# Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans

Directive Number: 4155.1

[Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit
Mortgage Loans
1](#mortgage-credit-analysis-for-mortgage-insurance-on-one--to-four-unit-mortgage-loans)

[CHAPTER 1 UNDERWRITING THE MORTGAGE
7](#chapter-1-underwriting-the-mortgage)

[1-1 WHAT FHA INSURES 7](#__RefHeading___Toc175360959)

[SECTION 1: OCCUPANCY STATUS 7](#section-1-occupancy-status)

[1-2 PRINCIPAL RESIDENCES 7](#__RefHeading___Toc175360961)

[1-3 SECONDARY RESIDENCES 9](#__RefHeading___Toc175360962)

[1-4 INVESTMENT PROPERTIES 9](#__RefHeading___Toc175360963)

[1-5 NONPROFIT ORGANIZATIONS AND STATE AND LOCAL GOVERNMENT AGENCIES
10](#__RefHeading___Toc175360964)

[SECTION 2: MAXIMUM MORTGAGE AMOUNTS
12](#section-2-maximum-mortgage-amounts)

[1-6 MAXIMUM MORTGAGE AMOUNT 12](#__RefHeading___Toc175360966)

[1-7 MAXIMUM MORTGAGES/CASH INVESTMENT REQUIREMENTS FOR PURCHASE
TRANSACTIONS 13](#__RefHeading___Toc175360967)

[1-8 TRANSACTIONS THAT AFFECT MAXIMUM MORTGAGE CALCULATIONS
16](#__RefHeading___Toc175360968)

[SECTION 3: SETTLEMENT REQUIREMENTS
19](#section-3-settlement-requirements)

[1-9 SETTLEMENT REQUIREMENTS 19](#__RefHeading___Toc175360970)

[SECTION 4: REFINANCE TRANSACTIONS
21](#section-4-refinance-transactions)

[1-10 REFINANCING 21](#__RefHeading___Toc175360972)

[1-11 MORTGAGE AMOUNTS ON REFINANCES 22](#__RefHeading___Toc175360973)

[1-12 STREAMLINE REFINANCES 23](#__RefHeading___Toc175360974)

[SECTION 5: SECONDARY FINANCING 28](#section-5-secondary-financing)

[1-13 SECONDARY FINANCING 28](#__RefHeading___Toc175360976)

[CHAPTER 2 MORTGAGE CREDIT ANALYSIS
31](#chapter-2-mortgage-credit-analysis)

[2-1 OVERVIEW 31](#__RefHeading___Toc175360978)

[2-2 MORTGAGE ELIGIBILITY (BORROWERS) 32](#__RefHeading___Toc175360979)

[SECTION 1: CREDIT HISTORY 34](#section-1-credit-history)

[2-3 ANALYZING THE BORROWER'S CREDIT 34](#__RefHeading___Toc175360981)

[2-4 CREDIT REPORT REQUIREMENTS 36](#__RefHeading___Toc175360982)

[2-5 ELIGIBILITY FOR FEDERALLY-RELATED CREDIT
38](#__RefHeading___Toc175360983)

[SECTION 2: EFFECTIVE INCOME 40](#section-2-effective-income)

[2-6 STABILITY OF INCOME 40](#__RefHeading___Toc175360985)

[2-7 SALARIES, WAGES, AND OTHER FORMS OF EFFECTIVE INCOME
40](#__RefHeading___Toc175360986)

[2-8 EMPLOYMENT BY FAMILY-OWNED BUSINESSES
45](#__RefHeading___Toc175360987)

[2-9 SELF-EMPLOYED BORROWERS 45](#__RefHeading___Toc175360988)

[SECTION 3: BORROWER\'S CASH INVESTMENT IN THE PROPERTY
48](#section-3-borrowers-cash-investment-in-the-property)

[2-10 FUNDS TO CLOSE 48](#__RefHeading___Toc175360990)

[SECTION 4: LIABILITIES 53](#section-4-liabilities)

[2-11 TYPES OF LIABILITIES 53](#__RefHeading___Toc175360992)

[SECTION 5: BORROWER QUALIFYING 55](#section-5-borrower-qualifying)

[2-12 DEBT-TO-INCOME RATIOS 55](#__RefHeading___Toc175360994)

[2-13 COMPENSATING FACTORS 55](#__RefHeading___Toc175360995)

[SECTION 6: SPECIAL UNDERWRITING INSTRUCTIONS
56](#section-6-special-underwriting-instructions)

[2-14 Temporary Interest Rate Buydowns 56](#__RefHeading___Toc175360997)

[2-15 ADJUSTABLE RATE MORTGAGES (ARMs) 58](#__RefHeading___Toc175360998)

[2-16 CONDOMINIUM UNITS--UTILITY EXPENSES
58](#__RefHeading___Toc175360999)

[2-17 CONSTRUCTION--PERMANENT MORTGAGE PROGRAM
58](#__RefHeading___Toc175361000)

[2-18 MORTGAGE INSURANCE FOR DISASTER VICTIMS \[Section 203(h)\]
60](#__RefHeading___Toc175361001)

[2-19 ENERGY-EFFICIENT HOMES (EEH) 61](#__RefHeading___Toc175361002)

[2-20 ENERGY EFFICIENT MORTGAGE (EEM) PROGRAM
62](#__RefHeading___Toc175361003)

[2-21 Advance Mortgage Payments Prohibited
64](#__RefHeading___Toc175361004)

[CHAPTER 3 DOCUMENTATION AND OTHER PROCESSING REQUIREMENTS
64](#chapter-3-documentation-and-other-processing-requirements)

[SECTION 1: UNDERWRITING DOCUMENTATION
65](#section-1-underwriting-documentation)

[3-1 APPLICATION PACKAGE 65](#__RefHeading___Toc175361007)

[3-2 DOCUMENTATION STANDARDS 67](#__RefHeading___Toc175361008)

[3-3 REAL ESTATE CERTIFICATION 67](#__RefHeading___Toc175361009)

[3-4 AMENDATORY CLAUSE 68](#__RefHeading___Toc175361010)

[SECTION 2: PROCESSING REQUIREMENTS
68](#section-2-processing-requirements)

[3-5 POWER OF ATTORNEY 68](#__RefHeading___Toc175361012)

[3-6 LOAN APPLICATION DOCUMENT PROCESSING
69](#__RefHeading___Toc175361013)

[3-7 SEVEN-UNIT LIMITATION 70](#__RefHeading___Toc175361014)

[3-8 HOTEL AND TRANSIENT USE 70](#__RefHeading___Toc175361015)

[3-9 SALES CONTRACTS AND LOAN CLOSING 70](#__RefHeading___Toc175361016)

[3-10 LENDER RESPONSIBILITY AT CLOSING 70](#__RefHeading___Toc175361017)

[3-11 FEDERAL STATUTES AND REGULATIONS 71](#__RefHeading___Toc175361018)

[3-12 FHA-INSURED MORTGAGES FOR HUD EMPLOYEES
74](#__RefHeading___Toc175361019)

[CHAPTER 4 ASSUMPTIONS 74](#chapter-4-assumptions)

[4-1 GENERAL 74](#__RefHeading___Toc175361021)

[4-2 RESTRICTIONS OF THE HUD REFORM ACT OF 1989
74](#__RefHeading___Toc175361022)

[4-3 RELEASE FROM LIABILITY 74](#__RefHeading___Toc175361023)

[4-4 CREDITWORTHINESS REVIEW PROCESSING
75](#__RefHeading___Toc175361024)

[4-5 LTV REDUCTION REQUIREMENTS 75](#__RefHeading___Toc175361025)

[APPENDIX I 76](#__RefHeading___Toc175361026)

[APPENDIX II 77](#__RefHeading___Toc175361027)

FOREWORD

This Handbook describes the basic mortgage credit underwriting
requirements for single-family (one to four units) mortgage loans
insured under the National Housing Act. For each loan FHA insures, the
lender must establish that the borrower has the ability and willingness
to repay the mortgage debt. This decision must be predicated on sound
underwriting principles consistent with the guidelines, rules, and
regulations described throughout this Handbook and must be supported by
sufficient documentation.

These underwriting guidelines discuss the types of transactions and
properties eligible for mortgage insurance, and FHA\'s requirements for
determining the borrower\'s ability and willingness to repay the debt.
Information regarding valuation and architectural requirements can be
found in HUD Handbooks 4150.1 REV-1 and 4145.1 REV-2,

CHG-1, respectively. These underwriting guidelines apply to mortgages
insured under Sections 203(b) and 234(c) of the National Housing Act,
and are also generally applicable to other single-family mortgage
insurance programs (except where inconsistent with special features of
those programs). Other single-family mortgage insurance programs are
described in HUD Handbook 4000.2 REV-2.

This Handbook provides direction to lenders and FHA staff and is based
on FHA \'s experience in insuring single-family mortgages. While it is
not FHA\'s intent to insure mortgages that are likely to result in
default, regardless of the borrower\'s equity, lenders may exercise some
discretion in the underwriting of home mortgages where the borrower\'s
financial and other circumstances are not specifically addressed by this
Handbook. However, lenders are expected to exercise both sound judgment
and due diligence in the underwriting of loans to be insured by FHA. For
ease of reading, we have chosen to use "lender" in lieu of "mortgagee"
throughout this user guide. However, "lender" is to be interpreted as a
FHA-approved mortgagee as described in 24 CFR § 202.10. Similarly,
"loan" is to be interpreted as "mortgage" as also described in 24 CFR §
202.10

Questions not addressed in the text should be directed to the
appropriate Home Ownership Center (HOC) or the Director, Office of
Single Family Program Development, HUD Headquarters, Robert Weaver
Building, 451 Seventh St., SW, Washington, DC 20410-8000.

References:

1\) 4000.2 REV-2 Mortgagees\' Handbook, Application through Insurance

2\) 4145.1 REV-2, CHG-1, Architectural Processing and Inspections

3\) 4150.1 REV-1 Valuation Analysis for Home Mortgage Insurance

4\) 4330.1 REV-5 Administration of Insured Home Mortgages

5\) Code of Federal Regulations, Title 24 (24 CFR). Codifies the general
and permanent rules of the Department.

TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION

1-1 WHAT FHA INSURES 1-1

SECTION 1: OCCUPANCY STATUS

1-2 PRINCIPAL RESIDENCES 1-1

1-3 SECONDARY RESIDENCES 1-1

1-4 INVESTMENT PROPERTIES 1-1

1-5 NONPROFIT ORGANIZATIONS AND GOVERNMENT AGENCIES 1-1

SECTION 2: MAXIMUM MORTGAGE AMOUNTS

1-6 MAXIMUM MORTGAGE AMOUNT 1-1

1-7 MAXIMUM MORTGAGES FOR PURCHASE TRANSACTIONS 1-1

1-8 TRANSACTIONS THAT AFFECT MAXIMUM MORTGAGE CALCULATIONS 1-1

SECTION 3: SETTLEMENT REQUIREMENTS

1-9 SETTLEMENT REQUIREMENTS 1-1

SECTION 4: REFINANCE TRANSACTIONS

1-10 REFINANCING 1-1

1-11 CALCULATING THE MORTGAGE AMOUNT ON REFINANCES 1-1

1-12 STREAMLINE REFINANCES 1-1

SECTION 5: SECONDARY FINANCING

1-13 SECONDARY FINANCING 1-1

CHAPTER 2 MORTGAGE CREDIT ANALYSIS

2-1 OVERVIEW 2-1

2-2 MORTGAGE ELIGIBILITY (BORROWERS) 2-1

2-3 ANALYZING THE BORROWER'S CREDIT 2-1

2-4 CREDIT REPORT REQUIREMENTS 2-1

2-5 CREDIT ELIGIBILITY REQUIREMENTS 2-1

SECTION 2: EFFECTIVE INCOME

2-6 STABILITY OF INCOME 2-1

2-7 SALARIES, WAGES, AND OTHER FORMS OF INCOME 2-1

2-8 EMPLOYMENT BY FAMILY-OWNED BUSINESS 2-1

2-9 SELF-EMPLOYED BORROWERS 2-1

SECTION 3: BORROWER'S CASH INVESTMENT IN THE PROPERTY

2-10 FUNDS TO CLOSE 2-1

SECTION 4: TYPES OF LIABILITIES

2-11 LIABILITIES 2-1

SECTION 5: BORROWER QUALIFYING

2-12 DEBT TO INCOME RATIOS 2-1

2-13 COMPENSATING FACTORS 2-1

SECTION 6: SPECIAL UNDERWRITING INSTRUCTIONS

2-14 TEMPORARY INTEREST RATE BUYDOWNS 2-1

2-15 ADJUSTABLE RATE MORTGAGES 2-1

2-16 CONDOMINIUM UNITS: UTILITY EXPENSES 2-1

2-17 CONSTRUCTION- PERMANENT MORTGAGE PROGRAM 2-1

2-18 MORTGAGE ASSISTANCE FOR DISASTER VICTIMS \[Section 203(h)\] 2-1

2-19 ENERGY EFFICIENT HOMES (EEH) 2-1

2-20 ENERGY EFFICIENT MORTGAGE (EEM) PROGRAM 2-1

CHAPTER 3 DOCUMENTATION AND OTHER PROCESSING REQUIREMENTS

SECTION 1: UNDERWRITING DOCUMENTATION

3-1 APPLICATION PACKAGE 3-1

3-2 DOCUMENTATION STANDARDS 3-1

3-3 REAL ESTATE CERTIFICATION 3-1

3-4 AMENDATORY CLAUSE 3-1

SECTION 2: PROCESSING REQUIREMENTS

3-5 POWER OF ATTORNEY 3-1

3-6 LOAN APPLICATION DOCUMENT PROCESSING 3-1

3-7 SEVEN-UNIT DOCUMENTATION 3-1

3-8 HOTEL AND TRANSIENT USE 3-1

3-9 SALES CONTRACT AND LOAN CLOSING 3-1

3-10 LENDER RESPONSIBILITY AT CLOSING 3-1

SECTION 3: FAIR HOUSING AND OTHER FEDERAL REQUIREMENTS

3-11 FEDERAL STATUTES AND REGULATIONS 3-1

3-12 FHA-PROCESSED HUD EMPLOYEE LOANS 3-1

CHAPTER 4 ASSUMPTIONS

4-1 GENERAL 4-1

4-2 RESTRICTIONS OF THE HUD REFORM ACT OF 1989 4-1

4-3 RELEASE FROM LIABILITY 4-1

4-4 CREDIT-WORTHINESS REVIEW PROCESSING 4-1

4-5 LTV REDUCTION REQUIREMENTS 4-1

APPENDICES

I. SINGLE FAMILY HOC JURISDICTIONS

II\. CLOSING COSTS AVERAGES FOR STATES FORMS RELEVANT TO HANDBOOK 4155.1

  ----------------- ------------------------------------- ----------------
  Form \#           Form Name                             OMB Approval
                                                          Number

  HUD 92564-VC      Valuation Condition-Notice to Lender  2502-0538

  HUD 92564-HS      Homebuyers Summary                    2502-0538

  HUD 92900-A       Addendum to URLA                      2502-0059

  URLA (FNMA 1003 / Uniform Residential Loan Application  N/A
  FHLMC 65)                                               

  HUD 92900-PUR     Mortgage Credit Analysis Worksheet    2502-0059
                    Purchase Money Mortgage               

  HUD 92900-WS      Mortgage Credit Analysis Worksheet    2502-0059

  HUD-1             Settlement Statement                  2502-0265

  GFE               Good Faith Estimate                   

  HUD 92300         Mortgagee Assurance of Completion     2502-0189

  URAR (FNMA 1004 / Uniform Residential Appraisal Report  N/A
  FHLMC 70)                                               

  HUD 92800.5B      Conditional Commitment-DE Statement   2502-0494
                    of Appraised Value                    

  VA-CRV            VA-Certificate of Reasonable Value    2900-0045

  HUD 92210         Request for Credit Approval of        2502-0036
                    Substitute Mortgagor                  

  HUD 92210.1       Approval of Purchaser and Release of  2502-0036
                    Seller                                

  HUD 92561         Borrower's Contract with Respect to   2502-0059
                    Hotel and Transient Use of Property   
  ----------------- ------------------------------------- ----------------

# 

# CHAPTER 1 UNDERWRITING THE MORTGAGE

[]{#__RefHeading___Toc175360959 .anchor}**1-1 WHAT FHA INSURES**.
[\<TOP\>](#_top) FHA insures mortgages on properties that consist of
detached or semi-detached dwellings, townhouses or row houses, and
individual units within FHA-approved condominium projects. Except as
otherwise stated in this Handbook, FHA\'s single-family programs are
limited to owner-occupied principal residences only. FHA will not insure
mortgages on commercial enterprises, boarding houses, hotels and motels,
tourist houses, private clubs, bed and breakfast establishments, and
fraternity or sorority houses.

# SECTION 1: OCCUPANCY STATUS

[]{#__RefHeading___Toc175360961 .anchor}**1-2 PRINCIPAL RESIDENCES**.
[\<TOP\>](#_top) A principal residence is a property that will be
occupied by the borrower for the majority of the calendar year. At least
one borrower must occupy the property and sign the security instrument
and the mortgage note for the property to be considered owner-occupied.
Our security instruments require a borrower to establish bona fide
occupancy in the home as the borrower\'s principal residence within 60
days after signing the security instrument with continued occupancy for
at least one year.

To prevent circumvention of the restrictions on FHA-insured mortgages to
investors, we generally will not insure more than one mortgage for any
borrower. Any person individually or jointly owning a home covered by a
mortgage insured by FHA in which ownership is maintained may not
purchase another principal residence with FHA mortgage insurance except
under the situations described below. Properties previously acquired as
investment properties are not subject to these restrictions.

