · Sales contract
   · A drive-by, limited walk-in or full walk-in appraisal
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    ·   Fully executed HUD-1
    ·   Fully executed deed transferring title
    ·   Exchange agreement identifying the holder of funds, buyer and home seller, expiration date,
        agreed upon value, closing date, closing costs and conditions of transfer and repairs if required
    ·   Statement of borrower s equity for the property to be relinquished, calculated as the lesser of
        the appraised value or the trade-in value (sales price) from the sales contract minus any
        outstanding liens and transfer costs

The following documentation is required in the loan file for both properties in a 1031 tax deferred
exchange transaction when the relinquished property is transferred prior to the purchase of the subject
(acquired) property:
   · Sales contract
   · Fully executed HUD-1
   · Exchange agreement identifying the holder of funds, buyer and home seller, expiration date,
        agreed upon value, closing date, closing costs and conditions of transfer and repairs if required.
   · Verification of funds from the qualified intermediary / accommodator

Income Tax Refund
If an income tax refund that has not yet been received will be used as funds for down payment or
closing costs, the borrower must provide a copy of the actual signed tax return to verify the anticipated
refund. Verification of receipt of the refund is required and must be documented by a copy of the
refund check.

Trade Equity
The property seller may take a property owned by the borrower as part of the down payment on the
property being sold to the borrower, as long as the borrower has made a 5% cash down payment. The
borrower s equity contribution must be a true value consideration supported by a current appraisal. The
credit package must include the following:
    · Current HVCC-compliant Conventional walk-in appraisal of the property being traded.
    · Copy of the trade-in contract.
    · Title search showing the borrower owns the real estate and verifying any liens associated with
        the property.
    · Documentation of the current balance on any liens

To calculate borrower s equity, use the following formula:
    Lesser of current appraised value or trade-in price outstanding liens          transfer fees = equity.

The property seller must provide proof of title transfer in addition to verification that either all liens have
been satisfied or the borrower is released of liability by an approved assumption. The transfer deed
must be recorded. The rules above apply to all trade-in transactions, including those evidenced with
two separate contracts in which the buyer and seller reverse roles.

The property being traded cannot be a manufactured home.

At closing, title must transfer and any outstanding liens must be satisfied or assumed by the seller.
The following documentation is required in the loan file for the property being traded:
    · Sales contract
    · A full walk-in appraisal
    · Fully executed HUD-1
    · Fully executed deed transferring title

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Land Equity
When paying off a construction loan, the land equity may be applied toward the down payment. The
land equity value is determined by a current appraisal for all loans where the land was purchased 12
months or more prior to application date; use acquisition cost if less than 12 months.


Bridge Loans
A bridge loan (or swing loan) is a short term loan that can be arranged by the borrower to obtain the
equity from a previous residence. By using funds from a bridge loan, the borrower can close on a new
home before selling their present home. This type of financing is acceptable if the following conditions
are met:
    · Verification of the terms of the loan must be included in the credit package, including a copy of
        the Note.
    · The bridge loan must be for a minimum term of six months.
    · The bridge loan must be included as a liability on the application.
    · If the bridge loan calls for payments of principal and/or interest, the payment must be included in
        long-term debt. If no payment is required, the monthly interest amount must be included in the
        DTI.
    · All other PITI for the previous residence must be included in long-term debt.
    · The loan must be secured by the previous property and not the property being purchased.
    · Copy of the Listing Agreement or fully executed Purchase Agreement if the property is sold, but
        not closed.


Repayment of Loans
When funds are obtained from repayment of a previous loan made by the borrower, the following
information must be provided:
    · Written agreement between the borrower and the recipient of the loan.
    · Verification the borrower had the ability to lend the funds.
    · Evidence the funds were withdrawn from the borrower s account and accepted by the recipient.
    · Verification the repayment has been made. Provide statements verifying the funds being
       withdrawn from the recipient s account and deposited into the borrower s account.

Credit Card Financing of Certain Costs
Some borrowers prefer to use a credit card to pay certain paid-outside-of-closing (POC) costs such as
those for lock-in fees, credit reports, or appraisal reports. Since these charges do not represent
extraordinary amounts (and credit card debt is considered in the borrower s total monthly obligations-to-
income ratio), the use of a borrower s charge card will be permitted for costs, such as lock-in fees,
credit report, and appraisal charges as long as the total amount of the charges is less than $1,000.

When verifying the funds available for closing for a borrower who paid these application charges with a
credit card, confirmation that the borrower has sufficient funds to cover these charges (as well as other
closing costs that will be paid) is required. However, the borrower does not need to actually pay off
these charges at closing, provided the credit card balance is included in DTI.

Life Insurance Cash Value
Cash value on a life insurance policy may be used as the borrower s assets for down payment and
closing. Provide verification of the cash value life insurance with a computer-generated or typed
statement from the insurance company which contains the following information:
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 Identifies the life insurance company
 Identifies the policy owner(s)
 Shows the period covered and ending cash value
 Shows any outstanding loans

If Life Insurance Cash Value is to be used for reserves, use 60% of the net cash value; if using for
down payment, use 100% of the net cash value; evidence of liquidation must be documented.

US Savings Bonds/Government Bonds
US Savings Bonds must be verified by the following:
   · A statement from a financial institution or the loan originator confirming review of the actual bonds
     and listing the serial numbers, date of maturity, type, amount and verifying that the borrower is the
     owner
   · Proof of value from the U.S. Treasury Table
   · Evidence of liquidation if the assets are required for closing.

Government Bonds
Government bonds should be valued at their 60% of the purchase price or redemption value (if known).
The redemption value can be determined and verified by copies of the bonds showing the borrowers as
owners, date of maturity, the amount of the bond, and the value of the bond on the appropriate U.S.
Treasury Table. The actual redemption of bonds and receipt of funds must be verified by a copy of a
statement in the loan file.

Cash-on-Hand
Not accepted

SuSu or g mach accounts, Community Savings System
Not Accepted

Systematic Future Savings
Borrowers should have the funds need to close the transaction at the time of underwriting. However, a
loan to a borrower who does not have sufficient assets to close may be underwritten subject to the
following parameters:
     · 80% of the required assets must be documented at the application date.
     · The ability of the borrower to save based on his/her income and debts must be documented by
        the borrower developing and the underwriter approving a systematic savings plan (budget). The
        budget must confirm the total monthly residual income available for savings. It must
        demonstrate that the borrower will have sufficient income, given the normal household
        expenses, to save a specific cash requirement in a specific time frame. The complete and
        signed budget must be included in the credit package.
     · If the above requirements have been fulfilled, the loan may be approved subject to evidence
        that the additional funds were saved, the source of funds are documented, and the funds
        verified in the borrower s account before closing.

Inheritance
Funds received through an inheritance may be treated as the borrower's own funds. The borrower must
provide a copy of the will or a letter from the Trustee detailing the distribution of the estate. Borrower's
receipt of funds must be verified prior to closing.



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Lawsuit or Insurance Settlement
When using funds received as a result of a lawsuit or insurance settlement the borrower must provide a
copy of the settlement agreement, judgment or letter from an attorney providing the amount of the
borrower's portion of the settlement. The receipt of funds must be documented with a copy of the
settlement check and deposit slip. These funds are considered as the borrower s own funds.
Funds already on deposit in the borrower s account must be supported by bank statements and
evidence of settlement, which must include the settlement agreement or letter from the settlement
attorney, claims statement or court order.

Trust Account Distribution
A distribution from a trust may be used for down payment, closing costs, and reserves if the borrower
has immediate access to the funds. The Trust manager or trustee must verify the value of the trust
account and confirm the conditions under which the borrower has access to the funds. The effect the
withdrawal of funds from the account will have on trust income must be documented if trust income is
used to qualify the borrower.

Receipt of the distribution must be evidenced by a letter from the trustee (unless the trustee and the
borrower are one in the same) and a copy of the check.

Verifications of trusts and distribution of assets must be a typed copy of the trust agreement (not
handwritten) or a signed statement from the trustee. The trustee must be an independent party that
typically handles trust accounts (trust company, financial institution, CPA, or Attorney, etc).
The documentation must verify:
    · The identity of the trustee, including the name, address, telephone number and an individual
        contact.
    · The borrower as beneficiary
    · The borrower has access to all or a certain specific amount of the funds.
    · The trust has sufficient assets to disburse funds to the borrower.

If the Trustee is a private party not meeting the criteria above, Trust Account Distribution funds are not
eligible.

Relocation Benefits
Benefits provided by a borrower s employer to offset relocation expenses are considered acceptable
funds for closing costs and will be treated as the borrower's own funds to meet closing costs
requirements. When a borrower will be using these funds to close, the following guidelines will apply:
   · The property must be an owner-occupied primary residence.
   · The borrower must provide a copy of the relocation policy and evidence he or she is eligible for
       the stated benefits.
   · The borrower must provide a copy of the request for funds anticipated for closing and a copy of
       the check from the employer.

Relocation assistance in the form of a reimbursement from the employer that is to be received after
closing will not be counted as available funds to close. The reimbursement funds may be given
consideration when meeting reserve requirements.




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Disaster Relief Grants/Loans
Disaster relief grants or loans that a state or federal agency uses to compensate an individual for
his/her flood losses are an eligible source of funds for the down payment, closing costs, prepaids, and
reserves. Borrowers do not need to make a 5% cash down payment with their own funds.

If the loan is a secured loan, include in the calculation of the CLTV. Any payments must be considered
in the calculation of the borrower's monthly housing expense-to-income and total obligations-to-income
ratios.
.

Relocation Equity Buyout
A corporate relocation buyout of a borrower's current home is acceptable if evidenced by one or more
of the following:
    · Copy of executed relocation agreement
    · Fully executed offer-to-purchase agreement with the borrower 's employer or a third-party
        relocation company
    · Evidence of an assigned sale with guaranteed purchase by the employer or relocation company
        if the assigned sale fails to close
    · Evidence of the equity advance received from the employer or relocation company
    · HUD-1 as evidence of settlement between the borrower and the employer, relocation company
        or third-party buyer

Individual Development Accounts
Not accepted

5-3 Cash Reserves
Refer to the Product Summary for specific reserve requirements.

Cash reserves should generally be in the borrower s seasoned personal assets. Cash out proceeds
may not be used to meet the minimum reserve requirement. DU recommendation does not eliminate
the requirement to verify reserves, as needed based on selected programs.

5-4 Contribution Limitations

Defined
Any costs that are normally the responsibility of the borrower, but paid by another party are considered
contributions. Contributions are considered either Seller/Interested Party Contributions or Sales
Inducements.

Seller/Interested Party Contribution
   · Buydown plans
   · Contribution toward financing fees normally paid by the borrower
   · Discount points
   · Commitment fees
   · Appraisal fees
   · Origination fees
   · Builder commitment fees that are attributable to a specific mortgage transaction
   · Contribution toward other costs related to the transaction that are normally paid by the borrower,
        but paid by another party:
            o Transfer taxes

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            o   Stamps
            o   Attorney s fees
            o   Surveys
            o   Title insurance
            o   Hazard insurance premium due at closing
            o   Hazard insurance and mortgage insurance prepaid charges, provided an escrow
                impound account is established, not to exceed 2 months payments.
            o   real estate taxes collected as prepaid escrows, in an amount typical and standard for the
                area, provided an escrow impound account is established.
            o   Per diem interest collected at closing
            o   Tax service fees
            o   One time up-front MIP or first year s premium for a renewable borrower paid MI policy

Certain appliances and non-realty items (such as window treatments) may remain with the property and
will not be treated as a Sale Inducement if inclusion in the transaction is common and customary for the
area. Replacement of existing equipment is not considered to be a sales inducement as long as it does
not result in a cash allowance paid to the borrower.


Sale Inducements
Sales inducements include items such as:
   · Furniture, decorator allowances, moving costs, prepayment of HOA fees or principal or interest
       payments, vacations, automobiles, or other items considered to be giveaways .
   · A financial obligations of the borrower (i.e., revolving debt and installment debt), being paid by
       the seller/interested party
   · Any amount of Seller/Interested Party contribution that exceeds the maximum allowed limitation
   · Per diem interest collected at closing


A downward adjustment to the property s sale price must be made to reflect the amount of the sales
inducement. Calculate LTV/CLTV ratios based on the lesser of the adjusted sales price or appraised
value.

Contributors
Contributors may include individuals not directly involved in the transaction, such as the borrower s
family members or employer. Contributors may also include direct participants such as the originator,
builder, seller, developer or real estate agent, etc. Contributions by the borrower s family or employer
are not considered seller contributions and therefore, not subject to the contribution limits. If the
contributor is a family member, the funds are considered a gift and are treated as such (Refer to the
Gift topic in this Chapter

A salary advance from the borrower s employer cannot be considered as a contribution since it
represents an unsecured loan.

Maximum Allowable Contributions
Refer to the Product Summary for variances.

Conforming Programs
          Occupancy                            LTV                   Maximum Contribution
      Primary/Second Home                90.00% and higher                  3%
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      Primary/Second Home                  75.01% - 90.00                        6%
      Primary/Second Home                 75.00% and less                        9%
           Investment                           ALL                              2%



Non-Conforming and Portfolio Programs
            Occupancy                          LTV                    Maximum Contribution
              Primary                    90.01% and higher                   3%
              Primary                     90.00% and less                    6%
           Second Home                   80.01% and higher                   3%
           Second Home                    80.00% and less                    6%
            Investment                         ALL                           2%



.
5-5 Unacceptable Sources

The following are considered unacceptable sources of funds and cannot be used for down payment,
closing costs or reserves unless permitted in product or program:
    · Depletion of assets
    · Cash advance on credit card
    · Signature loan
    · Unsecured financing
    · Personal loan
    · Cash advance on a revolving charge account, unsecured or secured line of credit, including
        HELOCs.
    · Labor performed by the borrower (also referred to as sweat equity ).
    · Materials furnished by the borrower that are not part of a pre-closing agreement with a builder.
    · Any payments received as a result of being a party to the sales transaction (i.e., real estate
        commission, loan commission, etc.).
    · A gift that must be repaid
    · Cash for which the source cannot be verified (cash on hand)
    · Commission from sale of subject property
    · Salary or bonus advance received against future earnings
    · Sweat equity (contribution to the construction or rehabilitation of a property in the form of labor
        or services rather than cash)
    · Unverifiable source of funds
    · 1031 Exchange funds for owner occupied or second homes
    · Reverse mortgage
    · Pension fund




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Chapter 6 Ratios

OVERVIEW
This chapter details ratios and how they are used to compare the borrower s anticipated
monthly housing expense and total monthly obligations to stable monthly gross income. These
ratios indicate limitations on the borrower s ability to meet expenses involved in home
ownership.

DU Approve/Eligible loans may exceed the Conforming program qualification ratios
requirements, unless the Product Summary limits the ratios.



6-1 Housing Expense Ratio

Monthly Housing Expense
The total monthly housing expense includes the following:
   · Principal and interest payment on the mortgage loan.
   · Payments on subordinate financing.
   · Hazard insurance premiums.
   · Real estate taxes.
   · Private mortgage insurance premiums.
   · Homeowner s association dues.
   · Flood insurance premiums.
   · Leasehold payments.

Housing Ratio Limitations
Housing expense-to-income ratios compare monthly housing expense to monthly stable gross income.

Conforming and Portfolio Programs
While historically the housing ratio limitation has ranged from 28% to 33%, DU currently does not
consider a housing ratio as a qualifying factor.

Non-Conforming
Refer to the Product Summary for specific requirements on qualifying formulas and limitations. The
current underwriting housing ratio limitation for non-conforming loans is 32%.


6-2 Monthly Obligation Ratio (DTI)

Obligation Expenses to Include in Ratios
This section discusses monthly debt obligation expenses required for calculation of the anticipated total
monthly debt-to-income ratio. The total monthly obligations considered is the sum of all housing
expenses plus any other monthly expenses incurred by the borrower.

Monthly obligation expenses include:
  · Monthly total housing expense.
  · Installment debts with over 10 months of remaining payments.



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    ·   Installment debts with less than 10 months remaining where the monthly payment may impact
        the borrower s ability to repay the mortgage debt, unless the borrower has additional excess
        reserves of at least the unpaid balance loan balance.
    ·   All auto lease payments, regardless of the number of remaining payments.
    ·   Alimony, child support and maintenance payments with over 10 months remaining. Note: DU
        will count these payments regardless of the months remaining.
    ·   All revolving and open-end account expenses. In the absence of a verified payment or a
        payment less than 1%, the greater of 5% of the outstanding balance or $10 must be considered
        to be the required monthly payment.
    ·   Payments on deferred loans
    ·   Aggregate net negative rental income from all rental properties.
    ·   Principal and/or interest on short-term notes.
    ·   Principal and/or interest payments on balloon notes.
    ·   Mortgage payments and related expenses on any non-income producing real estate.


HELOC Payments
For any Home Equity Line of Credit (HELOC), use 1% of the maximum line amount when calculating
ratios. This applies regardless of the property or occupancy. See Section 1-16 CLTV for additional
requirements.


Authorized User accounts
Payments on "Authorized User" accounts should always be included in the debt-to-income ratio unless
written documentation (i.e. 12 months cancelled checks) is provided proving that the owner of the
account is making the payments. If an authorized user's account is used to meet the minimum credit
requirements, then both the payment history, including any late payments, and the monthly obligation
must be considered in the credit analysis and included in the DTI ratios. If the AUS approval is based
on authorized user account trade lines, underwriter must confirm these accounts accurately reflect the
borrower's credit history.


Qualifying Amount for Property Taxes
For qualifying purposes for the property tax payment, for California purchase transactions use 1.25% of
the sales price. In all other cases, compare the following sources and use the highest of: appraisal; title
commitment binder/prelim; tax bill, if provided; or for new construction properties, 1.25% of the sale
price unless a higher percentage is typical and customary.

Open 30-Day Charge Accounts
On all 30-day accounts, also referred to as open accounts (e.g., Diners Club, American Express and
identified as "w/o" vs. "r" on the credit report), the payment is not counted. However, the balance should
be considered when calculating available assets for cash to close. If the borrower does not have
sufficient assets to cover the unpaid balance, or will not be reimbursed by their employer for the
charges, the account must be paid off at closing and the source of funds must be provided.

Voluntary Recurring Debts
Voluntary recurring debts should generally not be considered in the underwriting analysis nor
subtracted from gross income. Some examples of voluntary recurring debts are 401(K) contributions,
401(k) loans, union dues, commuting expenses, open accounts with zero balances, federal taxes, state

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taxes, local taxes, or other voluntary deductions. Specific circumstances in an individual file must
always be analyzed.

Deferred Loans
Deferred loans including student loans must always be considered in the ratios. If the credit report
does not reflect a monthly payment, request a copy of the creditor s payment letter to the borrower to
establish the qualifying monthly payment. If the creditor letter is not available, use 1.5% of the unpaid
balance.

Note: If the student loan has gone into default and a renegotiated payment plan has been established,
copies of the past 12 months payments and repayment agreement are required. A repayment history
of less than 12 months is not allowed.


Demand Loan/Term Note
Unless the Demand/Term Note is converted to a fully amortizing loan before closing, the borrower must
have sufficient excess reserves after closing to pay the Note in full; otherwise, use 5% of the unpaid
balance as an installment debt payment, regardless of when the Note is due.


