CONVENTIONAL UNDERWRITING GUIDELINES - …CONVENTIONAL UNDERWRITING GUIDELINES Conforming Loan...

CONVENTIONAL UNDERWRITING GUIDELINES

Conforming Loan Amounts FNMA DU ONLY FIXED RATE

PRIMARY RESIDENCE

Purchase & Rate/Term Refinance PROPERTY TYPE LTV CLTV/HCLTV FICO UNDW OPTIONS

1 unit (SFR,Condos,PUDs) 95 95 640 DU 2 unit 80 80 640 DU

3-4 unit 75 75 640 DU Cash Out Refinance

1 unit (SFR,Condos,PUDs) 85 85 640 DU 2-4 unit 75 75 640 DU

SECOND HOME Purchase & Rate/Term Refinance

PROPERTY TYPE LTV CLTV/HCLTV FICO UNDW OPTIONS 1 unit (SFR,Condos,PUDs) 90 90 640 DU

Cash Out Refinance 1 unit (SFR,Condos,PUDs) 75 75 640 DU INVESTMENT PROPERTY

Purchase PROPERTY TYPE LTV CLTV/HCLTV FICO UNDW OPTIONS


Rate/Term Refinance 1 unit (SFR,Condos,PUDs) 75 75 640 DU

2-4 unit 75 75 640 DU Cash Out Refinance


NOTE: LTV’s greater than 80% are subject to MI approval and guidelines with regard to maximum LTV for property types, FICO score and minimum trade line requirements.


Conforming Loan Amounts FNMA DU ONLY LIBOR ARM (3/1, 51, 7/1, 10/1 )

PRIMARY RESIDENCE Purchase & Rate/Term Refinance

PROPERTY TYPE LTV CLTV/HCLTV FICO UNDW OPTIONS1 unit (SFR,Condos,PUDs) 95 95 640 DU

2 unit 80 80 640 DU3-4 unit 75 75 640 DU

Cash Out Refinance 1 unit (SFR,Condos,PUDs) 85 85 640 DU1 unit (SFR,Condos,PUDs) 80 80 640 DU

2-4 unit 75 75 640 DUSECOND HOME

Purchase & Rate/Term RefinancePROPERTY TYPE LTV CLTV/HCLTV FICO UNDW OPTIONS

1 unit (SFR,Condos,PUDs) 90 90 640 DUCash Out Refinance

1 unit (SFR,Condos,PUDs) 75 75 640 DUINVESTMENT PROPERTY


1 unit (SFR,Condos,PUDs) 80 85 640 DU2-4 unit 75 75 640 DU

Rate/Term Refinance 1-4 unit (SFR,Condos,PUDs) 75 75 640 DU

Cash Out Refinance 1 unit (SFR,Condos,PUDs) 75 75 640 DU

2-4 unit 70 70 640 DU

CAPS MARGIN INDEX FLOOR 3/1 2/2/6 2.25 1 YR LIBOR margin 5/1, 7/1, 10/1 5/2/5 2.25 1 YR LIBOR margin


3/1 and 5/1 LIBOR ARM and will qualify at 2% above Note Rate 7/1 and 10/1 ARMS and will qualify at Note Rate.


Conforming Loan Amounts FHLMC LP ONLY FIXED RATE and LIBOR ARM

(3/1, 51, 7/1, 10/1 ) PRIMARY RESIDENCE


1 unit (SFR,Condos,PUDs) 95 95 640 LP 2-4 unit 80 80 640 LP

Cash Out Refinance 1 unit (SFR,Condos,PUDs) 80 80 640 LP

2-4 unit 75 75 640 LP SECOND HOME


1 unit (SFR,Condos,PUDs) 85 85 640 LP Cash Out Refinance

1 unit (SFR,Condos,PUDs) 75 75 640 LP INVESTMENT PROPERTY



Rate/Term Refinance 1 unit (SFR,Condos,PUDs) 75 75 640 LP

2-4 unit 75 75 640 LP Cash Out Refinance


LP Overlays Primary Residence Purchase & Rate/Term Refinance:LTV is limited to 95% without secondary financing & 90% with secondary financing with a max CLTV of 95% with or without secondaryfinancing. Max LTV is 80% without secondary financing, max LTV with secondary is 75% financing. Max CLTV is 80% with or without secondaryfinancing. LP Overlays Owner Occupied Cash Out Refinances:LP Overlay: Max LTV without secondary financing is 80%, max LTV with secondary financing is 75%. Max CLTV with or without secondaryfinancing is 80%. LP Overlay: Max LTV without secondary financing is 75%, max LTV with secondary Financing is 70%, Max CLTV with our without secondaryfinancing is 75%.

CAPS MARGIN INDEX FLOOR 3/1 2/2/6 2.25 1 YR LIBOR margin 5/1, 7/1, 10/1 5/2/5 2.25 1 YR LIBOR margin


3/1 and 5/1 LIBOR ARM and will qualify at 2% above Note Rate 7/1 and 10/1 ARMS and will qualify at Note Rate

Table of Contents APPRAISAL REQUIREMENTS ..................................................................................................................................... 10 1007/216 Requirements ........................................................................................................................................................... 10 Age of Appraisal ......................................................................................................................................................................... 10 Appraisal Form ........................................................................................................................................................................... 10 Appraisal Review Policy ........................................................................................................................................................... 12 Certification by Substitute Appraiser ....................................................................................................................................... 12 Health and Safety Issues .......................................................................................................................................................... 12 Net and Gross Adjustments ..................................................................................................................................................... 12 Photograph Requirements ....................................................................................................................................................... 12 Re-Inspection and Review Requirements for DISASTER AREAS ..................................................................................... 13 Swimming Pool Requirements ................................................................................................................................................. 13 Unacceptable Appraisal Practices ........................................................................................................................................... 14 AGE OF CREDIT DOCUMENTS ................................................................................................................................... 14 Documentation Expiration Dates ............................................................................................................................................. 14 Age of Documentation at Time of Application ....................................................................................................................... 14 ASSETS .......................................................................................................................................................................... 14 Business Funds .......................................................................................................................................................................... 15 Checking and Savings Accounts ............................................................................................................................................. 15 Sourcing Deposits ...................................................................................................................................................................... 15 Foreign Accounts /Currency Conversion ................................................................................................................................ 16 Earnest Money Deposit ............................................................................................................................................................. 16 Gift Funds ................................................................................................................................................................................... 16 Gift of Equity ............................................................................................................................................................................... 18 Home Equity Line of Credit ...................................................................................................................................................... 18 Inherited Funds .......................................................................................................................................................................... 18 Realtor Credits ........................................................................................................................................................................... 18 Retirement Accounts ................................................................................................................................................................. 18 Sale of an Asset ......................................................................................................................................................................... 18 Sale of Home .............................................................................................................................................................................. 19 Stocks, Bonds, Mutual Funds, or US Government Securities ............................................................................................. 19 Trust Account ............................................................................................................................................................................. 19 Rent Credit for Options to Purchase ....................................................................................................................................... 19 1031 Exchange Documentation .............................................................................................................................................. 19 Ineligible / Unacceptable Sources of Funds ........................................................................................................................... 19 BORROWERS ................................................................................................................................................................ 20

Borrower’s Age ....................................................................................................................................................................... 20 First-time Homebuyer ............................................................................................................................................................ 20 Ineligible Borrowers ............................................................................................................................................................... 20 Living Trust ............................................................................................................................................................................. 20 Maximum Number of Borrowers .......................................................................................................................................... 20 Military Personnel .................................................................................................................................................................. 20 Non-Occupying Co-Borrowers ............................................................................................................................................. 20 Non-Permanent Residents ................................................................................................................................................... 20 Non-Purchasing Spouse ....................................................................................................................................................... 20 Social Security Number ........................................................................................................................................................ 21 Residency and Immigration Status ...................................................................................................................................... 21

United States Citizen ......................................................................................................................................................... 21

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Permanent Resident Aliens / Green Cards .................................................................................................................... 21

Non-U.S. Citizen Borrowers / Non-Permanent Resident Aliens ......................................................................................... 21 Acceptable Visas ....................................................................................................................................................................... 21 Foreign Nationals (Non-Resident Aliens) ............................................................................................................................... 22 North American Free Trade Agreement (NAFTA) Workers ................................................................................................. 22 CLOSING REQUIREMENTS ......................................................................................................................................... 22 Allowable Fees . ........................................................................................................................................................................ 22 Chain of Title ............................................................................................................................................................................... 22 Escrows /Impound Accounts .................................................................................................................................................... 22 Interested Party contributions .................................................................................................................................................. 22 Short Sale Negotiation Fees .................................................................................................................................................... 23 Giveaways .................................................................................................................................................................................. 23 Homeowners’ Association Dues .............................................................................................................................................. 23 Power of Attorney ...................................................................................................................................................................... 23 Seller Credits .............................................................................................................................................................................. 24 Real Estate Commission Limitation ........................................................................................................................................ 24 CONDO WARRANTY REQUIREMENTS ...................................................................................................................... 24 2-4 Unit Projects ........................................................................................................................................................................ 24 Conversions 2-4 Unit Projects .................................................................................................................................................. 25 Conversions 5+ Unit Projects ................................................................................................................................................... 25 Detached Project ....................................................................................................................................................................... 25 Full Review ................................................................................................................................................................................. 25 Limited Review ........................................................................................................................................................................... 26 COMMUNITY PROPERTY STATES ............................................................................................................................. 27 CONVERSION OF PRIMARY RESIDENCE ................................................................................................................. 27

Equity Requirements ......................................................................................................................................................... 27

Reserve Requirements ..................................................................................................................................................... 27

Departing Residences with Negative Equity Position ................................................................................................... 28

CREDIT ............................................................................................................................................................................ 28 Adverse Credit and Past Due Accounts ............................................................................................................................. 28 Authorized User Accounts .................................................................................................................................................... 28 Bankruptcies ........................................................................................................................................................................... 28 Borrower Representative Score ........................................................................................................................................... 28 Credit Inquiries ....................................................................................................................................................................... 28 Credit Report Security Freeze .............................................................................................................................................. 28 Collections and Charge-Offs ................................................................................................................................................ 29 Consumer Credit Counseling ............................................................................................................................................... 29 Derogatory Credit ................................................................................................................................................................... 29 Disputed Account Information .............................................................................................................................................. 29 Derogatory Events ................................................................................................................................................................. 29

Extenuating Circumstances ............................................................................................................................................. 29

Fraud Alert Messages ........................................................................................................................................................... 29 Foreclosures ........................................................................................................................................................................... 30 Housing Payment History ..................................................................................................................................................... 30 Minimum Tradelines .............................................................................................................................................................. 30 Red Flag Alerts ....................................................................................................................................................................... 30

Lawsuits .................................................................................................................................................................................. 30 DOCUMENTATION & FORMS ...................................................................................................................................... 30 Initial 1003 ................................................................................................................................................................................... 30 Short Sales ................................................................................................................................................................................. 30 Purchase Agreements ............................................................................................................................................................... 30 Payoff Demand Statements ..................................................................................................................................................... 31 DU REFI PLUS ................................................................................................................................................................ 32 ELECTRONIC SIGNATURES ........................................................................................................................................ 32 ESCROW/ IMPOUND ACCOUNTS ............................................................................................................................... 32 ESCROW HOLDBACKS ................................................................................................................................................ 32 FLIPS(PROPERTY FLIPPING) ...................................................................................................................................... 32

Property Flips (Flipping) ........................................................................................................................................................ 32 INELIGIBLE TRANSACTIONS ...................................................................................................................................... 33 INCOME & EMPLOYMENT ............................................................................................................................................ 34

34 Amended Tax Return Requirements .............................................................................................................................. 34

Alimony, Spousal or Child Support ...................................................................................................................................... 34 Asset Depletion ...................................................................................................................................................................... 35 Automobile Allowance ........................................................................................................................................................... 36 Base Earnings ........................................................................................................................................................................ 36 Boarder Income/Room Rents Income ................................................................................................................................. 36 Capital Gains Income ............................................................................................................................................................ 36 Changes in Employment ....................................................................................................................................................... 36 Clergy Income ........................................................................................................................................................................ 36 Commission Income .............................................................................................................................................................. 37 Declining Income ................................................................................................................................................................... 37 Disability Income .................................................................................................................................................................... 37 Employed by Relatives .......................................................................................................................................................... 37 Foreign Income ...................................................................................................................................................................... 37 Foster Care/IHSS ................................................................................................................................................................... 37 Future Employment ............................................................................................................................................................... 38 Gap(s) in Employment .......................................................................................................................................................... 38 Handwritten Paystubs ........................................................................................................................................................... 38 Interest and Dividend Income .............................................................................................................................................. 38 IRA Distributions .................................................................................................................................................................... 38 Leave of Absence/Maternity Leave ..................................................................................................................................... 39 Mortgage Differential Payments .......................................................................................................................................... 39 Notes Receivable ................................................................................................................................................................... 39 Overtime & Bonus Income .................................................................................................................................................... 39 Pensions / Retirement Income / Social Security Income/ Annuities ............................................................................... 39

Grossing Up SSI Income .................................................................................................................................................. 40

Relocation / New Job ............................................................................................................................................................ 40 W2 to 1099 .............................................................................................................................................................................. 40 1099 to W2 ............................................................................................................................................................................. 40 Rental income from subject property .................................................................................................................................. 41 Rental income from property other than the Security Property ....................................................................................... 41

Refinance ............................................................................................................................................................................ 42

Rental income from other properties ............................................................................................................................... 42

Calculating Rental Income: Cash Flow Method ................................................................................................................ 42 Seasonal Employment .......................................................................................................................................................... 42 Second Job Or Part-Time ..................................................................................................................................................... 43 Self Employed Income .......................................................................................................................................................... 43 Tax Exempt Income ............................................................................................................................................................... 43 Teachers’ Income .................................................................................................................................................................. 43 Tip Income .............................................................................................................................................................................. 43 Trailing Income ....................................................................................................................................................................... 43 Trust or Estate Income .......................................................................................................................................................... 44 Unemployment and Welfare ................................................................................................................................................. 44 Union Workers ........................................................................................................................................................................ 44 VA Benefits ............................................................................................................................................................................. 44 Unacceptable Income ............................................................................................................................................................ 44 Contingent Liabilities ............................................................................................................................................................. 45 Excluding Debt Obligations Paid by Others ....................................................................................................................... 45 Monthly Debt Payments ........................................................................................................................................................ 45 Deferred Student Loans ........................................................................................................................................................ 46 Lease Payments .................................................................................................................................................................... 46 Payoff of Debt to Qualify ....................................................................................................................................................... 46 Property Tax Calculation ...................................................................................................................................................... 46 Qualifying Payment ................................................................................................................................................................ 47

Conforming ARMS ............................................................................................................................................................. 47

LOAN AMOUNTS ........................................................................................................................................................... 47 Maximum Loan Limits ............................................................................................................................................................... 47 Minimum Loan Amount ............................................................................................................................................................. 47 LOAN TERMS ................................................................................................................................................................. 47 ARM Loans ................................................................................................................................................................................. 47 Fixed Rate ................................................................................................................................................................................... 47 LTVs/High LTV’s ............................................................................................................................................................ 47 95.01% - 97% . . ........................................................................................................................................................................ 47 LTV Ratios .................................................................................................................................................................................. 48 MAX # OF FINANCED PROPERTIES .......................................................................................................................... 48 Number of Properties per Borrower ........................................................................................................................................ 48 Multiple Mortgages to Same Borrower ................................................................................................................................... 48 DETERMINING “Number of FINANCED” PROPERTIES ........................................................................................... 49 MORTGAGE INSURANCE ............................................................................................................................................ 50

Links to MI Companies ..................................................................................................................................................... 50

NON-ARMS LENGTH TRANSACTIONS ...................................................................................................................... 50 For Sale by Owner (FSBO) ...................................................................................................................................................... 50 Non-Arm’s Length Transactions .............................................................................................................................................. 50 Ineligible Relationships ................................................................................................................................................ 51 Borrower is an Interested Party .................................................................................................................................. 51

Required Documentation for Non-Arms Length Transaction ...................................................................................... 51

OCCUPANCY ................................................................................................................................................................. 52 Owner Occupied ............................................................................................................................................................ 52