We will not insure a mortgage if we conclude that the transaction was
designed to use FHA mortgage insurance as a vehicle for obtaining
investment properties, even if the property to be encumbered will be the
only one owned using FHA mortgage insurance. We do not object to
homebuyers using FHA mortgage insurance more than once if compatible
with the homebuyer's needs and resources as follows:

A. Relocations. If the borrower is relocating and re-establishing
residency in another area not within reasonable commuting distance from
the current principal residence, the borrower may obtain another
mortgage using FHA insured financing and is not required to sell the
existing property covered by a FHA-insured mortgage. The relocation need
not be employer mandated to qualify for this exception. Further, if the
borrower returns to an area where he or she owns a property with an
FHA-insured mortgage, it is not required that the borrower re-establish
primary residency in that property in order to be eligible for another
FHA insured mortgage.

B. Increase in Family Size. The borrower may be permitted to obtain
another home with an FHA-insured mortgage if the number of legal
dependents increases to the point that the present house no longer meets
the family\'s needs. The borrower must provide satisfactory evidence of
the increase in dependents and the property's failure to meet the
family\'s needs.

The borrower also must pay down the outstanding mortgage balance on the
present property to a 75 percent or lower loan-to-value (LTV) ratio. A
current residential appraisal must be used to determine LTV compliance.
Tax assessments, market analyses by real estate brokers, etc., are not
acceptable as proof of LTV compliance.

C. Vacating a Jointly Owned Property. If the borrower is vacating a
residence that will remain occupied by a co-borrower, the borrower is
permitted to obtain another FHA-insured mortgage. Acceptable situations
include instances of divorce, after which the vacating ex-spouse will
purchase a new home, or one of the co-borrowers will vacate the existing
property.

D. Non-Occupying Co-Borrower. A non-occupying co-borrower on property
being purchased with an FHA-insured mortgage as a principal residence by
other family members may have a joint interest in that property as well
as in a principal residence of their own with a FHA-insured mortgage.
(See paragraph 1-8 B for additional information).

Under no circumstances may investors use the exceptions described above
to circumvent FHA's ban on loans to private investors and acquire rental
properties through purportedly purchasing "principal residences."
Considerations in determining the eligibility of a borrower for one of
these exceptions are the length of time the previous property was owned
by the borrower and the circumstances that compel the borrower to
purchase another residence with an FHA-insured mortgage. In all other
cases, the purchasing borrower either must pay off the FHA-insured
mortgage on the previous residence or terminate ownership of that
property before acquiring another FHA-insured mortgage.

[]{#__RefHeading___Toc175360962 .anchor}**1-3 SECONDARY RESIDENCES**.
[\<TOP\>](#_top) A secondary residence is a property the borrower
occupies in addition to his or her principal residence. Secondary
residences are only permitted when the appropriate Home Ownership Center
(HOC) agrees that an undue hardship exists, meaning that affordable
rental housing that meets the needs of the family is not available for
lease in the area or within reasonable commuting distance to work, and
the maximum loan amount is 85 percent of the lesser of the appraised
value or sales price. Direct Endorsement (DE) lenders are not authorized
to grant hardship exceptions. Any request for a hardship exception must
be submitted by the lender in writing to the appropriate HOC. HOC
jurisdictions are listed in Appendix I. A borrower may have only one
secondary residence at any time. All the following conditions must be
met for secondary residences:

A. The secondary residence must not be a vacation home or otherwise used
primarily for recreational purposes; and

B. The borrower must obtain the secondary residence because of seasonal
employment, employment relocation, or other circumstances not related to
recreational use of the residence; and

C. There must be a demonstrated lack of affordable rental housing
meeting the needs of the borrower in the area or within a reasonable
commuting distance of the borrower\'s employment. Documentation to
support this must include:

1\. A satisfactory explanation from the borrower of the need for a
secondary residence and the lack of available rental housing in the area
that meets the need.

Written evidence from local real estate professionals who verify a lack
of acceptable rental housing in the area.

[]{#__RefHeading___Toc175360963 .anchor}**1-4 INVESTMENT PROPERTIES**.
[\<TOP\>](#_top) An investment property is a property that is not
occupied by the borrower as a principal residence or as a secondary
residence. With permission from the appropriate HOC, private investors,
including nonprofit organizations not meeting the criteria described in
paragraph 1-5 A, may obtain FHA-insured mortgages for the following
reasons:

A. Purchasing HUD Real Estate Owned (REO) properties. Owner occupancy is
not required when the jurisdictional HOC sells the property and permits
the purchaser to obtain FHA-insured financing on the investment
property.

B. Streamline refinancing without appraisals. See paragraph 1-12 for
additional qualifying information.

C. Underwriting Considerations:

Individual investors who credit qualify may assume mortgages made on
investment properties. This applies to the transactions described in
paragraphs 1-4 A and B, as well as to investment properties purchased
before the 1989 ban on investors that have been subsequently streamline
refinanced.

Qualifying ratios, the treatment of projected rental income, etc., are
described in Chapter 2, paragraph 2-7 M.

ARMs and graduated payment mortgages (GPMs) are not permitted on
investment properties.

Except for streamline refinances in which the mortgage was originally
insured in the name of a business, FHA will not insure loans made solely
in the name of a business entity (such as a corporation, partnership, or
sole proprietorship) or trust. One or more individuals, along with the
business entity or trust, must be analyzed for creditworthiness. The
individual(s) and the business entity or trust must appear on the
mortgage note. The business entity, trust, or individual(s) may appear
on the property deed or title. All parties appearing on the property
deed or title must also appear on the security instrument (i.e.,
mortgage, deed of trust, security deed).

[]{#__RefHeading___Toc175360964 .anchor}**1-5 NONPROFIT ORGANIZATIONS
AND STATE AND LOCAL GOVERNMENT AGENCIES**. [\<TOP\>](#_top) Nonprofit
organizations and state and local government agencies are permitted to
purchase properties with FHA-insured mortgages, subject to the
conditions listed below. These government and nonprofit organizations
are eligible for the same percentage of financing available on
owner-occupied principal residences. Nonprofit agencies may only obtain
FHA-insured fixed rate mortgages, and only an existing FHA-insured
mortgage is eligible for refinancing and may never result in equity
withdrawal.

A. Nonprofit Organizations. Nonprofit organizations that intend to sell
or lease the property to low- or moderate-income individuals (generally
defined as income not exceeding 115 percent of the applicable median
income) may obtain FHA-insured financing on rental property. The
appropriate HOC is responsible for determining the nonprofit agency\'s
eligibility to participate in FHA programs; the DE lender is responsible
for determining the agency's financial capacity for repayment. Lenders
also must verify that the agency is approved as a participating
nonprofit agency as of the date of underwriting. Lenders can verify
nonprofit approval status by visiting the HUD Website at
[www.hud.gov](http://www.hud.gov/).

B. Nonprofit Approval. In order to qualify to purchase properties with
FHA-insured mortgages and to obtain the same percentage of financing
available to owner-occupants, HUD must approve the nonprofit agency. The
nonprofit must:

1\. Be of the type described in Section 501(c)(3) as exempt from
taxation under Section 501(a) of the Internal Revenue Code of 1986; and

Have a voluntary board, and no part of the net earnings of the
organization or funds from the transaction may benefit any board member,
founder, contributor, or individual.

Have two years' experience as a provider of housing for low- and
moderate- income persons.

A nonprofit agency not meeting the above requirements, including
religious and charitable organizations, may only purchase properties
backed by FHA mortgage insurance under the conditions described for
other investors in paragraph 1-4A.

Detailed instructions on qualifying nonprofit organizations as
mortgagors, including documentation requirements, are contained in
Mortgagee Letter 2002-01. Questions concerning a nonprofit agency's
approval should be directed to the appropriate HOC.

C. State and Local Government Agencies. State and local government
agencies involved in the provision of housing may obtain FHA-insured
financing provided the agency meets the criteria described below. Loan
applications from these entities may be processed under the DE program
without prior approval from the appropriate HOC.

The agency must provide evidence from its legal counsel that the agency
has the legal authority and capacity to become the borrower, that the
state or local government is not in bankruptcy, and that there is no
legal prohibition that would prevent the lender from obtaining a
deficiency judgment (if permitted by state law for other types of
borrowers) on FHA\'s behalf in the event of foreclosure or deed-in-lieu
of foreclosure. Credit reports, financial statements, bank statements,
CAIVRS/LDP/GSA checks are not required.

# SECTION 2: MAXIMUM MORTGAGE AMOUNTS

[]{#__RefHeading___Toc175360966 .anchor}**1-6 MAXIMUM MORTGAGE AMOUNT**.
[\<TOP\>](#_top) The maximum insurable mortgage is the lesser of: (1)
the statutory loan limit for the area (typically a county or
metropolitan statistical area (MSA)) or (2) the applicable loan-to-value
(LTV) limit.

Most FHA mortgages require payment of an upfront mortgage insurance
premium (UFMIP). The statutory loan amount and loan-to-value limits
described in this Handbook do not include the UFMIP. All descriptions of
maximum insurable mortgages throughout this Handbook, unless otherwise
stated, exclude UFMIP.

A. Statutory Loan Amount Limits. The statutory loan amount limits vary
by program and the number of family units within the dwelling, and apply
to both purchases and refinances. For most programs, they may be
increased when housing costs for the area support higher limits. The
National Housing Act specifies the maximum loan amount for each program.

In high-cost areas, the maximum 203(b) mortgage amount (for a one-unit
property) can be increased by the appropriate HOC to 95 percent of the
median one-family house price in the area or 87 percent of the Federal
Home Loan Mortgage Corporation (Freddie Mac) limit, whichever is less.
Higher limits are available in Hawaii, Alaska, Guam, and Virgin Islands
but must be justified by local house prices.

The current FHA standard and high-cost area mortgage limits can be
accessed from the lender Web page on HUD's Web site at www.hud.gov or on
FHA Connection at <https://entp.hud.gov/clas/>. A Mortgagee Letter is
also issued each year announcing the new mortgage limits.

The standard area-wide mortgage limits and the maximum high-cost limits
are indexed to the Freddie Mac conforming loan limit. Therefore, as the
conventional conforming loan limits increase, the FHA loan limits also
increase.

B. Loan-to-Value Limitations.

The mortgage insurance program, whether the loan is for the purchase of
a property or for the refinance of an existing debt, the age of the
property, and several additional criteria (as per paragraph 1-8) are
used to determine the maximum LTV percentage available to the borrower.
This LTV percentage is then applied to the lesser of the sales price or
the appraised value, as described in paragraph 1-7.

[]{#__RefHeading___Toc175360967 .anchor}**1-7 MAXIMUM MORTGAGES/CASH
INVESTMENT REQUIREMENTS FOR PURCHASE TRANSACTIONS**. [\<TOP\>](#_top)
The property's sales price, subject to certain required adjustments as
described in A-C below, or the appraised value, if less, is multiplied
by a loan-to-value ratio. The resulting amount is the maximum mortgage
that FHA will insure. The borrower must make a cash investment at least
equal to the difference between the sales price and the resulting
maximum mortgage amount.

Except for certain property and transaction types as described in 1-8
below, the lower of the adjusted sales price or the appraised value is
multiplied by the factor shown in the chart below. The resulting amount
is the maximum loan that FHA will insure provided that the mortgagor has
made a cash investment of at least three percent of the contract sales
price.

Borrower-paid closing costs may be used to meet the three percent
minimum cash investment. If the borrower pays no closing costs at
settlement, the loan amount must be reduced sufficiently so that the
three percent minimum cash investment is met.

The maximum LTV limits shown below are functions of the property's
appraised value or the adjusted sales price (whichever is less) and the
State in which the property is located. (A list of states and their
closing costs averages may be found in Appendix II.) The maximum LTVs
for most purchase transactions are as follows:

Maximum Loan-to-Value Percentages

(Purchase Transactions Only on Proposed and Existing Construction)

States with Average Closings Costs At or Below 2.1 Percent of Sales
Price

98.75 percent: For properties with values/sales prices equal to or less
than \$50,000.

97.65 percent: For properties with values/sales prices in excess of
\$50,000 up to \$125,000

97.15 percent: For properties with values/sales prices in excess of
\$125,000.

States with Average Closings Costs Above 2.1 Percent of Sales Price

98.75 percent: For properties with values/sales prices equal to or less
than \$50,000.

97.75 percent: For properties with values/sales prices in excess of
\$50,000.

Our definition of closing costs does not include discount points or
prepaid items and, thus, these fees and expenses cannot be used in
meeting the cash investment requirements; see paragraph 1-9 A for
additional information including a description of closing costs eligible
for meeting the minimum cash investment requirement.

The borrower may pay for the appraisal and credit report with a credit
card. However, when these fees are paid for in this manner, they may not
be counted in meeting the minimum investment requirement.

Closing costs paid by the seller or lender may not be used to meet the
minimum investment requirement. Subject to the limits described below,
we are not concerned with the dollar amount of any particular fee
charged to the seller.

A. Seller Contributions. The seller (or other interested third parties
such as real estate agents, builders, developers, etc., or a combination
of parties) may contribute up to six percent of the property\'s sales
price toward the buyer\'s actual closing costs, prepaid expenses,
discount points, and other financing concessions. Contributions
exceeding six percent of the sales price or exceeding the actual cost of
prepaid expenses, discounts points, and other financing concessions will
be treated as inducements to purchase, thereby reducing the amount of
the mortgage. Closing costs normally paid by the borrower are considered
contributions if paid by the seller. Inducements to purchase are
described in paragraph B, below.

The six percent limitation also includes seller payment for permanent
and temporary interest rate buydowns and other payment supplements,
payments of mortgage interest for fixed rate mortgages and GPMs only
(but not principal), mortgage payment protection insurance, and payment
of UFMIP.

Fees typically paid by the seller under local or state law, or local
custom, such as real estate commissions, charges for pest inspections,
fees paid for trustees to release a deed of trust, etc., are not
considered contributions. The dollar limit for seller contributions is
calculated by using Attachment A on the HUD-92900-PUR/HUD-92900WS. Each
dollar exceeding FHA\'s six percent limit must be subtracted from the
property\'s sales price before applying the appropriate LTV ratio.

B. Inducements to Purchase. Certain expenses (beyond those described
above) paid on behalf of the borrower, as well as other inducements to
purchase, result in a dollar-for-dollar reduction to the sales price
before applying the appropriate LTV ratio. These inducements include
decorating allowances, repair allowances, moving costs, and other costs
as determined by the appropriate HOC. We also require dollar-for-dollar
reductions to the sales price for excess rent credit (see 2-10 N), as
well as for gift funds not meeting the requirements stated in Chapter 2.

Personal property items such as cars, boats, riding lawn mowers,
furniture, televisions, etc., given by the seller to consummate the sale
result in a reduction to the mortgage. The value of the item(s) must be
deducted from the sales price and the appraised value of the property
(if not already done so by the appraiser) before applying the LTV ratio.
However, certain items, depending upon local custom or law, may be
considered as part of the real estate transaction with no adjustment to
the sales price or appraised value necessary. These items include
ranges, refrigerators, dishwashers, washers, dryers, carpeting, window
treatments, and other items as determined by the jurisdictional HOC.
That office determines if these items affect value and are considered
customary. Replacement of existing equipment or other realty items by
the seller before closing, such as carpeting or air conditioners, does
not require a value adjustment provided no cash allowance is given to
the borrower.

In addition, if the seller or builder of the property agrees to pay any
portion of the borrower\'s sales commission on the sale of the
borrower's present residence, the amount paid by the seller or builder
is an inducement to purchase and must be subtracted dollar for dollar
from the sales price before the LTV ratio is applied. Similarly, a
borrower not paying real estate commission on the sale of a present home
constitutes a sales concession, if the real estate broker or agent is
involved in both transactions and the seller of the property purchased
by the borrower pays a real estate commission exceeding that typical for
the area. In these situations, the amount paid by the seller above the
normal real estate commission is considered an inducement to purchase
and must be subtracted from the sales price of the property being
purchased before applying the LTV ratio.

C. Additions to the Mortgage Amount. In some cases, the maximum mortgage
amount may be increased. Except for solar energy systems discussed
below, an increase generally is permitted only when the appraised value
exceeds the sales price. Only the amount by which the value exceeds the
sales price may be added; any remaining costs become part of the
borrower\'s settlement requirements. The following may result in an
increase to the mortgage amount:

1\. Repairs and Improvements. Repairs and improvements required by the
appraiser as essential for property eligibility and to be paid by the
borrower may be added to the sales price before calculating the mortgage
amount. (The appraised value will reflect these requirements.) For the
cost of repairs and improvements to be eligible for inclusion in the
mortgage amount, the sales contract or addendum must identify the
borrower as responsible for paying for or otherwise completing the
repairs or improvements.

The amount that may be added to the sales price before calculating the
maximum mortgage amount is the lowest of:

a\. The amount the value of the property exceeds the sales price; or

b\. The appraiser\'s estimate of repairs and improvements; or

c\. The amount of the contractor\'s bid, if available.

Only repairs and improvements required by the appraiser may be included.
Any repairs completed by the borrower on the property before the
appraisal is made are not eligible for inclusion in calculating the
maximum mortgage. The amount that cannot be financed into the mortgage
will become part of the borrower\'s required cash investment.

If repairs cannot be completed before loan closing due to
weather-related delays, the lender must establish an escrow account to
ensure eventual completion of all required repairs. See HUD Handbook
4145.1 REV-2 for details.

2\. Energy-Related Weatherization Items. If weatherization items are to
be added to the property and paid for by the borrower, the mortgage
amount may be increased by the cost of those items as described below.
Weatherization items include thermostats, insulation, storm windows and
doors, weather stripping and caulking, etc. These items may be added to
both the sales price and the appraised value before determining the
maximum mortgage amount. (A contractor\'s statement of cost of work
completed or a buyer\'s estimate of the cost of materials must be
submitted. See HUD Handbook 4150.1 REV-1 for details.) If the
weatherization items cannot be completed before loan closing due to
weather-related delays, the lender must establish an escrow account to
ensure eventual completion of all items. See HUD Handbook 4145.1 REV-2
for details.