6-3     Ratio Limitations
Debt-to-income underwriting compares all monthly obligations/debt payments to gross monthly stable
income.

Refer to the Product Summary for specific requirements on qualifying formulas and limitations. Unless
otherwise stated, or as restricted by mortgage insurance company limitations, DU will determine ratio
acceptance, which generally is a 45% DTI.


6-4 Compensating Factors
(Applicable to Portfolio Loans only that are manually underwritten.) HSOA recognizes that there may be
justification for exceeding the limits stated above. Higher housing expense and debt-to-income ratios
may be considered as long as there are sufficient compensating factors and rationale to justify their
use. Less flexibility is warranted for transactions involving layering of risk. The compensating factors
must be documented in the mortgage file and comments addressing them must be included on the
Loan Transmittal Summary (1008). Acceptable compensating factors include:
    · Successful history of paying previous housing expenses equal to or greater than the proposed
         monthly housing expense.
    · Demonstrated ability to apply more income to housing expense.
    · Demonstrated ability to accumulate savings and maintain a good credit history, or maintain a
         debt free position.
    · Large cash down payment on the purchase of the property.
    · A low loan-to-value ratio.
    · Potential for increased earnings and advancement based upon education, job training or time
         employed or practiced in a profession.
    · Income received by the borrower, but does not meet guidelines for inclusion as qualifying
         income.
    · Significant residual income (the amount of income available for use by the borrower after all
         housing and recurring debts have been deducted).
    · Substantial net worth, liquid and other verified assets, available to repay the loan.
    · Energy efficient property that reduces energy costs.

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6-5 Contingent Liabilities

Co-signed or Guaranteed Debts
When the borrower is a cosigner or guarantor on a mortgage or installment loan, the liability may be
excluded as a monthly debt payment when supported by the following documentation:
    · Evidence from the creditor showing the parties obligated to the liability (Note, Loan Agreement,
       etc).
    · Cancelled checks (minimum of 12 months) indicating the primary obligor has been making the
       monthly payments unassisted on a regular basis.
    · Minimum 12 month pay history.
    · No late payments in the account history. If the obligation doesn t show on the borrower s credit
       report, provide either a credit supplement or a payment history from the creditor.
If payment by the primary obligor cannot be sufficiently documented and/or a sufficient payment history
has not been established, the debt must be indicated on the mortgage loan application and considered
as a monthly debt payment for mortgage eligibility purposes. Cash as a source of payment is not
acceptable.

If payments are being made by someone not obligated on the Note, the debt must be included.

Revolving accounts must always be included in the ratios.

Liabilities Paid by the Business
When the borrower indicates on the loan application that certain liabilities are paid by his or her
business, the liability may be excluded as a monthly debt payment when supported by the following
documentation:
    · Cancelled checks (minimum of 12 months, unless DU asks for more) showing the debt paid
        from the borrower s business account.
    · Tax returns supporting the debt expense (entire payment) accounted for in the income
        analysis), and the asset and liability in the balance sheet.
    · Letter from the business accountant (CPA) stating the loan is paid by the business.
    · The account has no late payments in the last 12 months and no more than 1X30 in the past 24
        months
If any of these conditions cannot be met, the obligation must be included in the DTI.

Property Settlement Buy-Out
When the borrower s interest in a property was bought-out by another co-owner of the property, the
mortgage lender may not have released the borrower from liability under the mortgage, thus creating a
contingent liability for the borrower. The liability may be excluded as a monthly debt payment when
supported by the following documentation:
   · Evidence to support the buy-out (HUD I, separation agreement, etc.).
   · Evidence of the transfer of title to the property.
   · 12 months seasoning since sale, with no lates.

Assumption with release of liability
A Formal Assumption is when the borrower disposes of real estate and is released from the existing
lien by the lender. The liability may be excluded as a monthly debt payment when supported by the
following documentation:
     · Evidence of the transfer of ownership.
     · Copy of the executed Assumption Agreement.
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    ·   Copy of the release of liability.
    ·   A 12 month payment history for the property purchaser that assumed the mortgage indicating
        timely payments have been made. If the property purchaser s payment history cannot be
        verified or shown as being paid timely, the mortgage payment must be included. Exception
        requests allowed to steer to accepting investor.

Simple Assumption
A Simple Assumption is when the borrower is not released from the existing lien. The liability may be
excluded as a monthly debt payment when supported by the following documentation:
   · Minimum 12 months seasoning for completion of the Simple Assumption.
   · Evidence of the transfer of ownership.
   · Copy of the executed Assumption Agreement.
   · Copy of the release of liability OR credit supplement to confirm the assumption by another party.
   · Minimum 12 current months cancelled checks from the party who assumed the mortgage.
   · Evidence of no late payments within the current 12 months.
   · Significant cash reserves.
   · If the property purchaser s payment history cannot be verified or shown as being paid timely, the
       mortgage payment must be included.


Contract for Deed/Land Contract Sales
Payments received may be used to offset the outstanding mortgage obligation if the borrower provides
the most current one year s tax returns to support 12 months receipt of payments.

Court-Ordered Assignment of Debt
When a borrower has an outstanding debt that was assigned to another party by a court order, the
liability may be excluded as a monthly debt payment when supported by the following documentation:
    · Copy of the court order assigning the debt.
    · Evidence of the transfer of ownership (if applicable).

Loans Secured by Borrower s Financial Assets
A borrower may use an asset such as life insurance policies, 401(K) accounts, individual retirement
accounts, certificates of deposit, etc. as allowed in Section 5. The liability may be excluded as a
monthly debt payment when supported by the following documentation:
   · Copy of the applicable loan instrument showing the borrower s financial asset as collateral for
       the loan.
   · If the borrower intends to use the same asset to satisfy the cash reserve requirements for the
       mortgage loan, reduce the value of the asset by the proceeds securing the secured loan and
       any related fees in order to determine the borrower has sufficient reserves.


Other Real Estate Owned Free and Clear
When the borrower indicates on the loan application that other real estate owned is free and clear of
any mortgage liens, the underwriter has discretion for requiring evidence that the property is owned free
and clear. The borrower must qualify with the inclusion of hazard insurance, property taxes and any
other property related costs for the property owned free and clear.

Swing/Bridge Loans
Refer to Chapter 5 Assets - Bridge Loans topic for loan requirements.


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Payoff/Pay downs
Refer to the table below.

 Action                      Revolving Debt                                                  Installment
                                                                                             Debt
 Paying off debt             Acceptable if <=75% LTV/CLTV and borrower s credit history      Allowed, no
                             does not reflect a pattern of refinancing.                      further
                                                                                             consideration
                             If >75%LTV/CLTV or borrower has a history of refinancing with   required
                             increasing loan balances, paying off debt to qualify is
                             generally not allowed when large payments or balances are
                             involved and borrower does not have excess cash reserves
                             from which these accounts could have been paid.
                             Payments on effected accounts are to be included in the DTI
                             calculations.

 Paying down debt or         Generally, not allowed when large payments are involved. Underwriter must
 amortizing payments         consider effect of remaining payments on borrower s ability to make payments,
 have reduced number         including amount of excess reserves available that could be used to make the
 of payments to less         remaining payments
 than 10

6-6     Non-Occupant Co-borrowers
 Refer to the Product Summary for the ratios of all borrowers when the income and debt obligations are
combined and for any additional restrictions. Unless otherwise stipulated, when the loan includes non-
occupant co-borrowers, the occupant borrower ratios cannot exceed 35/43%. DU does not recognize
income or liabilities from non-occupant co-borrowers.


6-7     Calculating Ratios 2nd Homes and Investment Properties
Second Homes
The housing expense-to-income ratio must always be based upon the borrower s primary housing. The
total PITI for the subject property second home is included with the borrower s other obligations when
calculating the total obligations-to-income ratio.

Investment Properties
The housing expense-to-income ratio must always be based upon the borrower s primary housing.
    · 2-4 unit primary residence in which the borrower will occupy one unit
    · 1-4 unit investment property
Include any net negative cash flow in the borrower s other obligations when calculating the total
obligations-to-income ratio.

6-8     Conversion of Principal Residence
For Sale or Pending Sale
Current principal residence is for sale or pending sale (under contract) but the transaction will not be
closed (with title transfer to a new owner) prior to the new transaction:
· Both the current and the proposed mortgage payments must be used to qualify the borrower for the
    new transaction.
· Reserves:
       o If current principal residence is pending sale, and file documentation includes an executed
           copy of the purchase contract AND confirmation that any financing contingencies for that
           sale have been cleared, no additional reserves required.
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        o   In all other cases, 6 months of PITI for both properties is required to be in reserves. Lender
            may consider reduced reserves of no less than 2 months for both properties if there is
            documented equity of at least 30 percent in the existing property (derived from an appraisal
              an AVM or BPO are not accepted), minus outstanding liens. If an appraisal is provided it
            must be HVCC compliant, and obtained through HSOA or from Landsafe or LSI. (Exception
            process is required; HSOA s investors have differing requirements)

Conversion to a Second Home:
· Both the current and the proposed mortgage payments must be used to qualify the borrower for the
   new transaction; and
· 6 months of PITI for both properties is required to be in reserves. Lender may consider reduced
   reserves of no less than 2 months for both properties if there is documented equity of at least 30
   percent in the existing property (derived from an appraisal an AVM or BPO are not accepted),
   minus outstanding liens). See appraisal requirements, above.

Conversion to an Investment Property:
Property being converted is a one-unit building
· 75 percent of the rental income may be used to offset the mortgage payment in qualifying if there is
   documented equity of at least 30 percent in the existing property (derived from an appraisal an
   AVM or BPO are not accepted), minus outstanding liens). If an appraisal is provided it must be
   HVCC compliant, and obtained through HSOA or from Landsafe or LSI. (Exception process is
   required; HSOA s investors have differing requirements).

The rental income must be documented with:
· a copy of the fully executed lease agreement; and
· The receipt of a security deposit from the tenant and deposit into the borrower s account.

If the 30 percent equity in the property cannot be documented, rental income may not be used to offset
the mortgage payment.
· Both the current and the proposed mortgage payments must be used to qualify the borrower for the
     new transaction; and
· 6 months of PITI for both properties is required to be in reserves.

Property being converted is a 2-4 unit property.
The 30% equity rule applies to the rental income from the unit currently occupied by the borrower.

Cannot use rental income from the other units in that building unless borrower meets the
documentation requirements for rental income, above




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Chapter 7 Appraisal and Property

OVERVIEW
This chapter details the general requirements for underwriting the property and appraisal
aspects of mortgages made on the one-to-four family properties for both Conforming programs
and Non-Conforming programs. An accurate property valuation and review is one of the key
elements helping to ensure prudent underwriting of mortgage loans. An investor will hold the
lender responsibility for the accuracy of the appraisal or inspection and its assessment of the
marketability of the property. These requirements are intended to provide guidance to
underwriters as to the type of information that is needed to make a prudent underwriting
decision.


7-1      Role of Appraiser and Underwriter

Home Value Code of Conduct
Effective with all applications that started on or after May 1, 2009, and with any appraisals received in
underwriting after May 15, 2009 (regardless of application date) must be HVCC compliant.

Role of the Appraiser
The appraiser s role is to provide the lender with an accurate adequately supported opinion of value;
and/or a complete, accurate description of the property. It is in the best interest of HSOA to have an
independent, disinterested examination and valuation of the property to accurately determine the
borrower s collateral. The appraiser must refrain from of any outside influence in the valuation process,
and the estimated value must be based on the appraiser s professional conclusion, market data, logical
analysis, and judgment.

The appraiser s analysis may not comply with the specific guidelines for every appraisal challenge. The
appraiser is allowed to use his or her discretion to properly develop the value estimate. However, the
appraiser must conform to all Code of Professional Ethics & Standards of Professional Appraisal
Practice of the Appraisal Institute and the Uniform Standards of Professional Appraisal Practice
(USPAP) requirements and provide sound reasoning in the appraisal report.

Effective for appraisals dated on or after January 1, 2009, the following appraisal requirements have
been revised and clarified:

·     The Home Ownership and Equity Protection Act (HOEPA) directs that anyone involved in
      originating a loan must not directly or indirectly coerce, influence, or otherwise encourage an
      appraiser to misstate or misrepresent the value of the subject property.
·     The appraiser must be provided with a copy of both the purchase contract and all addenda to
      ensure any financing and/or sales concessions are considered when determining impact on the
      value of the property. Amendments or adjustments received after the appraisal must be complete
      and supplied to the appraiser for review.

·     If a supervisory appraiser signs the appraisal, the Supervisory appraiser must perform the property
      inspection.

·     If an appraiser uses comparable sales outside the subject neighborhood when comparable sales
      are available, an explanation must be provided.

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·     Appraisers must provide a 12-month listing history for the property. Frequent listings and/or sales
      require explanation on each occurrence or listing and should include the data source(s), offering
      prices, and date(s), and any further evaluation as they may indicate "flipping."

·     In the analysis and completion of the sales comparison approach, the appraiser may determine that
      time adjustments are required. These adjustments may be either positive or negative. The
      adjustments must reflect the difference in market conditions between the date of sale of the
      comparable and the effective date of appraisal for the subject property.


Scope of Work
The scope of work for an appraisal is defined by the complexity of the appraisal assignment and the
reporting requirements of the appraisal report form, including the definition of market value, statement
of assumptions and limiting conditions, and certifications. At a minimum, the appraiser must:
    · Perform a complete visual inspection of the interior and exterior areas of the subject property
        (based on appraisal form type).
    · Inspect the neighborhood.
    · Inspect each of the comparable sales from at least the street.
    · Research, verify, and analyze data from reliable public and/or private sources.
    · Report his or her analysis, opinions, and conclusions in the appropriate appraisal report.

Role of the Underwriter
The underwriter is responsible for thoroughly analyzing the appraisal report and through it, the property
itself. The underwriter s role is to:
    · Review the appraisal or the property inspection report to ensure that it is of professional quality
         and is prepared in a way that is consistent with our industry requirements.
    · Analyze the property based on the appraisal or property inspection report.
    · Judge the property s acceptability as security for the mortgage requested in view of its value
         and marketability.

Compliance
In compliance with Equal Credit Opportunity Act (ECOA) and Regulation B the following are required:
    · Provide a copy of the appraisal report to the loan applicants, whether or not the applicant has
      paid for the report (broker to complete).
    · Send copies of all supporting schedules, or any other supporting documentation submitted by
      the appraiser, with the appraisal report copies.
    · Provide one set of photographs to the applicant.
    · Send the copy of the appraisal report to the applicant, not to any other interest party.
    · Keep a copy of the appraisal disclaimer, signed and dated, in the loan file as evidence of
      compliance.

7-2      Unacceptable Appraisal Practices
The following are examples of appraisal practices that are unacceptable:
   · Inclusion of inaccurate or incomplete data about the subject neighborhood, site, improvements,
        or comparable sales.
   · Failure to comment on negative factors about the property, the neighborhood, or the proximity of
        the property to unfavorable conditions that could impact marketability (such as factories,
        airports, freeways).
   · Use of comparables in valuation process even though the appraiser has not personally
        inspected the exterior of the comparables by a drive by inspection, at a minimum.

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      ·   Selection and use of inappropriate comparable sales data or the failure to use comparables that
          are located closer to and physically the most similar to the subject property.
      ·   Use of data, particularly comparable sales data that was provided by parties who have a
          financial interest in the sales or financing of the subject property source. For example, it would
          be inappropriate for an appraiser to use comparable sales provided by the real estate agent
          who is handling the sale of the subject property, unless the appraiser verifies the accuracy of
          the data provided with another source and makes an independent investigation to determine
          that the comparables provided were the best available.
      ·   Use of adjustments to the comparable sales that do not reflect the market s reaction to the
          difference between the subject property and the comparables, or the failure to make
          adjustments when they are clearly indicated.
      ·   Development of a valuation conclusion that is based either partially or completely on the race,
          color, or national origin of either the prospective owners or occupants of the subject property or
          of the present owners or occupants of the properties in the vicinity of the subject property.
      ·   Development of a valuation conclusion that is not supported by available market data.


7-3       Appraisal Documentation

Appraisal Forms
Note: The following lists the types of appraisal forms. Consult the Product Summary for any limitations
as to form acceptance.

                         Form
   Form Name                                                      Property Type
                        Number
Uniform                  1004          ·   Single family.
Residential               70           ·   Two-unit properties if each of the units is occupied by one of
Appraisal Report                           the co-borrowers as a principal residence.
(URAR)                                 · PUD units.
                                       · A site condominium consisting solely of detached dwellings,
                                           and having no common area improvements other than
                                           greenbelts, private streets, and parking areas. The report
                                           must include an adequate description of the project,
                                           information about the HOA fees and the quality of the project
                                           maintenance.
Small Residential        1025          2-4 unit properties.
Income Property           72
Appraisal Report
Appraisal Report         1073          Single family properties that are units in condominium projects.
Individual               465
Condominium                            Exterior only 1075 and 466
Unit
One-Unit                 2000          Field review appraisals for 1 Unit.
Residential              1032
Appraisal Field
Review Report
Two-to-Four-Unit         2000A         Field review appraisals for 2-4 Units.
Residential               1072
Appraisal Field
Review Report
Quantitative             2055          Limited appraisal used for SFR and Units in Condo and PUD
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Analysis                               projects. May be used interchangeably with URAR form 1004 for
Appraisal Report                       1-unit owner-occupied and second home transactions if eligible by
                                       the AUS certificate, which also indicates the eligibility of external-
                                       only inspections.
Qualitative              2065          Only if indicated on the AUS certificate.
Analysis
Appraisal Report
Condition and            2070          Used to report the condition and marketability of 1-unit properties.
Marketability          (FHLMC          This form does not provide an estimate of value. May be
Report                   Only)         completed with interior or exterior-only inspections.
Property                 2075           FNMA form used to document an exterior-only inspection of the
Inspection Report       (FNMA          property. This form does not provide an estimate of value.
                         Only)
Property               No form          The AUS certificate may indicate that a 2075 property inspection
Inspection Waiver       number         report can be waived. If this waiver is exercised, no inspection
(PIW)                                  report or appraisal is needed; however, a fee is assessed.
                                       Note: PIW may NOT be used with new construction.
Appraisal Update        1004D          Multi purpose report form for any 1-4-unit property.
and/or                   442           It can be used to update an existing appraisal if the property has
Completion                             not declined in value since the date of the original appraisal report
Report                                 and/or to confirm that the requirements or conditions established
                                       in an appraisal report have been met.
Earthquake               465S          Required if property is a condominium in California.
Insurance              (FHLMC
Analysis                 Only)

Required Exhibits for URAR FNMA 1004 / FHLMC 70
Appraisal documentation will vary based upon program or requirements and the recommendation
issued by DU or LP. Streamlined property valuation and appraisal report forms are one of the
flexibilities available with DU and LP.