Second Homes .............................................................................................................................................................. 52 Investment Properties .................................................................................................................................................. 52 PROPERTY REQUIREMENTS ...................................................................................................................................... 52

General Requirements .......................................................................................................................................................... 52 Building Permits ..................................................................................................................................................................... 52 Certificates of Occupancy ..................................................................................................................................................... 53 Condo Warranty Requirements ........................................................................................................................................... 53 Legal Non-Conforming Use Properties ............................................................................................................................... 53 Log Homes .............................................................................................................................................................................. 53 Mixed Use ............................................................................................................................................................................... 53 Multiple Lots/Parcels ............................................................................................................................................................. 53 Private Well or Septic Facilities ............................................................................................................................................ 53 When private community facilities are used, the client should verify that the subject property has the right to access the system and that the facilities will be viable on an ongoing basis ................................................................ 53 Properties Listed for Sale (within the past 6 months) ....................................................................................................... 54 Rapid Appreciation Policy ..................................................................................................................................................... 54 Rural Properties with Excess Land Acreage ..................................................................................................................... 54 Unpermitted Additions ........................................................................................................................................................... 54 Unacceptable Properties ...................................................................................................................................................... 55

PROPERTY INSPECTIONS ........................................................................................................................................... 55 QUALIFYING RATE ....................................................................................................................................................... 56 QUALIFYING RATIOS ................................................................................................................................................... 56 REFINANCE .................................................................................................................................................................... 56

Rate and Term Refinance .................................................................................................................................................... 56 Cash Out ................................................................................................................................................................................. 57 Cash Out /Delayed Financing EXCEPTION ..................................................................................................................... 57 Cash Out From Concurrent Secondary Financing ............................................................................................................ 58

Max Amount of Cash Out ................................................................................................................................................. 58

Net Tangible Benefit (NTB) ...................................................................................................................................................... 58 Seasoning ................................................................................................................................................................................... 58 Continuity of Obligation ............................................................................................................................................................. 58 RESERVES ..................................................................................................................................................................... 59

Cash-Reserves Requirements ............................................................................................................................................. 59 Definition of PITIA for Reserves Calculations ................................................................................................................ 59

Reserves Requirements ................................................................................................................................................... 59

Reserve Requirements for Borrower with Multiple Financed Properties ................................................................... 59

Reserve Requirements for Borrower Converting a Primary Residence .................................................................... 59

SUBORDINATE FINANCING ........................................................................................................................................ 60 Subordinate Financing Documentation Requirements ..................................................................................................... 60 Modification HELOC Requirements .................................................................................................................................... 60 Seller-carry back /Private 2nds ............................................................................................................................................ 60 Ineligible Subordinate / 2nd Mortgages .............................................................................................................................. 60

Housing Expense Ratio .................................................................................................................................................... 61

TITLE REQUIREMENTS ................................................................................................................................................ 61 UNDERWRITING ............................................................................................................................................................ 61

APPRAISAL REQUIREMENTS

1007/216 Requirements 1007 Requirements

• A 1007 is required on all Investment Property transactions, regardless if rental income from the subject property is being used to qualify the borrower.

216 Requirements • If rental income from the subject property IS being used to qualify the borrower, a 1007 AND 216 is required • If rental income from the subject property IS NOT being used to qualify the borrower, a 216 is still required • Refinance transactions: When rents are being used to qualify the borrower and the borrower has owned the subject

property for less than one year and the rental income IS NOT being reported on Schedule E of the borrowers tax returns.

Age of Appraisal

Appraisal reports are valid for 90 days from completed date by appraiser to the date of the Note and mortgage.

If appraisal is over 90 days then a Re-Certification of Value is required with a minimum exterior inspection. If the value is Unsupported, then a New Appraisal will be required.

Recertification of Value to extend the original appraisal date for a maximum of 60 days resulting in a max age of appraisal not to exceed 180 days (6months) at time of funding

Appraisal Form Based on property type, the following appraisal report form must be used: PROPERTY TYPE FORM NAMESFR, PUD Uniform Residential Appraisal Form (#1004 / #70) Exterior only (#2055)Condominiums (include site condos) Individual Condominium Appraisal Report (#1073 / #465) Exterior only (#1075)2-4 units Small Residential Income Property Appraisal Report (#1025 / #72)

The type of the appraisal is based on the DU/LP Feedback. Exterior 2055 Inspection permitted only if AUS allows may NOT be utilized on Short Sales, Foreclosures, REO’s or

properties located in disaster areas Mixed use properties require a full appraisal regardless of the DU findings (refer to the “Property” Section of these

guidelines for additional requirements regarding Mixed-Use properties).

Appraisal Report Requirements All appraisals are subject to the following 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. • At least two active listings, or two pending comps, or one of each 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.

• 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 sources(s), offering prices, date(s), and any further evaluation that may indicate “flipping.”

• Appraiser must indicate the property has a fully functional kitchen and that all utilities are in working order. • Appraiser must provide the Appraisal addendum 1004MC. This addendum is intended to provide the Underwriter with a

clear and accurate understanding of the market trends and conditions prevalent in the subject’s neighborhood. • Legal Non Conforming: Appraiser must comment on any adverse effect of any non-conforming use when estimating the

market value and establish marketability of the property. Appraiser must also indicate it can be re-built to it’s original use if 100% destroyed (re-build letter is also acceptable)

Carbon Monoxide Detectors: If the property state requires Carbon Monoxide Detectors in the subject property and the detectors are missing ornonfunctional, the appraisal report will reflect "As-Is" with a comment about the missing/nonfunctioning detectors. A 1004D(provided by the appraiser) or a Lender Certification (provided by a iAL Employee or the Realtor) may be provided to verifythat the detectors have been installed or are currently functioning.

New 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 recently built and sold (last 90 days) comp from another builder/developer, or • A resale from within the subject property's development that has closed within the last 30 days.

Purchase Transaction Additional Requirements In accordance with agency guidelines for purchase money transactions, the appraiser must be provided with a copy of the Purchase Contract and all addenda so he or she can take into account any unusual or excessive sales contributions or concessions. Any amendments or adjustments after the appraisal is complete must be supplied to the appraiser for review.

Market Conditions Addendum (Fannie Mae Form 1004MC/Freddie Mac Form 71) This addendum provides the appraiser with a structured format to report market data, help further clarify conclusions made the appraiser, and supplies the lender with a clear and accurate understanding of the market trends and conditions prevalent in the neighborhood. Appraisers must analyze and note the following:

• Inventory Analysis Section – the appraiser must analyze and report important supply and demand factors in order to reach a conclusion

regarding housing trends and market conditions. In order to analyze the sales activity and the local housing supply, the appraiser must include the following: o Comparable data reflecting the total pool of comparable properties from which a buyer may select a property. The months of housing

supply is based on the total listings for the applicable period divided by the absorption rate. o The absorption rate at which properties for sale have been or can be sold (marketed) within a given area. To determine the absorption

rate, the appraiser divides the total number of settled sales by the time frame being analyzed. • Median Sale and List Price, Days on the Market (DOM), List/Sale Ratio – the appraiser must analyze additional trends including the

changes in the median prices and DOM for both sales and listings as well as a the change in the list-to-sales price ratios. • Overall Trend – the appraiser must report potential positive trends, neutral trends, or negative trends in inventory, median sale and list

price, DOM, list-to-sale price ratio, and seller concessions. • Seller Concessions – the appraiser must comment on the prevalence of seller concessions and the trend in seller concessions for the past

12 months. The change in seller concessions within the market provides the client with additional insight into current market conditions. The appraiser should consider and report on seller paid (or third-party) costs.

• Foreclosure Sales and Summary Analysis of Data – the appraiser must comment on the presence and extent of foreclosure/REO sales, summarizing the data, and provide other data analysis or additional information, such as analysis of pending sales which over time can show a market trend.

Appraisal Review Policy A AVM is run on every file. A desk review is ordered by an underwriter at, when any of the following apply to a file:

• AVM fails or reflects more recent comparables • Property Flipping • Refinance transactions with property listed for sale in past 12 months • At underwriters discretion if comps do not meet requirements. • Any time the DU findings indicate value may be excessive (and exceeds 50% LTV), a Desk Review is required

Certification by Substitute Appraiser

If, for some reason, the original appraiser cannot complete the certification (442, or 216 or 1007) a substitute may be used. The appraisal company must state the initial appraiser is not available. The substitute appraiser must acknowledge review of the initial appraisal.

Health and Safety Issues

Appraisers must comment on all health and safety issues and all deficiencies and needed repairs. Security Bars: there must be an emergency release latch for at least one window in each room where the security bars

are located. Net and Gross Adjustments

To determine if property qualifies as a comparable sale, the underwriter should use the following guidelines for the net and gross percentage adjustments: • The dollar amount of the line adjustments for each comparable sale cannot exceed 10% of the comparable's sales price. • The dollar amount of the net adjustments for each comparable sale should not exceed 15% of the comparable's sales price.

If the adjustments exceed 15%, the appraiser must comment on the reasons for not using more similar sales. • The dollar amount of the gross adjustments for each comparable sale should not exceed 25% of the comparable's sales

price. o The amount of the gross adjustment is determined by totaling all the individual adjustments without regard to plus or

minus signs. If the adjustments exceed 25%, the appraiser must comment on the reasons for not using more similar sales.

Note: If the adjustments are above the 15/25 limits, an automated valuation model (AVM) is not acceptable alone, and the underwriter should analyze the appraisal review more carefully.

Photograph Requirements

MLS photos or photos used for previous appraisals are unacceptable for the subject and comps. However they may be included as a supplement to photos taken by the appraiser.

Interior photographs of specific rooms must be included in the appraisal report whenever an interior inspection is performed.

o Kitchen o All bathrooms o Main living area o Examples of physical deterioration (if present) o Examples of recent updates/restoration/remodeling/renovation (if present)

Re-Inspection and Review Requirements for DISASTER AREAS IApprove Lending requires additional property re-inspection and review requirements on loans secured by properties located in disaster areas. Any adverse event (including, but not limited to: fire, earthquake, landslide, hurricane, flood, tornado, thunderstorm, etc) that may have impacted a subject property must be evaluated in terms of its effect on the subject’s habitability, marketability and value. It is important to note that not all disaster areas as determined by IApprove Lending are qualified as FEMA disaster declarations.

In the event of multiple adverse events (e.g. one hurricane followed by another) the Appraisal Update or Inspection of Property Condition must occur after the most recent event.

IApprove Lending will lend on properties that are located in declared disaster areas provided the following requirements are Adhered to and documented in the loan file.

For appraisals performed ON OR BEFORE the Disaster Date one of the following must be provided: Appraisal Update(Fannie Form 1004D/Freddie Mac Form 442)

The document must address the specific disaster and indicate any apparent damage. If the subject property has sustained more than minor cosmetic damage, a new interior appraisal is required and all

damage must have been repaired prior to funding. A 1004D (Completion of Repairs) is to be completed with photos prior to funding.

If there is no damage, the appraiser/inspector must provide the following commentary: Property is free from damage and the disaster has no affect on value or marketability.

Inspection of Property Conditions Certification o An Inspection of the property condition may be completed in lieu of an Appraisal Update when a disaster has affected the

subject property’s area and the subject has sustained no damage. o When a property inspection is used the following requirements must be met:

A minimum of one clear photo of the subject must be provided. The inspection certification must be signed by the original appraiser or Licensed Property Inspection.

a) The inspection may be provided on either corporate letterhead or a Certification of Property Inspection form. o Unlicensed appraiser assistants are is not authorized to perform this inspection. o If there are no damages, the appraiser/inspector must provide the following commentary: Property is free from damage

and the disaster has no affect on value or marketability.

For appraisals performed AFTER the Disaster Date the following requirements apply: An interior inspection is required in all Declared Disaster areas from the day following the Disaster Date until the

expiration of the Disaster Notice (generally 120 days from the date of the original event, but may be extended). The appraiser must provide current photos (post disaster) of the subject. If the appraisal indicates damage: The extent of the damage must be addressed. Completion of repairs is required

as evidenced by form 1004D with photos prior to funding. If the appraisal indicates no damage: The appraiser must provide the following commentary: Property is free from

damage and the disaster has no affect on value or marketability. Swimming Pool Requirements: • All swimming pools must meet the following guidelines

The appraiser must state that: The swimming pool does not pose any health, safety or environmental hazards Whether the pool equipment is fully operational

Empty swimming pools may be acceptable if one of the following requirements is met: The swimming pool is covered with a tarp The swimming pool has been filled with dirt A fence surrounds the swimming pool

Unacceptable Appraisal Practices

The following appraisal practices are not acceptable to IApprove Lending:

• Inclusion of inaccurate or incomplete data about the subject property, the neighborhood, or any comparable sale. • 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). • Relying on the valuation analysis of comparable sales that were not personally inspected by the appraiser by, at

minimum, a drive-by inspection. • Selection and use of inappropriate comparable sales or the failure to use comparables that are the most similar to the

subject property based on the location and physical size, age, condition, and appearance. • Use of data, particularly comparable sales data, provided by parties who have a financial interest in the sale or financing

of the subject property without verification from a disinterested source. • Use of excessive or unusual adjustments for differences between the property and the comparable sales that do not

reflect the market's reaction to such differences, or failure to make proper adjustments for differences when clearly necessary.

• Development of a valuation conclusion that is based, either partially or completely, on the race, color, religion, handicap, national origin or familial status of either the prospective owners or the occupants of the 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.

NOTE: Properties where the appraiser has rated the property in less than average condition and C5/C6 are ineligible.

AGE OF CREDIT DOCUMENTS

Credit documents include credit reports and employment, income, and asset documentation: Documentation Expiration Dates

Credit documents must be no more than 60 (90 for credit report) days old on the date the loan funds For age requirements related to appraisals, see Appraisal Requirements Title must be dated within 90 days of funding Termite, Other inspections must be dated within 90 days of funding

Age of Documentation at Time of Application

o All income must be dated no earlier than 30 days prior to the application date. o All assets must be dated no earlier than 30 days prior to application date if the statements are monthly; or

45 days of the application statements are quarterly ASSETS

General Guidelines All assets input into DU/LP must be verified. If a VOD is provided to verify assets it must be supported by 1 month bank statements. (VOD alone is not

sufficient to verify assets) If the date of the borrower’s most recent bank statement is more than 45 days earlier than the date of

application, the borrower must supply a supplemental statement. Bank statements for the most recent two-month period (or 1 month if allowed by AUS):

o Documents that are faxed or downloaded from the Internet must clearly identify the name of the depository or investment institution and the source of information by including that information in the internet or fax banner at the top of the document.

If funds to close are coming from a non-liquid asset, proof of liquidation is required regardless of AUS findings.

Borrowers are not permitted to use funds for services rendered from the sale of the subject property (i.e., real estate commissions) to satisfy down payment, closing costs, or reserve requirements.

Business Funds If the borrower(s) are 100% owners of the business, business funds may be used if all of the following are met:

Borrower’s ownership or interest in the business must be confirmed by documentation such as business license, tax returns, and/or K1’s

CPA letter stating withdrawal of funds will not impact the business. 1 month most recent business bank statement with no large deposits (greater than gross monthly income). LP requires Cash Flow Analysis in addition to CPA letter effective 12/1/2011

A cash flow analysis on the business is required. The cash flow analysis can be performed by the accountant, CPA or the borrower, if the borrower completes his own tax returns. If completed by a CPA, a letter from the licensed CPA completing the business returns which must be on the firm's letterhead and provide the CPA's address, phone number and signature.

NOTE: Business funds from a business other than a sole proprietor (Schedule C) are allowed on an exception basis.

Checking and Savings Accounts

100% of the funds may be used from checking, savings and time deposit accounts. If bank statements reflect additional parties on the account and that other party is not the borrower’s spouse, a 100%

use/access use letter is needed from the co-holder on the statements. Note: IApprove Lending requires all pages of the bank statement(s) in which, reserves, assets being used as qualification purposes, or from which funds to close are coming from.

Sourcing Deposits

The definition of a “large deposit” will vary based on the borrower’s overall financial profile and is determined by the Underwriter.

General requirements: Any deposit(s) that are either individual or cumulative on a statement that would exceed 50% of the total monthly income.