The amount that may be added in calculating the maximum mortgage is:

\$2000 without a separate value determination; or

Up to \$3500 if supported by a value determination by an approved or FHA
roster appraiser or DE underwriter; or

c\. More than \$3500 subject to a value determination by an approved or
FHA roster appraiser or DE underwriter and a separate on-site inspection
made by a FHA-approved fee inspector or DE staff appraiser.

3\. Solar Energy Systems. The cost of solar energy systems may be added
directly to the mortgage amount (before adding the UFMIP) after applying
the LTV ratio limits. The statutory mortgage limit for the area also may
be exceeded by 20 percent to accommodate the cost of the system.

The amount that may be added to the mortgage is limited to the lesser of
the solar energy system\'s replacement cost or its effect on the
property\'s market value. Both active and passive solar systems are
acceptable, as are wind-driven systems. See HUD Handbooks 4150.1 REV-1
and 4930.2 for details.

[]{#__RefHeading___Toc175360968 .anchor}**1-8 TRANSACTIONS THAT AFFECT
MAXIMUM MORTGAGE CALCULATIONS**. [\<TOP\>](#_top) Certain types of loan
transactions affect the amount of financing available and the
calculation of the maximum mortgage. These transactions include
identity-of-interest, properties with non-occupying co-borrowers, three-
and four-unit properties, properties for which a house will be
constructed by the borrower on his or her own land or as a general
contractor, payoffs of land contracts, and transactions involving
properties under construction or less than a year old. Unless otherwise
stated in this Handbook, the mortgage calculation procedures described
in paragraph 1-6 also apply.

A. Identity-of-Interest Transactions. Identity-of-interest transactions
on principal residences are restricted to a maximum LTV ratio of 85
percent. Identity-of-interest is defined as a sales transaction between
parties with family relationships or business relationships. However,
maximum financing above 85 percent LTV is permissible under the
following circumstances:

1\. A family member purchases another family member\'s home as a
principal residence.

If a property is sold from one family member to another and is the
seller\'s investment property, the maximum mortgage is the lesser of
either:

a\. 85 percent of the appraised value, or

b\. The appropriate LTV ratio percentage applied to the sales price,
plus or minus required adjustments.

The 85 percent limit may be waived if the family member has been a
tenant in the property for at least six months immediately predating the
sales contract. A lease or other written evidence must be submitted to
verify occupancy.

2\. An employee of a builder purchases one of the builder\'s new homes
or models as a principal residence.

3\. A current tenant purchases the property that he or she has rented
for at least six months immediately predating the sales contract. (A
lease or other written evidence must be submitted to verify occupancy.)

4\. A corporation transfers an employee to another location, purchases
that employee's home, and then sells the home to another employee.

B. Non-Occupying Borrowers. When there are two or more borrowers, but
one or more will not occupy the property as a principal residence, the
maximum mortgage is limited to a 75 percent LTV. However, maximum
financing, as described in paragraph 1-7, is available for borrowers
related by blood, marriage or law (spouses, parent-child, siblings,
stepchildren, aunts-uncles/nieces-nephews, etc.), or for unrelated
individuals that can document evidence of a family-type, longstanding,
and substantial relationship not arising out of the loan transaction.
All borrowers, regardless of occupancy status, must sign the security
instrument and mortgage note. If a parent is selling to a child, the
parent cannot be the co-borrower with the child on the new mortgage
unless the loan-to-value is 75 percent or less.

To reduce risk exposure, mortgages with non-occupying co-borrowers are
limited to one-unit properties if the LTV will exceed 75 percent. While
we do not object to legitimate transactions in which non-occupant
borrowers assist in the financing of the property--such as when parents
help their children buy a first home--this arrangement may not be used
by non-occupant borrowers to develop a portfolio of rental properties.
The degree of financial contribution by the non-occupant borrower, and
the number of properties similarly owned, may indicate that an investor
loan has become the practical reality and that, in effect, family
members are acting as \"strawbuyers.\" FHA does not impose additional
underwriting criteria on such transactions, such as specific qualifying
ratios the occupying-borrower must meet individually. Lenders must judge
each transaction on its merits.

C. Three- and Four-Unit Properties. Regardless of occupancy status, the
property must be self-sufficient (i.e., the maximum mortgage is limited
so that the ratio of the monthly mortgage payment, divided by the
monthly net rental income, does not exceed 100 percent). The mortgage
calculations described below are in addition to the calculations
detailed in paragraphs 1-6 and 1-7.

1\. The monthly payment is the principal, interest, taxes, and insurance
(PITI), including mortgage insurance, plus any homeowners\' association
dues, computed at the note rate (no consideration for buydowns may be
given).

2\. Net rental income is the appraiser's estimate of fair market rent
from all units, including the unit chosen by the borrower for occupancy,
less the appraiser's estimate for vacancies or the vacancy factor used
by the jurisdictional HOC, whichever is greater.

This calculation is used only to determine the maximum loan amount.
Borrowers must still qualify for the mortgage based on income, credit,
cash to close, and the projected rents received from the remaining
units. The projected rent may only be considered as gross income for
qualifying purposes; it may not be used to offset the monthly mortgage
payment.

3\. The borrower must have reserves equivalent to three months\' PITI
after closing on purchase transactions. Reserves cannot be derived from
a gift.

D. Building on Own Land. If the borrower acts as a general contractor,
and builds a house on land that the borrower already owns, or acquires
land separately, maximum financing is available if the borrower receives
no cash from the settlement. The appropriate LTV limits are applied to
the lesser of:

1\. The appraised value; or

2\. The documented acquisition cost of the property, which includes: (a)
the builder\'s price, or the sum of all subcontractor bids, materials,
etc.; (b) cost of the land (if the land has been owned more than six
months or was received as an acceptable gift, the value of the land may
be used instead of its cost); (c) interest and other costs associated
with any construction loan obtained by the borrower to fund construction
of the property; (d) the closing costs to be paid by the borrower; and
(e) reasonable discount points.

Equity in the land (value or cost, as appropriate, minus the amount
owed) may be used for the borrower\'s entire cash investment. However,
if the borrower receives more than \$250 cash at closing, the loan is
limited to 85 percent of the sum of the appraised value and allowable
closing costs. Replenishment of the borrower\'s own cash expended during
construction is not considered as \"cash back,\" provided the borrower
can substantiate with cancelled checks and paid receipts all
out-of-pocket funds used for construction.

E. Paying Off Land Contracts. If the borrower will use the loan to
complete payment on a land contract, contract for deed, or other similar
type financing arrangement in which the borrower does not have title to
the property, the new mortgage may be processed as either a purchase or
a refinance transaction with maximum FHA-insured financing if the
borrower receives no cash at closing. If all loan proceeds are used to
pay the outstanding balance on the land contract and eligible repairs,
renovations, etc., the appropriate LTV ratio is applied to the lesser
of:

The appraised value; or

2\. The total cost to acquire the property (the original purchase price,
plus any documented costs the purchaser incurs for rehabilitation,
repairs, renovation, or weatherization), plus allowable closing costs
and, if treated as a refinance, reasonable discount points.

Equity in the property (original sales price minus the amount owed) may
be used for the borrower\'s entire cash investment. However, if the
borrower receives more than \$250 cash at closing, the loan is limited
to 85 percent of the sum of the appraised value and allowable closing
costs. Replenishment of the borrower\'s own cash expended for repairs,
improvements, renovation, etc., is not considered as \"cash back,\"
provided the borrower can substantiate with cancelled checks and paid
receipts all out-of-pocket funds spent for those purposes.

F. Properties Under Construction or Existing Construction Less than One
Year Old

Properties not meeting the criteria shown below are considered as under
construction or existing construction-less than one year old and are
limited to 90 percent financing, i.e., 90 percent of the lesser of the
appraiser's estimate of value or sales price, plus or minus the
adjustments required by paragraph 1-7, A-C. For a property to be
eligible for greater than 90 percent financing, whether or not it has
been previously occupied, it must meet one of the criteria described
below. Otherwise, the property is classified as \"under construction\"
or \"less than one year old\" and is limited to 90 percent financing.

Construction was completed more than one year preceding the borrower\'s
signature on the Addendum to Uniform Residential Loan Application (form
HUD-92900-A, page 2); or

The dwelling\'s site plans and materials were approved by the Department
of Veterans Affairs (VA), an eligible DE underwriter, or a builder under
FHA\'s builder certification procedures, (see HUD Handbook 4145.1 REV-2)
before construction began; or

The local jurisdiction has issued both a building permit (prior to
construction) and a Certificate of Occupancy or equivalent. (NOTE: This
paragraph does not apply to condominiums or manufactured housing because
of the special circumstances regarding their approval.); or

The dwelling is covered by a builder\'s ten-year insured warranty plan
that is acceptable to HUD; or

The dwelling will be moved to a new location and the property is
eligible for an insured mortgage at the new location by one of the
methods described in 2 above.

# 

# SECTION 3: SETTLEMENT REQUIREMENTS

[]{#__RefHeading___Toc175360970 .anchor}**1-9 SETTLEMENT REQUIREMENTS**.
[\<TOP\>](#_top) For each transaction, the lender must estimate the
settlement requirements to determine the cash required to close the
mortgage transaction. In addition to the minimum cash investment
described in paragraph 1-7, additional borrower expenses, including
those described in A-I below, must be included in the total amount of
cash the borrower must provide at mortgage settlement. The difference
between the amount of the FHA-insured mortgage, excluding any UFMIP, and
the total cost to acquire the property, including these expenses,
determines the cash needed for closing a loan eligible for FHA mortgage
insurance.

Closing Costs. These include those FHA-approved non-recurring costs
associated with the mortgage transaction, including the appraisal fee,
any inspection fees, the actual cost of credit reports, the loan
origination fee, settlement fee, deposit verification fees, home
inspection service fees up to \$300, the cost of title examination and
title insurance, document preparation fees (if performed by a
third-party not controlled by the lender), property survey fees,
attorney\'s fees, recording fees, transfer stamps, and taxes, as well as
test and certification fees, such as flood-zone determination fees,
water tests, and other costs as determined by the appropriate HOC.

B. Prepaid Items. Prepaid items are collected at closing to cover
accrued and unaccrued hazard insurance and mortgage insurance premiums,
taxes and per diem interest, and include other similar fees and charges.
The lender must use a minimum of 15 days of per diem interest in its
estimate of prepaid items.

To reduce the burden on borrowers whose loans were scheduled to close at
the end of the month but did not due to unforeseen circumstances,
lenders and borrowers may agree to credit the per diem interest to the
borrower and have the mortgage payments begin the first of the
succeeding month. However, the dollar amount of the cash credit is not
to be used to reduce the minimum cash investment.

C. Discount Points. Discount points that are being paid by the borrower
become part of the total cash investment but are not eligible for
meeting the minimum cash investment requirement.

D. Non-Realty (Chattel) or Personal Property. Non-realty or personal
property items that the borrower agrees to pay for separately, including
the amount subtracted from the sales price in determining the maximum
mortgage, are included in the total cash requirements for the loan.

E. Closing Costs Not Eligible for Meeting the Cash Investment
Requirement. Certain closing costs, such as commitment fees for
guaranteeing the rate or points, and fees such as any ineligible real
estate broker fees or any portion, or any such allowable fee not
previously included in meeting the investment requirement are included
in calculating the total cash needed to close the mortgage.

F. UFMIPs. Any UFMIP amounts paid in cash are added to the total cash
settlement requirements. The UFMIP must be entirely financed into the
mortgage (except for any amount less than \$1) or paid entirely in cash
and all mortgage amounts must be rounded down to a multiple of \$1.

G. Repairs and Improvements. Repairs and improvements (or any portion)
to be paid by the borrower that cannot be financed into the mortgage are
part of the borrower's total cash requirements.

H. Real Estate Broker Fees. If the borrower is represented by a real
estate buyer-broker and must pay a fee directly to the broker, that
expense must be included in the total of the borrower\'s settlement
requirements and appear on the HUD-1 Settlement Statement.

If the seller pays the buyer-broker fee as part of the sales commission,
this is not to be considered an inducement to purchase or part of the 6
percent seller contributions limitation, provided that the seller is
paying only the normal sales commission typical of that market. The
lender must obtain a copy of the original listing agreement and compare
it with the HUD-1 Settlement Statement to determine if the seller paid a
buyer-broker fee in addition to the normal sales commission for that
market. If the seller paid an additional commission for the buyer-broker
fee, then this is considered an inducement to purchase.

I. Mortgage Broker Fees. If the borrower must pay a fee directly to a
mortgage broker, that expense must be included in the total of the
borrower\'s cash settlement requirements and appear on the HUD-1
Settlement Statement. (This requirement applies to instances in which
the borrower independently engages a mortgage broker to seek financing
and pays the broker directly. The payment may not come from the lending
institution.)

J. Premium Pricing on FHA Insured Mortgages. Lenders may pay the
borrower\'s allowable closing costs and/or prepaid items by \"premium
pricing". Closing costs paid in this manner need not be included as part
of the 6 percent seller contribution limit. The funds derived from a
premium priced mortgage:

1\. May never be used to pay any portion of the borrower\'s downpayment.

2\. Must be disclosed on the Good-Faith Estimate (GFE) and the HUD-1
Settlement Statement. The GFE and HUD-1 must include an itemized
statement ndicating which items are being paid on the borrower\'s
behalf; disclosing only a lump sum is not acceptable. Also, the amount
paid on the borrower\'s behalf for each item may not exceed the
allowable fee permitted by the jurisdictional HOC.

Must be used to reduce the principal balance if the premium pricing
agreement establishes a specific dollar amount for closing costs and
prepaid expenses with any remaining funds, in excess of actual costs,
reverting to the borrower.

May not be used for payment of debts, collection accounts, escrow
shortages or missed mortgage payments, or judgments.

K. Yield Spread Premiums. Yield spread premiums (YSP) are not part of
the cash required to close but must be disclosed to borrowers on the
Good Faith Estimate (GFE) and HUD-1 Settlement Statement in accordance
with the Real Estate Settlement Procedures Act (RESPA) requirements.

# SECTION 4: REFINANCE TRANSACTIONS

[]{#__RefHeading___Toc175360972 .anchor}**1-10 REFINANCING**.
[\<TOP\>](#_top) A refinance transaction involves repaying an existing
real estate debt from the proceeds of a new mortgage that has the same
borrower(s) and the same property. As long as the borrower has legal
title (even though not originally on the loan), the borrower is eligible
to refinance the loan.

The following must be considered when processing a refinance
transaction:

A. Maximum Percentage of Financing: The maximum percentage of financing
is governed by the occupancy status of the property, the use of the loan
proceeds, and how and when the property was purchased. FHA will insure
several different types of refinance transactions including streamline
refinances of existing FHA-insured mortgages made with and without
appraisals, \"no cash-out\" refinances of conventional and FHA-insured
mortgages where all proceeds are used to pay existing liens and costs
associated with the transaction, and \"cash-out\" refinances.

Maximum Term. The maximum term of any refinance with an appraisal is 30
years. A streamline refinance (see Section 1-12) without an appraisal is
limited to the remaining term of the existing mortgage plus 12 years
(not to exceed 30 years).

Re-Using an Appraisal. FHA appraisals on existing properties remain
valid for six months. However, they cannot be re-used during this period
once the mortgage, for which the appraisal was ordered, has closed. An
appraisal used for the purchase of a property cannot be used again for a
subsequent refinance, even if six months have not passed. A new
appraisal is required for each refinance transaction requiring an
appraisal.

Refinance Authorization. A lender must obtain a Refinance Authorization
Number from the FHA Connection or functional equivalent for all
FHA-to-FHA refinances.

"Skipped" Payments Not Acceptable. Lenders are not permitted to allow
borrowers to "skip" payments. The borrower is either to make the payment
when it is due or bring the monthly mortgage payment check to
settlement. When the new mortgage amount is calculated, FHA does not
permit the inclusion of any mortgage payments \"skipped\" by the
homeowner in the new mortgage amount. For example, a borrower whose
mortgage payment is due June 1 and expects to close the refinance before
the end of June is not permitted to roll the June mortgage payment into
the new FHA loan amount.

[]{#__RefHeading___Toc175360973 .anchor}**1-11 MORTGAGE AMOUNTS ON
REFINANCES**. [\<TOP\>](#_top)

A. \"No Cash-Out\" Refinances with Appraisals (Credit Qualifying). The
maximum mortgage is the lower of the loan-to-value or the existing debt
calculation described below, and may never exceed the statutory limit
except by the amount of any new upfront MIP:

1\. LTV Ratio Applied to Appraised Value: Multiply the appraised value
of the property by the appropriate factor, as shown in the chart below,
for the property's value and the state where it is located. (A list of
states and their closing costs averages may be found in Appendix II.)
Any appraisal requirements, including repairs, must be complied with
before the mortgage is eligible for insurance endorsement.

Maximum Loan-to-Value Percentages

States with Average Closings Costs At or Below 2.1 Percent of Sales
Price

98.75 percent: For properties with appraised values equal to or less
than \$50,000.

97.65 percent: For properties with appraised values in excess of
\$50,000 up to \$125,000

97.15 percent: For properties with appraised values in excess of
\$125,000.

States with Average Closings Costs Above 2.1 Percent of Sales Price

98.75 percent: For properties with appraised values equal to or less
than \$50,000.

97.75 percent: For properties with appraised values in excess of
\$50,000.

Existing Debt. Add together the amount of the existing first lien, any
purchase money second mortgage, any junior liens over 12 months old,
closing costs, prepaid expenses, borrower paid repairs required by the
appraisal, discount points, and other fees as determined acceptable by
the appropriate HOC and then subtract any refund of UFMIP. (If any
portion of the funds of an equity line of credit in excess of \$1000 was
advanced within the past twelve months and was for purposes other than
repairs and rehabilitation of the property, the line of credit is not
eligible for inclusion in the new mortgage.)