Uniform Residential Appraisal Report URAR (Form 70/1004) - Traditional appraisal report form used
for single-family properties, PUD units or site condominiums. The following are the required exhibits:
    · Location map - A street map that shows the location of the subject property and of all
        comparables the appraiser used.
    · Exterior building floor plan sketch - An exterior building sketch of the improvements indicating
        the dimensions. The appraiser must also include calculations to show how he or she arrived at
        the estimate for gross living area. Note: If the floor plan is atypical or functionally obsolete, thus
        limiting the market appeal for the property in comparison to competitive properties in the
        neighborhood, the appraiser must complete a floor plan sketch that indicates the dimensions
        instead of the exterior building or unit sketch.
    · Original front, rear, and street photographic/digital image of the property.
    · Original photographic/digital image of the comparables - Clear, descriptive photographs (either
        in black and white or color) that show the front of each comparable sale and that are
        appropriately identified. Generally, photographs should be originals that are produced by
        photography or electronic imaging; however, copies of photographs from a multiple listing
        service or from the appraiser s files are acceptable if they are clear and descriptive.
    · Three year sales history of subject property.
    · Any other data as an attachment or addendum to the appraisal report form, that are necessary
        to provide an adequately supported opinion of market value such as:
        Ø Statement of Limiting Conditions.
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        Ø FNMA 216 Operating and Income Statement (Investment Properties) required even when
          rental income from the subject is not used to qualify the borrower.
        Ø FNMA 1007 Comparable Rent Schedule (Investment Properties) required even when
          rental income is not used to qualify the borrower.

Small Residential Income Property Appraisal - FNMA 1025/FHLMC 72
Traditional appraisal report used for 2-4 unit properties. The following are the required exhibits:
   · Same as the Uniform residential Appraisal Report Form 70/1004
   · Operating Income Statement (Form 216) for 2-4 unit and single family investment properties
        required even if rental income from the subject is not used to qualify the borrower.

Individual Condominium or PUD Unit Appraisal - FNMA 1073-1075/FHLMC 465-466
Traditional appraisal report form used for all condominium units. The following are the required
exhibits:
    · Interior and Exterior inspections are reported on form 1073 / 465
    · Exterior only inspection are reported on 1075 / 466

Desktop Underwriter/Loan Prospector Quantitative Appraisal FORM 2055
Appraisal report based on either an interior-exterior or exterior-only inspection for one-family properties
that requires a quantitative sales comparison analysis. DU recommends the use of this report. DU and
LP appraisal recommendations are NOT acceptable for Non-Conforming programs.

    ·   New Construction DU and LP cannot differentiate between existing and new construction
        properties. For this reason, regardless of the DU or LP findings, the following documentation
        must be obtained (It is the authorized underwriter s responsibility to ensure compliance):
        Ø A full Uniform Residential Appraisal Report Form 1004.
        Ø A Certificate of Completion (Form 1004D), depending on processing style.
        Ø Final Photographs of subject property.

    ·   Appraisal with an exterior-only inspection using Form 2055
        The following exhibits are required:
        Ø Street map that shows the location of the subject property and the location of the
           comparables sales.
        Ø Photograph that shows the front scene of the subject property. Photographs of the rear of
           the subject property, the street scene, and the comparable sales are not required. Neither is
           a building sketch of the improvements.

Form 2075
Form 2075 is an appraiser-completed exterior inspection report in which the appraiser does not provide
an opinion of market value. Reliance upon property valuation as stated in the transaction is based on
the DU automated valuation models. Since no estimate of value is given, this form is not considered an
appraisal report. The following exhibits are also required:
    · A street map that shows the location of the subject property.
    · A photograph that shows the front scene of the subject property.

FNMA DU Property Inspection Waiver (PIW)
Conforming Programs Only
Desktop Underwriter Property Inspection Waiver (PIW) Fannie Mae accepts the sales price or
submitted value as the market value for the property. To register a waiver, click on the Request
Property Inspection Waiver (in DU on the menu next to Findings and Credit). If you do not wish to


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exercise the waiver, an exterior-only inspection on Form 2075 is required. The following are the
required exhibits:
    · Loan must be designated FNMA Only.
        Ø Select PIW as the Appraiser on UND (1) screen.
        Ø Use the purchase price or stated value as the appraised value.
        Ø The appraisal expiration date will be the must close by date on the DU Findings.
    · Notify Capital Markets by indicating FNMA PIW in the Loan Approval Recap area of the UND
        (5)
Electronically Transmitted Appraisal Reports
Electronically transmitted appraisal reports are acceptable, provided it includes a reproduced signature
of the appraiser. Photographs of the property and comparables must be clear.

Additional Appraisal Policy
Our alternative property valuation and reporting processes represent the minimum documentation
requirements for Conforming programs processed through DU or LP. It may be appropriate to obtain
only the minimum documentation we require or it may be necessary for the appraiser to provide
additional documentation to the next higher level under certain circumstances.

For example:
   · When DU recommends an exterior only property inspection reported on Form 2075 or 2070
       (these forms are not an appraisal reports), the appraiser is required to comment on:
       Ø Conformity of the subject property to zoning regulations.
       Ø Conformity of the subject property to other properties in the neighborhood.
       Ø The highest and best use of the property as improved.
       Ø Any apparent adverse physical deficiencies or conditions that were observed. HSOA will
           require a URAR Full Appraisal Report if the subject property is:
           § significantly larger or smaller than the properties in the neighborhood,
           § significantly older or newer than the properties in the neighborhood,
           § has apparent physical deficiencies needing significant repairs.
   · When DU or LP recommends an appraisal with an exterior-only inspection, HSOA requires the
       appraiser to obtain sufficient information about the physical characteristics of the subject
       property from reliable sources.

The appraiser s description of the physical characteristics of the property should be based on what he
or she considers being reliable data sources for the property and location. The appraiser is expected to
use the same type of data sources that he or she uses for comparable sales. If the appraiser s exterior-
only inspection of the property and available data sources does not provide sufficient information about
the property to perform the appraisal, we require the exterior-only appraisal to be upgraded to an
appraisal with an interior and exterior inspection. For example, if the appraiser cannot adequately view
the property from the street, apparent adverse physical deficiencies or conditions that were observed,
or the appraiser needs additional information about the physical condition of the property, upgrade the
exterior-only inspection appraisal to an appraisal with an interior and exterior inspection.

HSOA may require a higher level of property documentation for loans processed through DU and LP.
Supplemental documentation from the appraiser might be necessary to address specific underwriting
concerns. For example, the appraiser may need to provide an estimate of the site value for the subject
property, a replacement cost estimate, data about additional comparable sales and listings, etc., (even
though DU or LP do not require this level of detail). In addition, HSOA may always upgrade our
documentation recommendation to a higher level for any reason.

The use of Fannie Mae s streamlined documentation is available to the lender that submitted the
mortgage to DU for evaluation. It is also available to any lender that subsequently delivers the
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mortgage to or services it for Fannie Mae; provided that the terms of the closed mortgage and the
information in the underwriting file match all of the data entered in Desktop Underwriter.


7-4     Field Review Requirements

Required Forms
The Residential Appraisal Field Review Report (Form 1032/2000), original front and street photos of the
subject property and photos of the comparables must be used for all reviews of residential appraisal
reports.

Evaluation Procedure
An analysis comparing the original appraisal and the review appraisal should be performed. The
original appraiser must address any significant differences or discrepancies.


7-5     Property Types

Eligible Property Types
To the extent they meet HSOA guidelines and Product Summary restrictions, the following property
types are acceptable:
    · Single Family Residence
    · 2-4 Units
    · Unit in a Condominium or Planned Unit Development (PUD) project. (Refer to Condo/PUD
        chapter for project review details)
    · Modular Pre-cut / Panelized Housing

Ineligible Property Types
The following property types are ineligible:
    · Non-warrantable Condos, and projects not meeting Established Project criteria
    · Properties sold at auction by the builder, developer or construction lender
    · Manufactured Homes
    · Condotels
    · Live Work Style Condos
    · Condo/PUD Projects with pending litigation
    · Timeshare Units
    · Cooperatives
    · Houseboats
    · Properties exceeding 10 acres
    · Residences lacking full kitchen and bathroom facilities
    · Working farms, ranches, orchards and/or commercial operations
    · Properties without a permanent heat source and, if typical for the area, cooling. Space heaters
        and similar sources are not considered permanent, even if affixed to a wall*
    · Properties on FNMA s ineligible projects list
    · Deed/Resale restricted properties. Restrictions include those that limit the use of all or part of
        the land on one or any number of owner characteristics or other requirements, income limits,
        occupancy, homebuyer status, employment (employer provided subsidy), or resale price.
    · Leasehold Estates
    · Unique Properties: Dome, geothermal, foundation on stilts, one of a kind luxury residences
    · Properties located on Indian Tribal land
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    ·   Properties located in Hawaii Lava Zones 1 and 2.
    ·   Community Land Trusts
    ·   Survey exceptions
    ·   Properties located on land that does not allow for access for mortgage servicing purposes (e.g.
        foreclosure
    ·   Community or adult living group homes


Energy-Efficient Properties
Special underwriting consideration should be given to borrowers who are purchasing properties that are
energy efficient or that will be undergoing energy-related improvements. Higher monthly housing
expense and debt payment ratios may be justified because the borrower will realize savings in energy
costs.

The energy savings of a property along with other property and borrower characteristics should be
considered when deciding whether increased qualifying ratios are justified. For energy-efficient
properties, increases of up to 2% in the monthly housing expense-to-income ratio are allowed. The
property s energy-efficiency must be rated as high to justify the use of these increased ratios.

Underwriting an adjustable rate mortgage for a borrower with an energy-efficient home requires
additional consideration. By accepting higher ratios, a borrower is allowed to commit a greater portion
of his or her income to an obligation that has changing payment terms.

The appraiser must consider the market s reaction to energy-efficient improvements (or proposed
alterations) and reflect their contributory value in the sales comparison analysis adjustment grid on the
appraisal report form. This adjustment should be based on the appraiser s analysis of comparable
properties. However, if adequate comparables are not available, the appraiser may develop an
analysis of the present worth of the estimated savings in utility costs.

In order to qualify for the special underwriting consideration, savings justification must be satisfactorily
documented. One of the three methods of documentation listed below must be obtained and retained
in the loan file.

A Home Energy Rating (HERS) Report provided by one of the following two identified and approved
HERS providers; a third party charge will be incurred for a rating. The rating fee varies from state to
state, please verify with the appropriate rating provider. Residential Energy Services Network
(RESNET), Rating organization founded by the National Association of State Energy Officials and
Energy Rated Homes of America in 1995.
Website: www.natresnet.org
    · HERS providers have certified home energy raters in many states across the country. To find
        an energy rater in your state, refer to the handbook, The Source, Solar Book of Knowledge.
    · Letter provided by utility providers documenting quantifiable savings to be realized.

Properties Affected by Environmental Hazards
Refer to the Product Summary s Geographic Restrictions section for specific information regarding
known environmental issues.

If the real estate broker, the property seller, the property purchaser, any employee of HSOA, or any
other party to the mortgage transaction reveals that an environmental hazard exists in or on the
property or in the vicinity of the property, that information must be disclosed to the borrower and must
comply with any state or local environmental laws regarding disclosure.

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The appraiser is not considered to be an expert in the field of environmental hazards. The typical
residential real estate appraiser is neither expected nor required to be an expert in the specialized field;
however, the appraiser has a responsibility to note in the appraisal report any adverse conditions that
were observed during the inspection of the subject property or information that he or she became
aware of through the normal research involved in performing an appraisal. When the appraiser has
knowledge of any hazardous condition (whether it exists in or on the subject property or on any site
within the vicinity of the property), such as the presence of hazardous wastes, toxic substances,
asbestos-containing material, urea-formaldehyde insulation, radon gas, etc., he or she must note the
hazardous condition on the appraisal report and comment on any influence that the hazard has on the
property s value and marketability (if it is measurable through an analysis of comparable market data as
of the effective date of the appraisal) and make appropriate adjustments in the overall analysis of the
property s value.

In rare situations, a particular environmental hazard may have a significant effect on the value of the
subject property, although the actual impact is not measurable because the hazard is so serous or so
recently discovered that an appraiser cannot arrive at a reliable estimate of market value because there
is no comparable market data (such as sales, contract sales, or active listings) available to reflect the
impact of the hazard. In such cases, the mortgage is not acceptable.

A mortgage secured by a property that is affected by an environmental hazard will be considered if the
impact of the hazard is measurable though an analysis of comparable market data as of the effective
date of the appraisal and the appraiser reflects in the appraisal report any adverse effect that the
hazard has on the value and marketability of the subject property or indicates that the comparable
market data reveals no buyer resistance to the hazard. In the situation where the property is located in
a neighborhood affected by radon gas or the presence of hazardous wastes, the appraiser is expected
to reflect any adverse effect or buyer resistance that is demonstrated and measurable through the
available comparable market data. Therefore, when a property is located in a neighborhood that has a
relatively high level of radon gas, the appraiser is expected to consider and use comparable market
data from the same affected area because the sales prices of the settled sales, the contract prices of
pending sales, and the current asking prices for active listings will reflect any negative effect on the
value and marketability of the subject property.

Although the appraiser is expressly required to comment on the appraisal report about any
environmental hazard s influence on the property s value and marketability and to make appropriate
adjustments to the overall analysis of the property s value, HSOA makes the final decision about the
need for inspections and the adequacy of the property as security for the mortgage requested. Sound
judgment must be exercised in determining the acceptability of the property. For example, since the
appraiser is required to comment on a hazard s effect on the subject property s marketability and value,
the appraiser would have to note when there is market resistance to an area because of environmental
hazards or any other conditions that affect well, septic, or public water facilities. HSOA is exercising
sound judgment if it obtains a well certification to determine whether the water meets community
standards.

Rural Properties
See Product Summaries for acceptance
· A rural area relates to the country or anything beyond the suburban area.
· The primary dwelling for properties in rural areas must represent 70% or more of the total appraised
   value of the property. Outbuildings such as barns or stables are not considered in the 70%
   calculations.
· Working farms, ranches, orchards, and/or commercial operations are not permitted.

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·   Properties with outbuildings require special consideration.
    Properties with minimal outbuildings, such as a small barn or stable that are of relatively
    insignificant value in relation to the total appraised value are acceptable if they are typical
    residential improvements and support the residential use for the location and property type.
    Comparable sales with similar improvements should show they are typical and have an existing
    market. A property with an atypical minimal outbuilding is still acceptable as long as the appraiser s
    analysis reflects little or no value for it.
    Properties with significant outbuildings must be reviewed with great care, regardless of whether the
    appraiser assigns any value to them or not. Their existence may indicate the property may be used
    for agriculture or other income producing purposes.

Security Bars
The appraiser must comment with respect to the use of burglar or security bars. There must be an
emergency release latch for at least one window in each room (without doors to the outside) where the
security bars are located, unless local or municipal codes require more.


Deed and Age restrictions
· Restrictions include those that limit the use of all or part of the land on one or any number of owner
   characteristics or other requirements, income limits, occupancy, homebuyer status, employment
   (employer provided subsidy), or resale price. Due to investor differences, properties with age
   restrictions are considered, subject to exception approval


Mixed-Use Properties
See Product Summaries for acceptance.

Although mortgages that are secured by properties that have a business use in addition to their
residential use may be acceptable, special eligibility criteria for them must be met. The appraiser must
provide an adequate description of the mix-use characteristics of the subject property in the appraisal
report. Mixed-use property must meet the following:
    · The property must be a single-family detached property that the borrower occupies as his or her
        principal residence.
    · The mixed use of the property must represent a legal, permissible use of the property under the
        local zoning requirements, but may not contain any commercial zoning.
    · The borrower must be both the owner and the operator of the business.
    · The property must be primarily residential in nature. Areas designed or used for nonresidential
        purposes shall not exceed 25 percent of the total floor or lot, as applicable. Storage areas or
        similar spaces which are integral parts of the nonresidential portion shall be included in the total
        nonresidential area.
    · The property may not be structurally changed from its residential characteristics to support the
        business use.
    · The market value of the property must be primarily a function of its residential characteristic,
        rather than the business use of any special business-use modifications that were made.
    · At least three comparables must support the appraiser s conclusion that the property is primarily
        residential, the value is based on the residential use, and that there is a ready acceptance in the
        area marketplace of such properties as residential. These comparables must be:
        Ø Similar to and located near the subject.
        Ø Recently sold.
        Ø Closing occurred before the effective date of the appraisal.
        Ø Demonstrate the residential/business use is common to the area.

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 Accessory Apartment In-Law Suites
Not allowed in Texas on cash-out transactions

A single-family or two-family property that includes an accessory apartment (also referred to as a
mother-in-law, mother-daughter, or granny unit) is acceptable provided that special eligibility
requirements are met. The appraiser must be advised of any information regarding the suite, including
its legality when ordering the report.

If the accessory apartment represents a legal use of the property under local-zoning laws, the zoning or
legal status must be residential single family property with approval for non-conforming use. The
property must be appraised as a single-family property. If the zoning is two-unit or two-family, then
the property should be approached under two-to-four family guidelines.

If the accessory apartment represents an illegal use of the property under local zoning law, the property
must be appraised in conformity with its legal use, that of a single-family or two-family property.
Verification that the existence of the illegal accessory unit will not jeopardize future hazard insurance
claims is required. Three-to-four family properties with illegal accessory units are ineligible for
financing.

The following criteria are required for either legal or illegal use properties with an accessory unit:
   · The property may not have multiple accessory units.
   · The accessory unit should be significantly lesser in size and amenities than the SFR.
   · The property must conform to the subject neighborhood and the market.
   · Comparable sales must demonstrate an accessory unit as typical for the market (may be legal
        or illegal).
   · The value assigned by the appraiser must be based on contributory value of the accessory unit,
        considering the quality of above grade finish work. In some cases, no value may be assigned.
   · No rental income will be counted from the accessory unit.
   · Any illegal use accessory unit must be detached (see Building Permits/Unpermitted Space )

Properties in Special Assessment or Community Facilities Districts
Alternative methods for raising the capital necessary to satisfy utility and infrastructure requirements
are sometimes used in the development of new residential communities.
Generally, this involves the creation of local districts special assessment districts or community
facilities districts that have the authority to assess homeowners for the cost of developing utility
services and various infrastructure facilities (roads, sewer services, schools, police and fire protection
services, libraries, etc.). The appraiser must give special consideration to the valuation of properties
located in these districts, including whether the assessments levied by the district could have an affect
on property values and the marketability of the subject property. These assessments must be included
in the PITI calculation.

Special Assessment Districts
Special assessment districts (which may also be called special tax districts or municipal utility districts)
provide a specific service to homeowners living in a designated area. They are most often established
to provide water or other utilities in areas that are not served by existing city or municipal utility
services. The need for these districts arises when an existing utility service does not have sufficient
capacity or may not find it economically feasible to provide services for newly created subdivisions that
are located beyond its current operating area. State law governing the establishment of special
assessment districts varies greatly, as does the financial strength of the individual districts. The
districts are granted the authority to assess owners of properties within their boundaries for funds that
will be used to cover their operating costs and debt service.
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Special assessment districts that are established to serve newly developing subdivisions with utilities
often base their financial plans and the amount of assessment charged to each property owner on the
expected number of properties in the area to be served. The district then depends on the continuation
of development to maintain its budget expectations. If, for any reason, development stops short of the
degree of development that the district anticipated in preparing its budget, the district can become
financially distressed and may need to impose an additional assessment on the existing homeowners.

When the property being appraised is located in a special assessment district, the appraiser must
report on any special assessments that affect the property. If the special assessment district is
experiencing financial difficulty and that difficulty has an effect on the value or marketability of the
subject property, the appraiser must address the effect on the appraisal report. To assure that the
reaction of the market to the potential liabilities that may arise within a financially troubled special
assessment district is reflected in the analysis, the appraiser should consider current listings of
properties for sale within the district. There may be some instances in which the financial difficulty of a
special assessment district is so severe that its actual impact on the value and marketability of a
property is not measurable because there is no comparable market data available to enable the
appraiser to arrive at a reliable estimate of market value. When this is the case, a mortgage secured by
a property in that district is not acceptable until such time as an active market develops that will enable
the appraiser to demonstrate the value and marketability of the subject property.