The Underwriter must document this analysis in the 1008 comments. Any deposit not consistent with the borrower’s employment, earnings and/or savings profile must be fully explained

and sourced with acceptable documentation in order to be eligible for a down payment source A large deposit could be a single deposit or multiple deposits over a period of time that in aggregate, result in a large

deposit. A review of the borrower’s financial profile must be conducted in order to draw a conclusion that a deposit must be sourced. Items to take into consideration when identifying deposits to be sourced are as follows: * Are the deposits within the normal deposit pattern from an identifiable income source? * Are total monthly deposits consistent with income? * Is the ratio of deposits to income reasonable? * Is the borrower’s income direct deposited? * Are there multiple deposits over a period of time that in aggregate, result in a large deposit? * Was the account recently opened?

There may be occasions when the borrower is able to provide an explanation but unable or unwilling to sufficiently document the source of a large deposit and has assets exclusive of the large deposit that are sufficient for closing and reserves. An underwriter, after exercising due diligence to ensure funds are not from an unacceptable source, may deduct the large deposit from the balance of the account and allow the remaining balance in the account to be used as funds to qualify.

Foreign Accounts /Currency Conversion When a borrower is using funds from a foreign source for down payment and/or closing costs, the funds must be deposited in a

financial institution in the United States and verified. The verified funds will be the result of converting the foreign currency from the foreign source to U.S. dollars.

If a non-permanent resident alien maintained funds in a foreign depository and transferred them to a U.S. bank prior to closing, the borrower must provide evidence that they owned the funds prior to the transfer.

Evidence of the currency exchange rate from a financial institution or publication is required to support the amount of funds converted to U.S. dollars.

Other assets, which may include those used to meet the reserve requirements, and that are not needed for the down payment or closing costs, may be held in a foreign financial institution.

Verification of assets held in a foreign institution may be verified using standard documentation such as statements of account or by a letter from the institution that clearly identifies the borrower and the assets held.

Evidence of the conversion rate used must be obtained and retained in the loan file. A written conversion of the beginning and ending balances must be included.

Currency conversions can be calculated at a reputable online source and documented in the file. Note: The currency exchange rate cannot be provided by the real estate agent, broker, seller, borrower or any interested party to the transaction If account is a Foreign account in a foreign language, translation by a professional company is required to translate to

English Earnest Money Deposit Documentation Requirements:

Copy of Escrow Receipt Copy of Check(s) to Escrow Paper trail of Cashier’s Checks and/or Wires (Must denote source account funds came from)

Must be verified in one of the following ways: If the Earnest Money check HAS cleared: Provide a copy of the borrower’s canceled check and bank statement (up to and

including the date the check cleared) to evidence sufficient assets were available. If the Earned Money check HAS NOT clear: Provide verification there are sufficient funds on deposit in the borrower’s

account(s) to cover the earnest money and any other funds required to close The source of the deposit check must be documented to ensure that the deposit is not counted twice in the file.

Gift Funds Allowed on Owner Occupied and 2nd Homes ONLY (Not allowed on Investment Properties)

Acceptable gift funds

o An outright gift of cash investment is acceptable if the donor is: Relative, Domestic partner, Fiancé or Fiancée

Gift Letter Requirements The gift letter must:

Specify the dollar amount given Be signed by the donor and the borrower State that no repayment is required Show the donor’s name, address, telephone number and relationship to the borrower. Additionally, the gift letter must contain language asserting that the funds given to the homebuyer were not made

available to the donor from any person or entity with an interest in the sale of the property including the seller, real estate agent or broker, builder, loan officer, or any entity associate with them.

Gift Transfer Documentation

Gift funds deposited into the Borrower’s Account: o Document the transfer with a copy of the canceled check or withdrawal document showing the withdrawal is from

the donor’s personal account and the homebuyer’s deposit slip or bank statement showing the deposit. Funds Provided at Closing:

o Wire Transfer: A copy of the wire transfer detail reflecting that the funds are from the same individual(s) account as we received the gift letter from. Funds must be wired directly from the donor into escrow

o Certified check/Money Order (or similar): If the transfer of gift funds is by certified check, money order or similar from the donor’s account provide a copy of the check and a bank statement from the donor showing the withdrawal.

o Personal Check: If the transfer of gift funds is by personal check as a means of transferring gift funds provide a withdrawal document or a copy of the canceled check.

o If the donor borrowed the gift funds and cannot provide the documentation from his/her bank to evidence ability then the donor must provide evidence that those funds were borrowed from an acceptable source (not from a party of the loan transaction or mortgage lender).

Unacceptable Gift Funds o Except for eligible donors described above, the donor of the gift may not be a person or entity with an interest in the

sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. Gift Funds from a Municipality or Non-profit Community Organization: • Owner-occupant borrowers may use gifts or grants 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), borrower’s employer

and public agencies. • Borrowers must use their own funds to make the minimum required borrower contribution and can use donations to

supplement these funds. • Gifts or grants from acceptable entities may be used as the entire down payment for mortgages with an LTV/CLTV of 80%

or less. • Documentation must be maintained in the mortgage file that:

o Establishes the funds were provided by an entity that has a formal gift/grant 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/grant that does not have to be repaid

o Establishes the funds were received by the borrower or by the property seller on the borrower’s behalf o Identifies the donor’s mailing address o States the amount of the gift/grant

• The gift/grant must be shown on the HUD-1 closing

Gift of equity Iapprove gifts are restricted to primary residences only.

The LTV should be calculated based on the purchase price or appraised value whichever is less. o (The gift of iapprove may not be deducted from the sales price before calculating LTV.)

Gift policy criteria must be met. (Gift Letter) If the LTV exceeds 80%, at least 5% of the down payment must come from the borrower's own funds, unless the

program has a smaller down payment or borrower contribution requirement. To be eligible as a source of funds for down payment, the following requirements must be met:

o The lender must confirm that the borrower has contributed his or her own funds equal to at least 5% of the purchase price of the property if the gift of iapprove is less than 20% of the sales price; and

o The gift of iapprove must be identified in the Sales Contract; and o The sales price of the property must be at a market rate; and o The gift of iapprove must be transferred to the buyer as a credit in the transaction; the final iapprove exchange must

be documented on the fully executed HUD-1. Home equity Line of Credit:

If using an Existing Home Iapprove Line of Credit as source of funds to close new acquisition, the following must be documented

o Copy of current Note/Agreement with Line Amount and Terms of Repayment o Evidence of the draw from the HELOC (Copy of Check or evidence of Wire to escrow)

Printout acceptable o Payment for qualifying to be calculated based upon 1% of total line amount or based upon terms of

Note/Agreement for HELOC provided Inherited Funds: Funds received through an inheritance may be treated as the borrower's own funds. Receipt of funds must be evidenced by a letter from the executor of the estate or a copy of the will, plus a copy of the proceeds check

Realtor Credits: Credit towards closing costs from the selling agent and/or listing agent are acceptable provided the buyer is not the selling or listing agent AND the total combined with any seller credits does not exceed the maximum credits allowed and does not exceed the actual closing costs.

Retirement Accounts

To account for withdrawal penalties and taxes, only 60% of the vested amount of the account may count towards reserves.

The account must be documented with the most recent depository or brokerage account statement. Employer Sponsored Accounts (e.g. 401K): Evidence must be provided that the retirement account allows for with-

drawals for conditions other than in connection with the borrower’s employment termination, retirement or death. If withdrawals can only be made under these circumstances the retirement account may not be included as cash reserves. This documentation can be waived with evidence of liquidation for funds to close.

If the source of the reserve funds are from a retirement account, the terms of withdrawal from the retirement account must be provided. (Per AUS findings)

Sale of an Asset

If an asset other than real estate or exchange-traded securities is sold to accumulate funds to close obtain the following:

o Bill of sale signed by buyer o Evidence of sale proceeds o Document existence, ownership and value of the asset

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Sale of Home Obtain a signed Final HUD-1 or equivalent closing settlement statement If the borrower is being transferred by his or her company under a guaranteed sale plan, obtain an executed buyout

agreement and accompanying settlement statement indicating that the employer or relocation service takes responsibility for the outstanding mortgage debt.

Stocks, Bonds, Mutual Funds, or US Government Securities

70% of these assets accounts are allowable. If the account statements name an additional party other then the borrower or their spouse a 100% use letter is

needed from the institution issuing the statements, unless the other party named is the spouse of the borrower. Note: Stock options and non-vested restricted stock are not eligible for use as reserves.

Trust Account

Trust account funds may be used if the borrowers have access to them and they can be verified. Verification is limited to a trust cert or a copy of the actual trust agreement (all pages).

Rent Credit for Options to Purchase

The seller may give the purchaser credit toward the down payment for a portion of the previous rental payments the purchaser made under a documented rental purchase agreement with a minimum term of 12 months. The portion of the rental payment that exceeds fair market rent can be applied towards the applicant’s down payment. A copy of the rental purchase agreement along with copies of canceled checks or money orders for the last 12 months must be obtained. The appraiser must determine fair market rent for the calculation of the credit. Documentation must be provided to support the applicant’s own 5% down payment, including any allowable credit for payments made above the fair market rent.

Note: The use of rent credits given by an uninterested third party is not allowed. 1031 Exchange Documentation

Borrower funds obtained through 1031 tax deferred exchanges are allowed only on investment properties. The following documentation is required:

Sales contract and/or escrow instructions are required for both the relinquished and acquired properties. 1031 Exchange Agreement. HUD-1 Settlement Statement for both properties. Verification of receipt of funds by the Accommodator or exchange holder from the property being relinquished and credit of

those funds to the subject property. Ineligible / Unacceptable Sources of Funds The following are considered unacceptable sources of funds that cannot be used for the down payment, closing costs or reserves: Cash on Hand (Cash for which the source cannot be verified)

Cash advance on credit card(s) Depletion of assets Signature loan(s) Unsecured financing

Personal loan A gift that must be repaid Commission from sale of subject property

Salary advance Sweat equity (contribution to the construction or rehabilitation of a property in the form of labor or services rather than

cash) Unverified source of funds Reverse mortgage Pension fund

BORROWERS

Borrower’s Age All borrowers must have reached the age at which the mortgage note can be legally enforced in the jurisdiction where the property is located. There is no maximum age limit for borrowers. All applicants are evaluated on their ability to meet underwriting guidelines.

First-time Homebuyer A first-time homebuyer is defined as a borrower who:

Will purchase and reside in the subject property, AND

Has had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of purchase of the subject property,

OR Is a displaced homemaker or single parent who has had no ownership interest in a principal residence (other than joint ownership with a spouse) during the preceding three year period.

Ineligible Borrowers

Foreign Nationals Borrower with diplomatic immunity Borrower without a valid social security number Trusts A conservator or guardian to a borrower

Living Trust NOT ALLOWED Title to the property must be in the name of individual borrowers only at closing. It is acceptable to have vesting in a Trust at time on loan submission, but must be removed at closing. See title section for more details.

Maximum Number of Borrowers Maximum five (5) borrowers on a transaction

Military Personnel Military personnel stationed elsewhere are considered occupant-owners and are eligible for maximum financing provided a member of the immediate family will occupy the property as a principal residence.

Non-Occupying Co-Borrowers

Income from a non-occupying co-borrower is allowed subject to AUS approval. (Blended Ratios requires LP) Non-occupant Co-borrower must be an immediate family member

Non-Permanent Residents Non-permanent resident aliens are eligible provided they:

Occupy the property as a principal residence Have a valid Social Security number Are eligible to work in the United States and reasonable expect to continue for 3 years

Non-Purchasing Spouse To perfect a lien under governing state law when a married applicant purchases a property without involving a spouse, IApprove Lending requires the spouse to sign the security instrument, and any other applicable documentation, to confirm relinquishing all rights to the property.

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Social Security Number Permanent and non-permanent resident aliens must have valid social security numbers (SSNs). If IApprove Lending’s credit report shows a SSN variation, a Rapid Reporting form must be completed and executed with SSA office. Note: IApprove Lending does not allow for TINs

Residency and Immigration Status

United States Citizen

A United States citizen is a native or naturalized person entitled to rights and privileges of the United States. Unless otherwise noted, loan program requirements are based on the assumption that the borrower is a United States citizen.

Permanent Resident Aliens / Green Cards

A copy of the Green Card is required for all permanent resident aliens whose income and/or assets are being used to qualify for a loan. A copy of the front and back of the card is required and must be included in the loan file.

While the Green Card itself states “Do Not Duplicate” for the purposes of replacing the original card, U.S. Citizenship and Immigration Services (USCIS) allows photocopying of the Green Card. Making an enlarged copy or copying on colored paper may alleviate any concerns the borrower may have with photocopying.

Non-U.S. Citizen Borrowers / Non-Permanent Resident Aliens In order to ensure that the borrower(s) is legally able to reside and work in the U.S., a valid Social Security Number (SSN) is required for all borrowers whose income and/or assets are being used to qualify for a loan. Documentation must be provided showing that the borrower is a legal resident with a U.S. source of income history for the most recent two year period and continued expected income for the next three years. Obtaining a work visa can determine that the income is expected to continue.

Only the following types of Non-U.S. Citizen Borrowers are eligible for financing on all offered IApprove Lending programs provided the following documentation can be met:

Copy of the borrower’s I-94 card or un-expired passport, and A copy of the borrower’s VISA with proper photo identification, and Evidence the borrower has at least 6 months remaining on Visa.

Acceptable Visas

A Series (A-1, A-2, A-3): these visas are given to officials of foreign governments, immediate family members and support staff. Only those without diplomatic immunity, as verified on the visa, are allowed.

E-1, Treaty Trader: this visa is essentially the same as an H-1 or L-1; the title refers to the foreign country's status with the United States.

G series (G-1, G-2, G-3, G-4, G-5): these visas are given to employees of international organizations that are located in the United States. Some examples include the United Nations, Red Cross, World Bank, UNICEF and the International Monetary Fund. Verification that the applicant does not have diplomatic immunity must be obtained from the applicant's employer and/or by the viewing the applicant's passport.

H-1, (includes H1B-H1c) Temporary Worker: this is the most common visa given to foreign citizens who are temporarily working in the United States.

L-1, Intra-Company Transferee: an L-1 visa is given to professional employees whose company's main office is in a foreign country. TN, NAFTA visa: used by Canadian or Mexican citizens for professional or business purposes. TC, NAFTA visa: used by Canadian citizens for professional or business purposes.

Note: Borrowers who have a valid I-94 w/VISA classification that meet the above eligible VISA categories and can provide the application for permanent residency or application for extension are eligible for financing with IApprove Lending. Note: There is no minimum time required to be left on the VISA; however, underwriter discretion is advised. If there is less than 6 months remaining, the borrower should provide a letter explaining his/her intention to remain in the US and a copy of their application for VISA extension

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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.

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.

CLOSING REQUIREMENTS

Interest credit allowed. Loan must fund by the 7th calendar day of the month preceding the first payment date Allowable Fees

Borrowers may pay additional fees or payments in connection with acquiring a property that is a preforeclosure or short sale that are typically the responsibility of the seller or another party.

Examples of additional fees or payments include, but are not limited to, the following: • short sale processing fees (also referred to as short sale negotiation fees, buyer discount fees, short sale buyer fees); • payment to a subordinate lien holder; and • payment of delinquent taxes or delinquent HOA fees.

The following requirements apply: • The borrower (buyer) must be provided with written details of the additional fees or payments and the additional necessary

funds to complete the transaction must be documented. • The servicer that is agreeing to the preforeclosure or short sale must be provided with written details of the fees or

payments and has the option of renegotiating the payoff amount to release its lien. • All parties (buyer, seller, and servicer) must provide their written agreement of the final details of the transaction which

must include the additional fees or payments. This can be accomplished by using the “Request for Approval of Short Sale” or “Alternative Request for the Approval of Short Sale” forms published by the U.S. Treasury Supplemental Directive 09–

09 or any alternative form or addendum. • The HUD-1 Settlement Statement must include all fees and payments included in the transaction

Chain of Title 24 MONTHS Chain of Title is required on ALL transactions, including a copy of the last recorded Deed

Escrows /Impound Accounts California loans: required if the LTV is 90% or greater If impounds are not mandatory based on LTV then we can impound the taxes only (exclude insurance) at borrower’s request.