The amount of the existing first mortgage may include the interest
charged by the servicing lender when the payoff will not likely be
received on the first day of the month (as is typically assessed on
FHA-insured mortgages). The amount also may include any prepayment
penalties assessed on a conventional mortgage or FHA Title I loan. The
amount of the existing first mortgage may not include delinquent
interest, late charges, or escrow shortages. Prepaid expenses may
include the per diem interest to the end of the month on the new loan,
hazard insurance premium deposits, mortgage insurance premium, and any
real estate tax deposits needed to establish the escrow account.

Subordinate liens, including credit lines, regardless of when taken, may
remain outstanding, provided the FHA-insured mortgage meets our
eligibility criteria for mortgages with secondary financing as described
in Section 5 of this chapter.

If the purpose of the new loan is to refinance an existing mortgage to
buy out an ex-spouse\'s or other co-borrower\'s equity, the specified
equity to be paid is considered property-related indebtedness and is
eligible for inclusion in calculating the new mortgage. The divorce
decree, settlement agreement, or other bona fide equity agreement must
be provided to document the equity awarded to the ex-spouse or
co-borrower.

If the property was acquired less than one year before the loan
application and is not already FHA-insured, in addition to the
calculations described above, the original sales price of the property
also must be considered in determining the maximum mortgage. With
conclusive documentation, expenditures for repairs and rehabilitation
incurred after the purchase of the property may be added to the original
sales price in calculating the mortgage amount.

B. \"Cash-Out\" Refinances. "Cash-out" refinances are only permitted on
owner-occupied principal residences and are limited to a combined LTV
(FHA-insured first and any subordinate liens) of 85 percent of the
appraised value, provided the property has been owned by the borrower
for at least one year. If the property was purchased less than one year
preceding the loan application, the mortgage amount must be calculated
using the lesser of the appraised value or the original sales price of
the property multiplied by 85 percent. Properties owned free and clear
may be refinanced as cash-out transactions.

"Cash-out" refinances for debt consolidation represent considerable
risk, especially if the borrowers have not had an attendant increase in
income. Such transactions must be carefully evaluated.

[]{#__RefHeading___Toc175360974 .anchor}**1-12 STREAMLINE REFINANCES**.
[\<TOP\>](#_top) Streamline refinances are designed to lower the monthly
principal and interest payments on a current FHA-insured mortgage and
must involve no cash back to the borrower, except for minor adjustments
at closing not to exceed \$250. Streamline refinances can be made with
or without an appraisal. On streamline refinances with an appraisal,
Form HUD 92564-VC is required, but the Homebuyer Summary is not
required. FHA does not require repairs to be completed (except for
lead-based paint repairs) on streamline refinances with appraisals;
however, the lender may require completion of repairs as a condition of
the loan.

HUD\'s Credit Alert Interactive Voice Response System (CAIVRS) need not
be checked, but HUD's Limited Denial of Participation (LDP) and General
Services Administration (GSA) exclusion lists are still required checks
for all borrowers. FHA does not require a credit report (except for the
credit-qualifying streamline refinances described below) or a termite
inspection on this type of loan, but the lender may require either one
or both as part of its credit policy.

Lenders may use an abbreviated version of the Uniform Residential Loan
Application (URLA) that omits sections IV, V, VI, and a-k of VIII,
provided all other required information is captured. Furthermore, while
the lender must assure itself that it is in compliance with Equal Credit
Opportunity Act (ECOA) and all other regulations, the loan application
need not be signed by the borrower(s) until loan closing.

Streamline refinance processing and underwriting instructions are
described below. The mortgage amount limits may never exceed the
statutory limits except by the amount of any new upfront MIP.

A. Streamline Refinances WITHOUT an Appraisal. The maximum insurable
mortgage is the lower of the two calculations shown below:

Original Loan Amount: The original principal balance on the mortgage
(which will include any upfront mortgage insurance premium) plus the new
upfront premium that will be charged on the refinance, or

Existing Debt: Add the sum of the existing FHA insured first lien,
closing costs, reasonable discount points and the prepaid expenses
necessary to establish the escrow account, and subtract any refund of
upfront mortgage insurance premiums (UFMIP). The existing first lien may
include the interest charged by the servicing lender when the payoff is
not received on the first day of the month as is typically assessed on
FHA mortgages, but may not include delinquent interest, late charges or
escrow shortages.

This mortgage calculation process applies only to owner-occupied
properties. Investment properties, even if originally acquired as
principal residences by the current borrowers, may only be refinanced
for the outstanding principal balance. The term of the mortgage is the
lesser of 30 years or the remaining term of the mortgage plus 12 years.

Streamline refinances by investors or for secondary residences may only
be made without an appraisal and may be made solely in the business
entity\'s name if previously insured in the business entity\'s name. The
new security instruments will contain FHA\'s standard provision
permitting acceleration of the mortgage upon assumption by an investor
or as a secondary residence; however, FHA does not intend to authorize
the lender to exercise the acceleration provision if the investor
assumptor is found to be creditworthy.

Although a property purchased as a principal residence, under certain
circumstances as described in the security instruments, may be rented, a
streamline refinance without an appraisal does not \"convert\" the
mortgage to one eligible for assumption by an investor.

B. Streamline Refinance WITH an Appraisal (No Credit Qualifying). The
maximum insurable mortgage is the lower of the appropriate loan-to-value
ratio applied to the appraiser's estimate of value or the sum of the
existing indebtedness and related closing costs and prepaid expenses for
the refinance; both are described below.

1\. LTV Ratio Applied to Appraised Value: Multiply the appraised value
of the property by the appropriate factor as shown in the chart below
for the property's value and the State where it the property is located.
(A list of states and their closing costs averages may be found in
Appendix II.)

Maximum Loan-to-Value Percentages

States with Average Closings Costs At or Below 2.1 Percent of Sales
Price

98.75 percent: For properties with appraised values equal to or less
than \$50,000.

97.65 percent: For properties with appraised values in excess of
\$50,000 up to \$125,000

97.15 percent: For properties with appraised values in excess of
\$125,000.

States with Average Closings Costs Above 2.1 Percent of Sales Price

98.75 percent: For properties with appraised values equal to or less
than \$50,000.

97.75 percent: For properties with appraised values in excess of
\$50,000.

2\. Existing Debt: Add the sum of the existing FHA insured first lien,
closing costs, reasonable discount points and the prepaid expenses
necessary to establish the escrow account, and subtract any refund of
upfront mortgage insurance premiums (UFMIP) as described below. The
existing first lien may include the interest charged by the servicing
lender when the payoff is not received on the first day of the month as
is typically assessed on FHA mortgages, but may not include delinquent
interest, late charges or escrow shortages.

C. \"Credit-Qualifying\" Streamline Refinances. "Credit-qualifying"
streamline refinances contain all the normal features of a streamline
refinance, but provide a level of assurance of continued performance on
the mortgage. The lender must provide evidence that the remaining
borrowers have an acceptable credit history and ability to make
payments.

The following must be considered when processing a credit-qualifying
transaction:

1\. Mortgage Amount. The maximum loan amount is the same as in A
(without appraisal) or B (with appraisal) above, as appropriate.

2\. Credit Documentation/Qualifying. The lender must provide a
verification of income, a credit report, compute the debt-to-income
ratios and determine that the borrower will continue to make mortgage
payments.

3\. Purposes. Credit-qualifying streamline refinances may be used for
the following:

a\. When a change in the mortgage term will result in an increase in the
mortgage payment. (This is only permitted for owner-occupied principal
residences, secondary residences meeting the requirements of paragraph
1-3, and those investment properties purchased by governmental agencies
and eligible nonprofit organizations described in paragraph 1-5.)

b\. When deletion of a borrower or borrowers will trigger the
due-on-sale clause.

c\. Following an assumption of a mortgage that does not contain
restrictions (e.g., due-on-sale clause) limiting assumptions only to
creditworthy borrowers and the assumption occurred less than six months
previously.

d\. Following an assumption of a mortgage in which the transferability
restriction (i.e., due-on-sale clause) was not triggered, such as in a
property transfer resulting from a divorce decree or by devise or
descent and the assumption occurred less than six months previously.

D. Additional Information on Streamline Refinances.

1\. Appraisal, Termite Inspection, and Credit Report Fees. We do not
require an appraisal, termite inspection, or credit report on streamline
refinances (except credit qualifying streamline refinances). However,
the associated fees may be paid by the borrower out-of-pocket (i.e., not
financed) if law, banking regulations, or its secondary market investors
require the lender to obtain these services on a streamline refinance
made without a FHA appraisal.

2\. Cash-to-Close. Borrowers are not required to provide evidence of
cash-to-close.

.

3\. Withdrawn Condominium Approvals. If approval of a condominium
project has been withdrawn, FHA will insure only streamline refinances
without appraisals for that condominium project.

4\. Underwriting. Mortgage credit underwriting is not required except
for credit qualifying streamline refinance. The loan application and
form HUD 92900-WS must be submitted; however, the sections regarding
income, assets, and debts and obligations need not be completed (unless
the borrowers are credit qualified).

5\. Shortening the Term of Mortgage. A mortgage on a principal residence
may be refinanced to a shorter-term mortgage, provided the new monthly
principal and interest payment increases no more than \$50. (The \$50
latitude is not available for mortgages on investment properties or
secondary residences, unless the borrower qualifies under the provisions
described in paragraphs 1-3 and 1-4.) Since streamline refinances are
designed to reduce the borrower\'s principal and interest payments on a
current FHA-insured mortgage, that portion of the borrower\'s payment
for escrowed items need not be considered.

6\. Delinquent Mortgages. Delinquent mortgages are not eligible for
streamline refinancing until the loan is brought current. However, if
the mortgage is delinquent by no more than two monthly payments, the
refinancing lender may pay the borrower\'s mortgage to bring the
payments current provided no obligation is placed on the borrower to
repay the funds used to bring the mortgage current.

7\. \"No-Cost\" Refinances. "No-cost" refinances, in which the lender
charges a premium interest rate to defray the borrower\'s closing costs
and/or prepaid items, are permitted. The lender may also offer an
interest-free advance of amounts equal to the present escrow balances on
the existing mortgage to establish a new escrow account.

8\. Holding Period before Eligibility. A borrower who assumed or took
title subject to an FHA-insured mortgage, without being credit qualified
and with the previous mortgagors receiving a release of liability, must
have owned the property for at least six months before being eligible
for the streamline refinance program without credit qualifying. This
rule applies to mortgages that do not contain restrictions limiting the
assumption only to creditworthy assumptors. Typically those mortgages
were made prior to December 1989.

9\. Adding or Deleting Individuals on Title. Individuals may be added to
the title on a streamline refinance without credit worthiness review and
without triggering due-on-sale clauses. Individuals can be deleted from
the title on a streamline refinance only under the circumstances
described in paragraph 1-12 C, above or:

When an assumption of a mortgage not containing a due-on-sale clause
occurred more than six months previously and the assumptor can document
that he or she has made the mortgage payments during this interim
period; or

b\. Following an assumption of a mortgage in which the transferability
restriction (due-on-sale clause) was not triggered, such as in a
property transfer resulting from a divorce decree or by devise or
descent, and the assumption or quit-claim of interest occurred more than
six months previously and the remaining owner-occupant can demonstrate
that he or she has made the mortgage payments during this time.

10\. Seven-Unit Exemptions. An eligible investor that has a financial
interest in more than seven rental units, as described in 24 CFR 203.42,
may only refinance without appraisals.

11\. Subordinate Financing. Subordinate financing may remain in place,
regardless of the total indebtedness against the property on streamline
refinances, with or without appraisals. The borrower is not required to
satisfy any outstanding subordinate liens, as long as they will clearly
be subordinate to the new FHA-insured refinance mortgage.

12\. Proceeding as if No Appraisal was Completed. If the appraised value
is such that the borrower would be better advised to proceed as if no
appraisal had been made, the appraisal may be ignored and not used. A
notation of this decision must be made in the \"remarks\" section of
form HUD-92900-WS.

13\. Geographic Areas. Lenders may solicit and process streamline
refinances applications from any area of the country, provided the
lender is approved for DE by at least one HOC.

14\. ARM to ARM. An ARM may be refinanced to another ARM, provided that
an immediate payment reduction occurs and that the maximum interest rate
of the new mortgage does not exceed the maximum interest rate of the old
mortgage being refinanced. These refinances may be transacted with or
without an appraisal.

15\. ARM to Fixed Rate. An ARM may be refinanced to a fixed rate
mortgage, with or without an appraisal, provided the interest rate on
the new fixed-rate mortgage will be no greater than 2 percentage points
above the current rate of the ARM. In addition, all mortgage payments
must have been made within the month due for the past 12 months or the
period the mortgage has been in force, if shorter. If the new fixed rate
mortgage will be at a rate lower than the existing rate of the ARM thus
reducing the homeowner's monthly mortgage payment, the "within the month
due," (i.e., not more than 30 days late), rule is not applicable.

Fixed-Rate to ARM. Fixed-rate mortgages may be refinanced to a one-year
ARM, with or without an appraisal, provided the interest rate of the new
mortgage is at least 2 percentage points below the interest rate of the
current mortgage.

An ARM may be used for refinancing only on principal residences.

17\. Graduated Payment Mortgages (GPM) to Fixed-Rate. Section 245 GPMs
may be refinanced, with or without an appraisal, to a fixed-rate
mortgage provided the new mortgage payment will not exceed the current
mortgage payment. (If the streamline refinance is completed without an
appraisal, the new mortgage amount may exceed the statutory limit by the
accrued negative amortization and the new UFMIP.)

18\. GPM to ARM. A GPM may be refinanced to an ARM, provided the note
rate results in a reduction to the current principal and interest
payments. (If the streamline refinance is completed without an
appraisal, the new mortgage amount may exceed the statutory limit by the
accrued negative amortization and the new UFMIP.)

19\. Section 203(k) to Section 203(b). Section 203(k) Rehabilitation
mortgages may be refinanced into a Section 203(b) mortgage after all
work is complete. The rehabilitation work is considered complete by a
fully executed certificate of completion, the rehabilitation escrow
account has been closed with a final release, and the lender has entered
the required close out information into the FHA Connection or its
functional equivalent. The new mortgage will be subject to the
appropriate insurance premium applicable to a new Section 203(b)
mortgage.

20\. Section 235 to Section 203(b). Lenders may refinance Section 235
mortgages to Section 203(b) mortgages using the streamline underwriting
procedures described in paragraph 1-12. Any overpaid subsidy that has
been paid by the lender to HUD and is part of the borrowers\' mortgage
account can be included in the Section 203(b) mortgage amount, provided
the mortgage amount does not exceed the maximum mortgage permitted under
paragraphs 1-12 A or 1-12 B as appropriate.

Furthermore, if HUD has a junior lien that was part of the original
Section 235 financing, HUD will subordinate the junior lien to the
Section 203(b) mortgage that refinances the Section 235 mortgage.

# SECTION 5: SECONDARY FINANCING

[]{#__RefHeading___Toc175360976 .anchor}**1-13 SECONDARY FINANCING**.
[\<TOP\>](#_top)

Any financing (other than the FHA-insured first mortgage) that creates a
lien against the property is considered secondary financing and not a
gift, even if it is a "soft" or "silent" second (i.e., has no monthly
repayment provisions) or has other features forgiving the debt.

Documentation from the provider of the secondary financing must show the
amount of funds provided to the borrower in each transaction and copies
of the loan instruments are to be included in the endorsement binder.
Costs incurred for participating in a down payment assistance secondary
financing program may only be included in the amount of the second lien.
FHA reserves the right to reject any secondary financing that does not
serve the needs of the intended borrower or where it believes the costs
to the participants outweigh the benefits derived by the homebuyer.
Permissible secondary financing arrangements include:

A. Government Agencies. Federal, state, and local government agencies,
as well as nonprofit agencies considered instrumentalities of government
(see B, below), may provide secondary financing for the borrower\'s
entire cash investment. The second lien itself must be made or held by
the eligible governmental body or instrumentality. Neither governmental
units nor their established nonprofit instrumentalities may use
"agents," including other nonprofits or for-profit enterprises to make
the second lien regardless of the source of those funds. In other words,
even if the funds used for the secondary financing were derived from an
acceptable source such as HUD HOME funds or from a unit of government or
the eligible nonprofit instrumentality, the subordinate lien must be in
the name of the eligible entity, i.e., the state, county, city or
eligible nonprofit instrumentality must be the lien holder. This
authority cannot be delegated to another party that is not itself
permitted to provide this level of secondary financing. These other
entities, however, may be used to service the subordinate lien if
regularly scheduled payments are to be made by the mortgagor. Loans
secured by secondary mortgages are subject to the conditions described
below.

1\. The FHA-insured first mortgage, when combined with any second
mortgage or other junior liens from government agencies may not result
in cash back to the borrower. The sum of all liens cannot exceed 100
percent of the cost to acquire the property. The cost to acquire is the
sales price plus allowable borrower-paid closing costs, discount points,
repair and rehabilitation expenses, and prepaid expenses. The cost to
acquire may exceed the appraised value of the property under these types
of government assistance programs. The FHA insured first mortgage cannot
exceed the FHA statutory limit for the area where the property is
located. The combined indebtedness, however, may exceed the FHA
statutory limit.

2\. The required monthly payment under both the insured mortgage and the
second mortgage or lien, plus other housing expenses and all recurring
charges, cannot exceed the borrower\'s reasonable ability to pay.

3\. The source, amount, and repayment terms must be disclosed in the
mortgage application, and the borrower must acknowledge that he or she
understands and agrees to the terms.