Community Facilities Districts
Some states may have passed legislation that creates community facilities districts and permits them to
levy a special tax to fund the capital costs of a wide variety of public improvements, as well as the on-
going operation and maintenance costs of a limited number of public services. Proceeds of the special
tax are used to support the sale of tax-exempt bonds for the various capital improvements roads,
sewer services, schools, police and fire protection services, and libraries that are allowed under the
legislation.

The assessment that will be used to repay the tax-exempt bonds becomes an on-going responsibility of
the property owner, similar to state and local property taxes. The assessment lien and the obligation to
pay the assessment transfers with the title to the property when the ownership of the property is
transferred. In some cases, the term of the assessment obligation can be quite lengthy up to 40 years,
unless the assessment is prepaid. In some California cases, prepayment estimates can range from
$20,000 to $40,000 for a single-family property, depending on the amount of improvements that were
financed, the size of the dwelling, and the year it was purchased.

Such legislation generally requires full disclosure of special assessment to any purchaser of a property
located in a community facilities district. The appraiser must be given any information regarding special
assessments on a given property.

The appraiser should be aware of and addresses whether or not the subject property and the
comparable sales are located within or affected by a community facilities district. Properties subject to
an assessment by one of these districts often compete against properties that are either subject to a
significantly different special assessment or no assessment at all. The appraiser must consider the
reaction of the market to the assessment for the applicable community facilities district in the appraisal
by analyzing similarly affected comparable sales, and should note the effect of the assessment in the
appraisal report.




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7-6     Appraisal Analysis

Subject
The first section of the appraisal report is used to:
   · Identify and describe the location of the subject property.
   · Provide information about property taxes and special assessments.
   · Indicate the occupancy status of the property.
   · Describe the property rights to be appraised.
   · Summarize financing data and sales concessions.
   · Identify the borrower, the current owner, the client, and the appraiser.

The appraiser must identify the subject property by its complete property address and legal description.
A post office box number is not acceptable. The appraiser should indicate the nearest intersection if a
house number is not available. When the legal description is lengthy, the appraiser may attach the full
description as an addendum to the appraisal report, or may refer simply to its location in the public
records.

The appraiser must identify the property rights to be appraised as fee simple or leasehold. In addition,
the appraiser must indicate whether the subject property is located in PUD, condominium, or
cooperative project.

The appraiser must state the total dollar amount of the loan charges and/or concessions that will be
paid by the seller (or any other party who has a financial interest in the sale or financing of the subject
property) and provide a brief description of the items on the appraisal report. If the appraiser knows the
appraisal will be used for a refinance transaction, the form should indicate so.

Neighborhood Analysis
The purpose of a neighborhood analysis is to identify the area based on common characteristics or
trends which influence the subject property; not to rate or judge the neighborhood. The sales prices of
comparable properties in the area should reflect the positive and negative influences of the
neighborhood.

To perform a neighborhood analysis, the appraiser should collect pertinent data, make a visual
inspection of the neighborhood to observe its physical characteristics and boundaries, and identify land
uses. Appraisers should extend their search of the subject market area as far as necessary to assure
that all significant influences affecting the value of the subject property are reflected in the appraisal
report. Appraisers should use their best judgment in determining and describing neighborhood
boundaries. The limits of a neighborhood can be identified by various physical characteristics
including, but not limited to, streets, freeways, railroad tracks, airports, industry, bodies of water, land
uses, types of dwellings, etc. The underwriter should review the neighborhood description carefully to
confirm that the appraiser used comparables from within the subject neighborhood.

A neighborhood analysis should consider the influence of social, economic, government, and
environmental forces on property values in the subject neighborhood. However, neither the racial
composition nor the age of a neighborhood is an appraisal factor. A property located in an older
neighborhood can be as sound an investment as a property located in a new neighborhood. A property
located in a neighborhood inhabited primarily by members of one race can be as sound an investment
as one located in a racially mixed neighborhood or in a neighborhood inhabited primarily by a different
race. The appraiser must report neighborhood conditions in factual, specific terms; must be impartial
and specific in describing favorable or unfavorable factors in a neighborhood; and should avoid the use
of subjective terms or phrases such as:
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    ·    pride of ownership
    ·    no pride of ownership
    ·    poor neighborhood
    ·    good neighborhood
    ·    crime-ridden area
    ·    desirable neighborhood or location
    ·    undesirable neighborhood or location

HSOA does not designate certain areas as being acceptable or unacceptable; in other words, HSOA
does not red-line . Redlining can occur when perceived property risks are based on improper location
factors, such as the arbitrary granting of unfavorable loan terms because of geographic area. Redlining
can also occur when the perceptions of a risk are derived from factors that are not predictive or that
serve as a proxy for race. Redlining is not permissible. The appraiser and the underwriter must be
sensitive to these impermissible factors and apply these guidelines in a consistent equitable manner.
None of these property guidelines are intended to foster redlining. If any provision is interpreted to do
so, it has been misunderstood.

The appraiser should explain any changes that have occurred that might influence the marketability of
the properties within the neighborhood. The appraiser also must comment if there is market resistance
to a neighborhood because of the known presence of an environmental hazard or any other factor.
HSOA must be satisfied that the neighborhood will be acceptable to a sufficient number of buyers to
support an active, on-going market for the property. Mortgages in urban areas are sometimes
underwritten on a block-by-block basis. Block-by-block underwriting and appraisal analysis are
acceptable in cases in which rehabilitation has started (either in the block where the subject property is
located or in facing blocks visible to the property) but has not yet spread to the rest of the
neighborhood. This enables the underwriter to place weight on the positive influences of a
neighborhood in an urban area that is being rehabilitated. The acceptability of this type of appraising or
underwriting is conditioned on the appraiser demonstrating that local conditions make it appropriate and
that all essential factors are considered.

Location
Mortgages secured by residential properties in urban, suburban, or rural areas are acceptable. An
urban location relates to a city, a suburban location relates to the area adjacent to a city, and a rural
location relates to the country or anything beyond the suburban area. No area is designated as being
acceptable or unacceptable.

The appraiser and the underwriter must be sensitive to the varying conditions that characterize different
types of locations. Conditions that are typical of certain types of locations may not be present in other
locales. This does not mean that the conditions are unacceptable; rather that they must be evaluated
in context with the nature of the area in which the security property is located. For example, rural
properties often have large lot sizes and rural neighborhoods can be relatively undeveloped. If a
security property is located in an area that has one of these characteristics, the appraiser may have to
go a considerable distance to find properties that can be used to estimate the value of the security
property. On the other hand, if the security property were located in a suburban area, the appraiser
would most likely use comparable properties in the immediate vicinity of the property. This would be
expected, since suburban and urban areas are usually more highly developed and comparable sales
typically are available in the subject neighborhood. However, if the security property were located in an
area in which there is a shortage of recent truly comparable sales, either because of the nature of the
improvements of the subject property or the relatively low number of sales transactions in the
neighborhood, the appraiser might need to analyze and use as comparables sales, properties that are
not truly comparable to the subject. This is acceptable as long as the appraiser adequately documents

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his or her analysis in the appraisal report and explains why such comparables were used. When a
security property is located in an urban neighborhood that has vacant or boarded up properties, the
appraiser would need to evaluate comparable properties in the same neighborhood to assure that any
effect of the vacant or boarded up properties is taken into consideration in developing the estimate
value for the security property.

It is not uncommon for rural areas to consist of a variety of property types that may or may not have
different uses. It is also not uncommon for urban neighborhoods to consist of a variety of property
types that have different uses. Such areas may or may not reflect a successful blend of various single-
family residential and non-residential uses. For an urban area, this may include residential multifamily
properties and other properties that are used to provide commercial services (such as groceries and
other neighborhood stores) in support of the local neighborhood or industry. Viable urban
neighborhoods frequently are characterized by a successful mixing of different property uses and
types. The presence of varied property uses or types within an area does not mean a property located
in that area will be unacceptable. Since such uses may be a characteristic of the market area, the
appraiser should take them into consideration when performing the analysis of the market area and
defining the market area s boundaries. To assure any positive or negative effects of the land uses are
reflected in the sales comparison analysis, the appraiser should select comparable sales from within
the same area and under the same influences. If this is not possible, the appraiser will need to make
 location adjustments (if appropriate) for any sales that are not subject to this type of characteristic and
adequately document the market reaction to such influences.

A mortgage must be secured by a property that is residential in nature, based on the description of the
subject property, zoning, and the present land use. Mortgages secured by agricultural-type properties
(such as farms, orchards, or ranches), on undeveloped land, or on land development-type properties
are unacceptable. Properties with outbuildings must be given special consideration in underwriting and
appraisal review. Properties with minimal outbuildings, such as small barn or stable that are of
relatively insignificant value in relation to the total appraised value of the subject property are
acceptable if they are typical of other residential properties in the subject area. For example, a property
that has a small barn or stable is acceptable if the appraiser demonstrates through the use of
comparable sales with similar improvements that the barn or stable is typical of properties for which an
active, viable residential market exists. If outbuildings do not represent typical residential
improvements for the location and property type, the typical purchaser in the market would probably
recognize minimal, if any, contributory value for them. An atypical property with minimal outbuilding is
acceptable as long as the appraiser s analysis reflects little (or preferably no) contributory value for it.
On the other hand, properties with significant outbuildings, such as a large barn, a storage area or
facilities for farm-type animals, or a silo, will probably indicate that the property is agricultural in nature.
The property must be reviewed with great care, regardless of whether the appraiser assigns any value
to the outbuildings.

All properties must be readily accessible by roads that meet local standards, and must have adequate
utilities available and in service. The appraiser must also consider the present or anticipated use of any
adjoining property that may adversely affect the value or marketability of the subject property.
Certain aspects of the location of the property will require special consideration. For example,
properties in resort areas that attract people for seasonal or vacation use are acceptable only if they are
suitable for year-round use. Any property that is not suitable for year-round occupancy, regardless of
where it is located, is unacceptable.
Degree of Development and Growth Rate
The degree of development of a neighborhood (which is referred to as built-up on the appraisal report)
is the percentage of the available land in the neighborhood that has been improved. The degree of
development of an area may indicate whether a particular property is residential in nature.

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When reviewing an appraisal of a property located in a rural or relatively underdeveloped area, the
underwriter should focus on the characteristics of the property, zoning, and the present land use to
determine whether the property should be considered residential in nature. For example, if the typical
single-family building site in a particular area (based on the zoning, the highest and best use of the
land, and the present land use) is two acres in size, the property is acceptable regardless of the
percentage of the total one-unit land use, if the appraiser demonstrates through the use of comparable
sales that the property is typical residential property for that particular neighborhood. For Non-
Conforming Programs, a rural property must be located in an area that is a minimum of 25%
developed.

Because mortgages secured by agricultural-type properties, underdeveloped land, or land
development-type properties are not acceptable, the underwriter must carefully review the appraisal
report for properties that have sites larger than those typical for residential properties in the area.
Special attention must be given to the appraiser s description of the neighborhood, zoning, the highest
and best use determination, and the degree of compatibility between the subject property and the
comparable sales. If the subject property has a significantly larger site than the comparables used in
the appraiser s analysis, the subject property may not be a typical residential property for the
neighborhood.

Property Values
The appraiser must indicate whether property values in the subject neighborhood are increasing,
stable, or declining. Maximum financing is acceptable when property values are stable or increasing.
Generally, maximum financing must not be offered in any instance in which property values are
declining.

In reviewing a loan application in a declining area, we will use the appraiser s opinion concerning the
neighborhood to adjust the maximum LTV/CLTV permitted under high LTV/CLTV loan programs. As a
result, in a neighborhood where the property values are declining, the maximum LTV/CLTV permitted
under high LTV/CLTV loan programs may not be approved unless the area in which the property is
located is or will be participating in a focused redevelopment effort. The redevelopment plan must be
designed to infuse capital and provide lending programs to revitalize the neighborhood. The infusion of
capital and lending programs can come from local, state, or federal government programs targeted to
specific neighborhoods or communities. It may also come from programs that are funded by either a
nonprofit sector or public-private partnerships created to revitalize a particular neighborhood or
community. Focused local redevelopment efforts and definitions used to determine targeted
communities and neighborhood may be documented in whatever manner the locality uses to obtain
different forms of assistance (a community development block grant, a comprehensive housing
assistance strategy plan, etc.).

Demand/Supply and Marketing Time
An over-supply of housing is not desirable, since it indicates properties are selling slowly with a lot of
competition. An over-supply of properties may be on a neighborhood-wide or city-wide scale. In either
case, the appraiser must comment on the reason for the over-supply and its affect on the property s
value. Marketing time is the average time that it takes for a reasonably priced property to sell in the
subject neighborhood. When marketing time for a particular area is greater than six months, the
appraiser must comment on the reason for the extended marketing period and its affects on the
property s value. For Non-Conforming Programs, a rural property should be readily salable in six
months or less.




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Present Land Use
Typically, dwellings best maintain their value when they are situated in neighborhoods that consist of
other similar dwellings. However, some factors typical of varied neighborhoods, such as easy access
to employment centers and high level of community activity, can actually enhance the market value of
properties through increased buyer demand. Urban neighborhoods also frequently reflect a blend of
single-family residential and non-residential land uses, including residential multifamily properties and
other properties that are used to provide commercial services (such as groceries and other
neighborhood stores) in support of the local neighborhood or industry. The existence of different land
uses and property types in a neighborhood does not mean that a mortgage secured by a property
located in that neighborhood is unacceptable.

Different land uses and property types present in a market area should be considered a neighborhood
characteristic the appraiser needs to address when performing the neighborhood analysis and defining
the neighborhood boundaries. To assure that any positive or negative affects of the land uses are
reflected in the sales comparison analysis, the appraiser should select comparable sales from within
the same neighborhood whenever possible. If this is not possible, the appraiser may need to make
 neighborhood or location adjustments for any sales that are not subject to this type of neighborhood
characteristic and adequately document the market reaction to such influences.

The appraiser should provide the relative percentages of the developed land in the neighborhood when
discussing the present land use in his or her neighborhood analysis, rather than simply referring to the
zoning classifications. The appraiser should report separately the percentage of developed single-
family sites, developed two-to-four family sites, etc. Undeveloped land should be reported as vacant.
In addition, if there is a significant amount of vacant or undeveloped land in the neighborhood, the
appraiser should include comments to assure the appraisal adequately describes the neighborhood. If
the present land use in the neighborhood is not one of those listed on the appraisal report (such as
parkland), the appraiser must also indicate the type of land use and its related percentage. The total of
the types of land uses must equal 100%.

Competitive Properties
When the subject is a 2-4 family property, the appraisal report must include listing information for at
least three competitive properties from the subject neighborhood. They must be chosen from available
listings that represent the most current, similar and proximate competitive properties to the subject
property. The listing comparables can be the rental comparables or the sales comparables that are
used later in the appraiser market data analysis (as long as they are currently listed for sale). Although
it is not required, the appraiser may also provide additional comparisons of properties listed for sale
outside of the subject neighborhood, as long as they are relevant to the analysis. HSOA is primarily
concerned about competitive properties that are for sale in the subject neighborhood; therefore, if there
are fewer than three competitive properties for sale in that neighborhood, the appraiser should simply
state that fact in the comments section of the appraisal report and provide an explanation of why that
is the case (for example, because of an under-supply, non-conforming property types, etc.). The
appraiser must provide a storyline comparison of the listings and how they are comparable to the
subject property. This is usually done by describing the general market conditions that affect 2-4 family
properties in the subject market area, identifying trends in listing prices, average days on market and
recent land changes.

The purpose of reporting active listings is to provide support for the primary indicators of market
condition (growth rate, property values, demand/supply, and marketing time). The analysis of active
listings should be used to evaluate both the inventory of 2-4 family properties currently for sale in the
subject neighborhood and competing with the subject property, as well as the recent price and
marketing time trends that affect the subject property.

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Price Range and Predominant Price
The appraiser must indicate the price range and predominant price of properties in the subject
neighborhood. The price range must reflect high and low prevailing prices for residential properties that
are comparable to the property being appraised (SFR properties, 2-4 family properties, condominium
units, or cooperative units) and, in some cases, for competing properties (SFR properties when the
property being appraised is a 2-4 family property or condominium unit and condominium units when the
property being appraised is a cooperative unit). Isolated high and low extremes should be excluded
from the range, which means that the predominant price will be that which is most common or most
frequently found in the neighborhood. The appraiser may state the predominant price as a single figure
or as a range (if that is more appropriate).

When the subject property has a sales price (or value) that exceeds the upper price range, the property
is considered an over-improvement for the neighborhood. The property is considered an under-
improvement if its sales price (or value) is less than the lower price range. If the subject property is an
over-improvement, the loan terms generally should be more conservative because the property may
not be acceptable to typical purchasers. The appraiser must explain why the property is an over or
under-improvement and comment on the adjustments that were made in the sales comparison
analysis adjustment grid to reflect that condition.

The underwriter should consider whether a property in an urban area is among those being renovated.
Since demand for this type of property can be strong, the property should not be regarded as over-
improved if there is a strong market interest, which is indicated by the existence of comparable
properties.

Age Range and Predominant Age
The appraiser must indicate the age range and predominant age of the properties in the subject
neighborhood. The age range should reflect the oldest and newest ages for similar types of residential
properties (SFR properties, 2-4 family properties, condominium units, or cooperative units) and, in
some cases, for competing properties (one-family properties when the property being appraised is a 2-
4 family property or a condominium unit and condominium units when the property being appraised is a
cooperative unit.) However, isolated high and low extremes should be excluded from the range. The
predominant age is the one that is the most common or most frequently found in the neighborhood.
The appraiser may state the predominant age as a single figure or as a range (when that is more
appropriate). The appraiser should independently select the properties used to represent the age
range and predominant age, rather than merely relying on the same properties used to illustrate the
price range and predominant price.

The age of a property should be within the general age range of the neighborhood. Normally,
neighborhoods are developed over a relatively narrow span of time so that most dwelling units will fall
within a particular age range. A property that has an age outside of the general age range must receive
special consideration. Unless there is strong evidence of long-term neighborhood stability, a new
dwelling in an old neighborhood will carry some marginal risk. Conversely, an old dwelling in a newly
developed area is generally acceptable if renovation will result in its conforming to the neighborhood.

Neighborhood Analysis Rating
The Uniform Residential Appraisal report (Form 1004) requires the appraiser to focus on describing the
various components of a neighborhood and reporting the factors that have an impact on value in
descriptive form, rather than developing a relative rating for the neighborhood.

Two neighborhood characteristics that the appraiser should consider in selecting comparable sales and
in preparing the neighborhood analysis are:

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    ·   General Appearance - The general appearance of the properties in the neighborhood is a key
        factor. The appraiser must consider the extent to which the properties are receiving proper
        maintenance.
    ·   Appeal to Market - Essentially, this is a summary rating of the extent to which all aspects of the
        neighborhood will appeal to the typical purchaser in the market. An individual property by itself
        cannot overcome a generally prevailing reluctance of the market to invest in a neighborhood.
        On the other hand, a relatively weak property in a strong, viable neighborhood is likely to sustain
        its value, although it still must be carefully analyzed.