Interested Party contributions Contributions may be used to pay closing costs normally paid by the borrower and may be provided by the property seller only, and may be for Recurring, and/or Non Recurring Closing Costs, up to the max allowed limit by program, not exceeding actual closing costs.

The sales price may not be increased on a finalized purchase contract to cover closing costs. The LTV/CLTV must be based on the lesser of the original sales price or appraised value if there is evidence in the loan file that the sales price was increased to include the borrowers closing costs.

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Note: The Real Estate Agent(s) may credit any or all of their commissions to the buyer for recurring or non- recurring closing cost as long as total contributions do not exceed guideline limits for max contribution and do not exceed total closing costs.

Short Sale Negotiation Fees

Negotiation fee are allowable per the following requirements: o Must be deemed reasonable and paid to legitimate entity

o Must benefit or help the borrower obtain a new home o Negotiation fees may only be paid to individuals with a real estate license o IApprove Lending’s detailed written analysis and documentation must clearly verify this type of negotiation fee

as follows: � Fully signed acknowledged Purchase Contract outlining the negotiation fee � The appraiser needs to provide the detail on the appraisal along with their full analysis on how

this additional cost, to the borrower affects the value of the property. � This fee must be treated as an additional settlement charge. It must be omitted from the GFE

and shown in the 1300 serious on the HUD-1 [miscellaneous settlement charges] or on Lines 104 or 105 [additional items owed by the borrower].

� This negotiation fee is not part of the down payment requirements. � The negotiation fee funds must be verified and documented as required funds to close.

Giveaways The cost of any contributions from an interested party that are in the form of furniture, decorator allowances, moving costs or other “giveaways” must always be deducted from the property’s sales price.

Homeowners’ Association Dues Loans where the advance payment of Homeowners’ Association dues is subsidized are not eligible. Interested parties, including builders and property sellers, may not contribute any fees charged to the borrower at closing to set up or administer an HOA account.

Power of Attorney A Power of Attorney can be acceptable instrument used to close a loan. All transactions involving a POA must be approved by IApprove Lending’s Management.

Limited, Specific or Durable POA’s only A copy of the POA is required from Title/Escrow POA cannot be utilized on the initial loan application At least one borrower must be present at loan signing (Underwriter can approve exceptions allowed on case by case with

acceptable explanation) Signatures and typed names must match exactly LOE re: reason for POA also required

• Explanation regarding the reason the borrower is not available must be reviewed and approved by the

Underwriter

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Seller Credits The maximum allowable contribution depends on the mortgage type, the loan-to-value (LTV) ratio, and occupancy type. The maximum LTV must be calculated on the lesser of the reduced sales price or appraised value.

For all loans, the total of all contributions, as a percentage of sales price or appraised value, whichever is less, is limited to the following values shown in the table below.

Occupancy LTV/CLTV Maximum Financing

C t ib tiStandard Loans High-Balance Mortgage

Owner Occupied> 90% > 90% 3%

≤ 90% ≤ 85% 6% Second Home All LTV/CLTV All LTV/CLTV 3%

Investment All LTV/CLTV All LTV/CLTV 2%

Real Estate Commission Limitation Any aggregate real estate commission including a “bonus” greater than 8% is considered a sales concession and that

commission and/or bonus amount over 8% must be deducted from the sales price The appraiser is required to disclose whether the purchase contract was received and, if so, comment on any excessive

sales commission. Any excessive sales commission should be taken into consideration when arriving at the final value. The absence of Real Estate Commission generally indicates a non-arms length transaction and must be approved by the

Underwriter CONDO WARRANTY REQUIREMENTS

REFER TO OUR CONDO PUD MATRIX FOR MORE DETAILED INFORMATION ON PROJECT REVIEW TYPES

2-4 Unit Projects

FNMA Classification: S FHLMC Classification: ESTABLISHED

• All units (except one) are occupied and primary residence or 2nd

home

• No single entity owns more than one unit • Units and common elements are complete • No more than 15% of the total units are more than 30 days delinquent • No more than 20% of the total space is used for non-residential purposes • Project does not contact any characteristics contained on the ineligible projects list • Project is in compliance with applicable state laws • CC&R’s must contain an arbitration clause

• If there are no monthly HOA assessments the borrower must qualify with a minimum HOA payment equal to their portion of the Master Insurance Premium

• The project has the required Liability coverage and the policy names the HOA as insured • Unit owners have an undivided fee simple ownership • Unit owners have the sole ownership interest in, and rights to the use of project facilities and common elements. • No manufactured homes in project • Conversions require additional warranties

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Conversions 2-4 Unit Projects

• Projects legal documents have been recorded • The appraiser or other licensed professional has stated that that the project is structurally sound, and the condition and remaining useful

life of the major project components are sufficient to meet the residential needs of the project (roof and mechanical systems) • All rehabilitation work has been completed in a professional manner • Title cannot close as Tenants In Common

Conversions 5+ Unit Projects • Converted for Less than 3 years: A licensed professional has stated that that the project is structurally sound, and the condition and

remaining useful life of the major project components are sufficient to meet the residential needs of the project (roof, elevators and mechanical systems). A copy of the engineers report will satisfy this.

• All rehabilitation work has been completed in a professional manner • If the project is a partial rehabilitation, all repairs affecting soundness and habitability are complete and sufficient replacement reserves

have been allocated for capital improvements Detached Project

FNMA Classification: P (New) or Q (Established) FHLMC Classification: ESTABLISHED

• **Note for FHLMC a Full Review is required for a Non-owner regardless of if the unit is attached or detached** • No requirement for HOA control • No more than 15% of the total units are more than 30 days delinquent • No more than 20% of the total space is used for non-residential purposes • Project does not contact any characteristics contained on the ineligible projects list • Project is in compliance with applicable state laws • The project has the required Liability and Fidelity Bond (over 20 units only) coverage; and the policy names the HOA as insured • Unit owners have an undivided fee simple ownership • Unit owners have the sole ownership interest in, and rights to the use of project facilities and common elements. • No manufactured homes in project • Conversions and Live/work projects require additional warranties.

Full Review

FNMA Classification: S FHLMC Classification: ESTABLISHED

• 90% of the project is sold and conveyed • HOA has been turned over to the unit owners • Project is 100% complete and is NOT subject to any additional phases • Subject transaction is owner occupied (max LTV 90%) or 2nd home (max LTV 75%) • No more than 15% of the total units are more than 30 days delinquent • No more than 20% of the total space is used for non-residential purposes • Project does not contact any characteristics contained on the ineligible projects list • Project is in compliance with applicable state laws • The project has the required Liability and Fidelity Bond (over 20 units only) coverage; and the policy names the HOA as insured • Unit owners have an undivided fee simple ownership • Unit owners have the sole ownership interest in, and rights to the use of project facilities and common elements. • No manufactured homes in project • All facilities related to the project must be owned by the unit owners or HOA • The amenities and facilities cannot be subject to a lease between the HOA and another party • The developer may not retain any ownership interest in any of the facilities related to the project • Units are separately metered (exceptions available if typical for the area and project budget include adequate funding for utility payments

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• No single entity may own more than 10% of the total units in the project (for projects with less than 10 units no entity may own more than one unit)

• Project is well managed and in good financial condition • If the project is professionally managed the management contract should for a reasonable term, and the contract may not allowed for a

penalty payment or advance notice of more than 90 days • The project must be on one contiguous parcel of land (it may be divided by a public street) • Common elements and facilities must be consistent with the nature of the project and marketplace • Conversions and Live/work projects require additional warranties.

Budget Review

Appropriate Allocations for line items pertinent to the type of project Operating budget shows at least 10% of budget allocated towards replacement reserves, deferred maintenance and replacement cost of

major common elements. o Adequate funding for insurance deductible amount

Owner Occupancy Requirements o No requirement for Owner Occupies and 2nd Home transactions o Non-owner occupied transactions require 51% of the project is Owner occupied

Legal Warranties (FHLMC FULL REVIEW ONLY; Sellers Guide 42.11) Mortgagee Consent o Must provide that amendments of a material adverse nature to first lien mortgage be agreed to by mortgagees that represent at least

51% of the unit votes o Must provide for any action to terminate the legal status of the project or to use insurance proceeds for any purpose other than to be

rebuild, to be agreed to by first lien mortgagees that represent at least 51% of the unit votes o May allow implied approval to be assumed when a mortgagee fails to submit a response to any written proposal for an amendment

within 60 days after the mortgagee receives notice Rights of the Condominium Mortgagees and Guarantors – Project documents must provide the mortgagee the right to timely written

notice of: o Any condemnation or casualty loss affecting a material portion of project or unit securing the mortgage o Any 60-day delinquency in payment of assessments or charges owned by the unit owner o A lapse, cancellation or material modification of any insurance policy maintained by the HOA o Any proposed action requiring the consent of a specified percentage of the mortgages First Mortgagee’s Right Confirmed – There are no provisions in the project documents that give a unit owner or other party priority over

any rights of the first mortgagee in the case of payment to the unit owner of proceeds (insurance proceeds, condemnation awards or taking of units/common elements)

Unpaid Homeowners Association assessments – Any first mortgagee that obtains the title to the unit through remedies in the mortgage or through foreclosure is NOT liable for more than 6 months of the unit’s unpaid assessment or charges accrued before acquisition of title

Limited Review

FNMA Classification: Q FHLMC Classification: Streamline

90% of the project is sold and conveyed HOA has been turned over to the unit owners Project is 100% complete and is NOT subject to any additional phases Subject transaction is owner occupied (max LTV 90%) or 2nd home (max LTV 75%) No more than 15% of the total units are more than 30 days delinquent No more than 20% of the total space is used for non-residential purposes Project does not contact any characteristics contained on the ineligible projects list Project is in compliance with applicable state laws The project has the required Liability and Fidelity Bond (over 20 units only) coverage; and the policy names the HOA as

insured

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Unit owners have an undivided fee simple ownership Unit owners have the sole ownership interest in, and rights to the use of project facilities and common elements. No manufactured homes in project Conversions and Live/work projects require additional warranties

Live/Work

Live-Work Condominium Projects are projects that allow unit owners to use their unit for both residential and business use. A Live-Work condominium unit may be located in a Mixed-use Condominium Project.

Project meets all warranties for established projects The project documents allow commercial use and states what commercial use is or is not acceptable The commercial use is consistent with the residential nature of the project and there is minimal, if any, commercial traffic to

the unit The unit is a 1-unit dwelling designed for residential use with minimal accommodation for commercial use The unit owner occupies the unit as a Primary Residence and owns and runs the business

COMMUNITY PROPERTY STATES

AZ, CA, CO, ID, MT, NM, NV, TX, UT, & WA CONVERSION OF PRIMARY RESIDENCE iApprove Requirements

If the current primary residence will become an investment property and at least 30% iapprove in the current primary residence

can be documented with one of the following: 1007 AIR compliant appraisal 2055 exterior AIR compliant appraisal

The Following Additional Requirements Also Apply: o 75% of the rental income may be used to offset the mortgage payment in qualifying for the departure residence

when all the following requirements are met: o Rental income is documented with a fully executed lease agreement for a 12 month term o Rental Income from a Family member (or other individual with an established relationship or an interested

party to the transaction) is NOT allowed o The rental income must be deemed reasonable by the underwriter. At underwriter discretion a 1007 may be

required. o Proof is provided that a security deposit was received from the tenant and deposited into the borrower’s account o Reserve Requirements are met

Underwriter must also determine the logic of the of the primary residence conversion to an investment property based on the values of the two properties and the borrower’s situation (such as, moving to a larger home, retirees, distance from employment, etc.).

Reserve Requirements

Purchase transactions where the borrower will be retaining their current residence as either a 2nd home or converting it into a rental property and CANNOT document 30% iapprove in the departing home must have a minimum of 6 months PITI for the subject property and 6 months PITI for all other properties.

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Purchase transactions where the borrower will be retaining their current residence as either a 2nd home or converting it into a rental property and CAN document 30% equity in the departing home must have a minimum of 2 months PITI for the subject property and 2 months PITI for all other properties

NOTE: If the loan is approved through LP and the property that is converting to an investment property is a 1 unit property, the borrower must have a 2 year history of managing rental properties in order to use rental income to qualify or off-set the mortgage payment.

Underwriter must also determine the logic of the of the primary residence conversion to an investment property based on the values of the two properties and the borrower’s situation (such as, moving to a larger home, retirees, distance from employment, etc.).

Departing Residences with Negative Equity Position:

Generally are not allowed but will be considered on a case by case basis. CREDIT

Adverse Credit and Past Due Accounts

Judgments, Garnishments, Liens must be paid off prior to, or at closing Accounts that are past due must be brought current Verification of sufficient assets to satisfy these requirement must be documented

Authorized User Accounts An authorized user account is when a credit account owner permits another person, typically a family member who is managing credit for the first time, to have access to and use an account. If the account is included in the AUS run, no further action is required. However, to exclude the account from DTI calculations, a credit supplement deleting the account is required.

Bankruptcies

AUS Findings will be followed Seasoning is determined by the date the Note is signed Documentation Requirements:

o Proof of Discharge of Debtor (credit report or credit supplement is acceptable). o LOE re: circumstances resulting in filing

Borrower Representative Score

If there is only one borrower on the loan, the middle fico score for that borrower will be used to qualify. If there are co-borrowers on the loan, the credit score applicable to the loan itself will be the lowest of the respective borrowers’ scores.

All borrowers must have a minimum of 1 credit score. IApprove Lending Minimum Credit Score of 620 or per LTV/FICO Matrix for the loan program

Credit Inquiries Credit inquiries within 120 days of the credit report (other than those related to the subject transaction) must be explained via a written signed and dated LOE from borrower. The underwriter should carefully consider these inquiries and include any new debt in the DTI.

Credit Report Security Freeze If the borrower has frozen his credit file at one or more of the three national credit repositories, the credit freeze must be removed and a new credit report obtained before the loan can be underwritten.

Note: To temporarily lift the credit freeze, the borrower will need to contact the repositories to unfreeze their credit file.

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Collections and Charge-Offs Follow AUS findings as it relates to the payoff of collections. However, payoff will be required if the collection will threaten IApprove Lending’s first lien position.

For all owner-occupied and second home properties, collections and charge offs totaling more than $5,000 must be paid in full prior to or at closing.

For Investment properties, individual accounts >$250 and accounts totaling more than $1,000 must be paid at closing

Consumer Credit Counseling A borrower currently in Credit Counseling is eligible with AUS approval and a letter from the agency permitting the borrower to enter into a mortgage transaction.

Derogatory Credit The borrower must explain all derogatory credit in the last 24 months. Letters of Explanation for derogatory credit older than 24 months are required at Underwriter discretion

Disputed Account Information When erroneous or disputed accounts are identified on the credit report and AUS Findings Report, the underwriter must verify the accuracy of the disputed tradeline(s) and determine if the tradeline(s) belong to the borrower and confirm the accuracy of the payment history. To satisfy these requirements, the underwriter must use one of the following options:

Obtain a written LOE, signed and dated by the borrower(s) along with any supporting documentation for the erroneous or disputed account(s). If the tradeline does not belong to the borrower, or the reported payment history is inaccurate, no further action is required.

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, the borrower must remove the dispute on the tradeline(s) and a new credit report pulled reflecting the removal and new AUS findings issued.

Derogatory Events Derogatory Event Waiting Period Requirements

Due to Financial Mismanagement Waiting Period RequirementsWith Extenuating Circumstances

Bankruptcy (Ch 7 or 11) 4yrs 2yrs Bankruptcy (Ch 13) 2yrs from Discharge

4yrs from Dismissal2yrs from Discharge2yrs from Dismissal

Multiple Bankruptcies 5yrs if more than 1filied w/in 7yrs 3yrs from most recent discharge/dismissal dateForeclosure 7yrs 3 yrs Minimum

3-7 Yrs –Max 90% LTV with AUS approval

Deed-in-Lieu/Pre Foreclosure/Short Sale

2yrs –Max 80% LTV with DU Approval4yrs –Max 90% LTV with DU Approval 7yrs –LTV per Matrix and DU Approval

2yrs –Max 90% LTV with AUS ApprovalMust document Extenuating Circumstances

Extenuating Circumstances

To be eligible for the reduced seasoning time for Bankruptcy or Foreclosure the borrower must have re-established credit for 2 years and provide a letter of explanation and supporting documentation evidencing the incident was not due to financial mismanagement. Examples are examples of acceptable situations.