Nonprofit Agencies. Nonprofit agencies that meet the criteria described
in paragraph 1-5 B and are considered instrumentalities of government
may provide secondary financing under the terms outlined in A, above.
The appropriate HOC is responsible for approving the nonprofit agency,
as well as determining if it can be considered an instrumentality of
government. To obtain this status the nonprofit must be an entity
"established by a governmental body or with governmental approval or
under special law to serve a particular public purpose or designated by
law (statute or court opinion)." FHA also requires that the unit of
government that established the nonprofit also must either exercise
organizational control, operational control, or financial control of the
nonprofit in its entirety or, at minimum, the specific homebuyer
assistance program that is using FHA's credit enhancement. The HOCs
review applications from nonprofits that purport to be instrumentalities
of government and make approval decisions based on information submitted
by the nonprofit.

Nonprofit agencies not considered instrumentalities of government that
otherwise meet the criteria described in paragraph 1-5 B may provide
secondary financing under the same conditions as described in A, above,
provided the borrower makes a cash investment of at least 3 percent of
the acquisition cost and the combined amount of the first and second
mortgages do not exceed the statutory loan limit for the area where the
property is located. The jurisdictional HOC is responsible for approving
the nonprofit agency.

C. Other Organizations and Private Individuals. Other organizations and
private individuals may provide secondary financing under the following
conditions:

1\. The combined amount of the first and second mortgages do not exceed
the applicable LTV ratio and the maximum mortgage limit for the area.

2\. The repayment terms of the second mortgage must not provide for a
balloon payment before ten years (or other such term acceptable to FHA),
unless the property is sold or refinanced, and must permit prepayment by
the borrower, without penalty, after giving the lender 30 days advance
notice.

3\. The required monthly payment under both the insured mortgage and the
second mortgage or lien, plus other housing expenses and all recurring
charges, cannot exceed the borrower\'s reasonable ability to pay. Any
periodic payments due on the second mortgage are due monthly and are
essentially the same in dollar amount.

D. Borrowers 60 Years of Age or Older. Borrowers 60 years of age or
older may borrow the required cash investment for purchasing a principal
residence, provided:

1\. The donor or lender is a relative of the borrower, a close friend
with clearly defined interest in the borrower, the borrower\'s employer,
or an institution established for humanitarian or welfare purposes.

2\. The donor or lender's interest is not solely in the sale of the
property, such as a builder or seller, or any person or organization
associated with builders or sellers.

3\. The principal amount of the insured mortgage loan, plus the note or
other evidence of indebtedness in connection with the property, may not
exceed 100 percent of the value, plus prepaid expenses.

4\. The note or other evidence of indebtedness may not bear an interest
rate exceeding the interest rate of the insured mortgage.

E. Family Member Lending. Family members (defined below) may help with
the costs of acquiring a home in the form of a gift or a loan. All such
gifts must also meet the requirements of paragraph 2-10(C). FHA permits
family member to lend on a secured or unsecured basis, up to 100 percent
of the homebuyer\'s required cash investment. This lending may include
the downpayment, closing costs, prepaid expenses and discount points. If
the money lent by the family member is secured against the subject
property, whether borrowed from an acceptable source or from the family
member\'s own savings, only the family member provider(s) may be the
note holder. FHA will not approve any form of securitization of the note
that results in any entity other than the family member being the note
holder, whether at loan settlement or at any time during the mortgage
life cycle.

Further, if the funds that are lent by the family member are borrowed
from an acceptable source, the homebuyer may not be a co-obligor on that
note (e.g., the son and daughter-in-law may not be co-obligors on the
note used to secure money borrowed by the parents that in turn was lent
for the down payment).

The following financing terms and conditions also apply:

1\. The maximum insurable mortgage is not affected by gifts or loans
from family members.

2\. The combined amount of financing may not exceed 100 percent of the
lesser of the property\'s value or sales price, plus normal closing
costs, prepaid expenses, and discount points. While the family member
may lend 100 percent of the cash investment requirements, cash back to
the homebuyer (beyond refund of any earnest money deposit) at closing is
not acceptable.

3\. If periodic payments of the secondary financing are required, the
combined payments may not exceed the borrower\'s reasonable ability to
pay. The secondary financing payments are to be included in the total
debt-payment-to-income ratio (i.e., the \"back-end\" ratio) for
qualifying purposes.

4\. The second lien may not provide for a balloon payment within five
years from the date of execution.

5\. If the family member providing the secondary financing borrows those
funds, the source may not be any entity with an identity-of-interest in
the sale of the property, including the seller, builder, loan officer,
real estate agent, etc. Mortgage companies that have retail banking
affiliates may have that entity make a loan to the family member,
providing the secondary financing for the home purchase. However, the
lending institution may not make such financing available under terms
and conditions more favorable than to other borrowers (i.e., there may
not be any special considerations provided in connection between making
the mortgage and lending funds to family members to be used as secondary
financing for the purchase of the home).

6\. An executed copy of the document outlining the terms of the
secondary financing must be maintained in the lender's file. An executed
copy of this agreement also must be provided in the endorsement binder.

For the purposes of this paragraph, a "family member" is defined as a
child, parent, or grandparent of the borrower or borrower's spouse.
Included in this definition are legally adopted sons or daughters (and a
child who is a member of an individual\'s household, if placed with such
individual by an authorized agency for legal adoption by that
individual), and foster children. The term \"child\" means a son,
stepson, daughter, or stepdaughter.

# CHAPTER 2 MORTGAGE CREDIT ANALYSIS

[]{#__RefHeading___Toc175360978 .anchor}**2-1 OVERVIEW**.
[\<TOP\>](#_top) The purpose of underwriting is to determine a
borrower's ability and willingness to repay the mortgage debt, thus
limiting the probability of default and collection difficulties, and to
examine the property offered as security for the loan to determine if it
is sufficient collateral. The "Four C's of Credit" (Credit history,
Capacity to repay, Cash to close, and the Collateral) are evaluated
during the underwriting process.

This chapter on mortgage credit analysis describes procedures for
evaluating the credit history, the borrower's capacity to make payments,
and whether sufficient cash assets are available to close the mortgage.
It provides the requirements on the types of income that may be
considered in qualifying the borrower, the liabilities that must be
included in the determining creditworthiness, and the debt-to-income
ratios and compensating factors used in the underwriting process. These
underwriting instructions are FHA's "base-line" credit policies. For
those lenders using FHA-approved automated underwriting systems (AUS) or
those employing FHA's TOTAL mortgage scorecard, there will be a
considerable number of revisions to these policies, including
documentation requirements, as described in other FHA issuances.

[]{#__RefHeading___Toc175360979 .anchor}**2-2 MORTGAGE ELIGIBILITY
(BORROWERS)**. [\<TOP\>](#_top) Generally, we will insure mortgages made
to individuals only. Under the conditions described in Chapter 1, we
will also insure mortgages made to state and local government agencies
and approved nonprofit organizations.

A. Borrowers, Co-Borrowers and Co-Signers. Borrowers and Co-borrowers
take title to the property and are obligated on the mortgage note and
must also sign the security instrument. The co-borrower's income,
assets, liabilities, and credit history are considered in determining
creditworthiness.

Co-signers do not hold ownership interest in a property, but are liable
for repaying the obligation and must sign all documents with the
exception of the security instruments. The co-signer\'s income, assets,
liabilities, and credit history are considered in determining
creditworthiness for the mortgage and the co-signer must complete and
sign the loan application.

We do not permit an individual to take an ownership interest in the
property at settlement without signing the mortgage note and all
security instruments.

The following conditions also apply to co-borrower and co-signer
eligibility:

1\. A co-borrower or a co-signer may not be a party that has a financial
interest in the transaction, such as the seller, builder, real estate
agent, etc. Exceptions may be granted if the seller and
co-borrower/co-signer is related to the owner by blood, marriage or law.

2\. An individual signing the loan application must not be otherwise
ineligible for participation. (See paragraph 2-5).

3\. Unless otherwise exempted (e.g., military service with overseas
assignments, U.S. citizens living abroad), any non-occupying
co-borrowers or co-signers must have a principal residence in the United
States.

All references to co-borrowers -- including the 75 percent LTV limits
(paragraph 1-8(B)), etc. -- apply equally to co-signers (except
co-signers do not take title to the property or sign the security
instruments).

B. Citizenship and Immigration Status. Citizenship of the United States
is not required for eligibility. When a mortgage loan applicant
indicates on the loan application that he or she holds something other
than U.S. citizenship, the lender must determine residency status from
the documentation provided by the borrower.

Lawful Permanent Resident Aliens: For those borrowers with lawful
permanent resident alien status, FHA will insure the mortgage under the
same terms and conditions as U.S. citizens. The lender must document the
mortgage file with evidence of permanent residency and indicate on the
Uniform Residential Loan Application (URLA) that the borrower is a
lawful permanent resident alien. Evidence of lawful permanent residency
is issued by the Bureau of Citizenship and Immigration Services (BCIS)
(formerly the Immigration and Naturalization Service) within the
Department of Homeland Security.

Non-Permanent Resident Aliens: FHA will also insure a mortgage made to a
non-permanent resident alien provided that the property will be the
borrower\'s principal residence, the borrower has a valid SSN, and the
borrower is eligible to work in the U.S. as evidenced by an Employment
Authorization Document (EAD) issued by BCIS. If the authorization for
temporary residency status will expire within one year and a prior
history of residency status renewals exists, the lender may assume
continuation will be granted. If there are no prior renewals, the lender
must determine the likelihood of renewal, based on information from the
BCIS.

Although social security cards may indicate work status, such as "not
valid for work purposes," an individual's work status may change without
the change being reflected on the actual social security card.
Therefore, the social security card is not to be used as evidence of
work status for non-permanent resident aliens; the BCIS employment
authorization document is to be used instead.

Non-U.S. Citizens with no lawful residency in the U.S. are not eligible
for FHA-insured mortgages.

C. Borrower\'s Age. There is no maximum age limit for a borrower. The
minimum age is the age at which the mortgage note can be enforced
legally in the state or other jurisdiction in which the property is
located.

D. Non-Purchasing Spouses. If required by state law in order to perfect
a valid and enforceable first lien, the non-purchasing spouse may be
required to sign either the security instrument or documentation
evidencing that he or she is relinquishing all rights to the property.
If the non-purchasing spouse executes the security instrument for such
reasons, he or she is not considered a borrower for our purposes and
need not sign the loan application. In all other cases, the
non-purchasing spouse is not to appear on the security instrument or
otherwise take title to the property at loan settlement.

Where there are non-purchasing spouses who sign security instruments
relinquishing their rights to the property pursuant to applicable state
laws, these non-purchasing spouses do not have to sign the mortgage
note. Signing the security instrument for such purposes does not make
the non-purchasing spouse a co-borrower.

Except for the obligations specifically excluded by state law, the debts
of the non-purchasing spouse must be included in the borrower's
qualifying ratios if the borrower resides in a community property state
or the property to be insured is located in a community property state.
Although the non-purchasing spouse\'s credit history is not to be
considered a reason for credit denial, a credit report that complies
with the requirements of paragraph 2-4 must be obtained for the
non-purchasing spouse in order to determine the debt-to-income ratio.

E. Military Personnel. Military personnel are considered occupant-owners
and are eligible for maximum financing if a member of the immediate
family will occupy the property as a principal residence, even if the
service person is stationed elsewhere.

F. Living Trusts. Property held in a living trust is eligible for FHA
mortgage insurance for owner-occupied property, as long as an individual
borrower remains the beneficiary and occupies the property as a
principal residence. The lender must be satisfied that the trust
provides reasonable means to assure that the lender will be notified of
any subsequent change of occupancy (for owner-occupant loans only) or
transfer of beneficial interest. The trust must appear on the security
instrument (i.e., mortgage, deed of trust, security deed). The
individual borrower must appear on the security instrument when required
to create a valid lien under state law; otherwise, the individual
borrower is not required to appear. The owner-occupant, if any, and
other borrower(s), if any, must appear on the note with the trust. The
individual borrower(s) is not required to appear on the property deed or
title.

# SECTION 1: CREDIT HISTORY

[]{#__RefHeading___Toc175360981 .anchor}**2-3 ANALYZING THE BORROWER'S
CREDIT**. [\<TOP\>](#_top) Past credit performance serves as the most
useful guide in determining a borrower's attitude toward credit
obligations and predicting a borrower's future actions. A borrower who
has made payments on previous and current obligations in a timely manner
represents reduced risk. Conversely, if the credit history, despite
adequate income to support obligations, reflects continuous slow
payments, judgments, and delinquent accounts, strong compensating
factors will be necessary to approve the loan.

When analyzing a borrower\'s credit history, examine the overall pattern
of credit behavior, rather than isolated occurrences of unsatisfactory
or slow payments. A period of financial difficulty in the past does not
necessarily make the risk unacceptable if the borrower has maintained a
good payment record for a considerable time period since the difficulty.
When delinquent accounts are revealed, the lender must document their
analysis as to whether the late payments were based on a disregard for
financial obligations, an inability to manage debt, or factors beyond
the control of the borrower, including delayed mail delivery or disputes
with creditors.

While minor derogatory information occurring two or more years in the
past does not require explanation, major indications of derogatory
credit--including judgments, collections, and any other recent credit
problems--require sufficient written explanation from the borrower. The
borrower\'s explanation must make sense and be consistent with other
credit information in the file.

Neither the lack of credit history nor the borrower\'s decision not to
use credit may be used as a basis for rejecting the loan application. We
also recognize that some prospective borrowers may not have an
established credit history. For those borrowers, and for those who do
not use traditional credit, the lender must develop a credit history
from utility payment records, rental payments, automobile insurance
payments, or other means of direct access from the credit provider. The
lender must document that the providers of non-traditional credit do, in
fact, exist and verify the credit information. Documents confirming the
existence of a non-traditional credit provider may include a public
record from the state, county, or city records, or other means providing
a similar level of objective confirmation. To verify the credit
information, lenders must use a published address or telephone number
for that creditor.

As an alternative, the lender may elect to use a non-traditional
mortgage credit report developed by a credit-reporting agency, provided
that the credit reporting agency has verified the existence of the
credit providers and the lender verifies that the non-traditional credit
was extended to the applicant. The lender must verify the credit using a
published address or telephone number to make that verification.

The basic hierarchy of credit evaluation is the manner of payments made
on previous housing expenses, including utilities, followed by the
payment history of installment debts, and then revolving accounts.
Generally, an individual with no late housing or installment debt
payments should be considered as having an acceptable credit history,
unless there is major derogatory credit on his or her revolving
accounts.

When reviewing the borrower\'s credit and credit report, the lender must
pay particular attention to the following:

A. Previous Rental or Mortgage Payment History. The payment history of
the borrower\'s housing obligations holds significant importance in
evaluating credit. The lender must determine the borrower\'s payment
history of housing obligations through either the credit report,
verification of rent directly from the landlord (with no
identity-of-interest with the borrower) or verification of mortgage
directly from the mortgage servicer, or through canceled checks covering
the most recent 12-month period.

B. Recent and/or Undisclosed Debts. The lender must ascertain the
purpose of any recent debts, as the indebtedness may have been incurred
to obtain part of the required cash investment on the property being
purchased. Similarly, the borrower must provide a satisfactory
explanation for any significant debt that is shown on the credit report
but not listed on the loan application. The borrower must explain in
writing all inquiries shown on the credit report in the last 90 days.

C. Collections and Judgments. Court-ordered judgments must be paid off
before the mortgage loan is eligible for FHA insurance endorsement. (An
exception may be made if the borrower has agreed with the creditor to
make regular and timely payments on the judgment and documentation is
provided that the payments have been made in accordance with the
agreement.) FHA does not require that collection accounts be paid off as
a condition of mortgage approval. Collections and judgments indicate a
borrower's regard for credit obligations and must be considered in the
analysis of creditworthiness with the lender documenting its reasons for
approving a mortgage where the borrower has collection accounts or
judgments. The borrower must explain in writing all collections and
judgments.

D. Previous Mortgage Foreclosure. A borrower whose previous principal
residence or other real property was foreclosed or has given a
deed-in-lieu of foreclosure within the previous three years is generally
not eligible for a new FHA-insured mortgage. However, if the foreclosure
was the result of documented extenuating circumstances that were beyond
the control of the borrower and the borrower has re-established good
credit since the foreclosure, the lender may grant an exception to the
three-year requirement. Extenuating circumstances include serious
illness or death of a wage earner, but do not include the inability to
sell the house because of a job transfer or relocation to another area.

E. Bankruptcy. A Chapter 7 bankruptcy (liquidation) does not disqualify
a borrower from obtaining an FHA-insured mortgage if at least two years
have elapsed since the date of the discharge of the bankruptcy.
Additionally, the borrower must have re-established good credit or
chosen not to incur new credit obligations. The borrower also must have
demonstrated a documented ability to responsibly manage his or her
financial affairs. An elapsed period of less than two years, but not
less than 12 months, may be acceptable if the borrower can show that the
bankruptcy was caused by extenuating circumstances beyond his or her
control and has since exhibited a documented ability to manage his or
her financial affairs in a responsible manner. Additionally, the lender
must document that the borrower's current situation indicates that the
events that led to the bankruptcy are not likely to recur.

A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an
FHA-insured mortgage provided the lender documents that one year of the
payout period under the bankruptcy has elapsed and the borrower's
payment performance has been satisfactory (i.e., all required payments
made on time). In addition, the borrower must receive permission from
the court to enter into the mortgage transaction.

F. Consumer Credit Counseling Payment Plans. Participation in a consumer
credit counseling payment program does not disqualify a borrower from
obtaining an FHA-insured mortgage provided the lender documents that one
year of the pay-out period has elapsed under the plan and the borrower's
payment performance has been satisfactory (i.e., all required payments
made on time). In addition, the borrower must receive written permission
from the counseling agency to enter into the mortgage transaction.

[]{#__RefHeading___Toc175360982 .anchor}**2-4 CREDIT REPORT
REQUIREMENTS**. [\<TOP\>](#_top)

A. Traditional Credit Reports. Credit reports submitted with each loan
must contain all credit available in the accessed repositories. They
also must provide an account of all credit, residence history, and
public records information available in the credit repositories of each
borrower responsible for the mortgage debt. The minimum credit report
required by FHA is a \"three repository merged\" credit report (TRMCR).
A Residential Mortgage Credit Report (RMCR) from an independent
consumer-reporting agency also may be used. One report is required for
each borrower, or a joint report may be obtained for a married couple.