Site Analysis
The property site should be of a size, shape and topography that is generally conforming and
acceptable in the market area. It must also have competitive utilities, street improvements and other
amenities. Since amenities, easements, and encroachments may either detract from or enhance the
site s marketability, the appraiser must comment on them if the site is not typical for the neighborhood.
If there is market resistance to a property, because its site is not compatible with the neighborhood or
with the requirements of the competitive market, the underwriter should evaluate the mortgage more
carefully, and if appropriate, require more conservative mortgage terms.

The Lot
The topography, shape, size, and drainage of the lot are all equally important. Steep slopes that cause
erosion, difficulty in maintaining a lawn, or difficult access to the property itself or to a garage are
generally unfavorable conditions. Drainage must be away from the improvements to avoid the
collection of water in or around them.

Conforming Programs
There are generally no maximum lot size limitations, as long as the subject s lot size is typical and
supported by comparable sales.

Non-Conforming and Portfolio Programs
Maximum acreage on a property secured by a Non-Conforming loan generally should not exceed ten
(10) acres. Refer to Chapter 1, Loan Eligibility Analysis/ Value Defined for requirements specific to
Texas Equity Refinances. Also, refer to the specific Program Summary for variances.

Zoning
The appraiser is responsible for reporting the specific zoning classification for the subject property. The
appraiser must include a general statement to describe what the zoning permits (single-family, two-
family, etc.) when he or she indicates a specific zoning such as R-1, R-2, etc. The appraiser must also
include a specific statement indicating whether the improvements represent a legal use; a legal, but
non-conforming (grandfathered) use; or an illegal use under the zoning regulations; or whether there is
no local zoning.

A property is generally unacceptable if the improvements do not constitute a legally permissible use of
the land. Certain allowances to this policy can be made, as long as the property is appraised and
underwritten in accordance with the following special requirements:
    · A mortgage that is secured by a 1-4 family property or a unit in a PUD project is acceptable if
       the property represents a legal, but non-conforming, use of the land as long as the appraiser s
       analysis reflects any adverse effect that the non-conforming use has on the value and
       marketability of the property.
    · A condominium unit mortgage from a project that represents a legal, but non-conforming, use of
       the land is acceptable only if the improvements can be rebuilt to current density in the event of
       their partial or full destruction. (In such cases, the mortgage file must include a copy of the
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        applicable zoning regulations or a letter from the local zoning authority that authorizes
        reconstruction to current density.)
    ·   A mortgage secured by a single-family or two-family property that includes an illegal additional
        unit or accessory apartment (which may be referred to as a mother-in-law, mother-daughter, or
        granny unit) is acceptable as long as the illegal use conforms to subject neighborhood and to
        the market. The property must be appraised in conformity with its legal use, that of a single-
        family or two-family property (and the borrower must qualify for the mortgage without
        considering any rental income from the illegal unit). Refer to Accessory Apartment/In-Law
        Suites section in this Chapter.
    ·   The appraiser must report that the improvements represent an illegal use and demonstrate that
        the improvements are typical for the market through an analysis of at least three comparable
        properties that have the same illegal use. HSOA must also make sure that the existence of the
        illegal additional unit will not jeopardize any future hazard insurance claim that might need to be
        filed for the property. A mortgage secured by a three-to-four-family property that includes an
        illegal accessory apartment is unacceptable.
    ·   A mortgage secured by property that is subject to certain land-use regulations (such as coastal
        tideland or wetland laws) that create setback lines or other provisions that prevent the
        reconstruction (or maintenance) of the property improvements if they are damaged or destroyed
        is unacceptable. (The intent of these types of land-use regulations is to remove existing land
        uses and stop land development including the maintenance or construction of seawalls within
        specific setback lines.)


Agricultural Zoning
Agricultural zoning is typically not permitted for residential lending. Mortgages secured by such
properties require careful review and may be acceptable under the following conditions:
   · The property is primarily residential in nature, the residential use is permissible under the zoning
        and land use regulations, the property improvements represent the highest and best use of the
        site as improved, and the property is a relatively typical residence for the neighborhood or
        market area.
   · The appraisal must encompass the entire legal description. It is not acceptable to render value
        of a lesser amount of acreage (hypothecated value). No more than 35% of value may be
        attributable to land value.
   · The property must meet maximum acreage restrictions of the individual program.
   · Must be an owner-occupied or second home.
   · The appraiser must confirm the property is not being used as a working farm, ranch, orchard
        and/or commercial operation.
   · The subject property parcel may not have been split from a larger parcel which has agricultural
        use.
   · The subject property may not be an over-improvement.
   · Maximum 90% CLTV and maximum $1,000,000 loan amount.

Commercial Zoning
1-4 unit properties that contain commercial zoning represent unique challenges for residential lending.
The appraisal must demonstrate the subject property s immediate area represents a residential
community with an active and viable residential market. The property s value must be supported by
comparable sales from the subject s immediate neighborhood with similar properties containing the
same commercial zoning. The appraisal must confirm the subject and comparable sales have no
mixed-use function (refer to the mixed-use topic for more information).



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Highest and Best Use
The highest and best use of a site is a reasonable and probable use that supports the highest present
value on the effective date of the appraisal. For improvements to represent the highest and best use of
a site, they must be legally permitted, be financially feasible, be physically possible, and provide more
profit than any other use the site would generate. All four of these criteria must be met if the
improvements are to be considered as the highest and best use of a site.

A strict theoretical highest and best use analysis identifies the perfect improvements for a site assuming
the site is vacant and available to be developed. The appraiser s highest and best use analysis of the
subject should consider the property as it is improved. This treatment recognizes that the existing
improvements should continue in use until it is financially feasible to remove the dwelling and build a
new one, or renovate an existing dwelling. The appraiser should consider the existing use as
reasonable and report it as the highest and best use if:
    · The use of comparable sales demonstrates that the improvements are reasonably typical and
         compatible with market demand for the neighborhood.
    · The present improvements contribute to the value of the subject property so that its value is
         greater than the estimated vacant site value.

On the other hand, if the current improvements clearly do not represent the highest and best use of the
site as an improved site, the appraiser must so indicate on the appraisal report. In such cases, the
property would not be acceptable for financing.

Utilities
For a property to be eligible for a mortgage, the utilities must meet community standards and be
accepted by area residents. If public sewer and/or water facilities that are supplied and regulated by
the local government are not available, then community or private well and septic facilities must be
available and utilized by the subject property. If community facilities are used, the owners of the
subject property must have the right to access those facilities, which must be viable on an on-going
basis. Generally, private well or septic facilities must be located on the subject site. However, off-site
private facilities are acceptable if the inhabitants of the subject property have the right to access them
and if there is an adequate, legally binding agreement for their access and maintenance.

If there is market resistance to an area because of environmental hazards or any other conditions that
affect well, septic or public water facilities, the appraiser must comment on the hazards affect on the
subject property s marketability and value.

Off-Site Improvements
The appraiser must state the type of any off-site improvements (streets, curb/gutters, sidewalks,
streetlights, and alleys) that are present and indicate whether they are maintained publicly or privately.
The presence of sidewalks, curbs and gutters, streetlights, and alleys depends on local custom. If they
are typical in the community, they should be present on the subject site. The appraiser must comment
on any adverse conditions and address their affect on the marketability and value of the subject
property.

The property should front on a publicly dedicated and maintained street that meets community
standards and is accepted by area residents. If the property is on a community owned or privately
owned and maintained street, there must be an adequate, legally enforceable agreement for
maintenance of the street. A street that does not meet city or state standards frequently requires
extensive maintenance, and property values may decline if it is not regularly maintained. If a property
fronts on a street that is not typical of those found in the community, the appraiser must comment on
the affect of that location on the subject property s marketability and value.

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The cost to the homeowner to maintain the subject s private road must be included in the housing PITI
payment.


Flood Hazard Area
The appraiser must indicate on the appraisal report whether or not the property is located in a Special
Flood Hazard Area that is identified on the Federal Emergency Management Agency s (FEMA Flood
Insurance Rate Maps (FIRM). These maps include areas that are within the 100-year flood boundary.
Note: The term 100-year flood does not mean that a flood will occur once in every 100 years, but
rather that there is a 1% or greater chance that a flood level will be equal to or exceeded in any given
year. The appraiser must also indicate the specific FEMA flood zone, the map number and its effective
date.

Improvement Analysis
The appraiser must provide a clear, detailed, accurate, and comprehensive description of the
improvements. The appraiser should be as specific as possible (commenting on such things as
needed repairs, additional features, modernization, etc.), and should provide supporting addenda when
necessary. The description of the improvements should include a general overall description and
specific descriptions of the exterior, foundation, basement, insulation, interior surfaces, heating and
cooling systems, kitchen equipment, attic, amenities, and car storage. If the property that is being
appraised includes an accessory apartment, the appraiser should describe it in the comments section
of the improvement analysis portion of the appraisal report.

Actual and Effective Ages
The relationship between the actual and effective ages of the property is a good indication of its
condition. A property that has been well maintained will generally have an effective age somewhat
lower than its actual age. On the other hand, properties that have an effective age higher than their
actual age probably have not been well maintained or may have a particular physical problem. In such
cases, the underwriter must pay particular attention to the condition of the subject property in the review
of the appraisal.

There is no restriction on the age of eligible dwellings. Consequently, mortgages on older dwellings
that meet the general requirements are acceptable. The improvements for all the properties must be of
the quality and condition that will be acceptable to typical purchasers in the subject market area.

Foundation
HSOA will accept only properties built on or installed on (in the case of manufactured housing) the
original foundation at time of completion of construction. Re-installations of structures from one
foundation to another are unacceptable properties.

Infestation, Dampness and Settlement
If the appraiser indicates that there is evidence of dampness, wood boring insects, or settlement, he or
she must comment on its affects on the subject property s marketability and value. The underwriter
must request either satisfactory evidence the condition was corrected or a professionally prepared
report based on an inspection of the property, confirming the condition does not pose any threat of
structural damage to the improvements.

Heating System
All properties must have a permanently affixed heating system. A property with no heating system,
where the only source of heat is a space heater, fireplace, or wood-burning stove, is NOT acceptable.
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In addition, a property in which only some rooms in the property are heated and some are not heated is
NOT acceptable. If a property has an unusual heating system, it must be determined whether the
system is permanently affixed, properly vented to the exterior and is in accordance with the local
codes. The property may be acceptable if wide-spread marketability can be established. To establish
marketability, the appraiser must use comparables with similar type heating system. Properties with
unusual heating systems will be reviewed on an individual basis.

Properties with permanently affixed wall heat sources, where accepted          as indicated in the Product
Summary, require exception processing.

Unit/Room List
The appraisal report contains a room list section to describe the subject property and provide space for
the square footage per level, as well as space for a summary of the above-grade room count and the
above-grade gross living area for the finished area. The Small Residential Income Property Appraisal
Report (Form 1025) contains a unit/room list section to describe the subject property and requires the
appraiser to indicate the square feet per each unit of a 2-4 family property. The unit/room list section
gives the appraiser the flexibility to report the units individually or to report them as a single line entry if
they are equal in size. The total square footage reported in the unit/room list section of Form 1025
should reflect the net rentable area of the property (will not necessarily equal the gross building area).

Layout and Floor Plans
Dwellings with unusual layouts, peculiar floor plans, or inadequate equipment or amenities generally
have limited market appeal. A review of the room list and floor plan for dwelling unit may indicate an
unusual layout such as bedrooms on a level with no bath, or kitchen on a different level from the dining
room. If the appraiser indicates that such inadequacies result in the market resistance to the property,
an appropriate adjustment should be made to reflect this in the overall analysis. On the other hand, if
the market acceptance can be demonstrated through the use of comparable sales with the same
inadequacies, no adjustments are required.

Gross Living Area
The most common comparison for single-family properties (including units in PUD or condominium
projects) is above grade gross living area. The appraiser must be consistent when he or she calculates
and reports the finished above-grade room count and the square feet of gross living area. For units in
condominium projects, the appraiser should use interior perimeter unit dimensions to calculate the
gross lining area. In all other instances, the appraiser should use the exterior building dimensions per
floor to calculate a property s above-grade gross living area. Only finished above grade areas should
be used, garages and basements (including those that are partially above-grade) should not be
included.

A level is considered to be below-grade if any portion of it is below-grade, regardless of the quality of its
finish or the window area of any room. Therefore, a walkout basement with finished rooms would not
be included in the above-grade room count.

Rooms that are not included in the above-grade room count may add substantially to the value of a
property, particularly when the quality of the finish is high. For that reason, the appraiser should report
the basement or other partially below-grade areas separately and make appropriate adjustments for
them on the basement and finished areas below-grade line in the sales comparison analysis grid.

To assure consistency in the sales comparison analysis, the appraiser generally should compare
above-grade areas to above-grade areas and below-grade areas to below-grade areas. However, if
the appraiser needs to deviate from this approach because of the style of the subject property or of any

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of the comparables, he or she must explain the reason for the deviation and clearly describe the
comparisons that are being made.

Gross Building Area
Gross building area, which is the total finished area (including any interior common areas, such as
stairways and hallways) of the improvements based on exterior measurements, is the most common
comparison for 2-4 family properties. The gross building area must be consistently developed for the
subject property and all comparables used by the appraiser. It should include all finished above and
below-grade living areas, counting all interior common areas (such as stairways, hallways, storage
rooms, etc.) but not counting exterior common areas (such as open stairways).

The use of other comparisons for 2-4 family properties, such as the total above-grade and below-grade
areas as discussed above is acceptable, as long as the appraiser explains the reasons he or she did
not use a gross building area comparison and clearly describes the comparisons that were made.

Insulation and Energy Efficiency
The appraiser should compare the energy-efficient features of the subject property to those of the
comparable properties in the sales comparison analysis grid to assure that the overall contribution of
these items is reflected in his or her estimate of the market value of the subject property.

An energy-efficient property is one that uses cost-effective design, materials, equipment and site
orientation to conserve nonrenewable fuels. Special energy saving items should be recognized in the
appraisal process. The nature of these items and their contribution to value will vary throughout the
country because of climatic conditions and differences in utility costs.

Building Permits /Unpermitted Space
This is generally applicable when there has been an increase in the overall finished above grade improvements
(generally excludes basements except for bath or kitchenette improvements, or remodeling that does not change
the footprint example: updated kitchen and/or bath, but still the same lay-out).

If the appraiser comments that an addition or conversion was made with permits, a copy of the permit(s) is not
required.

If the appraiser makes no comments about there being any additions no requirements unless the photos or
description shows there was recent additional living space added, or the property had an obvious garage
conversions.

If the Appraiser comments about additional space, but is silent on permits, either the city or appraiser is to confirm
if permits were obtained.

All work performed must be to professional work standards. If not completed in professional quality, property is
not eligible for financing. Summary of the following: the property is not eligible for financing through HSOA if any
additions or space conversions involved mechanical, electrical or plumbing work without permits.
Type of               No permits, but the work DID NOT entail additional             No permits, but the work DID
improvement           plumbing, electrical or mechanical changes                     entail additional plumbing,
                                                                                     electrical or mechanical
                                                                                     changes
Room                  Acceptable, but exclude additional space from square           Not eligible for financing;
expansions            footage calculations                                           Cannot exclude additional
                                                                                     space from square footage
                                                                                     calculations



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Garage             The appraiser must show the value and description/floor         Not eligible for financing
conversions        plan as a garage/original use and not as a converted            Cannot exclude
                   room.                                                           garage/conversion space from
                   The appraiser must also estimate (and include in the            square footage calculations
                   valuation) a reduction for the amount of the cost to cure for
                   re-conversion back to its original use.
                   Municipality or appraiser must also confirm property does
                   not violate any ordinances regarding off-street parking
                   requirements.
Patio/porch        The appraiser must show the value and description/floor         Not eligible for financing
enclosures         plan as a patio/porch/original use and not as a converted       Cannot exclude enclosed area
                   room.                                                           from square footage
                   The appraiser must also estimate (and include in the            calculations.
                   valuation) a reduction for the amount of the cost to cure for
                   re-conversion back to its original use.



Property Condition and Appraiser Comments
Based on the factual data of the improvement analysis, the appraiser must express an opinion about
the condition of the improvements. The appraiser must report the condition of the improvements in
factual, specific terms. Any condition that may affect the value or marketability of the subject property
must be reported to assure that the appraiser adequately describes the property. The appraiser must
report a detrimental condition of the improvements even if that condition is also typical for competing
properties. For instance, the appraiser should note if a property is characterized by deferred
maintenance or lack of updating even if the same condition applies to competing properties in the
neighborhood.

The appraiser must describe any adverse conditions that affect the livability, soundness or structural
integrity of the property. The appraiser must also address adverse environmental conditions (such as,
but not limited to, hazardous wastes, toxic substances, etc.) that are present in the improvements, on
site, or in the immediate vicinity of the subject property in the space provided for that purpose.

The only inspection of the subject property performed by the appraiser for a drive-by appraisal report is
visual inspection of the front exterior as seen from the road. Therefore, the appraiser must assume that
the condition of the interior is consistent with the exterior of the property.

Conformity to Neighborhood
The improvements should generally conform to the neighborhood in terms of age, type, design and
materials used for their construction. Careful underwriting review is required when there is market
resistance to the property because improvements are not compatible with the neighborhood or with the
requirements of the competitive market due to adequacy of pluming, heating, electrical services,
design, quality, size, condition or any other reason directly related to market demand. If appropriate,
require more conservative mortgage terms. However, the underwriter should be aware that many older
neighborhoods have favorable heterogeneity in architectural styles, land use and age of housing. For
example, older neighborhoods are especially likely to have been developed through custom building;
this variety may be a positive marketing factor.

In the appraisal and underwriting process, special consideration must be given to properties that
represent special or unique housing for the subject neighborhood. Non-traditional types of housing,
such as earth houses, geodesic domes, log houses, etc. are generally not acceptable due to the
difficulty in obtaining comparable sales.

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There is no requirement that one or more of the comparable sales must be of the same design and
appeal as the property that is being appraised (although appraisal accuracy is enhanced by using
comparable sales that are the most similar to the subject property). On a case-by-case basis, both the
appraiser and the underwriter must independently determine whether there is sufficient information
available to develop a reliable estimate of market value. This will depend on the extent of the
difference between the special or unique property and the more traditional types of houses in the
market and the number of such properties that have already been sold in the market area.

If recent comparable sales of the same design and appeal as the subject are not available, the
mortgage may be acceptable if:
     · The appraiser is able to determine sound adjustments for the differences between the
        comparables that are available and the subject property.
     · The appraiser demonstrates the marketability of the property based on:
        Ø Older comparable sales
        Ø Comparable sales in competing neighborhoods
        Ø The existence of similar properties in the market area
        Ø Any other reliable market data

However, if the appraiser is not able to find any evidence of market acceptance and characteristics of
the property are so significantly different that a reliable estimate of market value cannot be established,
the property will not be acceptable as security for any mortgage.

There is generally no minimum size or living area requirements for properties (Refer to the Product
Summary for variances). However, dwelling units of any type should contain sufficient living area to be
acceptable to typical purchasers or tenants in the subject market area. There should be comparables
of similar size to the subject property to support the general acceptability of a particular property type.