Death of a primary wage earner Long term illness or disability not covered by insurance

Fraud Alert Messages All three national credit repositories have developed automated messages to help identify possible fraudulent activity on a credit report. These alerts are commonly known as HAWK Alerts.

All alert messages shown on a credit report (particularly those in the Fraud Verification Information section) must be addressed and resolved prior to closing a loan.

Foreclosures See Above Derogatory Event Matrix

Max LTV of 90% or program limit Purchase: owner occupied only Rate-Term: All occupancies Cash-out: not eligible Documentation Requirements: Property Profile and Copy of Deed (For seasoning verification) and LOE re:

circumstances leading to Foreclosure

Note: Modification of a HELOC down to a lower limit is not considered a foreclosure. Note: In a community property State, if an applicant’s current spouse, who is not on the transaction, has defaulted on a property in the past, the credit rating will affect our borrower.

Housing Payment History Per AUS Findings.

Minimum Tradelines For a credit score to be considered valid and usable, the underwriter must determine if the borrower’s credit contains a significant mix of older and new accounts to create a true credit profile for the borrower.

1st Time Homebuyer’s

o A trade line rated for at least 24 months with a high limit of at least $2000 may be used to satisfy both of the above requirements.

o Authorized user or alternative credit accounts may not be used to satisfy tradeline or history requirements. Red Flag Alerts If the credit report reflects a Red Flag Alert the information must be verified by either confirming the information with other documentation in the file, or by requesting additional documentation.

The Underwriter must document this analysis in the 1008 comments. Lawsuits Borrower(s) involved in lawsuits will not necessarily exclude them from obtaining financing. If the borrower(s) are involved in a lawsuit, a signed and dated LOE with a copy of the complete lawsuit must be provided to determine if the potential outcome of the lawsuit will have an effect on the borrower’s ability to repay his/her monthly obligations.

DOCUMENTATION & FORMS

Initial 1003 Each file must contain an initial 1003 signed and dated by borrower(s) and loan officer. All pages must be included, initialed or signed and include a complete 2 year residence and employment history for each borrower.

NO Power of Attorney signature allowed on Initial 1003 Short Sales A copy of lender approved agreement is required. If there are 2 existing liens on title, they must both approve the sale, and approve the HUD before closing.

Purchase Agreements All attachments to the purchase contract must be provided. The underwriter must carefully review the purchase agreement and will request all attachments, addendums and disclosures referenced in the contract.

Payoff Demand Statements Regardless of Automated Underwriting System (AUS) approval, a payoff demand statement is required in each loan file on all refinance transactions. The payoff demand statement must reflect the following about the loan being paid off:

Is not more than 30 days delinquent Does not contain charges associated with default/forbearance Does not indicate a curtailment of principle/interest (for example, a short pay) Meets the mortgage derogatory requirements

DU REFI PLUS

See Separate DU Refi Plus Guidelines

The standard refinance guidelines must be followed when underwriting for this program in addition to adhering to the additional following guidelines:

Maximum $250 cash in hand at Close of Escrow The loan being paid off was delivered to Fannie Mae prior to June 1, 2009 Only the payoff of 1st liens are allowed (2nd liens and debts are not allowed) Any existing subordinate lien must re-subordinate without modification

ELECTRONIC SIGNATURES

An electronic or digital signature is one generated by a computer. A stamped signature is one produced by a rubber

stamp. Electronic signatures are acceptable only on the Initial disclosures and the Initial 1003 application. Electronic signatures are acceptable on the purchase contract for the seller only (not our borrower).

ESCROW/ IMPOUND ACCOUNTS

Escrow/Impound accounts may NOT be waived as follows: California Properties with LTV’s > 90% Non California Properties with LTV > 80%

ESCROW HOLDBACKS

Not permitted

FLIPS(PROPERTY FLIPPING)

Property Flips (Flipping) Property flips occur when ownership of one property changes several times in a brief period. Flips artificially inflate the value of a property in order to obtain larger loans than what might otherwise be possible, and to “skim” the newly created iapprove from the property. Flips also are used to conceal the identity of the true buyer or client of the property. Potential indicators of property flips include:

Ownership changes two or more times in a brief period of time. The current seller obtained ownership under 3 months from new purchase contract date.

• Two or more closings occur at nearly the same time for significantly different values, resulting in artificially inflating the property’s value.

• Property seller is not on title policy. • Reference to double escrow or other Settlement Statement (HUD-1) form. • Parties to the transaction are affiliated or related by birth or marriage. • A property sale that does not involve a Realtor.

Investigating Property Flips When potential flip indicators are detected in a loan file, IApprove Lending requires further investigation to determine the legitimacy of the transaction and the true value of the collateral. The following are required:

The transaction must be an owner occupied purchase. Appraiser to comment on all upgrades and improvements by current seller. Verification that the property seller and owner of record are one and the same. Verification that there is no apparent relationship between the parties to the transaction, either on the current sale or previous sale.

IApprove Lending will perform a Desk Review on appraisal.

Note: In order for an increase in appraised value on a flip transaction to be considered acceptable, repairs to the subject property must have been made to the extent that it justifies the increase in the subject property’s appraised value. Refer to “PROPERTY ELIGIBILITY: RAPID APPRECIATION” for more information.

Note: Non-Arm’s length transactions that are also flip transactions are not eligible for financing.

INELIGIBLE TRANSACTIONS

Straw Borrowers/Straw Buyers A straw borrower is used as a “cover” or “front” when the true identity or motivation of the actual borrower is concealed to gain loan approval. Indicators of a straw borrower situation include: Names added to the purchase contract.• Sales to a relative or related party.• No sales agent involved.

Double Escrows Double escrow transactions are not illegal; however, they are considered high risk since they are often associated with no- money-down purchase transactions, and/or inflated property values. Double escrows are one of the methods used to avoid down payment requirements. Parties involved in property flipping schemes often use double escrows in the original acquisition of the property.

Equity Skimming Equity skimming involves investment property. The owner/investor collects the monthly rents and fails to make the mortgage payments. The investor usually obtains the property through a purchase transaction or an assumption.

If obtained through a purchase transaction, the investor generally executes a second trust deed to the property seller as the down payment, resulting in no cash investment in the property.

Once the property is assumed, the investor profits by collecting rent for the time it takes the lien holder to complete the foreclosure process. Investors using this method frequently obtain several properties within a short period of time. The investor makes mortgage payments (while acquiring other properties using the same scheme) before finally defaulting on the mortgage payments.

Foreclosure Bailout A foreclosure bailout may be a refinance or purchase transaction when the true purpose of the loan is to bail out the property owner from an existing lien that is in foreclosure. These transactions can be structured as a refinance or a purchase.

When structured as a refinance, title is transferred (or gifted) to a friend or family member who applies for a loan in his/her own name.

When structured as a purchase, the borrower acts as a “straw buyer” for the true owners of the property. In this case, the sales price and appraisal may be inflated to support an artificially low LTV.

Restructured Loans: A restructured loan is a mortgage in which the terms of the original transaction have been changed, resulting in either the absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan. Restructured loans result in:

Short Payoffs: A short payoff is a mortgage loan in which the servicer/investor of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage

INCOME & EMPLOYMENT

General Requirements Documentation determined by DU/LP The number of years of tax returns required is generally determined AUS. However, at underwriter discretion 2 years

tax returns may be required regardless of findings. A written VOE must be supported by paystub AND W-2. A written VOE may not be the only income documentation in

the file. All income sources must be analyzed individually and correctly labeled in the AUS.

4506-T

• The number of years requested is required to match the number of years of income used • An initial and final signed 4506-T is required on all loan submissions • 4506-T will be processed on 100% of the transactions • Tax transcripts DO NOT replace any required tax returns on the loan transaction. • Transcript requirements only apply to personal tax returns • If the IRS returns “no transcripts available” for the time period requested then proof of extension and the most recent years

transcripts would be required. Amended Tax Return Requirements:

o The original filed return AND the amended return are required. o Tax returns must have been amended prior to application date. o If applicable, evidence of payment is required o Confirmation from the IRS of filing is required with either:

� A R e cord of Account from a 4506-T

Alimony, Spousal or Child Support Spousal or child support must continue at least three years after closing to be considered. IApprove Lending 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, court records, any other type of legal agreement or court decree that describes the payment terms, The document must specify the amount of the award and the period of time over which it will be received.

Support income is Less than 30% of qualifying income: 6 month proof of receipt is required. Support income is More than 30% of qualifying income: 12 month proof of receipt is required. If support is conditionally upon the age of a child then the birth date of the child must be verified

Asset Depletion IApprove Lending will recognize an income stream from employment-related assets as eligible for loan qualification for loans underwritten by Desktop Underwriter

Income Derived From Assets Eligibility Desktop Underwriter

Assets must be owned by one or more of the borrowers Assets must be liquid, unrestricted and available to the borrower without penalty

o NOTE: Borrower must be of Retirement Age (60) for IRA/Retirement’s to be Non Restricted

Maximum 70% LTV/CLTV/HCLTV Minimum credit score 640 Purchase and limited cash out refinance Primary residence and second homes

Eligible Assets Non-self-employed severance package, or Non-self employed lump sum retirement package Document with a distribution letter from the employer (1099R) and deposited into a verified

asset account

401k, KEOGH or IRA and SEP-IRA, retirement accounts are eligible if: o Distribution is not yet set up, or

o Distribution is set up and being received, yet the distribution amount s not enough to qualify. Evidence of distribution change is not required.

o Document with the most recent monthly, quarterly, or annual statement.

Value and Income Calculation Net Value Determination Retirement accounts: Use 70 percent of the value Stocks, bonds, and mutual funds: Use 70 percent of the value

Net Documented Assets Eligible assets less 30% (Net Value - if retirement, stocks, bonds, mutual funds) less any funds that will be used for closing or required for reserves.

Income Calculation Divide the “Net Documented Assets” by 360 months (regardless of the loan term).

Ineligible Assets The following non-employment related assets are not eligible: Cash Divorce proceeds Inheritance Stock options Lawsuits Lottery winnings Non-vested restricted stock Sale of real estate

Automobile Allowance Income from automobile allowances may be used if the borrower has a 2 year history of receipt from their current employer and the income is likely to continue for the next 3 years. This can be documented by obtaining either:

Written VOE from the borrower’s employer breaking down their base income and the amount of the automobile allowance year-to-date and for the previous 2 years as well as commenting on the VOE that the income is likely to continue.

Base Earnings Base earnings are reflected on paystubs as a consistent amount. Generally, hourly (consistent hours per paystubs), weekly, bi- weekly, semi-monthly, monthly etc. Base income should be supported by YTD earnings. If a recent raise was received, provide Written VOE

Boarder Income/Room Rents Income Rent from boarders in a single family residence that is also the borrower’s primary residence or 2nd home, AKA room rents, may not be considered as income.

Capital Gains Income A capital gain or loss is generally a one-time transaction and must not be included as either a gain or loss in income. However, if the borrower’s business has a constant turnover of assets which produces regular gains, the gain be considered if it has been received for the past two years as documented per the most recent 2 years personal tax returns. The borrower must also demonstrate the ability to continue earning the calculated income by documenting enough assets needed to continue this level of income. Capital gains from onetime occurrences may not be used to qualify. A 5% return on investment will be used unless documentation on the asset statements provided clearly shows a higher rate of return YTD.

IF permitted, Income will be calculated using the following method: 2 years most recent personal tax return / 24 months Note: If income has declined year over year, must use recent year / 12.

Changes in Employment If the borrower’s employer changed over the past two years, verification must be obtained from the previous employers as well as the current employer. Full verification must be done for the entire two-year period. Frequent Job Changes Borrowers who frequently change their jobs do pose a greater credit risk. If the job changes are for advancement or higher wages, these changes should be viewed favorably.

Clergy Income 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. If housing allowance is being used to qualify the borrower, all of the following must be obtained to support housing income:

Monthly allotment statements Proof of receipt for past 2 years Proof of continuance for a minimum of 3 years Copy of employment contract A letter from the institution confirming all of the above is acceptable

Commission Income It is important to establish an earnings trend for the income, especially when commission/bonus/overtime is 50% or more of the qualifying income. Annual earnings must be level or increasing. If earnings show a decline in the current year, there must be strong offsetting factors to make the income acceptable.

Evidence the borrower has been on his/her current job for the past (2) years, OR if at employer less than 2 years written VOE’s breaking down commission/bonus/overtime income for the previous employer.

Borrowers who receive commission income equal to or greater than 25% of their total income must provide tax returns per the AUS findings.

Declining Income

If the borrower’s income is declining year over year, the underwriter must condition for an LOE from the borrower documenting why the income declined and be absolutely sure that income has stabilized. Typically a decrease in income over 30% year over year is considered unstable income, and cannot be used.

Income will be calculated using the most recent tax returns if income is declining, not a 2 year average. Disability Income Permanent Disability Income may be used to qualify a borrower only when the following is documented. The documentation must clearly show:

Payment amount and conditions for termination of payment. The most recent check copy or bank statement is required if the award letter does not contain the current disability payment being received.

The disability income will continue for the next three years. Employed by Relatives If borrowers are employed by a relative, domestic partner, fiancé/fiancée, or family business, the following must be obtained:

Most recent (2) years completed personal federal tax returns, and Most recent paystub covering at least 30 days earnings year to date, and The most recent (2) years W2s, and A written VOE by disinterested party (Accountant, CPA) verifying income. If Handwritten paystubs, must provide 2months cancelled checks and a YTD payroll ledger showing earnings

Current income reported on the paystub may be used only if it’s consistent with the W-2 earnings reported on the tax returns. If the W-2 earnings or income is substantially lower on the current paystub, the underwriter will use the current YTD amount.

Foreign Income Foreign income is an acceptable source of income, provided the following can be documented:

Evidence the borrower has received the foreign income for past two year as denoted on the most recent two years personal tax returns.

The pay in its totality is in US dollars. Letter from the employer evidencing stability and continuance. Occupancy of our transaction must be reasonable based on the proximity to the borrowers employment. Generally these transactions are done as a second home or investment property.

Income for Non-Permanent Resident Aliens is not allowed when employed abroad by a foreign company. Future Employment Under certain circumstances, income from future employment may be used. The underwriter may qualify a borrower utilizing the income documented in the employment contract. Past experience and income levels are considered when determining iffuture income is accepable. The borrower must be on the job prior to funding.

A verbal VOE is also required from the employer and iAL will follow up for a 30day YTD paystub after closing. A copy of the employment contract and a written VOE confirming start date and likelihood of continued employment is

required.

Gap(s) in Employment The loan application should reflect all borrowers work history over the course of the past two years. Upon review of this employment history, if it is found that an employment gap exists for 1 – 12 months, income can be used provided the following can be obtained and documented:

• Written LOE signed by the borrower addressing the reason for the employment gap • The borrower has had a 2 year work history prior to the employment gap • The borrower maintained credit during the gap

For gaps in employment more than 12 months, income can be used provided the following can be obtained and documented: Written LOE signed by the borrower addressing the reason for the employment gap

• The borrower has had a 2 year work history prior to the employment gap • The borrower has been on his or her current job for a minimum of (6) months • The borrower maintained credit during the gap

In cases where the borrower has just graduated from college (within the past 2 months before entering the job market) and has entered the field in which he or she obtained a degree, income may be used to qualify if the following documentation is met:

• The borrower has been on his/her current job for the past 3 months and • A copy of the borrower’s diploma is provided.

Handwritten Paystubs

Not allowed on LP Need 2 year of W-2 and 1040’s Written VOE required Fully 30 days earnings and YTD earnings must be reflected. If not, then Payroll Ledger to show Year To Date Activity and Earnings required If Employed by Family Member, see “Employed by Relatives” for additional requirements

Interest and Dividend Income Income must have been received for the past two years as documented per the most recent 2 years personal tax returns. The borrower must also demonstrate the ability to continue earning the calculated income by documenting enough assets needed to continue this level of income.