The following are requirements for traditional credit reports:

1\. The TRMCR submitted must be an original received electronically and
printed on the lender\'s printer or delivered by the credit-reporting
agency. The report must not have whiteouts, erasures, or alterations. It
must indicate the name, address, and telephone number of the
consumer-reporting agency; and each account listed must show the primary
repository from which the particular information was pulled. The name of
the company ordering the report must be shown.

2\. The credit report must include all credit and legal information not
considered obsolete under the Fair Credit Reporting Act, including
bankruptcies, judgments, law suits, foreclosures, and tax liens that
have occurred within the last seven years. All inquiries made within the
last 90 days must also be included on the report. Credit reports that
fail to show bankruptcies, judgments, lawsuits, foreclosures and tax
liens must be supplemented with a corrected report. Lenders must retain
all copies of all credit reports and document in writing an analysis of
the reasons for any discrepancies between the credit reports. If a
lender receives any information inconsistent with the information on the
credit report, the lender must reconcile the inconsistency.

3\. The credit report must identify each borrower\'s name and social
security number. For each debt listed, the report also must show the
date the account was opened, the high credit amount, the required
payment, the unpaid balance, and the payment history, as contained in
the credit repositories. The report must be in an easy-to-read and
understandable format, and it should not require code translations.

4\. The lender must also develop credit information separately for any
open debt that is listed on the loan application but not referenced on
the credit report. Accounts listed as \"rate by mail only\" or \"need
written authorization\" require separate written verification.

5\. While the TRMCR should prove sufficient for processing most loan
applications, the following circumstances require an RMCR:

The borrower(s) disputes the ownership of accounts on the TRMCR; or

The borrower(s) claims that collections, judgments, or liens listed as
open on the TRMCR have been paid and cannot provide separate
documentation supporting this claim; or

The borrower claims that certain debts shown on the TRMCR have different
balances and/or payments and cannot provide current statements (less
than 30 days old) attesting to this claim; or

The lender\'s underwriter determines that it would be prudent to use an
RMCR in lieu of a TRMCR to underwrite the loan properly.

6\. RMCRs must access at least two named repositories and meet all the
requirements for the TRMCR, plus the following:

a\. Provide a detailed account of the borrower\'s employment history.

b\. Verify each borrower\'s current employment and income (if
obtainable). It also must include a statement attesting to certification
of employment and date verified. If this information is not obtained
through an interview with the employer, the credit reporting agency must
state why this action was not taken.

c\. Each account with a balance must have been checked with the creditor
within 90 days of the credit report.

B. Credit Report Requirements (Non-Traditional). A Non-Traditional
Mortgage Credit Report (NTMCR) is designed to assess the credit history
of a borrower without the types of trade references normally appearing
on a traditional credit report. It can be used either as a substitute
for a TRMCR or an RMCR for a borrower without a credit history with
traditional credit grantors or as a supplement to a traditional credit
report having an insufficient number of trade items reported. A NTMCR
may not, however, be used to enhance the credit history of a borrower
with a poor payment record or to manufacture a credit report for a
borrower without a verifiable credit history. It also may not be used to
offset derogatory references found in the borrower\'s traditional
credit, such as collections and judgments.

The following conditions apply when using non-traditional credit
reporting:

1\. If the information obtained through the standard credit report is
not sufficient for the lender to make a prudent underwriting decision,
the lenders may use a NTMCR developed by a credit-reporting agency that
documents all non-traditional credit references. Otherwise, the lender
must develop its own non-traditional credit history that is consistent
with the requirements for credit reporting agencies described in
paragraph 2-4.

2\. The credit-reporting agency should consider only the types of credit
that require the mortgage applicant to make periodic payments on a
regular basis. These types of credit include rental housing; utilities
(if not included in the rental payment); telephone service; cable
television service; insurance payments (excluding those paid through
payroll deductions), such as medical, automobile, life, household, and
renter\'s insurance; payments to child care providers; school tuition;
payments to local stores; payments for the uninsured portion of any
medical bills; etc.

[]{#__RefHeading___Toc175360983 .anchor}**2-5 ELIGIBILITY FOR
FEDERALLY-RELATED CREDIT**. [\<TOP\>](#_top) A borrower must be rejected
if any of the following conditions apply:

A. HUD Limited Denial of Participation (LDP) and the U.S. General
Services Administration's "List of Parties Excluded from Federal
Procurement and Non-Procurement Programs" (GSA List) A person suspended,
debarred, or otherwise excluded from participation in the Department's
programs is not eligible to participate in FHA-insured mortgage
transactions. The lender must examine HUD's LDP list and the
government-wide General Services Administration's (GSA) "List of Parties
Excluded from Federal Procurement or Nonprocurement Programs" and
document this review on the HUD 92900-WS/92900-PUR. If the name of the
borrower, seller, listing or selling real estate agents, or loan officer
appears on either list, the application is not eligible for mortgage
insurance. A lender may check HUD's LDP list by going to
[www.hud.gov](http://www.hud.gov/) and the Federal government's list of
excluded parties by going to http://epls.arnet.gov. (An exception shall
be made for a seller on the GSA list when the property being sold is the
seller's principal residence.)

B. Delinquent Federal Debts. If the borrower, as revealed by public
records, credit information, or HUD's Credit Alert Interactive Voice
Response System (CAIVRS), is presently delinquent on any Federal debt
(e.g., VA-guaranteed mortgage, Title I loan, Federal student loan, Small
Business Administration loan, delinquent Federal taxes) or has a lien,
including taxes, placed against his or her property for a debt owed to
the U.S., the borrower is not eligible until the delinquent account is
brought current, paid, otherwise satisfied, or a satisfactory repayment
plan is made between the borrower and the Federal agency owed and is
verified in writing. Tax liens may remain unpaid provided the lien
holder subordinates the tax lien to the FHA-insured mortgage. If any
regular payments are to be made, they must be included in the qualifying
ratios.

Since the IRS routinely takes a second lien position without the
necessity of independent documentation, eligibility for FHA mortgage
insurance will not be jeopardized by outstanding IRS tax liens remaining
on the property unless the lender has information that the IRS has
demanded a first-lien position.

Although eligibility for an FHA-insured mortgage may be established by
performing the actions described above, the overall analysis of the
creditworthiness must include consideration of a borrower\'s previous
failure to make payments to the Federal agency in the agreed-to manner
and must document its analysis of how the previous failure does not
represent a risk of mortgage default.

C. CAIVRS. HUD's CAIVRS is a Federal government-wide repository of
information on those individuals with delinquent or defaulted Federal
debt and on those for whom a payment of an insurance claim has occurred.
Lenders must screen all borrowers, including nonprofit agencies acting
as a borrower, using CAIVRS (except on streamline refinances). If CAIVRS
indicates the borrower is presently delinquent or has had a claim paid
within the previous three years on a loan made or insured by HUD on his
or her behalf, the borrower is not eligible except as described below.
Lenders access CAIVRS either through the FHA Connection or functional
equivalent or by calling 301-344-4000 on a touch-tone telephone. Lenders
must write the CAIVRS authorization code for each borrower on the
HUD-92900-WS/92900-PUR. Exceptions to this rule may be granted under the
following situations:

1\. Assumptions. If the borrower sold the property, with or without a
release of liability, to an individual who subsequently defaulted, the
borrower is eligible, provided he or she can prove the loan was not in
default at the time of assumption.

2\. Divorce. A borrower may be eligible if the divorce decree or legal
separation agreement awarded the property and responsibility for payment
to the former spouse. However, if a claim was paid on a mortgage in
default prior to the divorce, the borrower is not eligible.

3\. Bankruptcy. When the property was included in a bankruptcy that was
caused by circumstances beyond the borrower\'s control (such as the
death of the principal wage earner or serious long-term uninsured
illness), the borrower may be eligible if the borrower meets the
requirements in Paragraph 2-3 E.

While FHA may delete erroneous information regarding a borrower falsely
indicated as having defaulted on a FHA mortgage, such as incorrect
social security number reporting, it will not remove correct CAIVRS
information even if the borrower is judged eligible under the conditions
described above.

Lenders may not rely upon a clear CAIVRS approval when in possession of
independent evidence of delinquent federal obligations and must document
the resolution of any conflicting information. If the lender has reason
to believe the CAIVRS message is erroneous or needs to establish the
date of claim payment, the lender must contact the appropriate HOC for
instructions or documentation to support the borrower\'s eligibility.
The appropriate HOC can provide information when the three-year waiting
period will elapse or if the social security number in CAIVRS is
erroneous. The HOC will also provide instructions to lenders regarding
processing requirements for other HUD-related defaults and claims (e.g.,
Title I loans).

We cannot alter or delete CAIVRS information reported from other Federal
agencies, such as the Department of Education, Veterans Affairs, etc.
The borrower and/or the lender must contact those agencies to correct or
remove erroneous or outdated information. We do not require a \"clear\"
CAIVRS authorization number as a condition for mortgage endorsement, but
the lender must document and justify its approval based on the
exceptions described above.

# SECTION 2: EFFECTIVE INCOME

# 

The anticipated amount of income, and the likelihood of its continuance,
must be established to determine a borrower\'s capacity to repay
mortgage debt. Income may not be used in calculating the borrower\'s
income ratios if it comes from any source that cannot be verified, is
not stable, or will not continue. This section describes acceptable
types of income, procedures for calculating effective income, and
requirements for establishing income stability.

[]{#__RefHeading___Toc175360985 .anchor}**2-6 STABILITY OF INCOME**.
[\<TOP\>](#_top) We do not impose a minimum length of time a borrower
must have held a position of employment to be eligible. However, the
lender must verify the borrower\'s employment for the most recent two
full years. If a borrower indicates he or she was in school or in the
military during any of this time, the borrower must provide evidence
supporting this claim, such as college transcripts or discharge papers.
The borrower also must explain any gaps in employment spanning one month
or more. Allowances for seasonal employment, such as is typical in the
building trades, etc., may be made if documented by the lender.

To analyze and document the probability of continued employment, lenders
must examine the borrower's past employment record, qualifications for
the position, previous training and education, and the employer\'s
confirmation of continued employment. A borrower who changes jobs
frequently within the same line of work, but continues to advance in
income or benefits, should be considered favorably. In this analysis,
income stability takes precedence over job stability.

In some cases, a borrower may have recently returned to the work force
after an extended absence. In these circumstances, the borrower\'s
income may be considered effective and stable provided the following
conditions apply:

The borrower has been employed in the current job for six months or
more, and

B. The borrower can document a two-year work history prior to the
absence from the work force. Acceptable documentation includes
traditional employment verifications, copies of W-2\'s or paystubs.

An example of an acceptable employment situation includes a person that
took several years off of work to raise children and then returned to
the workforce. Situations not meeting the criteria listed above may be
considered as compensating factors only.

[]{#__RefHeading___Toc175360986 .anchor}**2-7 SALARIES, WAGES, AND OTHER
FORMS OF EFFECTIVE INCOME**. [\<TOP\>](#_top) The income of each
borrower to be obligated for the mortgage debt must be analyzed to
determine whether it can reasonably be expected to continue through at
least the first three years of the mortgage loan. If the borrower
intends to retire during this period, the effective income must be the
amount of documented retirement benefits, social security payments, or
other payments expected to be received in retirement. No inquiry may be
made regarding possible future maternity leave.

In most cases, the borrower's income will be limited to salaries or
wages. Income from other sources can be included as effective income
with proper verification by the lender. Procedures for analyzing other
acceptable income sources besides salaries and wages are described
below:

A. Overtime and Bonus Income. Both overtime and bonus income may be used
to qualify if the borrower has received such income for the past two
years and it is likely to continue. The lender must develop an average
of bonus or overtime income for the past two years, and the employment
verification must not state that such income is unlikely to continue.
Periods of less than two years may be acceptable provided the lender
justifies and documents in writing the reason for using the income for
qualifying purposes.

An earnings trend also must be established and documented for overtime
and bonus income. If either type shows a continual decline, the lender
must provide a sound rationalization in writing for including the income
for borrower qualifying. If bonus income varies significantly from year
to year, a period of more than two years must be used in calculating the
average income.

Part-Time Income. Part-time/second job income, including employment in
seasonal work, may be used in qualifying if the lender documents that
the borrower has worked the part-time job uninterrupted for the past two
years and will continue to do so. Seasonal employment (e.g., umpiring
baseball games in summer, working at a department store during the
holiday shopping season) is considered uninterrupted and may be used in
qualifying if the lender documents that the borrower has worked the same
type of job for the past two years and expects to be rehired during the
next season. Income from a part-time position that has been received for
less than two years may be included as effective income, provided the
lender justifies and documents that the income\'s continuance is likely.
Income from part-time positions not meeting these requirements may be
considered as a compensating factor only.

For qualification purposes, part-time income refers to jobs taken to
supplement the borrower\'s income from regular employment (i.e., a
second job -- not meaning primary jobs of less than 40 hours per week.)
If a borrower\'s regular employment involves less than a typical 40-hour
workweek, the stability of that income should be evaluated as any other
regular, on-going primary employment. For example, a registered nurse
may have worked 24 hours per week for the last year. Although this job
requires less than 40 hours of work per week, it is the borrower\'s
primary employment and is to be considered effective income.

We recognize that many low- and moderate-income families rely on
part-time and seasonal income for day-to-day needs. Lenders must not
restrict the consideration of such income sources in qualifying these
borrowers.

C. Military Income. In addition to base pay, military personnel may be
entitled to additional forms of pay. Income from variable housing
allowances, clothing allowances, flight or hazard pay, rations, and
proficiency pay is acceptable, provided its probability of continuance
is verified in writing. An additional consideration may be the
tax-exempt nature of some of these payments (see paragraph Q for
additional information.)

D. Commission Income. Commission income must be averaged over the
previous two years. The borrower must provide copies of signed tax
returns for the last two years, along with the most recent pay stub.
(Unreimbursed business expenses must be subtracted from gross income.)
Individuals whose commission income shows a decrease from one year to
the next require significant compensating factors to allow for loan
approval. Borrowers with commission income received for more than one
but less than two years may be considered favorably provided the
underwriter is able to make a sound rationalization for acceptance and
can document the likelihood of continuance.

Commissions earned for less than one year are not considered effective
income. Exceptions may be made for situations in which the borrower\'s
compensation was changed from a salary to commission within a similar
position with the same employer. A borrower also may qualify when the
portion of earnings not attributed to commissions would be sufficient to
qualify the borrower for the mortgage.

E. Retirement and Social Security Income. Retirement and social security
income require verification from the source (former employer, Social
Security Administration) or federal tax returns. If any benefits expire
within the first full three years, the income source may be considered
only as a compensating factor.

F. Alimony, Child Support, or Maintenance Income. Income in this
category may be considered as effective if such payments are likely to
be consistently received for the first three years of the mortgage. The
borrower must provide a copy of the final divorce decree, legal
separation agreement, or voluntary payment agreement, as well as
evidence that payments have been received during the last twelve months.
Acceptable evidence of payment regularity includes cancelled checks,
deposit slips, tax returns, and court records. Periods less than twelve
months may be acceptable, provided the payer's ability and willingness
to make timely payments is adequately documented by the lender.

G. Notes Receivable. A copy of the note must be presented to establish
the amount and length of payment. The borrower also must provide
evidence that these payments have been received consistently for the
last twelve months, which may include deposit slips, cancelled checks,
or tax returns. If the borrower is not the original payee on the note,
the lender must also establish that the borrower is now a holder in due
course and able to enforce the note.

H. Interest and Dividends. Interest and dividend income may be used,
provided that documentation (tax returns or account statements) supports
a two-year history of receipt. This income must be averaged over the two
years. Any funds derived from these sources and required for the cash
investment must be subtracted before the projected interest or dividend
income is calculated.

I. Mortgage Credit Certificates. If a government entity subsidizes the
mortgage payments, either through direct payments or through tax
rebates, these payments can be considered as acceptable income if
verified in writing. Either type of subsidy may be added to gross income
or may be used to directly offset the mortgage payment before
calculating the qualifying ratios.

J. Employer Differential Payments. If the employer subsidizes the
mortgage payments through direct payments, the amount of the payments is
considered gross income; it may not be used to offset the mortgage
payment directly, even if the employer pays the servicing lender
directly.

K. VA Benefits. Direct compensation, such as for a service-related
disability, is acceptable, subject to documentation from the VA.
Education benefits, used to offset education expenses, are not
acceptable.

L. Government Assistance Programs. Income received from government
assistance programs is acceptable, subject to documentation from the
paying agency, provided the income is expected to continue at least
three years. If the income is not expected to be received for at least
three years, such income may be considered as a compensating factor.
(Unemployment income must be documented for two years. Reasonable
assurance of its continuance is also required. This requirement may
apply to individuals employed on a seasonal basis, such as farm workers,
resort employees, etc.)

M. Rental Income. Rent received for properties owned by the borrower is
acceptable if the lender can document that the rental income is stable.
Examples of stability may include a current lease, an agreement to
lease, or a rental history over the previous 24 months that is free of
unexplained gaps greater than three months. (Student, seasonal, or
military renters, or property rehabilitation would provide such an
explanation). A separate schedule of real estate is not required for
rental properties, provided all properties are shown on the URLA.

If the borrower resides in one or more units of a multiple-unit property
and charges rent to tenants of other units, that rent may be used for
qualifying purposes. However, projected rent of additional units only
and not the owner-occupied unit(s) may be considered gross income only
after deducting the HOC's vacancy and maintenance factor. They may not
be used as a direct offset to the mortgage payments.