Cost Approach
Required only for New Construction:

The cost approach to value assumes that a potential purchaser will consider building a substitute
residence that has the same use as the property that is being appraised. This approach measures
value as a cost of production; therefore, the reliability of the cost approach depends on valid
reproduction cost estimates, proper depreciation estimates and accurate site values. The cost
approach is important when appraising newer or substantially rehabilitated properties as a check for the
market data approach. However, as the effective age of a property increases, the reliability of the cost
approach may decrease because the depreciation estimates may be subjective. Appraisals relying
solely on the cost approach as an indicator of the market value are not acceptable.

If the appraiser believes the cost approach is not applicable (e.g. turn of the century homes) and if
sufficient sales of comparable properties are available in the market, the cost approach may be omitted,
with comments explaining this belief. Whether or not the cost approach is used, the appraiser must
show an opinion of site value. This figure must be based on the value of land as though it were
developed to its highest and best use consistent with its present zoning classification. The site value
must be used when calculating maximum land-to-value.

Since units in condominiums are integral parts of the total project, the cost approach is generally
impractical for determining the value of any given unit; therefore, the appraiser does not have to
consider the cost approach or site value when appraising these units.
Remaining Economic Life

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Because the appraisal reports are designed to meet the needs of several different user groups, the
appraiser may address the remaining economic life for the property; however, it is not necessary. If the
appraiser does report this information, HSOA does not need to consider it because any related property
deficiencies will be discussed in the sections of the appraisal report that address the improvement
analysis and comments on the condition of the property. There are no requirements that the mortgage
term have any correlation to the remaining economic life of the property.
Determining the Indicated Value
There are three principal types of depreciation the appraiser must consider
    · Physical Depreciation. Traditionally referred to as physical deterioration, this is a loss in value
        caused by deterioration in physical condition of the improvements. Appraisers classify physical
        deterioration as curable or incurable. Curable physical deterioration refers to items of deferred
        maintenance (painting, items in need of repair, broken stair rails, etc.). Incurable physical
        deterioration refers to other items that currently are not practical or feasible to correct (furnace
        or roof singles that have not reached the end of their economic life).
    · Functional Depreciation. Traditionally referred to as functional obsolescence, this is a loss in
        value that is caused by defects in design of structure. Examples include inadequacies in such
        items as architecture, floor plan, or sizes and types of rooms. It also can be caused by changes
        in market preferences that result in some aspect of improvements being considered obsolete by
        current standards. Examples include the location of a bedroom on a level with no bathroom, or
        access to a bedroom only through another bedroom.
    · External Depreciation. Traditionally referred to as economic obsolescence, this is a loss in
        value that is caused by negative influences that are outside of the site, such as economic
        factors or environmental changes. Examples include shopping centers, expressways or
        factories that are adjacent to the subject property.

The appraiser arrives at the indicated value of property by estimating the reproduction cost of new
improvements, subtracting the amount of depreciation from all causes and adding an estimate of the
value for the site if it were vacant and available to be developed to its highest and best use. The
reproduction cost estimate should reflect the cost of construction based on current prices of producing
a replica of the property being appraised, including all positive and negative characteristics. Although
construction materials used for the estimate should be as similar as possible to those used for the
subject property, they do not have to be exactly the same. If the appraiser s estimate of the value for
the site is not typical for a comparable residential property in the subject neighborhood, he or she must
comment on how the variance affects the marketability of the subject property.

Appraiser s Comments and Adjustments
In reviewing the appraisal report, the underwriter should make sure that the appraiser s analysis and
comments for the cost approach is consistent with comments and adjustments mentioned elsewhere in
the report. For example, if the neighborhood or site description reveals that the property backs up to a
shopping center, the underwriter should expect to see an adjustment for external depreciation in the
cost approach. Similarly, if the improvement analysis indicates that it is necessary to go through one
bedroom to get to another bedroom, the underwriter should expect to see an adjustment for functional
depreciation.

Comparable Rental Data
In developing the valuation for 2-4 family investment properties, the appraiser must analyze the most
current and most comparable rental properties that are available to develop an estimated market rent
for the subject property. The appraiser must report and analyze at least three rental comparables
(which do not have to be the same comparables used in the sales comparison analysis). The appraiser
should reconcile the comparable rental data and provide support for the estimated market rents for the


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individual subject units, providing information about lease dates, number of vacant units, actual rents
and estimated market rents for the subject property.

The appraisal report should assure HSOA that the units and properties selected as comparables are
comparable to the subject property (in terms of both the units and the overall property) and accurately
represent the rental market for the subject property, unless the appraiser states otherwise in the report.

Sales Comparison Approach
The sales comparison approach to value is an analysis of comparable sales, contract offerings, and
current listings of properties that are the most comparable to the subject property. However, the
appraiser s analysis of a property must take into consideration all factors that have an impact on value,
recognizing that a well-informed or well-advised purchaser will pay no more for a property than the
price he or she would pay for a similar property of equal desirability and utility if it were purchased
without undue delay. To accomplish this, the appraiser must analyze the closed or settled sales, the
contract sales, and the current listings of properties that are most comparable to the subject property.
This is particularly important in soft or declining markets, because the competing current listings and
contracts probably reflect the upper-end of value for the subject property as of the effective date of the
appraisal; and we expect appraisers to accurately report and reflect market conditions as of that date.

The comparable market data must be verified, analyzed, and adjusted for differences between the
comparable properties and the subject property. Because the appraiser s estimate of market value is
no better than the reliability of the comparable data that is used, the appraiser must exercise due
diligence to ensure the reliability of the comparable sales data that he or she uses. The appraiser must
report his or her data and/or verification source(s) for each comparable sale on the appraisal form. An
appraiser may use a single source for the data and verifications or multiple sources if they are needed
to adequately verify the comparable sales. The quality of the data varies from source to source and
from one locality to another. In view of this, a single data source may be adequate if the appraiser uses
a source that provides quality sales data that is confirmed or verified by closed or settled transactions.
On the other hand, if the appraiser s basic data source does not confirm or verify the sales data, the
appraiser will need to use additional sources. When a party that has a financial interest in either the
sale or financing of the subject property provides comparable sales data, the appraiser must re-verify
the data with a party who does not have a financial interest in the subject transaction.
Selecting the Comparables

The appraiser must report a minimum of three comparable sales as part of the sales comparison
approach. The appraiser may submit more than three comparable sales to support his or her estimate
of market value, as long as at least three are actual settled or closed within the last 6 months (90 days
may be required in some markets). However, the appraiser may use older comparable sales as
additional supporting data if he or she believes that it is appropriate. The appraiser must comment on
the reasons for using any comparable sales that are more than six months old. In addition, the
appraiser may use the subject property as a fourth comparable sale or as supporting data if the
property previously was sold (and closed or settled). If the appraiser believes that it is appropriate, he
or she also may use contract offerings and current listings as supporting data.

For properties that are in established subdivisions or for units in established condominium or PUD
projects (those that have resale activity), the appraiser should use comparable sales from within the
subdivision or project, if there are any available. Resale activity from within the subdivision or project
should be the best indicator of value for properties. If the appraiser uses sales of comparable
properties that are located outside of the subject neighborhood, he or she must include an explanation
with the analysis.


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For properties in new subdivisions or for units in new (or recently converted) condominium or PUD
projects, the appraiser must compare the subject property to other properties in its general market area
as well as to properties within the subject subdivision or project. This comparison should help
demonstrate market acceptance of new developments and the properties within them. Generally, the
appraiser should select one comparable sale from within the subject subdivision or project, one from
outside the subject subdivision or project, and the third can be from inside or outside, as long as the
appraiser considers it to be a good indicator of value for the subject property. In selecting the
comparables, the appraiser should keep in mind that sales or resale s from within the subject
subdivision or project are preferable to sales from outside the subdivision or project as long as the
developer or builder of the subject property is not involved in the transactions.

Because rural properties often have large lot sizes and rural neighborhoods can be relatively
undeveloped, there may be a shortage (or absence) of recent truly comparable sales in the immediate
vicinity of a subject property that is in a rural location. This means that the appraiser will often need to
select comparable sales that are located a considerable distance from the subject property. In such
cases, the appraiser must use his or her knowledge of the area and apply good judgment in selecting
comparable sales that are the best indicators of value for the subject property. The appraiser should
include an explanation of why the particular comparables were selected in his or her analysis.

Comparable Sales - General Appraisal requirements
· The most recent and similar comparable sales available as part of the sales comparison approach
  must be used. Any change in market conditions from the date the contract of sale was signed and
  date of the appraisal must be considered.
· Verification of comparable sales with a reliable party that is not associated with the subject property
  or the subject property s development, and at least two comparables, must be verifiable through the
  Multiple Listing Service (MLS) as arms length transactions.
· Two of the comparable sales must have closed within the last 90 days as of the month of closing.
· Two additional comps of current listings or pending sales must be provided.
· Comparable sales must be mapped in the appraisal.
· Days-on-market (DOM) for subject and comparable sales must be provided, if applicable. The
  average days-on-market for the comparable sales must not exceed the Marketing Time box
  marked by the appraiser.
· If the appraiser is unable to meet any of the above requirements, the appraiser must provide a
  detailed explanation as to why the requirements were not met, and if it resulted in making an
  adjustment to the property value.

New construction Projects and Developments - Additional Requirements
·   The appraiser must use at least one current sale from the subject builder/developer in the project,
    and either:
·   One current sale from a competing builder/developer, or
·   A resale from within the subject property's development that has closed within the last 30 days.
·   If the appraiser is unable to meet any of the above requirements, the appraiser must provide a
    detailed explanation as to why the requirements were not met, and if it resulted in making an
    adjustment to the property value.
·   When appraising new construction, both the contract/sales date (when the buyer entered into the
    contract with the builder), and the closing date must be reported and analyzed. Differences in
    market conditions between the contract/sales date and the effective date must be analyzed.
·   The appraiser must provide the builder names of the subject property, and the comparables (if new
    construction also).


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Adjustments to Comparable Sales
Each comparable sale that is used in the sales comparison approach must be analyzed for differences
and similarities between it and that property that is being appraised. The appraiser must make
appropriate adjustments for location, terms and conditions of sale, date of sale and the physical
characteristics of the properties. Time adjustments must be representative of the market and should be
supported by the comparable sales whenever possible. The adjustments must reflect the time that
elapsed between the contract date for the comparable sale and the effective date of the appraisal for
the subject property.

Comparable sales must be adjusted to the subject property, except for sales and financing
concessions, which are adjusted to the market at the time of sale. The subject property is the standard
against which the comparable sales are evaluated and adjusted. Thus, if an item in the comparable
property is superior to that in that subject property, a negative (-) adjustment is required to make that
item equal to that in the subject property. Conversely, if an item in the comparable property is inferior
to that in that subject property, a positive (+) adjustment is required to make that item equal to that in
the subject property.

The proper selection of comparable properties minimizes both the need for, and the size of, any dollar
adjustments. Occasionally, there may be no similar or truly comparable sales for a particular property
because of the uniqueness of the property or other conditions. In such cases, the appraiser must use
his or her knowledge and judgment to select comparable sales that represent the best indicators of
value for the subject property and to make adjustments to reflect the actions of typical purchasers in the
market. Dollar adjustments should reflect the market s reaction to the difference in the properties, not
necessarily the cost of the difference. Swimming pools, electronic air filters, intercom systems,
elaborately finished basements, carpets and other special features generally do not affect value to the
extent of their cost.

There are established guidelines for line item, net and gross percentage adjustments underwriters may
rely on as a general indicator of whether a property should be used as a comparable sale. Generally,
the dollar amount of adjustments for each comparable should not exceed:
    · 10% of the comparable s sale price for any one line item adjustment.
    · 15% of the comparable s sales price for the total net adjustments.
    · 25% of the comparable s sales price for the total gross adjustments.

When the adjustments exceed these guidelines, the appraiser must comment on the reasons for not
using a more similar comparable. Total net adjustments are determined by subtracting all negative
adjustments from all positive adjustment and then dividing into the sales price. The total net adjustment
may be either a positive or negative number. Total gross adjustments are determined by adding all
individual adjustments without regard to the positive or negative adjustments and then dividing into the
sales price.

In some circumstances, the use of comparables with higher-than-normal adjustments may be
warranted, but the appraiser must satisfactorily justify their use. The appraiser must research the
market and select the most comparable sales that are available for the subject property, and then
adjust them to reflect the market s reaction to the differences (except for sales and financing
concessions) between the comparable sales and the subject property, without regard for the
percentage or amount of the dollar adjustments. If the appraiser s adjustments do not fall within the
adjustment guidelines, but the appraiser believes that the comparable sales used in the analysis are
the best available, as well as the best indicators of value for the subject property, the appraiser simply
has to provide an appropriate explanation. If the extent of the appraiser s adjustments to the


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comparable sales is great enough to indicate that the property may not conform to the general market
area, the underwriter must review the property carefully and may offer less than maximum terms.

Bracketing
Rather than using comparables that will require sizable adjustments in the same direction, the
appraiser should attempt to use the bracketing technique during the selection of comparables. This
essentially involves choosing one comparable that is superior to the subject, one that is inferior and one
that is most similar. Through the adjustment process, the superior comparable will adjust downward to
the subject, the inferior one will adjust upward and the most similar comparable will require few
adjustments, if any.

Bracketing will create a range of value for the subject by establishing a high and low sales price from
the comparables selected; in other words the comparables will bracket the subject s value. Bracketing
is also beneficial as it eliminates unwanted situations in which all comparables support a value higher
than their sale prices. For example, all comparables sold for $350,000 and all were adjusted upward
due to inferior characteristics by $100,000. The value of the subject would be $450,000, yet no
property in the neighborhood sold for anything near that price. Without analyzing any other factors, this
would be considered a deficient appraisal, which could have been avoided by using the bracketing.

Unadjusted Units of Comparison
For 2-4 family properties, the appraiser must report certain unadjusted units of comparison for the
subject property and the comparable sales: the sales price per gross building area, the sales price per
unit, and the sales price per room. Because purchasers of small residential income properties may rely
on these unadjusted units of comparison, the appraiser should consider them in the analysis and
reconciliation if they are relevant to the purchaser s motivation in the subject market area.

Sales Comparison Analysis Adjustment Grid
The underwriter should thoroughly review the sales comparison analysis adjustment grid. The sales
comparison analysis provides many places in which an error can be made in the use of dollar
adjustments. A spot-check must always be made of the positive and negative adjustment calculations.
Errors in arithmetic may have a significant effect on the value conclusion and must be corrected by the
appraiser. The sales comparables should be under the same market influences as the subject
(physical boundaries by freeway, water, golf courses, railroads, airports, commercial/industrial, etc.).

The underwriter should pay particular attention to the following items, because a substantial variance
raises questions about the validity of using a specific comparable sale. The appraiser should address
the reason for a variance.
    · Proximity to subject property, and location. The description of the comparables proximity to the
        subject property must be specific (e.g., two blocks south). Whenever possible, the appraiser
        should use comparable sales in the same neighborhood as the subject property, because the
        sales prices of comparable properties in the neighborhood should reflect the same positive and
        negative location characteristics.
    · Sales price. The sales price of each comparable sale should be within the general range of the
        estimate of market value for the subject property. A $100,000 comparable sale for a $75,000
        subject property would raise questions about the validity of the comparable.
    · Sales or financing concessions. The dollar amount of sales or financing concessions paid by
        the seller must be reported for the comparables if the information is reasonably available.
        Generally, sales or financing data for comparable sales, such as the mortgage amount, loan
        type, interest rate, term and any fees or concessions the seller paid is available. The appraiser
        should obtain this information from an individual who was a party to the comparable transaction
        (the broker, buyer, or seller) or from a data source that the appraiser considers to be reliable.

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There may be some situations in which sales or financing information is not available because of legal
restrictions or other disclosure-related problems. In such cases, the appraiser must explain why the
information is not available. However, an explanation that indicates that the appraiser did not make an
effort to verify the information will not be acceptable. In all other cases, the appraiser must provide the
sales and financing concession information that was available and verified for the comparables. If the
appraisal report does not provide enough space to discuss this information, the appraiser should make
adjustments for the concessions on the form and explain them in an addendum to the appraisal report.

Examples of sales or financing concessions include interest rate buydown or other below-market rate
financing, loan discount points, loan origination fees, closing costs customarily paid by the buyer,
payment of condominium or PUD association fees, refunds of or credit for the borrower s expenses,
absorption of monthly payments, assignment of rent payments and the inclusion of non-realty items in
the transaction. The amount of the negative adjustment to be made to each comparable with sales or
financing concessions is equal to any increase in the purchase price of the comparable the appraiser
determines to be attributable to the concessions. The need to make negative adjustments and the
amount of the adjustments to the comparables for sales and financing concessions are not based on
how typical the concessions might be for a segment of the market area. Large sales concessions can
be relatively typical in a particular segment of the market and still result in sale prices that reflect more
than the value of the real estate. Adjustments based on mechanical, dollar-for dollar deductions that
are equal to the cost of the concessions (as a strict cash equivalency approach would dictate) are not
appropriate. The adjustments must reflect the difference between what the comparables actually sold
for with the sales concessions and what they would have sold for without the concessions so that the
dollar amount of the adjustments will approximate the market s reaction to the concessions.

Positive adjustments for sales or financing concessions are not acceptable. For example, if local
tradition or law results in virtually all of the property sellers in the market area paying a 1% loan
origination fee for the purchaser and a property seller in that market did not pay any loan fees or
concessions for the purchaser, the sale would be considered as a cash equivalent sale in that market.
The appraiser should recognize comparable sales that sold for all cash or with cash equivalent
financing and use them as comparables if they are the best indicators of value for the subject property.
Such sales can also be useful to the appraiser in determining those costs that are normally paid by
sellers as the result of tradition or law in the market area.
    · Date of sale/time adjustment. More than three comparable sales will be accepted as part of the
        appraisal report, but at least three of them must be actual settled or closed sales. The appraiser
        should provide the date of the sales contract and the settlement or closing date for each
        comparable sale. Unless the appraiser believes that the exact date is necessary to understand
        the adjustments, only the month and year of the sale need to be reported. If the appraiser does
        not report both the contract date and the settlement or closing date, he or she must identify the
        reported sale date as either the contract date or the settlement or closing date. If the appraiser
        reports the contract date only, he or she must state whether the contract resulted in a settlement
        or a closing.
    · Above-grade room count and gross living area. Only finished above-grade areas should be
        included in the calculation of gross living area for a single-family property or a unit in a
        condominium or PUD project. The appraiser should report the basement and other partially
        below-grade areas separately and adjust them accordingly. The room count and gross living
        area should be similar for the subject property and all comparables. For example, a four-
        bedroom comparable sale generally is not acceptable to support the value of a two-bedroom
        subject property. The appraiser must address large differences between subject property and
        comparable sales, since they raise doubts about the validity of the comparables as good
        indicators of value.