Any funds used for the down payment or closing costs must be subtracted before the income is calculated. A current asset statement must be provided showing YTD earnings consistent with the income being used. The institution name does not need to match the tax returns, but the earnings level must be consistent.

Income will be calculated using the following method:

2 years most recent personal tax return / 24 months Note: If income has declined year over year, must use recent year / 12.

IRA Distributions IRA distribution income may be used to qualify a borrower with following documentation:

A 1 year history of receipt via 1099-R or tax returns, and Evidence of (3) years continuance as documented with the most recent months bank statements showing enough

funds currently in the account to sustain the calculated income amount.

Leave of Absence/Maternity Leave Temporary Leave Income is an eligible source of income per the following requirements:

• IF the borrower WILL return to work as of the 1st mortgage payment date, the borrower may be qualified using the

expected earnings upon return to work. o In order to use the borrower current salary any Borrower’s that are currently out on leave of absence must have a

confirmed return date from the employer and letter of clearance from their doctor. o The borrower must write a letter confirming their intent to return to work

• IF the borrower WILL NOT return to work prior to 1st mortgage payment date income used to qualify borrower will be based upon amount of temporary leave income (if any) o The amount and duration of the borrower's "temporary leave income" must be documented

Mortgage Differential Payments An employer may subsidize an employee's mortgage payments by paying all or part of the interest differential between the employees’ present and proposed mortgage payments. This income is not acceptable.

Notes Receivable Notes receivable income may be used to qualify provided the income is regular, recurring and deemed stable by the underwriter. In order to use notes receivable the following documentation must met:

A copy of the note confirming the amount, frequency, duration of payments, and Evidence the note’s payments started at least 1 year prior to the loan application date, and Evidence each individual note being used to qualify has at least three years remaining on it, and The most recent years personal tax returns with the note income being reflected on schedule B

Overtime & Bonus Income Overtime and Bonus Income may be used for all borrowers on the loan application provided all of the following has been met:

The most recent paystub reflecting year-to-date Bonus/Overtime income earned A written VOE breaking down base and Bonus/Overtime year to date, and for the previous (2) years The borrower has a two year history of receiving Bonus/Overtime within the same industry W-2 forms and payroll earning statements indicate and earnings level that is consistent with the total income that is being used to qualify

Overtime and bonus income will be calculated using the following method:

Year to date + previous year / (# of months worked YTD + 12)

Note: The two year history of overtime or bonus income may be satisfied from different employers, so long as the borrower was in the same position and industry at his/her previous employer. Note: If income has declined as evidence per YTD earnings then overtime/bonus income must be calculated using Year to date / # of months worked year to date. Note: Due to the volatility of the stock market, the typical vesting schedule and restrictions placed on them, stock options may not be considered as stable bonus income but may be used as a potential compensating factor.

Pensions / Retirement Income / Social Security Income/ Annuities If the borrower is of retirement age, income may be used in the qualifying of the borrower with receipt of one of the following:

• Copy of the most recent award letter/earning statement, OR • Copy of the most recent 1099-R, OR • Copy of the most recent signed federal tax returns, OR • Bank statement evidencing 2 months receipt of auto deposit

Note: Proof of continuance is not required if income is corporate, government, or military retirement/pension income. If retirement income is in the form of a monthly annuity payment, 401(k), or IRA monthly distribution, proof of three years’ continuance is required.

Grossing Up SSI Income If the income is verified as nontaxable, and the income and its tax-exempt status are likely to continue, develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25 percent of the nontaxable income to the borrower’s income.

Tax returns are required in order to validate that the income is not taxable. Filing requirements can be found on the IRS website: http://www.irs.gov/publications/p554/ch01.html

Relocation / New Job Income from a borrower who is relocating or taking on a new job may be used with the following documentation:

Copy of the employment offer, showing start date, employee name, company and pay rate, and A written VOE documenting the borrower has completed at least one day of work prior to funding

Note: If a self employed borrower has recently become a wage earner, evidence of the dissolution of the prior business is needed, or no income can be used from the new wage earner job. Refer to Base Monthly Income for Wage Earners calculations.

W2 to 1099 Same Company

Case by Case -Subject to Exception/Management Review need 6 months of self employed income on tax returns

Requires Written VOE o Must provide current YTD and previous 2yrs earnings broken out as applicable o Employer to comment on reason for change to 1099 o Employer to comment on affect 1099 earnings would have on employees expenses

Different Company 1 Year tax returns reflecting at least 6 months of 1099 income is required

1099 to W2 Same Company

Requires Written VOE Must provide current YTD paystub reflecting 30 days of income Employer to comment on reason for change to W2 Employer to comment on affect W2 earnings would have on employees expenses Expenses reported on the previous years Schedule C must be deducted from the current gross income per

VOE/Paystub. Different Company

All of the above requirements plus must be same line of work.

Rental income from subject property

RENTAL INCOME NOT PERMITTED FOR FIRST TIME HOMEBUYER’S ON LP

Purchase: Document rental income by obtaining an appraiser’s opinion of market rent (appraisal forms 1007 & 216) and a copy of the lease (if applicable). Income will be calculated using the lesser of the current market rent derived by the appraiser or the lease currently in place x 75% of that amount – the PITI for the subject property.

RENTAL INCOME FROM THE SECURITY PROPERTYDoes Borrower Have History of Receiving Rental Income From Property?

Documentation Requirements Calculate Monthly Net Rental Income (or Loss)

Yes Document the rental cash flow byobtaining copies of pages from the borrower’s most recent two years of signed federal income tax returns and the related Schedule E.

Analyze the borrower’s cash flow and calculatethe net rental income (or loss), making sure that depreciation or any interest, taxes, or insurance expenses were added back in the borrower’s cash flow analysis

No Document the rental income by obtaining an appraiser’s opinion of market rent and, if applicable, copies of the current lease agreement(s).

The gross rental income from the property is equal to the lesser of the market rent established by the appraiser or the current rent based on the existing lease agreement(s). Net rental income equals 75% of the gross rent; the remaining 25% of the gross rent is absorbed by vacancy losses and ongoing maintenance expenses.

Rental income from property other than the Security Property

RENTAL INCOME FROM PROPERTY OTHER THAN THE SECURITY PROPERTY Does Borrower Have History of Receiving Rental Income From Property?

Documentation Requirements Calculate Monthly Net RentalIncome (or Loss)

Yes Obtain copies of the borrower’smost recent two years of signed federal income tax returns and the related Schedule E, or a copy of the current lease agreement(s) (only if a property is not listed on Schedule E because it was acquired subsequent to filing the tax return).

When calculating the net rental income (or loss)from signed federal tax returns (including Schedule E), ensure that depreciation or any interest, taxes, or insurance expenses are added back in the borrower’s cash flow analysis. Since Schedule E does not account for the full amount of the mortgage payment for the rental property, ensure that any portion of the payment (interest, taxes, and insurance) that needs to be added back in the cash flow analysis to avoid a double counting of the expenses is, in fact, added back. If using the lease agreement, net rental income is 75% of the gross rent from the lease agreements, with the remaining 25% being absorbed by vacancy losses and ongoing maintenance expenses.

No Obtain copies of current leaseagreements.

Net rental income is 75% of the gross rent fromthe lease agreements, with the remaining 25% being absorbed by vacancy losses and ongoing maintenance expenses.

Refinance: If the property has been acquired within the most recent tax year

Document the rental income by obtaining an appraiser’s opinion of market rent (form 1007 & form 216) and copy of current lease agreement.

Income will be calculated using the lower of market rent or lease agreement x 75% of that amount – the PITI on subject property.

If the property was acquired prior to the most recent tax year:

Obtain most recent two years signed personal tax returns (may use 1 year if DU allows for lesser documentation), a copy of the lease agreement and appraiser form 1007 & 216.

Income will be calculated using the lesser of the following methods: o Gross rent amount on the 1040s x 100% – the PITI of the subject property – actual expenses reported on schedule E o Current lease amount x 75% - the PITI of the subject property o Appraiser’s opinion of market rent x 75% - the PITI of the subject property

Rental income from other properties If the property has been acquired within the most recent tax year:

Provide Copy of Closing HUD1 Settlement Statement or a property profile to document COE date Obtain a copy of lease agreement and copy of cleared security deposit check. Income will be calculated using lease agreement x 75% - PITI for the property

If the property was acquired prior to the most recent tax year:

Obtain most recent two years signed personal tax returns (may use 1 year if DU allows for lesser documentation). Income will be calculated using the Cash Flow Method (see below section for “Calculating Rental Income”). If income was not reported on Sch E of tax returns, no rental income may be used for subject property.

Calculating Rental Income: Cash Flow Method When Schedule E’s are required for calculating rental income please utilize the net income line approach Calculate as follows:

Example Rental income Calculation (From Schedule E of 1040’s):

Rents Received (Line 3) (-) Minus Deduct Expenses (Lines 5 through 19) –(+)Plus Add back in the mortgage interest deduction reported on line 12= Subtotal ÷ 12 SubTotal ÷ 12 = Monthly Amount(-) Minus Deduct full principal and interest payment (From Mortgage Statement) = Total Net Rents Final monthly net rental incomeNote: If using the net income line approach, one-time extraordinary expenses, such as the cost of a new roof, may be excluded if the borrower can satisfactorily evidence the expense was a one-time occurrence. Note: If the property was acquired in the previous tax year, but rental income was not claimed on the personal tax returns due to the property being “fixed up”, rental income may be used to qualify if receipts are provided along with a copy of the current lease and six months cancelled checks/bank statements. Note: On subject non-owner and 2-4 unit owner transactions where rental income is being used to qualify, a minimum of 6 months’ Rent Loss insurance is required for the subject property. Note: If using the net income line approach, one-time extraordinary expenses, such as the cost of a new roof, may be excluded if the borrower can satisfactorily evidence the expense was a one-time occurrence. Note: If the property was acquired in the previous tax year, but rental income was not claimed on the personal tax returns due to the property being “fixed up”, rental income may be used to qualify if receipts are provided along with a copy of the current lease and six months cancelled checks/bank statements. Note: On subject non-owner and 2-4 unit owner transactions where rental income is being used to qualify, a minimum of 6 months’ Rent Loss insurance is required for the subject property.

Seasonal Employment Seasonally employed borrowers due to their nature of work, pose a greater lending risk and thus must have compensating factors to be eligible for financing.

Borrower must have a 2 year history of seasonal work Employer must confirm the borrower is eligible to be re-hired

Second Job Or Part-Time Income from a second job must meet either the documentation requirements for a wage earner or self employed borrower. The borrower must also have a two year history of working at both his/her primary and second job in order to use income from any secondary job.

Self Employed Income A borrower is considered self-employed whenever he/she has a 25% or greater equity stake in a sole proprietorship, partnership or corporation.

AUS findings must be followed and at a minimum the following documentation is required:

Most recent year signed personal federal tax returns, and Most recent year W2s and K-1s (as applicable), and Evidence the borrower has been self employed under the same name/entity for at least the past two years as evidenced by a CPA letter, business license or professional license

If the most recent signed personal federal tax return cannot be provided due to a filing of an extension, the additional documentation must be provided:

Copy of the most recent federal tax extension, and A copy of the previous year’s tax returns, and A Profit and Loss statement

Note: In the event that the borrower’s federal tax returns show a self employed loss for a non-borrowing spouse, IApprove Lending does not require that the negative income from the spouse be counted against the borrower’s total income.

Tax Exempt Income If it has been determined and documented that tax exempt income (including military allowances, worker’s compensation benefits, social security and disability retirement payments) is likely to continue and remain untaxed as documented per personal tax returns, the underwriter MUST gross up the net income and use it when determining capacity.

Teachers’ Income Teachers may be paid on a 9-month, 10-month or 12-month basis. As such, a current year-to-date paystub dated within 30 days of application date may not be available. Income structure must be determined before calculating qualifying income. If the borrower is on a pay structure other than 9-months a written VOE, or valid contract is needed to verify pay.

Tip Income Tip income, averaged over a two-year period, may be included for loan qualification purposes, provided it meets the following requirements and documentation is provided:

• The borrower must have a two-year history evidencing receipt of tip income. • The tip income must be stable or increasing, and likely to continue. • Provide a Written Verification of Employment Letter or two years of personal income tax returns (including W-2’s). • A current paystub with year-to-date earnings for the most recent 30 days.

Note: If the tip income is not reported on the pay stub or income tax returns, it may not be used for qualifying or as a compensating factor.

Trailing Income IApprove Lending does not currently allow trailing income from any borrower.

Trust or Estate Income Trust income may be used if it is properly documented:

Must be an irrevocable trust Verify distribution amount for previous year. (May be reported on Schedule E of personal tax returns) Copy of the Trust Agreement or the trustee’s statement confirming the amount, frequency, and duration of the payments The income must be guaranteed to continue for at least three years Trust fund must have enough remaining assets to guarantee 3 yrs continuance Lump sum distributions made before loan closing may be used for the down payment, or closing costs if they are verified by a copy of the check or the trustee’s letter shows the distribution amount

Unemployment and Welfare Unemployment income is an acceptable source of income, provided the following can be documented:

Evidence the borrower has received unemployment for past 2yr as denoted on the most recent 2yrs personal tax returns. Unemployment is common for the position (seasonal worker). Letter from the employer stating the date borrower will return to work.

Union Workers Union workers are members of a specific trade union and are often skilled tradesperson. (E.g. electricians, plumbers, roofers, etc) Workers can work for a single employer on a long-term basis or for more than one employer throughout the year. In order to use income from a union worker, the borrower must be currently employed and provide the following:

Most recent two years tax returns, and All W-2 forms from all employers for the past (2) years, and A current paystub, and Written verification that the borrower has been part of the union for the past two years and is currently an active member Verbal verification the borrower is currently still working

This policy does not apply to borrowers who are employed by a traditional employer (E.g. Ford, GM, etc) but rather are members of a trade union such as a carpenters union. Income will be calculated using the following method:

Previous 2 year W-2 income – past 2 years 2106 expense / 24 months

Note: If income has declined as evidence per YTD earnings then income must be calculated using Previous Year W-2 income – last year’s 2106 expense / 12 months.

VA Benefits These benefits must be documented by letter or distribution forms from the Veterans Administration and must continue for at least three years. VA Education benefits are not acceptable income because they are offset by education expenses.

For VA Disability and VA Retirement refer to those sections for documentation requirements. Unacceptable Income IApprove Lending will not accept the use of any income or compensation for qualifying borrowers whose source is not covered in these guidelines.

Examples of these types of unacceptable income included by not limited to:

The systematic withdraw of funds from a brokerage, savings or checking account Unstable income (such as side jobs, under-the-table work, etc)

LIABILITIES

Contingent Liabilities In calculating the borrower’s recurring expenses, certain debts may be excluded. These are limited only to:

Debts paid by third party Court ordered debts

Excluding Debt Obligations Paid by Others Obligations may only be excluded if evidence is provided that loan was co-signed by the party making the payments and if all the following documentation is provided:

• 12 months of canceled checks that show payments have been made in full by another party. If the account or

loan has been in existence for less than 12 months, the full payment of the co-signed account is considered a liability and must be used in calculating the debt ratio.

• Verification that there have been no delinquencies on the account during the most recent 12 months .

NOTE: 12months cancelled checks/proof of another party paying is insufficient unless documentation is provided to show party making payments is legally obligated to do so

Court Ordered Debt • A copy of the pertinent pages from the court order, showing assignment of the debt to another party AND • Documentation of any ownership transfer (as applicable)

Monthly Debt Payments

. The monthly debt payment is the sum of the following monthly charges: Monthly housing expense (PITIA) for all properties. Payments on all installment debts with more than 10 months of payments remaining.

o The only exception to this policy is that payments on all automobile and non-automobile leases, regardless of the remaining number of payments, must be included in the calculation of recurring monthly expenses.

Alimony, child support, or maintenance payments. Monthly payments (or 5% of the outstanding balance if a monthly payment is not provided) on revolving

accounts, open accounts, and unsecured lines of credit (all considered to be open-ended) regardless of the balance unless instructed to be handled otherwise per the applicable AUS decision.