Income from roommates in a single-family property to be occupied as the
borrower\'s primary residence is not acceptable. Rental income from
boarders is acceptable if the boarders are related by blood, marriage,
or law. The rental income may be considered effective income if shown on
the borrower\'s tax returns. Otherwise, the income only may be
considered a compensating factor and must be documented adequately by
the lender.

The following is required to verify all rental income:

1\. Schedule E of IRS Form 1040. Depreciation may be added back to the
net income or loss shown on Schedule E. Positive rental income is
considered gross income for qualifying purposes; negative rental income
must be treated as a recurring liability. The lender must be certain
that the borrower still owns each property listed, by comparing the
Schedule E with the real estate owned section of the residential loan
application. (If the borrower in the same general area owns six or more
units, a map disclosing the locations must be submitted evidencing
compliance with FHA\'s seven-unit limitation. See paragraph 4-8 for
additional information.)

2\. Current Leases. If a property was acquired since the last income tax
filing and is not shown on Schedule E, a current signed lease or other
rental agreement must be provided. The gross rental amount must be
reduced for vacancies and maintenance by 25 percent (or the percentage
developed by the jurisdictional HOC), before subtracting PITI and any
homeowners\' association dues, etc., and applying the remainder to
income (or recurring debts, if negative).

N. Eligible Investment Properties. If the property to be insured is an
eligible investment property or sold through FHA\'s REO program, the
following calculations of qualifying ratios apply:

Subtract the monthly payment (PITI) from the monthly net rental income
of the subject property (gross rents, minus the 25 percent reduction or
HOC's percentage reduction for vacancies and repairs). If this
calculation yields a positive number, add the number to the borrower\'s
monthly gross income. If the calculation results in a negative number,
consider it a recurring monthly obligation; then

Calculate the mortgage payment-to-income ratio (top or front-end ratio)
by dividing the borrower\'s current housing expense (principal
residence) by the monthly gross income. (The monthly gross income will
include any positive cash flow from the subject investment property.);
and

3\. Calculate the total fixed payment-to-income ratio (bottom or
back-end ratio) by dividing the borrower\'s total monthly obligations,
including any net loss from the subject investment property, by the
borrower\'s total monthly gross income.

O. Automobile Allowances and Expense Account Payments. Only the amount
by which the borrower\'s automobile allowance or expense account
payments exceed actual expenditures may be considered income. The
borrower must provide IRS Form 2106, Employee Business Expenses, for the
previous two years to establish the amount of income that may be added
to gross income. The borrower also must provide verification from the
employer that these payments will continue. (If these calculations show
a loss, that amount must be treated as a recurring debt. If the borrower
uses the standard per-mile rate in calculating automobile expenses, as
opposed to the actual cost method, the portion that the IRS considers
depreciation may be added back to income.) Additionally, the borrower\'s
monthly car payment must be treated as a recurring debt; it may not be
offset by the car allowance.

P. Trust Income. Income from trusts may be used if guaranteed, constant
payments will continue for at least the first three years of the
mortgage term. Documentation is required and includes a copy of the
Trust Agreement, or other trustee\'s statement, confirming amount,
frequency of distribution, and duration of payments. Funds from the
trust account also may be used for the required cash investment with
adequate documentation.

Q. Non-Taxable Income. If a particular source of regular income is not
subject to federal taxes (e.g., certain types of disability and public
assistance payments, military allowances), the amount of continuing tax
savings attributable to the non-taxable income source may be added to
the borrower\'s gross income. The percentage of income that may be added
may not exceed the appropriate tax rate for that income amount, and no
additional allowances for dependents are acceptable. The lender must
document and support the adjustments (the amount the income is \"grossed
up\") made for any non-taxable income source. Child support income
cannot be grossed up. The lender should use the tax rate used to
calculate last year\'s income tax for the borrower. If the borrower is
not required to file a federal income tax return, the tax rate to use is
25 percent.

R. Projected Income. Projected or hypothetical income is not acceptable
for qualifying purposes. However, exceptions are permitted to this rule
for income from cost-of-living adjustments, performance raises, bonuses,
etc., which are both verified by the employer in writing and scheduled
to begin within 60 days of loan closing.

If a borrower is about to start a new job and has a guaranteed,
non-revocable contract for employment that will begin within 60 days of
loan closing, the income is acceptable for qualifying purposes. The
lender also must verify that the borrower will have sufficient income or
cash reserves to support the mortgage payments and any other obligations
during the interim between loan closing and the start of employment.
(This condition may be appropriate for situations such as teachers whose
contracts will begin with the new school year, or physicians who will
begin residency after the loan is scheduled to close.) However, if the
loan will close more than 60 days before the borrower's employment
begins, the loan is not eligible for endorsement until the lender
provides a pay stub or other acceptable evidence that the borrower has
begun the new job.

[]{#__RefHeading___Toc175360987 .anchor}**2-8 EMPLOYMENT BY FAMILY-OWNED
BUSINESSES**. [\<TOP\>](#_top) Borrowers employed at businesses owned by
their family member(s) are required to provide additional income
documentation. These borrowers must provide the normal verification of
employment, pay stubs, and evidence that they are not an owner of the
business. This evidence may include copies of the borrower\'s signed
personal tax returns or a signed copy of the corporate tax return
showing ownership percentages.

[]{#__RefHeading___Toc175360988 .anchor}**2-9 SELF-EMPLOYED BORROWERS**.
[\<TOP\>](#_top) A borrower with a 25 percent or greater ownership
interest in a business is considered self-employed for FHA mortgage loan
underwriting purposes.

The following conditions apply to underwriting self-employed borrowers:

A. Minimum Length of Self-Employment. Income from self-employment is
considered stable and effective if the borrower has been self-employed
for two or more years. The high probability of failure during the first
few years of a business makes the following requirements necessary for
individuals who have been self-employed less than two years:

1\. Between One and Two Years. An individual self-employed between one
and two years must have at least two years of documented previous
successful employment (or a combination of one year of employment and
formal education or training) in the line of work in which the borrower
is self-employed or in a related occupation to be eligible.

2\. Less than One Year. The income from a borrower self-employed less
than one year may not be considered effective income.

B. Documentation Requirements. The following documents are required from
self-employed borrowers:

1\. Signed and dated individual tax returns, plus all applicable
schedules, for the most recent two years.

2\. Signed copies of federal business income tax returns for the last
two years, with all applicable schedules, if the business is a
corporation, an \"S\" corporation, or a partnership.

3\. A year-to-date profit-and-loss (P&L) statement and balance sheet.

4\. A business credit report on corporations and \"S\" corporations.

C. Analyzing Income. The lender must establish the borrower\'s earnings
trend over the previous two years but may average the income over three
years, if all three years\' tax returns are provided. If the borrower
provides quarterly tax returns, the analysis can include income through
the period covered by the tax filings. If the borrower is not subject to
quarterly tax filings or does not file quarterly returns (Form IRS 1040
ES), the income shown on the P&L statement may be included in the
analysis, provided the income stream based on the P&L statement is
consistent with the previous years\' earnings. If the P&L statements
submitted for the current year show an income stream considerably
greater than what is supported by the previous years\' tax returns, the
analysis of income must be predicated solely on the income verified
through the tax returns.

To determine if the business can be expected to continue to generate
sufficient income for the borrower\'s needs, lenders must analyze
carefully the business\'s financial strength, the source of its income,
and the general economic outlook for similar businesses in the area.
Annual earnings that are stable or increasing are acceptable.
Conversely, a borrower whose business shows a significant decline in
income over the period analyzed is not acceptable, even if current
income and debt ratios meet our guidelines.

There are four basic types of business structures: sole proprietorships,
corporations; limited liability (\"S\" corporations); and partnerships.
Each type requires slightly different forms of analysis.

The following provides additional information on analyzing tax returns:

1\. Individual Tax Returns (IRS Form 1040). The amount shown on the IRS
Form 1040 as \"adjusted gross income\" either must be increased or
decreased, based on the lender\'s analysis of the individual tax returns
and any related tax schedules. Particular attention must be paid to the
following:

a\. Wages, Salaries, and Tips. An amount shown under this heading may
indicate that the individual is a salaried employee of a corporation or
has other sources of income. It also may indicate that the spouse is
employed, in which case the income must be subtracted from the adjusted
gross income in the analysis.

b\. Business Income or Loss (from Schedule C). The sole proprietorship
income calculated on Schedule C is business income. Depreciation or
depletion may be added back to adjusted gross income.

c\. Rents, Royalties, Partnerships, Etc. (from Schedule E). Any income
received from rental properties or royalties may be used as income after
adding back any depreciation shown on Schedule E.

d\. Capital Gain or Loss (from Schedule D). This transaction generally
occurs only one time, and it should not be considered in determining
effective income. However, if the business has a constant turnover of
assets resulting in gains or losses, the capital gain or loss may be
considered in determining the income, provided the borrower has at least
three years\' tax returns evidencing capital gains. An example includes
an individual who purchases old houses, remodels them, and sells them
for a profit.

e\. Interest and Dividend Income (from Schedule B). This income, which
is taxable and tax-exempt, may be added back to the adjusted gross
income only if it has been received for the past two years and is
expected to continue. (If the interest-bearing asset will be liquidated
as a source of the cash investment, the lender must adjust accordingly.)

f\. Farm Income or Loss (from Schedule F). Any depreciation shown on
Schedule F may be added back to the adjusted gross income.

g\. IRA Distributions, Pensions, Annuities, and Social Security
Benefits. The non-taxable portion of these items may be added back to
the adjusted gross income, if the income is expected to continue for the
first three years of the mortgage.

h\. Adjustments to Income. Certain adjustments to income shown on the
IRS Form 1040 may be added back to the adjusted gross income. Among
these adjustments are IRA and Keogh retirement deductions, penalties on
early withdrawal of savings, health insurance deductions, and alimony
payments.

i\. Employee Business Expenses. These expenses are actual cash expenses
that must be deducted from the borrower\'s adjusted gross income.

2\. Corporate Tax Returns (IRS Form 1120). Corporations are
state-chartered businesses owned by their stockholders. Compensation to
its officers, generally in proportion to the percentage of ownership, is
shown on the corporate tax returns and will appear on individual tax
returns. If the borrower\'s percentage of ownership is not shown, it
must be obtained separately from the corporation\'s accountant, with
evidence that the borrower has the right to those funds. Once the
adjusted business income is determined, it should be multiplied by the
borrower\'s percentage of ownership in the business.

In analyzing the corporate tax returns, lenders must adjust for the
following:

a\. Depreciation and Depletion. The corporation\'s depreciation and
depletion must be added back to after-tax income.

b\. Taxable Income. Taxable income is the corporation\'s net income
before federal taxes. It must be reduced by the tax liability.

c\. Fiscal Year vs. Calendar Year. If the corporation operates on a
fiscal year that is different from the calendar year, an adjustment must
be made by the lender to relate corporate income to the individual tax
return.

d\. Cash Withdrawals. The borrower\'s withdrawal of cash from the
corporation may have a severe negative impact on the corporation\'s
ability to continue operating.

3\. \"S\" Corporation Tax Returns. An \"S\" corporation is generally a
small, start-up business, with gains and losses passed on to
stockholders in proportion to each stockholder\'s percentage of business
ownership. The income for the owners comes from W-2 wages and is taxed
at the individual rate.

The \"compensation of officers\" line on the IRS Form 1120S is
transferred to the borrower\'s IRS Form 1040. Both depreciation and
depletion may be added back to income in proportion to the borrower\'s
share of income. However, income also must be deducted proportionately
by the total obligations payable by the corporation in less than one
year. The borrower\'s withdrawal of cash from the corporation may have a
severe negative impact on the corporation\'s ability to continue
operating and must be considered in the analysis.

4\. Partnership Tax Returns. A partnership is formed when two or more
individuals form a business and share in profits, losses, and
responsibility for running the company. Each partner pays taxes on his
or her proportionate share of the partnership's net income.

Both general and limited partnerships report income on the IRS Form
1065; this form must be reviewed by the lender to assess the viability
of the business. The partner\'s share of income is carried over to
Schedule E of IRS Form 1040. Both depreciation and depletion may be
added back to income in proportion to the borrower\'s share of income.
However, income also must be deducted proportionately by the total
obligations payable by the partnership in less than one year. The
borrower\'s withdrawal of cash from the partnership may have a severe
negative impact on the partnership\'s ability to continue operating and
must be considered in the analysis.

# SECTION 3: BORROWER\'S CASH INVESTMENT IN THE PROPERTY

[]{#__RefHeading___Toc175360990 .anchor}**2-10 FUNDS TO CLOSE**.
[\<TOP\>](#_top) The cash investment in the property must equal the
difference between the amount of the insured mortgage, excluding any
upfront MIP, and the total cost to acquire the property including
prepaid expenses and closing costs as described in paragraph 1-9.

All funds for the borrower\'s investment in the property must be
verified and documented. Acceptable sources of these funds include the
following:

A. Earnest Money Deposit. If the amount of the earnest money deposit
exceeds 2 percent of the sales price or appears excessive based on the
borrower\'s history of accumulating savings, the lender must verify with
documentation the deposit amount and the source of funds. Satisfactory
documentation includes a copy of the borrower\'s cancelled check. A
certification from the deposit-holder acknowledging receipt of funds and
separate evidence of the source of funds is also acceptable. Evidence of
source of funds includes a verification of deposit or bank statement
showing that at the time the deposit was made the average balance was
sufficient to cover the amount of the earnest money deposit.

Savings and Checking Accounts. A verification of deposit (VOD), along
with the most recent bank statement, may be used to verify savings and
checking accounts. If there is a large increase in an account, or the
account was opened recently, the lender must obtain a credible
explanation of the source of those funds.

C. Gift Funds. An outright gift of the cash investment is acceptable if
the donor is the borrower's relative, the borrower\'s employer or labor
union, a charitable organization, a governmental agency or public entity
that has a program to provide homeownership assistance to low- and
moderate-income families or first-time homebuyers, or a close friend
with a clearly defined and documented interest in the borrower. The gift
donor 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. Gifts from these sources are considered
inducements to purchase and must be subtracted from the sales price. No
repayment of the gift may be expected or implied. (As a rule, we are not
concerned with how the donor obtains the gift funds provided they are
not derived in any manner from a party to the sales transaction. Donors
may borrow gift funds from any other acceptable source provided the
mortgage borrowers are not obligors to any note to secure money borrowed
to give the gift.) This rule also applies to properties of which the
seller is a government agency selling foreclosed properties, such as the
Veterans Administration or Rural Housing Services. Only family members
may provide equity credit as a gift on a property being sold to other
family members. These restrictions on gifts and equity credit may be
waived by the jurisdictional HOC provided that the seller is
contributing to or operating an acceptable affordable housing program.

FHA deems the payment of consumer debt by third parties to be an
inducement to purchase. While FHA permits sellers and other parties to
make contributions of up to six percent of the sales price of a property
toward a buyer\'s actual closing costs and financing concessions, this
policy applies exclusively to the provision of mortgage financing. Other
expenses paid on behalf of the borrower must result in a
dollar-for-dollar reduction to the sales price. The dollar-for-dollar
reduction to the sales price also applies to gift funds not meeting the
requirement that the gift be for downpayment assistance and is provided
by an acceptable source. When someone other than a family member has
paid off debts, the funds used to pay off the debt must be treated as an
inducement to purchase and the sales price must be reduced by a
dollar-for-dollar amount in calculating the maximum insurable mortgage.

Documentation Requirements. The lender must document the gift funds by
obtaining a gift letter, signed by the donor and borrower, that
specifies the dollar amount of the gift, states that no repayment is
required, shows the donor's name, address, telephone number and states
the nature of the donor's relationship to the borrower. In addition, the
lender must document the transfer of funds from the donor to the
borrower, as follows:

1\. If the gift funds are in the homebuyer\'s bank account, the lender
must document the transfer of the funds from the donor to the homebuyer
by obtaining a copy of the canceled check or other withdrawal document
showing that the withdrawal is from the donor\'s account. The
homebuyer\'s deposit slip and bank statement that shows the deposit is
also required.

2\. If the gift funds are to be provided at closing:

a\. If the transfer of the gift funds is by certified check made on the
donor\'s account, the lender must obtain a bank statement showing the
withdrawal from the donor\'s account, as well as a copy of the certified
check.

b\. If the donor purchased a cashier\'s check, money order, official
check, or any other type of bank check as a means of transferring the
gift funds, the donor must provide a withdrawal document or canceled
check for the amount of the gift, showing that the funds came from the
donor\'s personal account. If the donor borrowed the gift funds and
cannot provide documentation from the bank or other savings account, the
donor must provide written evidence that those funds were borrowed from
an acceptable source, i.e., not from a party to the transaction,
including the lender. \"Cash on hand\" is not an acceptable source of
the donor\'s gift funds.

Regardless of when the gift funds are made available to the homebuyer,
the lender must be able to determine that the gift funds ultimately were
not provided from an unacceptable source and were indeed the donor\'s
own funds. When the transfer occurs at closing, the lender remains
responsible for obtaining verification that the closing agent received
funds from the donor for the amount of the purported gift and that those
funds came from an acceptable source.

NOTE: FHA does not "approve" down payment assistance programs in the
form of gifts administered by charitable organizations (i.e.,
nonprofits). Mortgage lenders are responsible for assuring that the gift
to the homebuyer from the charitable organization meets the appropriate
FHA requirements and the transfer of funds is properly documented. In
addition, FHA does not allow nonprofit entities to provide gifts to
homebuyers for the purpose of paying off installment loans, credit
cards, collections, judgments, and similar debts.

D. Collateralized Loans. Funds can be borrowed for the total required
investment as long as satisfactory evidence is provided that the funds
are fully secured by investment accounts or real property. Such assets
may include stocks, bonds, real estate (other than the property being
purchased), etc.