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    ·   Over-improvements. In some instances, the improvements represent an over-improvement for
        the neighborhood, but are still within the neighborhood price range. Examples include a
        property with an in-ground swimming pool, large addition, or oversized garage in a market that
        does not demand these kinds of improvements. The appraiser must comment on such over-
        improvements and indicate their contributory value in the sales comparison analysis adjustment
        grid. Because an over-improved property may not be acceptable to the typical purchaser, the
        underwriter must review appraisals on this type of property carefully to ensure that the appraiser
        has reflected only the contributory value of the over-improvement in his or her analysis.
    ·   Listings and prior sales. The appraiser s analysis for a property should include comments about
        any prior sales of the subject property and the comparable sales that took place in the 36
        months preceding the effective date of the appraisal report, as well as about any current
        agreement of sale, option, or listing of the subject property. The listing of properties repeatedly
        in this time frame should be evaluated carefully (see property flip topics in the Credit Policy
        Manual). It may be necessary for the underwriter to review listing agreements and/or
        explanation letters, or require additional documentation.
    ·   Appraiser s comments and indicated value. The appraiser s comments should reflect his or her
        reconciliation of the adjusted or indicated values of the comparable sales and identify the
        comparable(s) that were given the most weight in arriving at the indicated value for the subject
        property.

For 2-4 family properties, the appraiser should also provide an evaluation of the typical purchaser s
motivation for purchasing the property and an analysis for any current agreements of sale, option, or
listing for the subject property.

Income Approach
The income approach to value is based on the assumption that market value is related to the market
rent or income that a property can be expected to earn. Its use generally is appropriate in
neighborhoods of single-family properties when there is a substantial rental market and it is an
important approach in the valuation of a 2-4 family properties. However, it generally is not appropriate
in areas that consist mostly of owner-occupied properties, since adequate rental data generally does
not exist for those areas. An appraisal is not acceptable if the appraiser relies solely on the income
approach as an indicator of market value.

To arrive at the indicated value by the income approach, the appraiser multiplies the estimated market
rent for the subject property by a reconciled gross rent multiplier. Because of the way value is
estimated under the income approach, this approach provides a reliable indication of value only if the
comparable sales are truly comparable.
    · Estimated market rent is based on an analysis of comparable rentals in the neighborhood. After
        appropriate adjustments are made to the comparables, their adjusted (or indicated) values are
        reconciled to develop an estimated monthly market rent for the subject property.
    · The gross rent multiplier is determined by dividing the sales prices of comparable properties that
        were rented at the time of sale by their monthly market rent; which is then reconciled to create a
        single gross rent multiplier (or range of multipliers) for the subject property.

Appraisers must use their best judgment regarding the applicability of the income approach. An
instance in which the income approach may not be an appropriate indicator of value involves the
appraisal of a two-family property in a neighborhood that is dominated by owner-occupied two-family
properties. In such cases, the appraiser does not need to develop a gross monthly rent multiplier, but
must report the estimated market rent for the subject property. In such cases, the appraiser should
provide an appropriate explanation of why he or she chose to report in this manner.


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When the property being appraised is a single-family property that will be used as an investment
property, the appraiser must prepare a Single family Comparable Rent Schedule (Form 1007) in
addition to the appropriate appraisal report. This form is not required for 2-4 family properties since the
Small Residential Income Property Appraisal Report (Form 1025) provides substantially the same
information. When the appraiser is relying on the income approach, he or she should attach the
supporting comparable rental and sales data and the calculations used to determine the gross rent
multiplier as an addendum to the appraisal report.

The Operating Income Statement (Form 216) is required in all cases, including those where rental
income from the subject property is not used to qualify the borrower.

Final Reconciliation
The reconciliation process that leads to the estimate of market value is an on-going process throughout
the appraiser s analysis. In the final reconciliation, the appraiser must reconcile the reasonableness
and validity of the indicated values and the available data. The appraiser then must select and report
the approach or approaches that were given the most weight. The final reconciliation must never be an
averaging technique.

If the appraiser has provided a comprehensive and logical analysis of the neighborhood and the
property, the underwriter should be able to reach a sound conclusion of the adequacy of the property
as security for the mortgage.
Appraisal Conditions
The appraiser must indicate whether the appraisal is made as is; subject to the repairs, alterations, or
conditions listed; or completion per plans and specifications.

If the appraisal is made subject to the repairs, alterations or conditions listed, a certification from the
appraiser as to the completion of repairs will be a condition of loan approval. If the appraisal is subject
to completion per plans and specifications, a certification from the appraiser as to the completion of the
property (Form 442) together with a photograph of the property will be a condition of loan approval.
Any other certifications, such as termite certifications, water certifications, roof certifications, etc., are
not required unless specifically required by the appraiser

        o A determination on whether or not the property value has declined.
    Note: If the appraiser determines that the value has declined, a new appraisal is required and the
    loan must be re-underwritten using the new value.

        o   At Least two (2) comparables sold within 90 days of the updated valuation.
        o   An indication there has been an exterior inspection of the property.
        o   Comments on any market changes.
        o   If an appraiser other than the original appraiser, for example, a substitute appraiser,
            completes the re-inspection:
                § The file must contain documentation specifying the reason why the original appraiser
                    was not used, and
                § The substitute appraiser must review the original appraisal and comment on whether
                    the original appraiser s opinion on market value was reasonable on the date of the
                    original report.

Market Conditions Addendum to the Appraisal Report
Effective with appraisals, appraisal updates and completion reports dated on or after April 1, 2009, the
Market Conditions Addendum to the Appraisal Report (Form 1004MC) is required for all conventional
loans. Form 1004MC will:

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·     provide the appraiser with a structured format to report market data,
·     help further clarify conclusions made by the appraiser, and
·     supply the lender with a clear and accurate understanding of the market trends and conditions
      prevalent in the subject neighborhood.

The form is posted on eFannieMae.com.




7-7      Unacceptable Appraisal Practices

HSOA will not accept appraisals or field reviews that are misleading (through omission or
commission), discriminatory, biased, or falsified. If HSOA identifies any of the following
practices, the appraisal will be rejected.

Furthermore, the appraiser could be subject to corrective action, which will typically impact
assignment eligibility.

Discrimination: Development of a valuation conclusion that is based either partially or
completely on:
· Sex, race, color, religion, handicap, national origin, or familial status of either the prospective
   owners or occupants of the subject property or the present owners or occupants of the properties in
   the vicinity of the subject property.
· Any other factor that local, state, or federal law designates as being discriminatory.

Improper Influence: Development of a valuation conclusion that is based on improper influence
such as:
   · Use of data, particularly comparable sales data, which were provided by parties who have a
      financial interest in the sale or financing of the subject property without verification of the
      information from a disinterested source.
   · Basing an opinion of value on the opinion of others who have a financial interest in the sale or
      financing of the subject property.

Sale Contract: Not adequately analyzing and reporting the subject s pending sales contract:
   · Not reporting a sales contract analysis for a purchase loan
   · Not analyzing/disclosing significant sale concession(s)

Neighborhood Reporting: misleading neighborhood information:
   · Expanding neighborhood parameters to justify the use of superior market data
   · Reporting neighborhood housing trends that conflict with available market data

Property Condition: Not appropriately analyzing and reporting property condition:
   · Property conditions that significantly impact marketability or value are not disclosed/analyzed
   · AS IS value concluded when subject property is not livable due to health, safety, and structural
      soundness issues. (does not apply to REO assignments).

      Examples include, but are not limited to:
            o Incomplete construction
            o Structural integrity of roof or walls is compromised

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Declining Market: Not analyzing and reporting declining market characteristics despite market
evidence to the contrary:
   · Not disclosing comparable data that clearly indicates a declining market when the comparable
       data reported in the appraisal supports a stable or improving market
   · Prior sales/listings of the subject not disclosed that are either required (within 36 months) or
       relevant due to declining market analysis
   · Prior sales of comparable sales not disclosed that are either required (within 12 months) or
       listings, if relevant, due to declining market analysis

Subject Sales & Listings: Not disclosing or analyzing the subject s sales and listing history:
   · Not analyzing and reporting subject sales and listing history required by USPAP
   · Not disclosing prior listing activity of the subject that indicates market resistance to list price(s)
      or an overall lack of marketability over an extended period of time

Comparable Selection & Analysis: Not selecting / adjusting comparables appropriately:
  · Use of comparable sales that were not personally inspected (exterior) by the appraiser
  · All or a majority of comparables presented are outside subject neighborhood, when
     comparables located within the subject neighborhood are available
  · Unsupported/excessive location or site adjustments, or lack of adjustments, when comparables
     outside reasonable neighborhood boundaries are used
  · Inappropriate, omitted or unsupported adjustments are applied across-the-board or involve
     excessive percentages (greater than: 25% Gross, 15% Net, 10% Line Item) without explanation
     and adequate market support (i.e., paired sale analysis)

Reconciliation: Not reconciling value conclusion when appraised value is:
   · Not within the adjusted sales price range.
   · Not supported by the majority of comparables or most relevant comparables.
   · Significantly higher than predominant value/sales comparables reported (example: ranking the
     subject at the high end of the market without explanation).
   · Significantly higher or lower than the subject s pending sales price.

Additional Information
Fannie Mae Unacceptable Appraisal Practices
Fannie Mae published a guide for lenders and appraisers in April 2009 that includes a section titled
Unacceptable Appraisal Practices. The guide can be found at the Web address below.
https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/appraisalguidance.pdf


7-8     Repair Escrow Procedures
Escrow Holdbacks for the completion of minor repairs will now be permitted as long as they adhere to
all of the following:
     · The Holdback amount must be at least 1.5 times the amount needed for repairs
     · Holdback amount not to exceed $5,000, which means the cost of repairs cannot exceed
         $3,333.00
     · Holdbacks will be permitted up to 10 Business Days MAXIMUM.
     · A copy of the invoice/contractor s bids reflecting an estimate of repairs to be completed and
         must be sent to the ROC Manager and or UW Manager for approval.
     · All Escrow Holdbacks will require the approval of the UW and or ROC Manager
     · Escrow company to hold any and all broker/originator funds including YSP(Wholesale) until all
         repairs have been completed.

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      ·   Other than incidental painting, all work must be performed by licensed contractors (no do-it-
          yourself projects).
      ·   Standard Escrow holdback agreements, as provided by Doc Magic are required.
      ·   Final inspection by appraiser (or fee inspector for FHA loans) with photos is required before
          release of funds.


7-9       Natural Disasters


Background
Refer to the Closing Manual for additional information on this topic.

The Federal Emergency Management Agency (FEMA) responds when a disaster overwhelms a State s
resources and is requested by a State s Governor. When a specific county and/or independent cities
become a Federally Declared Disaster Area, FEMA designates if the area is eligible for Individual
(individuals and households) or Public (State/local governments and certain private non-profit
organizations) federal aid assistance.

Procedures
The Funder must clearly mark all loans currently in the pipeline located in a Federally Declared Disaster
Area "Re-Inspection Required" in bold face type on the outside of the loan file. These loans will not be
permitted to fund without prior review and sign-off of the inspection or re-inspection notice by an
Underwriter or operations manager

The Underwriter must make the inspection or re-inspection a condition of the loan closing.

Inspections
The appraisal and property re-inspection requirements are determined by whether the subject is
located within an area declared for Individual or Public Assistance. The individual who performs the
inspection should review the original appraisal report and be able to certify that his or her personal
inspection of the property and neighborhood revealed no indication of significant disaster related
damages. The inspector must address the physical condition of the site and improvements as well as
the impact of the damages to the property value and marketability. If the condition of the property is
acceptable, we will accept the value conclusion made prior to the disaster.

Appraisal Performed Prior to Declaration of Disaster
Property must be re-inspected by the original appraiser or, if not available, another licensed appraiser
(No exceptions). The appraiser must provide the following commentary/evidence:
   · Property is free from damage and the disaster has no effect on the value or marketability.
   · If the re-inspection indicates damage, the extent of the damage must be addressed.
   · Completion of repairs is required as evidenced by Form 442, Satisfactory Completion
       Certificate, with photos, prior to the closing of the loan.
   · Physical inspection of the property and neighborhood evidenced by completion of the
       Catastrophic Disaster Area Inspection form.
   · Photos: interior, exterior, and neighborhood.

Alternative Inspection Source



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Property must be re-inspected by the original appraiser or acceptable inspection source (nationally
recognized field review company or local professional licensed inspector). The appraiser/property
inspector must provide the following commentary/evidence:
    · Property is free from damage and the disaster had no effect on the value or marketability.
    · If the re-inspection indicates damage, the extent of the damage must be addressed.
    · Completion of the repairs is required as evidenced by Form 442, Satisfactory Completion
       Certificate, with photos, prior to the closing of the loan.
    · Physical inspection of the property and neighborhood.
    · Photos: exterior and neighborhood.
    · Written Inspection Certification Certificate (see example below) or completion of the
       Catastrophic Disaster Area Inspection form.

Appraisal Performed After Declaration of Disaster
Applies to both Individual Assistance and Public Assistance Disaster declarations for disasters rated as
 Standard when the appraisal is dated within 90 days after a disaster declaration. Appraiser comments
are not required if the declaration pre-dated the appraisal by at least 90 days. (For disasters rated as
 Severe , funding is not allowed).

Appraisal must include written certification by the appraiser that:
   · The property is free from damage and the disaster has had no effect on the value or
       marketability.
   · If the appraisal indicates damage, the extent of the damage must be addressed.
   · Completion of repairs is required as evidenced by Form 442, Satisfactory Completion
       Certificate, with photos, prior to the closing of the loan.
   · A physical inspection of the neighborhood as evidenced by completion of the Catastrophic
       Disaster Area Inspection form.
   · Photos: interior, exterior, and neighborhood.

Non-Standard Appraisals (Property Valuation Update, PIW, 2075, etc.)
Non- Standard appraisal forms are not allowed for 1 (one) year after the disaster, as measured from the
disaster effective date to the new loan application date.

Written Inspection Certification Statement
HSOA requires a written statement from all parties that perform property inspections, including the
appraiser. The certification should be on company letterhead, bearing an original signature. The
statement is required to contain text similar to:
"Having reviewed the original appraisal report and personally inspected the exterior of the property
located at (subject address) and surrounding neighborhood on (date), I hereby certify that, to the best
of my knowledge and belief, the inspection revealed no indications of moderate to significant physical
damage to the property or neighborhood, needed repairs to the site or the improvements other than
those that were noted in the original appraisal report and that the marketability and value of the
property has not been adversely affected.
    · This inspector did not previously inspect this property for purposes of a real estate appraisal.
    · This inspector did previously inspect this property for the purposes of a real estate appraisal and
       the condition of the interior is assumed the same as that noted in the original appraisal report."

Property Damage
If the property was damaged and the appraiser performed the property damage inspection, we require
that the property be re-inspected by a qualified home inspector, an architect, or an engineer to assess
the nature and degree of the damage. A damaged property must be repaired before the loan is closed.

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Chapter 8 Condominium and PUD Projects


OVERVIEW
A condominium is a form of ownership characterized by holding title to a single unit together with a
proportionate undivided ownership interest in the common elements. Common elements typically
include land, roofs, floor, walls, lobbies, and community spaces and facilities. The common elements
are usually maintained but not owned, by a non-profit homeowner's association.


See Section 2-19 for underwriter review requirements for condominiums and attached PUDs.

            8-1 NEW, ESTABLISHED and INELIGIBLE CONDOMINIUM PROJECTS
There are two types of condominium projects      new and established.

New Projects
Definition: Projects in which less than 90 percent of the total units have been conveyed to the unit
purchasers. New projects also include projects that are not fully complete, such as proposed
construction, or the proposed, new construction or the proposed or incomplete conversion of an
existing building to a condominium. New projects also include condos that have never been turned over
to the homeowners association by the developer.

Currently, HSOA will not accept loans in New Projects, unless the project has been approved by FNMA
or an HSOA investor.

Established Projects
Definition: Projects in which 90 percent or more of the total units have been purchased and conveyed to
the unit purchasers, the project or conversion is complete, and the project has been turned over to the
homeowners association by the developer.

Ineligible Projects
  Condominium Hotel (a.k.a. Condotel): A project that has a rental desk, short-term occupancy, and
cleaning services that operates as a commercial hotel even though the units are owned individually;
including the following characteristics:
      · Is publicly advertised as a condominium hotel or resort (for example, the project advertises on
        travel or hotel Web sites, or has a Web site on the Internet and presents itself as a condominium
        hotel) or Web sites are available to determine room availability and/or to make reservations.
      · Has hotel-like amenities (such as front desk, maid service, concierge service, on site
        recreational activities, lifeguard on duty, towel or linen service, etc.)
      · Shares facilities, common elements, or amenities with a hotel, resort, and/or lodge owned and
        managed by the developer or another third-party entity (pool, spa, fitness center, parking,
        business center, conference facility, etc.)
      · Has units that do not have full size kitchen appliances, or that have efficiency kitchens
      · Has a name that includes hotel, resort, motel, inn, or lodge, has an affiliation with, and/or
        is managed by an entity, usually a hotel chain or hospitality entity.
      · Is located at the same address as a hotel or resort, or within a hotel or resort, or has a hotel or
        hospitality identity

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      · Has non-incidental businesses operated or owned by the homeowner s association (for
       example, restaurant, health club, spa, etc.).
      · Has a revenue sharing arrangement between a rental management firm and the HOA
      · Requires mandatory membership (tennis, golf, health club, etc.)
      · Requires a mandatory rental pooling agreement or has blackout periods.
      · The bylaws, CC&Rs, or the HOA allow short-term and seasonal rentals (periods of less than
       one month), or fractional or time-share ownership
      · The HOA budget includes items that suggest hotel-type features, such as housekeeping costs,
       business income, membership fee income, personnel costs (lifeguard, maid, concierge, front
       desk, shuttle service, internet service fees, etc.).

   Multi-Dwelling Unit Condominium: A project that permits an owner to hold title to more than 1-unit,
     with ownership evidenced by a single deed and mortgage.
   Non-Conforming Use of Land: A project that represents a legal but nonconforming use of the land if
     zoning regulations prohibit rebuilding the improvements to its current density in the event of their
     partial or full destruction.
   Timeshare, or segmented ownership
   Houseboat Project
    Live-work condominium units
   A project where more than 20% total space is used for non-residential purposes.
   A project where a single entity (the same individual, investor group, partnership, or corporation)
     owns more than 10% of the total units in the project. If the project has fewer than 10 units, a
     single entity may not own more than 1 unit. In the case of 2-4 unit condominium projects, all but
     one unit must have been sold to principal residence or second home purchasers. For limited
     review transactions, the appraisal can be reviewed to obtain this information.
   New projects offering excessive sale/financing structures in excess of standard interested party
     contribution policy including builder/developer contributions, sales concessions, HOA or principal
     and interest payment abatements, and/or contributions not disclosed on the HUD-1.
   Any project that the homeowners association is named as a party to current litigation or, if the
     project has not been turned over to the homeowners association, the project sponsor or developer
     is named as a party to current litigation that relates to the project. Depending on the extent and
     type of litigation involved, exceptions may be considered but must be reviewed by Credit Policy
     prior to purchase. (Projects where the HOA is named as the plaintiff in a foreclosure action or as
     the plaintiff in an action for past due HOA dues are not considered ineligible projects.)
   A project that consists of manufactured housing units.
   A project for which HSOA or HSOA s investors concentration level is exceeded. See Unit Limitations
     below.
   Projects with non-incidental business operations owned or operated by the homeowners association
     such as, but not limited to, a restaurant, spa, health club, etc.
   Investment Securities, defined as projects that have documents on file with the Securities and
     Exchange Commission or projects where unit ownership is characterized or promoted as an
     investment opportunity.
   Any project or building that is owned by several owners as tenants-in-common, an own-your-own
     project, or by a homeowners association in which individuals have an undivided interest in a
     residential apartment building and land, and have the right to exclusive occupancy of a specific
     apartment in the building.
            8-2 Types of Project Reviews



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HSOA accepts conventional loans on condominiums that meet Fannie Mae s project requirements.
These project requirements depend on the basic condominium classification. The basic condominium
classifications are as follows:

Limited Review: Allows the evaluation and approval of condominium projects based on limited
documentation. Eligibility is based on specific loan level criteria, including LTV, occupancy, and the
method by which the loan is evaluated and decisioned. To be eligible for purchase, the project must
meet the Limited Project Review requirements.