Aggregate negative net rental income from all investment properties owned. Monthly mortgage payment for second home and departing residence. Monthly payment amount on an existing HELOC secured by property other than the subject property. The

payment amount shown on the credit report is used to calculate the debt-to-income ratio. If the payment amount is not shown on the credit report, use 1% of the total line amount to calculate the monthly payment amount.

Payments on all deferred loans (for instance, student loans and loans in forbearance). In all cases, deferred loan payments must be included as a recurring monthly expense. If a payment is not indicated on the borrower’s credit report, a copy of the borrower’s payment letter is required

to determine the payment OR a payment equal to 2.5% of the balance. Business expenses incurred by the borrower that are not reimbursed by the employer must be included in the

debt ratio calculation. This average must be subtracted from the borrower’s monthly income. Collection accounts must include a $10 monthly payment

Deferred Student Loans

Deferred Installment Debt Deferred installment debts, such as deferred student loans, must be included as part of the borrower’s recurring monthly debt obligations. If the borrower’s credit report does not indicate the monthly amount that will be payable at the end of the deferment period, the lender must obtain copies of the borrower’s payment letters or forbearance agreements so that a monthly payment amount can be determined and used in calculating the borrower’s total monthly obligations.

Exception: For a student loan, in lieu of obtaining copies of payment letters or forbearance agreements, the lender can calculate a monthly payment using no less than 2% of the outstanding balance as the borrower's recurring monthly debt obligation. However, if any documentation is provided by the borrower or obtained by the lender that indicates the actual monthly payment, that figure must be used in qualifying the borrower.

Lease Payments

Lease payments must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease. This is because the expiration of a lease agreement forrental housing or an automobile typically leads to either a new lease agreement, the buyout of theexisting lease, or the purchase of a new vehicle or house.

Payoff Of Debt to Qualify

Use of gift funds for debt payoff is acceptable The payoff of revolving debt to qualify the borrower is allowed with the following documentation requirements:

⎜ Prior to Closing a Credit supplement showing a zero balance and closed account is required

EXCEPTION REQUIREMENT TO PAYOFF DEBT TO QUALIFY THROUGH CLOSING/ESCROW: Payoff through escrow will require an exception and will be allowed on a case by case basis. If the exception is approved the following documentation will be required:

Statement from escrow documenting the payoff and the request for account closure If the borrower does not qualify with the credit report payment then they must sign a certification authorizing escrow to

close the accounts. A copy of this letter must be included in the loan file. **Refer to http://www.ialmortgage.com for a copy of the form**

Note: For purchase or limited cash-out refinance, the Client must manually reduce the borrower’s liquid assets in the AUS by the amount being paid off and resubmit the loan case file to the AUS. This manual reduction of the assets is not required for cash-out refinance transactions.

Property Tax Calculation

Refinances: Use amount on title, unless property purchased in last 12 months. Then use the higher of actual amount

on title or 1.25% of previous purchased price. Purchases: Use 1.25% of the purchase price, unless tax information sheet completed by title shows a higher amount.

Qualifying Payment Conforming ARMS

3/1 & 5/1:Qualify at the greater of the fully indexed rate or note rate + 2% 7/1 & 10/1: Qualify at the great of the fully indexed or note rate

LOAN AMOUNTS

Maximum Loan Limits The following current maximum loan limits for conforming first mortgages are:

Number of Units 48 Contiguous States Alaska, Guam, Hawaii & Virgin Islands

Conforming Conforming1 Unit $417,000 $625,500 2 Units $533,850 $800,775 3 Units $645,300 $967,950 4 Units $801,950 $1,202,925

To determine the maximum loan amount by county, refer to the following Web sites. Fannie Mae: https://www.efanniemae.com/sf/refmaterials/loanlimits/index.jsp

Minimum Loan Amount

Minimum loan amount is $100,000 EXCEPTIONS are available by contacting the Lockdesk for a pricing hit

LOAN TERMS ARM Loans

Fixed Period: 3 years (3/1), 5 years (5/1), 7 years (7/1) or 10 years (10/1) Fixed Rate

10, 15, 20 and 30 year term

LTVs/High LTV’s

LTV Ratios

The following general requirements apply when determining loan-to-value (LTV) and combined-loan-to-value (CLTV) ratios. LTV: Loan-to-value is determined by dividing the loan amount by the lesser of the purchase price or appraised value. CLTV Ratio: Combined loan-to-value ratio is determined by dividing the sum of the unpaid principal balance of the

first mortgage and 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.

Note: Calculations must be taken out to two decimal places and always rounded upward to the next whole number. For example, 80.01% becomes 81%.

Transaction Calculation Based On: Purchase The LTV/CLTV is based on the lesser of the sales price or appraised value. Refinances Owner Occupied: The LTV/CLTV is based on the current appraised value

Second Homes: The LTV/CLTV is based on the lesser of the current appraised value Non-Owner: The LTV/CLTV is based on the lesser of the current appraised value or original sales price if acquired within 6 months of the application date.

MAX # OF FINANCED PROPERTIES

Number of Properties per Borrower Maximum number properties that can be financed are limited to 4. This includes joint or total ownership and is cumulative across all borrowers on the loan.

Multiple Mortgages to Same Borrower The occupancy of the property being financed determines the limitations on how many other financed one-to-four family properties the borrower may own. For all loans, the borrower's primary residence, subject property and any properties owned separately by a co-borrower must be included in the total. Joint ownership in residential property is considered the same as total ownership for limitation purposes.

Ownership in multi-family (5+units), commercial real estate or unimproved land is excluded from these limitations. Allowable Number of Financed Properties The following table lists the maximum number of financed properties a borrower may have including the subject property.

Occupancy Conforming

Owner-Occupied No restrictionsSecond Home 4Investment Property 4

The following are not included when evaluating the maximum number of financed properties: Ownership in multi-family (5+ unit) properties Ownership in commercial real estate Ownership in unimproved land

Note: The max number of financed properties allowed is the total amount of properties for all borrowers on the loan application and must also include any properties listed on the schedule E of the borrower(s) personal tax returns.

DETERMINING “Number of FINANCED” PROPERTIES

The following table describes how to apply the limitations based on the type of property ownership Type of Property Ownership Property Subject to

Limitations? Joint ownership of residential real estate. (This is considered to be the same as total ownership of an individual property.) Note: Other properties owned or financed jointly by the borrower and co-borrower are only counted once.

Yes

Ownership of commercial real estate. NoOwnership of a multifamily property consisting of more than four dwelling units.

No

Joint or total ownership of a property that is held in the name of a Corporation or an S Corporation, even if the borrower is the owner of the corporate and the financing is in the name of the Corporation of the S Corporation

No

Joint or total ownership of a property that is held in the name of a Corporation or an S Corporation, even if the borrower is the owner of the corporate however, the financing is in the name of the borrower

Yes

Ownership in a timeshare NoObligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property).

Yes

Ownership of a vacant (residential) lot NoJoint or total ownership of a property that is held in the name of a Limited Liability Company (LLC) or Partnership

Yes

Ownership of a Manufactured home and the land on which is it situation that is titled as real property

Yes

Ownership of a manufactured home on a leasehold estate not title as real property (chattel lien on the home)

No

Examples: If the borrower owns two financed investment properties and the co-borrower owns three other financed investment

properties, then jointly, the borrowers have five financed investment properties in addition to their principal residence(s), if applicable.

If the borrower is obligated on a mortgage for a residential property (though is not on title) and the co-borrower

owns a second home and an investment property (both of which are financed),then jointly, the borrowers have three financed properties that must be included in the count in addition to their principal residence(s), if applicable. If a borrower and a co-borrower are purchasing an investment property and they already own and/or are obligated on five other investment properties that they jointly own and/or are obligated on, the new property being purchased would be considered the borrowers' sixth investment property.

MORTGAGE INSURANCE

General Requirements Generally, mortgage insurance is required on all first mortgage loans with an LTV greater than 80%. Eligible Providers are: Radian, UGI and Genworth LPMI (Lender Paid MI) & Single Premium is available. Refer to MI Company rates and guidelines (see links below) Split Premium MI is NOT Available Reduce Mortgage Insurance coverage is not allowed

General steps for determining eligibility and obtaining Mortgage Insurance: 1. Determine MI Type (monthly or LPMI, Etc) 2. Price MI 3. Review MI Guidelines to determine if loan meets requirements 4. iAL Underwriter to order MI Certificate

LPMI (Lender Paid MI) & Single Premium is available. Refer to MI Company rates and guidelines (see links below)

Percent of MI Coverage The required percentage of MI coverage is determined by the type, term and LTV of the loan.

STANDARD MI COVERAGE

LTV 10-20 YEAR 30 YEAR 95.01-97 N/A 35% 90.01-95 25% 30% 85.01-90 12% 25% 80.01-85 6% 12%

Links to MI Companies

• GENWORTH http://www.mortgageinsurance.genworth.com/MIProducts/Default.aspx • RADIAN http://www.radian.biz/page?name=RatesAndGuidelinesStandardProgram • UNITED GUARANTY http://www.ugcorp.com/

NON-ARMS LENGTH TRANSACTIONS

Note: Non-arm’s length transactions are allowed ONLY on owner occupied transactions and may require additional documentation depending on the underwriter's assessment of risk.

For Sale by Owner (FSBO)

For Sale by Owner purchase transactions are allowed, but must be treated as non-arm’s length transaction. Non-Arm’s Length Transactions

A non-arm’s length transaction occurs when a personal or business relationship exists between the borrowers and the builder or lender. These transactions include:

Sales from existing landlord Employees working at the same company as the submitting loan officer Family sales or transfers Corporate sales or transfers

Realtors who are also the broker on the loan transaction Listing/Selling agents who are also the buyer Mortgagors employed in the real estate or construction trades who are involved in the construction, financing, or sale of the subject property

Some transactions involving principals or a lender or other vendor (such as an appraiser, settlement agent, title company) who is involved in the lending process of the subject property

Broker owned escrow companies are acceptable with the following documentation o They are properly licensed in their State o Title company will issue the CPL o Escrow has E & O and a Fidelity bond

Relationships between the Loan Officer and Realtor for the borrower is allowed on a Case by Case Basis

Ineligible Relationships Agent acting as both Loan Officer and Realtor for borrower

Borrower is an Interested Party This is not allowed if the builder, property seller and/or any party currently on title to the subject property is any of the following:

A company owned by the borrower A borrower who is related to the builder, property seller or any party currently on title as a Registered Agent Sales Agent Business Partner Employee The borrower may act as an interested party to the a sales transaction for the subject property; however, the borrower

pay not use any payment for services rendered from the transaction towards down payment, closing costs or reserve requirements. Including but not limited to:

Realtor commissions Broker commissions Sales associate commissions

Required Documentation for Non-Arms Length Transaction

Owner occupied transactions only. Evidence the existing mortgages on title are current (need payoff demands). An executed purchase or sales agreement. Verification that the borrower is not now, nor has been in the previous 24 months, on title to the subject property. Borrower must provide a written explanation stating the relationship to the seller and the reason for purchase. 5% of sales price must be verified as borrower’s own funds. (these funds do not have to be used towards down payment) unless LTV is </= to 80% then down-payment not required

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 allowed if they meet gifting guidelines. Agent acting as both Loan Officer and Realtor for borrower is not Allowed

CONVNTIONAL UNDERWRITING GUIDELINES


OCCUPANCY

Owner Occupied A principal residence is a 1-to-4 family property that is the borrower’s primary residence. Borrower occupies the property for the majority of the year. Property location is convenient to the Borrower’s principal place of employment The borrowers must occupy the subject property within 60 days of the close of escrow. If there is a rent or lease back agreement between the property seller and buyer the time period is limited to 30 days. If the borrower is purchasing a new primary residence, occupancy must be reasonable as determined by the

Underwriter.

Note: If the borrower has completed another Primary Residence transaction in the last 12 months the new transaction may only be done as owner occupied if the borrower can document a life change that supports occupancy (example; job transfer or increase in family size). Generally only one owner occupied transaction is allowed in a 12 month period.

Second Homes

A second home is a 1-unit SFR or detached PUD property that the borrower occupies in addition to the borrower’s primary residence.

Second homes must be located in a universally accepted vacation/resort area. If the property’s location in a vacation/resort type area is in question, consideration by exception basis will be given to

homes located in a metropolitan area the borrower frequently visits, but the borrower may not own any investment properties in that area.

If rental income has been claimed on the subject property within the past year, the home must be considered non- owner.

Investment Properties An investment property is a 1-to-4 family property that the borrower does not occupy. This definition is used whether or not the property produces income.

PROPERTY REQUIREMENTS General Requirements

1-4 Unit primary residence and investment properties 1 unit second homes Single Family residences attached and detached DU: Condo projects meeting FNMA Type P, Q and S requirements LP: Condo projects meeting FHLMC Streamline or Full review requirements PUD projects meeting type E and F requirements Modular, panelized and prefabricated homes

Building Permits

Building permits are required under any of the following conditions: • Whenever the Purchase Agreement or Sales Contract requires it. • If indicated in the appraisal report that there is an addition to the original structure, extensive remodeling, or

conversions of an existing structure. • Whenever a second story, kitchen, bath, multiple rooms, or detached unit has been added to the original

structure. Note: If the appraiser comments that the addition, remodeling, or conversion was permitted, a copy of the actual permit is not required.


Certificates of Occupancy

The underwriter must warrant that a Certificate of Occupancy has been issued if property is a new construction. Condo Warranty Requirements

REFER TO SEPARATE SECTION Legal Non-Conforming Use Properties

Legal non-conforming use properties are properties that do not conform to current zoning requirements but its use is permitted in its present state. This may be a result of a “grandfather clause” which stipulates that changes to the zoning ordinance do not affect a structure built prior to the law, only new structures.

IApprove Lending will originate a mortgage secured by a legal, non-conforming use property; however, the appraiser must confirm the ability to rebuild in the event of full or partial destruction, citing the specific source of his or her data, e.g., the name, position and telephone number at the municipal agency. A “rebuild letter” is also acceptable.

Log Homes

Comparable sales must be similar log style homes The property needs to be common/typical for the area, highest/best use need to be residential and the property need to

demonstrate market acceptable. Mixed Use

The mixed use must be allowed by zoning and subject must conform to zoning The mixed use should not exceed 25% of the gross living area or acreage Income may not be generated on the property for agricultural purposes Mixed use should not result in significant alteration to the property and should generate minimal amount of traffic noise The subject must be a single family residence The room layout must be reasonable for a residential home The appraiser must comment on any affect the mixed use has on the marketability with the subject’s neighborhood Industrial and manufacturing not allowed Borrower must be both the owner and operator of the business No hazardous materials used or stored at the mortgage premises

Multiple Lots/Parcels IApprove Lending typically lends on properties that have only one tax parcel number. In certain circumstances, division of the lot/parcel is necessary, as when the plot is located on two sides of a public way.

Multiple lots/parcels are eligible with the following requirements:

• The lots/parcels must be adjoining. • The lots/parcels must be zoned residential. • Only one lot/parcel may have a dwelling unit. • Adjoining lot/parcel may have either no improvements or limited, nonresidential improvements, such as a garage. • PTF condition will be listed to instruct Title to confirm that our deed of trust is recorded against each lot/parcel

Private Well or Septic Facilities If the property has private well or septic facilities IApprove Lending requires a satisfactory certification under the following conditions: • The appraiser makes a comment that there appears to be a problem or requires an inspection. OR • The sales contract requires an inspection.

When private community facilities are used, the client should verify that the subject property has the right to access the system and that the facilities will be viable on an ongoing basis.


Properties Listed for Sale (within the past 6 months) Properties listed for sale are eligible for financing if the following criterion is met:

Copy of MLS cancellation showing property was withdrawn off market 1 day prior to application date Final appraised value must be reasonable based on lowest previously listed price of subject. Max LTV/CLTV for Cashout is 70%. Satisfactory signed LOE why property was listed for sale and removed. All occupancies are permitted

Rapid Appreciation Policy

Property with an increase in value of 20% or greater in the past 6 months is considered to have “rapid appreciation” and must follow these requirements:

Owner occupied only Verification that there is NO relationship between the parties of the transaction on either the current

transaction or any previous transactions Verification that the property seller and owner of record are one and the same. Appraisal Desk Review or Field Review must support value

Rural Properties with Excess Land Acreage

IApprove Lending will lend on properties that are residential in nature with no specific restriction is place on maximum acreage; however the following criteria must be met:

Working farms, ranches, orchards and commercial operations of any type are not permitted. The appraisal must show that such land/acreage is typical and readily marketable for the area. The primary dwelling generally must represent 70% of the overall value of the property Property must be appraised as current use (cannot value based on hypothetical reduced acreage)

Unpermitted Additions

If the property has an unpermitted addition, IApprove Lending will lend on this property if all the following apply:

The addition is minimal in nature The addition does not contain an unpermitted kitchen The appraiser gives no value to the addition. The appraiser must indicate it was completed in a workmanlike manner. The appraiser must comment the addition conforms to the neighborhood, and wont effect marketability. The appraiser must confirm use is legal per zoning. If the garage has been converted, the appraiser may not give value as a garage, and must comment on the cost to cure back to a garage not exceeding $5,000.

The property is not a multi-unit property with the unpermitted addition being an additional unit.

Note: No rental income can be used for guest homes, casitas or au pairs.


Unacceptable Properties

IApprove Lending does not lend on: Condotels and Hotel Condominiums Manufactured or Mobile homes 2-4 unit properties with detached units that can be subdivided Subject to deed restrictions that do not meet FNMA guidelines Properties that are unique to the area, including but not limited:

o GLA o Lot Size o Design o Consisting of additional structures (E.g. barns, workshops, in-law units)

Geodesic domes, dome homes, log cabins, A-Frames Homes located in Lava Zones 1 or 2 Properties located in possible earth slippage, landslide and potential environment hazards Properties with Chinese drywall Properties with Manufactured home on the property Income producing Properties containing (5) or more units Commercial Industrial Properties without a heating source or septic systems that aren’t common for the subject property’s area Attached Single Family Residences that do not have a common wall agreement Undeveloped land Land developments Agricultural properties, such as farms, ranches, orchards Timeshare or segmented ownership properties Houseboats Multi-dwelling PUDs Residences lacking kitchen and full bathroom facilities Properties in less than average condition

PROPERTY INSPECTIONS

State and Local Requirements IApprove Lending will generally rely on the appraiser and Realtor (via the sales contract) for notification or mandatory

state or local inspections.

Termite, Well and Septic Inspections Properties under one year old require mandatory inspection, treatment and testing, even if previously occupied. For existing properties over one year old, inspection and/or testing is only required if:

o The appraisal indicated there may be a problem or that problems are common in the area. o Mandated by the state or local jurisdiction (see below) o Required by sales contract. o A water purification system is present. If the water supply does not test safe without the purification

system, then the requirements in ML 92-18 must be met. Wells and Other Water Systems: Refer to FHA Single Family Reference Guide Ch 1, Pg 1-21 Septic Systems: Refer to FHA Single Family Reference Guide Ch 1, Pg 1-20


QUALIFYING RATE

• Fixed Rate Qualify at Fully Amortizing Note Rate • 3/1 and 5/1 ARM’s qualify at Note Rate + 2% • 7/1 and 10/1 ARM’s qualify at Note Rate

QUALIFYING RATIOS

IApprove Lending will follow AUS without limitation on DTI

Note: If the loan requires mortgage insurance, refer to applicable mortgage insurer’s guidelines for maximum debt to income ratios

REFINANCE

A refinance mortgage is a mortgage whose proceeds are used to pay off an existing mortgage or mortgages secured by the subject property, with the creation of a new mortgage to the same borrower.

Rate and Term Refinance

IApprove Lending will consider transactions meeting the following criteria to be Rate/Term (i.e., No Cash-out) refinances:

A refinance of the subject property may not have been a cashout transaction in the last 6 months. o If the credit report shows a refinance in the last 6 months, a copy of the final hud is required. o Recording date of existing mortgage to note date of current mortgage is what is used to calculate the six months.

Pay off of the current mortgage (principal balance plus accrued interest, and any required prepayment penalty, only; other costs such as late fees and past-due amounts may not be paid with the new loan)

If the first mortgage is a Home equity Line of Credit (HELOC) a copy of the HUD-1 Settlement Statement from the borrower’s purchase of the subject property must be provided evidencing the proceeds were used in their entirety to acquire the subject property

Pay off (as defined above) of any subordinate mortgage lien that was used in its entirety to acquire the subject property - regardless of seasoning

A copy of the HUD-1 Settlement Statement from the borrower’s purchase of the subject property must be provided evidencing that any subordinate financing was used in its entirety to acquire the subject property

Standard loan fees (e.g., closing costs on the new mortgage; prepaids, such as interest, taxes, insurance, etc; and points) Incidental cash to the borrower not to exceed the lesser of $2000 or 2% of the principal balance of the new loan amount. If

the borrower is receiving over the maximum $2000 or 2%, a principle curtailment may be applied to a max $1500 and still consider this loan a rate and term.

Note: Delinquent property taxes or HOA dues cannot be included in the loan amount on a rate-and-term refinance.

Note: If the final HUD shows a lesser draw amount on HELOC than current balance reflected on the credit report, the loan must be considered a cashout.

Note: The payoff of a junior lien, regardless of age, is acceptable for the transaction to be considered a rate/term refinance when the junior lien on the property is being paid by funds brought to closing by the borrower, not by the proceeds of the rate/term refinance. Existing secondary fees, such as re-conveyance fees that are charged at closing, may be paid by the proceeds of the rate/term refinance.

Note: For loans which are eligible financing per the Rate and Term guidelines and are which also classified by the AUS as DU Refi plus eligible, the DU and guidelines must be adhered to for both sets of guidelines, ultimately resulting in the max cash in hand at the close of escrow as $250.

Note: If the subject property is a 2nd home or Investment property and has been acquired in the past 6 months from the application date, please reference the “LTV/CLTV Calculations” section of the guidelines for maximum LTV/CLTV limits.


Rate-Term: Divorce or Inheritance Buyout

Purpose of the Refinance Requirements Documentation RequirementsThe “buyout” of the interest of one owner or beneficiary, such as in an inheritance settlement

Allowed. The borrower who will be acquiringsole ownership must receive no cash out from the transaction, with the exception of incidental cash back. Incidental cash back may not exceed the lesser of 2% of the principal amount of the new mortgage or $2000.

A copy of the will, probate court approval, deed,or other documentation substantiating the transfer.

The “buyout” of the interest of a spouse, domestic partner, fiancée, or fiancé

Allowed with the following restrictions:The subject property must have been jointly owned by both borrowers for at least 12 months before the date of the loan application. Both borrowers must be able to demonstrate that they occupied the subject property as their principal residence. The borrower who will be acquiring sole ownership must receive no cash out from the transaction, with the exception of incidental cash back. Incidental cash back may not exceed the lesser of 2% of the principal amount of the new mortgage or $2000.

A copy of the divorce decree, propertyseparation agreement, or other written agreement that states the terms of the property transfer and the proposed disposition of the proceeds from the refinance. A copy of one of the following items may be used to satisfy the proof of occupancy:

Bank statement Credit card bill Phone bil

Cash Out

A cash-out refinance involves a new mortgage loan in which the cash back exceeds the lesser of 2% of the new mortgage principal balance or $2,000 and is used to pay off the unpaid principal balance of the existing first mortgage and the amount required to satisfy any outstanding subordinate mortgage liens, no matter how old.

Cash Out /Delayed Financing EXCEPTION

he past six months are eligible for a cashout refinance if all of the

ual documented amount of the borrower's initial investment in g costs, prepaid fees, and points (subject to the maximum saction. ch confirms that no mortgage financing was used to obtain the subject

are documented (such as, bank statements, personal loan documents,

are met and cash-out pricing is applied.

Borrowers who purchased the subject property within t following requirements are met:

The new loan amount can be no more than the actpurchasing the property plus the financing of closinLTV/CLTV/HCLTV ratios for the transaction).

The purchase transaction was an arms-length tran The transaction is documented by the HUD-1, whi

property. The sources of funds for the purchase transaction

HELOC on another property). All other cash-out refinance eligibility requirements

Note: The preliminary title search or report must not reflect any existing liens on the subject property. If the source of funds to acquire the property was an unsecured loan or HELOC (secured by another property), the new HUD-1 must reflect that source being paid off with the proceeds of the new refinance transaction

These loans are an Exception and a .75% pricing hit will apply for approved transactions


Cash Out From Concurrent Secondary Financing

The borrower may receive cash out from the proceeds of the concurrent secondary lien as long as the CLTV is within loan program guidelines and the first lien meets the seasoning requirements.

If the first lien is a rate-and-term refinance and cash out is received from concurrent secondary financing, the first lien may remain classified as a rate-and-term refinance.

Max Amount of Cash Out

There is no cash in hand limit, Amounts greater than $20,000 must be accominied by a signed and dated detailed LOE from all borrowers explaining the purpose/use of the cashout.

Net Tangible Benefit (NTB)

All refinance transactions must contain a net tangible benefit to the borrower. These include but are not limited to: o Moving from an ARM loan to a Fixed rate loan o Shortening the term of a Fixed rate loan (e.g., from 30 years to a 15 or 20 year fixed) o Reducing the interest rate by 0.25% or more on a fixed rate loan o Providing cash in hand o Reducing overall monthly payments (paying off debt)

Seasoning

If the borrower has owned the property for less than six months preceding the application date, the borrower is ineligible for a cash-out refinance transaction. Unless they qualify for delayed financing exception (See Above)

Continuity of Obligation

Borrowers Not On Current Mortgage and Note

On refinance transactions, at least one borrower on the existing mortgage must be on the new mortgage. Any borrower(s) not on the existing mortgage must meet all of the following requirements to be eligible for financing:

Clearly document residency for the past 12 months in the subject property Be able to demonstrate an immediate relative relationship with the current obligator Have been vested on title for at least the past 12 months.

Or The existing loan being refinanced and the title have been held in the name of a natural person or LLC, as long as the

borrower was a member of the LLC prior to transfer. Transfer of ownership from a corporation to a borrower does not meet the continuity of obligation requirements. LLCs are not acceptable forms of title for the new loan transaction.

Or The borrower recently inherited or was legally awarded the property (for example, divorce or separation).

Or If the borrower has been on title for at least 6 months but does not meet any of the above requirements then the max LTV is 50%

Note: Immediate relative is defined as the borrower’s spouse, child, or other dependent, or any individual related by blood (sibling, parent, grandparent, aunt, uncle, niece, nephew or 1st cousin), marriage, adoption, or legal guardianship. VOM and cancelled checks are required for payment verification.

Note: Spouses can be added to title at closing on refinance transactions.


RESERVES Cash-Reserves Requirements

Definition of PITIA for Reserves Calculations

For all loans, the reserves calculation for a financed property should be based on the monthly housing expense of the financed property. The monthly housing expense (defined as PITIA) includes the all of the following (as applicable): • Principal and interest payments on the mortgage • Hazard and flood insurance premiums • Payments on subordinate financing • Real estate taxes and • Any applicable charges for:

o Mortgage insurance premiums o Leasehold payments o Homeowner’s association dues or condominium maintenance fees, excluding utility charges o Co-op maintenance fees o Special Assessments o Payments on secondary financing o Ground rents

Reserves Requirements

Liquid reserves are required per AUS findings and FNMA/FHLMC requirements. Assets must be verified per the AUS findings or the below (whichever is GREATER)

General Requirements

o Interest Only loans: 24 months (as required by DU) Reserve Requirements for Borrower with Multiple Financed Properties

o 2-4 unit Primary Residence: Follow AUS findings o Second Home: 2 months PITIA for subject + 2 months for each additional property o Non-owner: 6 months PITIA for subject + 2 months for each additional property

Reserve Requirements for Borrower Converting a Primary Residence

REFER TO SEPARATE SECTION “CONVERSION OF PRIMARY RESIDENCE”

Note: When multiple loans are concurrently closed for the same borrower, each loan must individually meet the cash-reserve requirements for the property type. Note: Proceeds from the subject transaction may never be used to satisfy minimum reserve requirements.


SUBORDINATE FINANCING Subordinate Financing Documentation Requirements

Lien must be recorded and clearly subordinate to the first mortgage lien. All loans with subordinate financing must meet the established LTV and CLTV program requirements along with the following:

A copy of the Original Note/Agreement for UNDW to verify acceptable terms o No balloon payment will be due within the next 5 years o No Pre Payment Penalty o The note shows at a regular monthly payment, that at a minimum covers the monthly interest due; with NO

Negative Amortization o If the interest rate is fixed, the terms may not be more than 2% below the market rate for Fannie Mae

second mortgages at the time of origination. To locate the market rate, refer to the Historical Daily Yields under Reference Materials on the efanniemae.com website.

o If the loan has a variable rate, the monthly payment must remain constant for each 12 month period over the term of the loan (this does not apply to HELOCs).

o If the subordinate financing is a HELOC, the repayment terms must provide for regular monthly payments that require the monthly interest due paid so that negative amortization will not occur.

o HELOCs including HELOCs that have been frozen by the lender, with or without a balance, must be calculated into the CLTV.

The full original recorded line amount must be used to determine LTV/CLTV eligibility unless a modification/resubordination agreement is recorded prior to or concurrently with the subject transaction. The following is required:

Modification HELOC Requirements HELOC must be PERMANENTLY reduced (frozen HELOC’s with a temporary reduction must qualify at the full line amount)

o A recordable Modification document must be provided and record concurrently with our transaction o If a recordable Modification document is not available (but the borrower can obtain a letter that states the line is

PERMANENTLY reduced) then verbiage confirming the reduced line amount may be added to the subordination agreement to record with our transaction

Seller-carry back /Private 2nds

Allowed if the above referenced requirements are met. o A copy of the note, deed and fully executed subordination agreement (if applicable) is required o Max CLTV of 80%

Ineligible Subordinate / 2nd Mortgages

IApprove Lending will not close mortgages that are subject to subordinate financing if: The subordinate mortgage has wraparound terms, combining the indebtedness of the first mortgage with the subordinate mortgage.

The subordinate mortgage does not provide for either regular monthly payments of principal and interest, or interest only. (silent seconds, forgivable silent 2nds)

The subordinate mortgage allows negative amortization. (Negam) – You may modify the current second lien, removing the negam verbiage

The subordinate lien is cross collateralized. Seller carry with LTV/CLTV that exceeds 80%.

CONVENTONAL UNDERWRITING GUIDELINES Housing Expense Ratio

For existing HELOCs use current monthly payments as shown on credit report. If the line has a balance and no monthly payment reflected on credit, use 1% of line limit.

When calculating the total housing expense ratio, the payment for the secondary financing must be included. For new HELOCs, calculate the monthly payment using the higher of 1% of the total line amount OR actual amount on new note.

For HELOCs with written evidence of a line modification after the application date, the modified limit is used to calculate the 1% monthly payment. A copy of the original HELOC terms is always needed. TITLE REQUIREMENTS

Amount of Policy Title policies may not be for less than the original principal loan amount. Endorsements Many title exceptions require a title endorsement. The applicable endorsement must be included on all title policies or binders. Indemnification The attorney for the closing agents must provide IApprove Lending with an Indemnification Letter, also referred to as an Insured Closing Protection Letter ( CPL ), from the underwriting title company. Name on Policy The title policy must name IApprove Lending LLC, and/or its assigns, as the insured. Title must be vested in the mortgagors’ names. Purpose of Title Insurance Title insurance is written by a title company to protect owners against loss if title to a property is imperfect, and to evidence ownership of a property and its lawful possession. Title Insurance Requirements The title policy must be written on American Land Title Association (ALTA) 2006 standard policy form with the ALTA Form 8.1, Environmental Protection Lien Endorsement.

UNDERWRITING

As described in the table below, IApprove Lending closes loans using the following methods:

UNDERWRITING METHOD ELIGIBLE ACCEPTABLE AUS RESULTManual DU LP

No Yes Yes

N/A Approve/Eligible Accept/Eligible

Factors to Consider When evaluating the borrower’s capacity, consider the following factors:

Payment shock Reserves are low, adequate or substantial Income stability Debt ratios suggest questionable affordability.

CONVENTIONAL UNDERWRITING GUIDELINES - …CONVENTIONAL UNDERWRITING GUIDELINES Conforming Loan...

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