CPM Expedited Review: The Expedited Review process may be followed when the transaction does
not meet the Limited Review and the project is not on the FHA Approved Project List, the Fannie Mae
accepted Condominium Development List, or a project accepted by any of HSOA s investors. To be
eligible, the project must meet the CPM Expedited Project Review requirements for Established
Projects. HSOA will not process CPM Project reviews where HSOA is required to analyze or warrant
any review of the condominium documentation legal status, bylaw, covenants or restrictions, or any
environmental analysis.

Lender Full Review: The Lender Full Review process is for those projects that do not qualify for
approval under Limited Review or Expedited Review guidelines.

FHA-Approved Projects: Not eligible for conventional financing based on FHA project approval.

Fannie Mae Review ( 1028 ): Fannie Mae will no longer performs reviews or issue acceptances for
condominium projects. Fannie Mae will continue to publish its listing of accepted condo projects with
their applicable expiration date, searchable by state, on www.efanniemae.com.

Fannie Mae PERS (Project Eligibility Review Service) review: This is Fannie Mae s introduction to a
new project review service option. Lenders now have the option to submit new and newly converted
condominiums project to Fannie Mae for review to determine eligibility. PERS approval is required for
Florida projects that do not meet the Established Projects guidelines. (Refer to Fannie Mae s
Announcement 08-34 for additional requirements). HSOA does NOT currently accept or process PERS
project reviews.

HSOA Investor acceptance
If a condominium project is approved by one of HSOA s investors, HSOA will accept conforming
conventional loans for delivery to that specific investor.

            8-3 Project Codes & Definitions
Q Limited Review Established Project or Established Two-Unit to Four-Unit Project
R CPM Expedited Review or Lender Full Review New Project (Not currently utilized)
S CPM Expedited Review or Lender Full Review Established Project or Established Two-Unit to
Four- Unit Project
T Fannie Mae Review / PERS approval
U FHA-Approved Project

            8-4 Unit Limitation On Condominiums
For loans secured on units within condominium projects, HSOA allows up to 25% of the units in a given
condominium project.



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            8-5 Limited Project Review
Limited Review guidelines allow the evaluation and approval of condo projects based on limited
documentation. HSOA will accept Limited Project Reviews in Established Projects, when DU findings
allow limited reviews. Limited Reviews are not permitted if HSOA or its investors are named as a
preferred lender by either the Developer or the Home Owners Association.
 If property is an established project a limited review can be performed if the project is 100% complete
and not and ineligible project.
 If the property is a detached condo, a limited review is acceptable on primary residences and second
homes only.


Limited review - attached condominium units
To be eligible under the Limited Project Review, a project must meet all of the following eligibility
criteria:
 DU findings specifically allow for a Limited Project Review
· The project is not an ineligible project per HSOA guidelines.
 The project is an established project which is defined as:
          90% or more of the units conveyed (closed) to owners, and:
          Construction is complete, including all amenities, and
          The project has been turned over to the homeowners association by the developer.
 The mortgage is not secured by a manufactured home.
 The units, common areas, and facilities have been completed per the appraisal, and,
 The proper insurance coverage has been provided

New Construction projects are not eligible for Limited Review. This is a FNMA restriction.

Note: New Projects in Florida: all NEW OR NEWLY CONVERTED attached projects in Florida require
mandatory submission to Fannie Mae s PERS process, and are not eligible for Limited Review.

Limited review - detached/site condo units
Detached or site condominiums consist of units that physically resembles a traditional detached
single-family dwelling. The project may be new or established.
For a detached condo unit to be eligible for a Limited Project Review Approval, the following criteria
apply:
  A single-family detached unit in the condominium project secures the mortgage and it is not a
manufactured home.
  The condominium unit is occupied as a primary residence or second home.
  The appraiser has addressed the impact buyer resistance may have on market value as it relates to
this form of ownership.
  If the project is new, the appraiser must have at least 1 comparable sale that is a detached condo
unit. The unit may be located in a competing project or in the same project as the subject. However, if
the unit is in the same project, the same builder as the subject may not have built it.
  The completion of project amenities may be waived if the incomplete items are minor and have a
minor impact on marketability
  The project has the proper insurance coverage as defined within the Insurance Requirements section
of this chapter.

PROPERTY INSURANCE on Detached/Site Condo Units
 If the unit consists of the entire structure as well as the site and air space: The borrower must carry
appropriate hazard and flood insurance required for a single-family detached dwelling; or


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 If the unit only consists of the air space for the unit, and the improvements and site are considered
common areas: The homeowners association must provide evidence of a master insurance policy.

PROJECT CODE
 Q: Limited Review       Established Project or 2-4 units

             8-6 FNMA 1028
Projects that have been reviewed and accepted by Fannie Mae are on the Fannie Mae-Accepted
Condo project list at https://www.efanniemae.com/sf/refmaterials/approvedprojects

             8-7 CPM Expedited Project Review
If the project is new, or if it is not on the list and the loan does not qualify under the Limited Review
process, the project may be submitted to Fannie Mae s Condo Project Manager (CPM) system. CPM is
an online approval process that also tracks the status of delegated project reviews. CPM is available on
line at www.eFannieMae.com.

Condominiums that meet Fannie Mae s Expedited Project Review requirements in must also meet the
requirements set forth below.

ELIGIBILITY CRITERIA
New or Conversion Projects (Except for 2-4 Unit Projects)
 CPM must be used to obtain project acceptance for new projects under the Expedited Review
Process. When submitting a project for acceptance using CPM, the underwriter must analyze the
project to make sure the following requirements are met:
 The project is not an ineligible project.
 For new projects:
    · CPM will base its project review decision on the pertinent project data input into the system.
        While Fannie Mae guidelines call for a minimum of 51% presale, CPM may allow broadened
        criteria on a project-level basis with reduced presale requirements.
    · CPM project acceptance will be valid for a period of 6 months. The project may be eligible for an
        extension of project acceptance certification upon submission of updated project data.
    · HSOA will not process CPM Project reviews where HSOA is required to analyze, warrant or
        review any:
             o condominium documentation legal status (bylaw, covenants or restrictions), or
             o environmental analysis, or
             o structural/engineering analysis.

New Projects in Florida*: all NEW OR NEWLY CONVERTED attached projects in Florida require
mandatory submission to Fannie Mae s PERS process, and are not eligible for CPM Expedited Review.


ALL OTHER TRANSACTIONS (EXCEPT DU REFI PLUS) IN THE STATE OF FLORIDA:
Occupancy            LTV/CLTV

Primary Residence                75%/75%

Second Home                      70%/70%

Investment                       Not Allowed

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PROJECT CODE
The following Project Code Types must be assigned:
 R: Expedited Review New Project
 S: Expedited Review Established Project or 2-4 unit projects.

            8-8 Fannie Mae PERS (project eligibility review services)
Fannie Mae is reintroducing their project review function under the name of Project Eligibility Review
Services (PERS). Effective 01/15/09, all new and newly converted Florida Condo Projects must be
submitted to PERS for approval; PERS is optional for other states and projects.

There is a fee charged in connection with this review, therefore HSOA will not submit Condo projects to
PERS for approval. All Florida projects not meeting the Established Project guidelines must be on the
PERS approved list.

PERS Approved projects will be posted on eFannieMae.com. Conditional Project Approvals will not
be accepted. Project must be marked as Final Project Approval. Final project approval will expire one
year after issuance.

Note: All new or newly converted Florida condominium projects that have been submitted to CPM and
received a Certified by Lender recommendation or Owner-Occupied and Second Home
recommendation as of January 15, 2009, will be valid until expiration. Re-certifications will not be
permitted. Refer to Fannie Mae s Announcement 08-31 for additional PERS information.

PROJECT CODE
The following project Code Types must be assigned:
 T: Fannie Mae Review / PERS

            8-9 Lender Full Review
The Lender Full Review process is for those projects that do not qualify for approval under Limited
Review or CPM Expedited Review guidelines.

ELIGIBILITY CRITERIA

New or Newly Converted Projects (Excluding 2-4 Unit Projects)
Not eligible for HSOA financing; only Established Projects are accepted.

Eligibility Requirements for Established Projects (Excluding 2-4 Unit Projects):
· The project may not be an ineligible project.
· Project is owned fee simple (not leasehold)
· All units, common elements, and facilities within the project must be 100% complete, and the
    project cannot be subject to additional phasing or annexation.
· If the subject property is an investment property, at least 51% of the total units in the project must
    have been conveyed to owner-occupant principal residence or second home purchases. Financial
    institution-owned REO units that are for sale, not rented, may be counted as owner occupied units
    to meet the 51% requirement.
· Budget analysis:

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    ·   No more than 15% of the total units in a new or established project may be 30-days or more
        delinquent on condominium/HOA fee payments.
    ·   It is consistent with the nature of the project.
    ·   It is adequate and allocates a portion of the income (at least 10%) for replacement reserves,
        capital expenditures, and deferred maintenance.
    ·   It adequately funds insurance deductible amounts.

·   The unit owners must be in control of the HOA.
·   HOA must be the sole owner of and have rights to the use of the projects facilities, common
    elements, and limited common areas.
·   At least 90% of the units must be sold and closed.
·   No single entity may own more than 10% of the total units in the project.
·   No more than 20% of the project can be commercial space.
·   The individual units should be separately metered; if not, the project s plans should provide for the
    adoption of unit metering.


Eligibility Requirements 2-4 Unit Projects
· The project may not be an ineligible project.
· All units, common elements, and facilities within the project including those that are owned by any
    master association must be 100% complete.
· All but one unit in the project must have been conveyed to owner occupant principal residence or
    second home purchasers
· The developer or unit owners may be in control of the HOA.
· The units in the project must be owned in fee simple, and the unit owners must be the sole owners
    of, and have rights to the use of, the project s facilities, common elements and limited common
    elements.
· None of the units may be 30 days or more delinquent on condominium/HOA fee payments.

PROJECT CODE
The following Project Code Types must be assigned:
 R: Lender Full Review New Project
 S: Lender Full Review Established Project or 2-4 unit projects.


            8-10        PUD Project Requirements
OVERVIEW
A planned unit development (PUD) is a project or subdivision that consists of common property and
improvements that are owned and maintained by a homeowner's association for the benefit and use of
the individual units within the project. For a project to qualify as a PUD, the homeowner's association
must require automatic, non-severable membership for each individual unit owner, and provide for
mandatory assessments.

PROJECT REVIEW
PUD projects that consist of detached units do not require review of the project. This includes both
Type E and Type F PUD Projects.




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Type E
A Type E PUD classification applies to any established PUD project in which control of the
homeowners association has been turned over to the unit purchasers. This is the sole eligibility
criterion for a Type E PUD designation. There is no specific length of time that the homeowner's
association must have been in control.


Type F
A Type F PUD classification applies to projects in which the homeowners association is still controlled
by the developer, regardless of the status of the construction- proposed, completed or under
construction. Type F PUD projects require additional project review based on the unit or project
characteristics. See Eligibility Criteria section below for further details.

ELIGIBILITY CRITERIA
Type F PUD projects consisting of attached units in which the developer is still in control of the
homeowner's association must meet the following criteria:
  Project must meet Fannie Mae condo guidelines as outlined in the Fannie Mae Selling Guide Part XII,
Chapter 1, Section 103, General Warranty of Project Eligibility.
  At least 50% of the total units in the project (or legal phase) must be conveyed, or are under contract
to, unit purchasers. In addition, the project must contain enough sold units to support the
responsibilities of the homeowner's association. Less than 50% presale may be considered on a case-
by-case basis provided:
    · Marketability of the project can be established; AND
    · A sufficient number of units in the project (or legal phase) have been conveyed and can support
         the responsibilities (including maintenance costs) of the owner's association for at least two
         years
  The project was not created by the conversion of existing buildings into a planned unit development.
  The project is not composed of any manufactured homes.
  The project cannot include multi-dwelling units that represent the security for a single mortgage.
  All common area improvements in the project or subject phase (other than greenbelts, private streets,
and parking areas) must be complete.
  The units must be owned fee simple. Unit purchasers must have the sole ownership/interest in, and
the right to use the project s facilities once control of the homeowner's association has been turned
over to them.
  The project s budget must provide for replacement reserve funds that are consistent with the
responsibilities of the homeowner's association.
  Evidence of the required coverage for hazard, liability, and flood (if applicable) insurance must be
obtained. Verification of fidelity bond insurance is not required.

INELIGIBLE CRITERIA
  Non-Conforming Use of Land: Projects that represent a legal but non-conforming use of land if zoning
regulations prohibit rebuilding the improvements to current density in the event of their partial or full
destruction.
  Timeshares
· Any project that exhibits any of the ineligibility characteristics listed under Condominium Hotel in
  Section 8-1
  Projects with more than 20% commercial space.
  Any PUD project where the owner s association has been named as a party to current litigation is
ineligible. If the project has not been turned over to the association, the project sponsor or developer
may not be named as a party to current litigation.
            8-11        Insurance Requirements
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                            Conventional Underwriting Guidelines


OVERVIEW
Each loan must be covered by the project's blanket hazard and flood insurance policies. All coverages
must be consistent with local, state, and federal insurance laws. This is in addition to all standard
insurance requirements for the individual unit. This applies to all condominium projects whether
approved by FannieMae, FHA or an HSOA investor.


Hazard Insurance
 Policy Type: A Master or Blanket Policy with premiums that are part of the common expense
unless the property is a detached condominium that is eligible for single-family coverage; or for projects
with legal documents that allow for the individual unit owners to obtain their own hazard insurance
policy and allow for a blanket insurance policy to cover the project s common elements, both the project
and the individual unit are covered by the required hazard insurance policy.

HO-6 Endorsement and Replacement Cost Requirements
If the master or blanket insurance policy does not provide coverage of the interior of the unit an HO-6
policy ( walls-in coverage) must be provided showing a minimum coverage of 20% of the unit s
appraised value. Additionally, the HO-6 must be escrowed for unless waived per the requirements of
the Mortgage Origination Section / Escrow Waivers.

Note: The following are not permitted with respect to master or blanket project insurance:
    · A blanket policy that covers multiple unaffiliated condominium associations or projects, or;
    · A self-insurance arrangement whereby the owners association is self-insured or has banded
        together with other unaffiliated associations to self insure all of the general and limited common
        elements of the various associations.
  Carrier: The insurance carrier must have general policyholder s rating of B or financial performance
index of six or better in Best s Key Rating Guide, or an A or better by Demotech, Inc.
  Coverage: All perils must be covered by a standard extension coverage endorsement including those
covered by the standard all risk endorsement or broad form coverages.
  Amount: The policy must cover 100% of the insurable replacement cost of the project s
improvements including the individual units. If the policy contains a Guaranteed Replacement
Cost Endorsement: or Replacement Cost Endorsement the amount of coverage is
acceptable. Coverage does not need to include land, foundations, excavations, or other items
that are usually excluded from insurance coverage.
  Deductibles: The hazard insurance deductible may not exceed 5% of the dwelling coverage for the
master policy as well as the individual HO6 policy.
  Special Endorsements:
    · Inflation Guard, if it can be obtained.
    · Building Ordinance or Law, if the enforcement of any building, zoning, or land-use law results in
        loss, damage, increased cost of repairs, etc.
    · Steam Boiler and Machinery if the project has central heating or cooling.
    · Special Condominium always required for condominiums only.


Flood Insurance
Flood insurance compensates for physical property damages resulting from flooding. It is required in
federally designated Special Flood Hazard Areas. Flood insurance may NEVER be waived. If a
condominium project (including high-rise or other vertical buildings), and any part of the improvements
are located in a Special Flood Hazard Area (SFHA), the association and/or the applicant must provide a
policy evidencing proof of flood insurance for each building that is located in a SFHA.
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If the condominium association has obtained an RCBAP that provides 100% of replacement cost value
(RCV) coverage or the NFIP maximum coverage (i.e. limited to $250,000 times the number of units),
then the condo building is considered adequately insured. If the condominium association has obtained
less than 100% of RCV cost coverage, but not less than 80% of RCV, we will require individual
Dwelling coverage equivalent up to the full insurable value of the unit, which is the same as 100%
replacement cost value, not to exceed the maximum insurance available under NFIP of $250,000 per
unit. We will not lend on condo units where the condo association has not obtained at least 80% of
RCV coverage unless the RCBAP coverage was limited to
the NFIP maximum as described above.

The policy must include coverage on all the units within the building and the improvements within the
units up to a maximum of 100% of replacement cost but not to exceed $250,000 per unit (e.g., 10 units
@ $250,000 each requires coverage totaling $2,500,000).

These parameters apply to all properties within condominium projects that are located in FEMA flood
zone A or V regardless of the number of units, the type of project review required (e.g., Limited
Project Review), including those approved by Fannie Mae as evidenced by an unexpired FNMA Form
1028, and properties located within projects that have already been approved. The deductible may not
exceed $25,000 (the maximum deductible allowed under the National Flood Program). The RCBAP
must include a provision that premiums are to be paid as a common expense. If, during the
underwriter s review, it is determined that the project has coverage that differs from the requirements
defined above, then the insurance documents must be forwarded to the Operations Risk Condo-Coop
Group for review and a final decision.


Liability Insurance
  Policy Type: Commercial Liability Policy with premiums that are part of the common expense unless
the property is a detached condominium and eligible for single-family coverage.
  Carrier: Commercial Liability.
  Coverage: Bodily Injury and Property damage resulting form operation, maintenance, or use of the
project s common areas and elements.
  Amount: A minimum of $1,000,000 for bodily injury or property damage for any single occurrence.
  Deductibles: None.
  Special Endorsements: If the policy does not include a severity of interest , a specific endorsement to
preclude the insurer s denial of a unit owner s claim because of negligent acts of the homeowners
association or other unit owners.

Fidelity Insurance
Fidelity insurance is a type of insurance that a condominium association obtains to protect itself against
economic loss from dishonest acts of anyone who either handles (or is responsible for) funds that the
association or corporation holds or administers, whether or not that individual receives compensation
for services.
  Policy Type: Master or Blanket policy with premiums that are part of the common expense unless
the property is a detached condominium and eligible for single-family coverage.
  Carrier: Master Insurance Carrier.
  Coverage: Anyone who handles or is responsible for the homeowners association funds. Note: If the
size and type of the project requires fidelity bond coverage, the homeowners association must carry the
insurance, even though there may be a management company who handles the funds on behalf of the
association.
· Amount:

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                            Conventional Underwriting Guidelines

Meet the minimum coverage required by state law in those states that have statutory fidelity insurance
requirements, or
If no state law exists, an amount sufficient to cover three months of homeowners' association dues,
plus the amount of annual dues allocated to reserves.

Note: Fidelity insurance is required on all projects (including limited review and FHA and Fannie Mae
approved projects) that have more than 20 units regardless of project approval type. It may not be
waived for projects under the Expedited or FHA review.




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