In addition, certain types of loans secured against deposited funds,
such as signature loans, the cash value of life insurance policies,
loans secured by 401(k)s, etc., in which repayment may be obtained
through extinguishing the asset; do not require consideration of a
repayment for qualifying purposes. However, in such circumstances, the
asset securing the loan may not be included as assets to close or
otherwise considered as available to the borrower.

An independent third party must provide the borrowed funds. The seller,
real estate agent or broker, lender, or other interested third party may
not provide such funds. Unacceptable borrowed funds include signature
loans, cash advances on credit cards, borrowing against household goods
and furniture and other similar unsecured financing.

E. Sales Proceeds. The net proceeds from an arms-length sale of a
currently owned property may be used for the cash investment on a new
house. A fully executed HUD-1 Settlement Statement must be provided as
satisfactory evidence of the cash sales proceeds accruing to the
borrower. If the property has not sold by the time of underwriting, loan
approval must be conditioned upon verifying the actual proceeds received
by the borrower. The lender must document both the actual sale and the
sufficiency of the net proceeds required for settlement.

F. Trade Equity. The borrower may agree to trade his or her real
property to the seller as part of the cash investment. The amount of the
borrower\'s equity contribution is determined by subtracting all liens
against the property being traded (along with any real estate
commission) from the lesser of that property\'s appraised value or
sales/trade price.

Value must be determined by a residential appraisal no more than six
months old. Evidence of ownership also is required. Additionally, if the
property being traded has an FHA-insured mortgage, assumption processing
requirements and restrictions apply (see Chapter 4 for additional
information).

G. Sale of Personal Property. If the borrower intends to sell personal
property items (cars, recreational vehicles, stamps, coins, baseball
card collections, etc.) to obtain funds required for closing, the
borrower must provide a satisfactory estimate of their worth, in
addition to conclusive evidence the items have been sold. The estimated
worth of the items being sold may be in the form of published value
estimates, such as those issued by automobile dealers, philatelic or
numismatic associations, or a separate written appraisal by a qualified
appraiser with no financial interest in the loan transaction. Only the
lesser of this estimate of value or the actual sales price is considered
as assets to close.

H. Employer\'s Guarantee Plans. If the borrower's employer guarantees to
purchase the borrower\'s previous residence as the result of relocation,
the borrower must submit evidence of the agreement and the net proceeds
must be guaranteed.

I. Employer Assistance Plans. If the employer, to attract or retain
valuable employees, pays the employee\'s closing costs, mortgage
insurance premium, or any portion of the cash investment, this payment
is considered employee compensation and no adjustment to the maximum
mortgage amount is required. If the employer provides this benefit after
loan settlement, the borrower must provide evidence of sufficient cash
for closing. A salary advance, however, cannot be considered as assets
to close since it represents an unsecured loan.

J. Savings Bonds, Etc. Government issued bonds are counted at original
purchase price, unless eligibility for redemption and redemption value
are confirmed. Actual receipt of funds at redemption must be verified.

K. IRAs, Thrift Savings Plans, 401(k)s & Keogh Accounts. Assets such as
IRAs, thrift savings plans, and 401(k)s, etc., may be included in the
underwriting analysis up to only 60 percent of value unless the borrower
provides conclusive evidence that a higher percentage may be withdrawn
after subtracting any federal income tax and any withdrawal penalties.
Evidence of redemption is required.

L. Stocks and Bonds. The monthly or quarterly statement provided by the
stockbroker or financial institution managing the portfolio may be used
to verify the value of these securities. Actual receipt of funds must be
verified and documented.

M. Cash Saved At Home. Borrowers who have saved cash at home and are
able to demonstrate adequately the ability to do so are permitted to
have this money included as an acceptable source of funds to close the
mortgage. To include such funds in assessing the homebuyer\'s cash
assets for closing, the money must be verified--whether deposited in a
financial institution or held by the escrow/title company--and the
borrower must provide satisfactory evidence of the ability to accumulate
such savings.

The asset verification process requires the borrower to explain in
writing how such funds were accumulated and the amount of time taken to
do so. The lender must determine the reasonableness of the accumulation
of the funds based on the borrower\'s income stream, the time period
during which the funds were saved, the borrower's spending habits,
documented expenses and the borrower's history of using financial
institutions. (All other factors being equal, individuals with checking
and/or savings accounts are less likely to save money at home than an
individual with no history of such accounts.)

N. Rent Credit. The cumulative amount of the rental payments that exceed
the appraiser\'s estimate of fair market rent may be considered
accumulation of the borrower\'s cash investment. Both the
rent-with-option-to-purchase agreement and the appraiser\'s estimate of
market rent must be included in the endorsement package.

Conversely, if the sales agreement reveals that the renter has been
living in the property (or one owned by the seller) rent-free, or that
an agreement was made allowing the renter to occupy at a rental amount
considerably below fair market value in anticipation of eventual
purchase of the property, this situation must be treated as an
inducement to purchase with an appropriate reduction to the mortgage.
Exceptions may be granted in situations, such as when a builder fails to
deliver a property at an agreed-to time and then permits the borrower to
occupy that or another unit for less-than-market rent temporarily until
construction is complete.

O. Sweat Equity. Labor performed or materials furnished by the borrower
before closing, on the property being purchased, may be considered as
the equivalent of a cash investment, to the extent of the estimated cost
of the work or materials. (Sweat equity may be \"gifted\" subject to the
gift requirements and additional requirements shown below.)
Additionally, the following apply to sweat equity:

1\. On existing construction, only the repairs or improvements listed on
the appraisal are eligible for sweat equity. Any work completed or
materials provided before the appraisal is made are not eligible. On
proposed construction, the sales contract must indicate the tasks to be
performed by the homebuyer during construction.

2\. The borrower\'s labor may be considered as the equivalent of cash,
if the borrower can demonstrate his or her ability to complete the work
in a satisfactory manner. The lender must document the contributory
value of the labor through either the appraiser\'s estimate or a cost
estimating service.

3\. Delayed work (on-site escrow), clean up, debris removal, and other
general maintenance cannot be included as sweat equity.

4\. There can be no cash back to the borrower in these transactions.

5\. Sweat equity on a property other than the property being purchased
is not acceptable. Compensation for work performed on other properties
must be in cash and be properly documented.

6\. Evidence of the source of funds used to purchase and the market
value of the materials must be provided if the borrower furnishes these.

P. Commission from Sale. If the borrower is a licensed real estate agent
entitled to a real estate commission from the sale of the property being
purchased, that amount may be used for the cash investment with no
adjustment to the maximum mortgage required. A family member entitled to
the commission also may provide gift funds to the homebuyer.

Q. Disaster Relief Grants and Loans. Grants or loans from state and
federal agencies \[e.g., Federal Emergency Management Agency (FEMA)\]
that provide immediate housing assistance to individuals displaced due
to natural disaster may be used for the borrower\'s cash investment.
Secured or unsecured disaster relief loans administered by the Small
Business Administration (SBA) also may be used. However, if the SBA loan
will be secured against the property being purchased, it must be clearly
subordinate to the FHA-insured mortgage. Any monthly payment arising
from such a loan must be included in the qualifying ratios.

R. Cash Accumulated with Private Savings Clubs. Some borrowers may
choose to use non-traditional methods of saving money by making deposits
into private savings club. Often, these private savings clubs pool
resources for use among the membership.

If a homebuyer claims that the cash to close an FHA-insured mortgage is
from savings held with a private savings club, the borrower must be able
to adequately document the accumulation of those assets with the club.
While such clubs are not supervised banking institutions, the clubs must
--at a minimum-- have account ledgers, receipts from the club,
verification from the club treasurer, and identification of the club so
that the lender can reverify the information provided. The underwriter
must be able to determine that it was reasonable for the borrower to
have saved the money claimed and that there is no evidence these funds
were borrowed with an expectation of repayment.

# SECTION 4: LIABILITIES

[]{#__RefHeading___Toc175360992 .anchor}**2-11 TYPES OF LIABILITIES**.
[\<TOP\>](#_top) The following are types of liabilities that must be
considered in qualifying borrowers:

A. Recurring Obligations. The borrower\'s liabilities include all
installment loans, revolving charge accounts, real estate loans,
alimony, child support, and all other continuing obligations. In
computing the debt-to-income ratios, the lender must include the monthly
housing expense and all other additional recurring charges extending ten
months or more, including payments on installment accounts, child
support or separate maintenance payments, revolving accounts and
alimony, etc. Debts lasting less than ten months must be counted if the
amount of the debt affects the borrower\'s ability to make the mortgage
payment during the months immediately after loan closing; this is
especially true if the borrower will have limited or no cash assets
after loan closing.

The following additional information deals with revolving accounts and
alimony payments:

1\. Revolving Accounts. If the account shown on the credit report has an
outstanding balance, monthly payments for qualifying purposes must be
calculated at the greater of 5 percent of the balance or \$10 (unless
the account shows a specific minimum monthly payment).

2\. Alimony. Because of the tax consequences of alimony payments, the
lender may choose to treat the monthly alimony obligation as a reduction
from the borrower\'s gross income in calculating qualifying ratios,
rather than as a monthly obligation.

B. Contingent Liabilities. A contingent liability exists when an
individual will be held responsible for payment of a debt, should
another party, jointly or severally obligated, default on that payment.
Unless the borrower can provide conclusive evidence from the debt holder
that there is no possibility the debt holder will pursue debt collection
against him or her should the other party default, the following rules
apply to contingent liabilities:

1\. Mortgage Assumptions. When a borrower remains obligated on an
outstanding FHA-insured, VA-guaranteed, or conventional mortgage secured
by a property that has been sold or traded within the last twelve months
without a release of liability, or is to be sold on assumption without a
release of liability being obtained, contingent liability must be
considered unless:

The originating lender of the mortgage being underwritten obtains from
the servicer of the assumed loan a payment history showing that mortgage
has been current during the previous 12 months; or

b\. An appraisal or closing statement from the sale of the property
supports a value that results in a 75 percent LTV ratio \[i.e., the
outstanding balance on the mortgage loan (minus any UFMIP, if
applicable) cannot exceed 75 percent of the appraised value or sales
price\].

2\. Co-Signed Obligations. If the individual applying for an FHA-insured
mortgage is a co-signer--or is otherwise co-obligated on a car loan,
student loan, mortgage, or any other obligation -- contingent liability
applies unless the lender obtains documented proof that the primary
obligor has been making payments during the previous 12 months on a
regular basis and does not have a history of delinquent payments on the
loan.

C. Projected Obligations. If a debt payment, such as a student loan, is
scheduled to begin within twelve months of the mortgage loan closing,
the lender must include the anticipated monthly obligation in the
underwriting analysis, unless the borrower provides written evidence
that the debt will be deferred to a period outside this timeframe.
Similarly, balloon notes that come due within one year of loan closing
must be considered in the underwriting analysis.

D. Obligations Not Considered Debt. Obligations not to be considered
debt (or subtracted from gross income) include federal, state, and local
taxes; FICA or other retirement contributions such as 401(k) accounts
(including repayment of debt secured by these funds); commuting costs;
union dues; open accounts with zero balances; automatic deductions to
savings accounts; child care; and voluntary deductions.

# SECTION 5: BORROWER QUALIFYING

The paragraphs below discuss debt-to-income ratios and the compensating
factors that may be used to exceed the qualifying ratios. As evidenced
by the description of compensating factors, ratios can be exceeded when
significant compensating factors exist. We also do not set an arbitrary
percentage that ratios may never exceed; however, the underwriter should
judge the overall merits of the loan application and determine what
compensating factors apply and the extent to which ratios may be
exceeded.

Underwriting requires careful analysis of the many aspects of the
mortgage. Each loan is a separate and unique transaction, and there may
be other factors that demonstrate the borrowers\' ability and
willingness to make timely mortgage payments. There is a danger of
\"layering flexibilities\" in assessing mortgage insurance risk, and
simply establishing that a loan transaction meets minimal standards does
not necessarily constitute prudent underwriting. The lender is
responsible for adequately analyzing the probability that the borrower
will be able to repay the mortgage obligation in accordance with the
terms of the loan.

[]{#__RefHeading___Toc175360994 .anchor}**2-12 DEBT-TO-INCOME RATIOS**.
[\<TOP\>](#_top) Ratios are used to determine whether the borrower can
reasonably be expected to meet the expenses involved in homeownership,
and otherwise provide for the family. The lender must compute two
ratios:

A. Mortgage Payment Expense to Effective Income. If the total mortgage
payment (principal and interest; escrow deposits for real estate taxes,
hazard insurance, the mortgage insurance premium, homeowners\'
association dues, ground rent, special assessments, and payments for any
acceptable secondary financing) does not exceed 29 percent of the gross
effective income, the relationship of the mortgage payment to income is
considered acceptable. A ratio exceeding 29 percent may be acceptable
only if significant compensating factors as discussed in paragraph 2-13
are documented and are recorded on the mortgage credit analysis
worksheet. Typically, for borrowers with limited recurring expense,
greater latitude is permissible on this ratio than on the total fixed
payment ratio described below.

B. Total Fixed Payment to Effective Income. If the total of the mortgage
payment and all recurring charges does not exceed 41 percent of the
gross effective income, the relationship of total obligations to income
is considered acceptable. A ratio exceeding 41 percent may be acceptable
only if significant compensating factors as discussed in paragraph 2-13
are documented and are recorded on the mortgage credit analysis
worksheet.

[]{#__RefHeading___Toc175360995 .anchor}**2-13 COMPENSATING FACTORS**.
[\<TOP\>](#_top) Compensating factors that may be used to justify
approval of mortgage loans with ratios exceeding our benchmark
guidelines are those listed below. Underwriters must record on the
\"remarks\" section of the HUD 92900-WS/HUD 92900-PUR the compensating
factor(s) used to support loan approval. Any compensating factor used to
justify mortgage approval must be supported by documentation.

A. The borrower has successfully demonstrated the ability to pay housing
expenses equal to or greater than the proposed monthly housing expense
for the new mortgage over the past 12-24 months.

B. The borrower makes a large downpayment (ten percent or more) toward
the purchase of the property.

C. The borrower has demonstrated an ability to accumulate savings and a
conservative attitude toward the use of credit.

D. Previous credit history shows that the borrower has the ability to
devote a greater portion of income to housing expenses.

E. The borrower receives documented compensation or income not reflected
in effective income, but directly affecting the ability to pay the
mortgage, including food stamps and similar public benefits.

F. There is only a minimal increase in the borrower\'s housing expense.

The borrower has substantial documented cash reserves (at least three
months' worth) after closing. In determining if an asset can be included
as cash reserves or cash to close, the lender must judge whether or not
the asset is liquid or readily convertible to cash and can be done so
absent retirement or job termination. Also see paragraph 2-10K.

Funds borrowed against these accounts may be used for loan closing, but
are not to be considered as cash reserves. "Assets" such as equity in
other properties and the proceeds from a cash-out refinance are not to
be considered as cash reserves. Similarly, funds from gifts from any
source are not to be included as cash reserves.

H. The borrower has substantial non-taxable income (if no adjustment was
made previously in the ratio computations).

I. The borrower has a potential for increased earnings, as indicated by
job training or education in the borrower\'s profession.

J. The home is being purchased as a result of relocation of the primary
wage-earner, and the secondary wage-earner has an established history of
employment, is expected to return to work, and reasonable prospects
exist for securing employment in a similar occupation in the new area.
The underwriter must document the availability of such possible
employment.

MORTGAGE CREDIT ANALYSIS

# SECTION 6: SPECIAL UNDERWRITING INSTRUCTIONS

[]{#__RefHeading___Toc175360997 .anchor}**2-14 Temporary Interest Rate
Buydowns**. [\<TOP\>](#_top) Interest rate buydowns are designed to
reduce the borrower's monthly payment during the early years of the
mortgage and are permitted only on purchase transactions. Buydowns may
only be used on fixed-rate mortgages.

Buydown funds may come from the seller, lender, borrower or other party.
Funds from the seller or any other interested third party are considered
seller contributions and must be included in the six percent limit on
seller contributions (see paragraph 1-7A). Lenders must ensure that the
funds described in the escrow agreement have been placed in escrow
before or at closing and that the agreement meets the requirements
described below.

Buydowns on eligible loans not meeting all the criteria described in
paragraph A, below, may be considered only as compensating factors.
However, all buydowns must comply with the escrow agreement requirements
in paragraph B, below.

Underwriting Requirements for Qualifying Borrowers at the Buydown
Interest Rate.

The mortgage must be a fixed rate loan on an owner occupied principal
residence.

The buydown must not result in a reduction of more than two percentage
points below the interest rate on the note.

The buydown must not result in more than a one-percentage point annual
decrease in the interest rate. The borrower's payment may change only
once a year.

B. Additional Interest Rate Buydown Instructions.

1\. Lender-funded buydowns on fixed-rate purchase money mortgages
through premium pricing are acceptable provided that the funds generated
do not result in a reduction of more than 2 percentage points below the
note rate.

2\. The lender must establish that the eventual increase in mortgage
payments will not affect the borrower adversely and likely lead to
default. The underwriter must document that the borrower meets one of
the following criteria:

a\. The borrower has a potential for increased income that would offset
the scheduled payment increases, as indicated by job training or
education in the borrower\'s profession or by a history of advancement
in the borrower\'s career with attendant increases in earnings.

b\. The borrower has a demonstrated ability to manage financial
obligations in such a way that a greater portion of income may be
devoted to housing expenses. This criterion also may include borrowers
whose long-term debt, if any, will not extend beyond the term of the
buydown agreement.

c\. The borrower has substantial assets available to cushion the effect
of the increased payments.

d\. The cash investment made by the borrower substantially exceeds the
minimum required.

3\. Escrow Agreement Requirements. A copy of the escrow agreement,
signed by the borrower and the provider of funds, must accompany the
loan application. (The underwriter may condition the loan approval for
an executed buydown agreement at closing.)

The following are requirements for the escrow agreement:

a\. The agreement must provide that any escrow funds not distributed at
the time the mortgage loan is prepaid be applied to the outstanding
balance due on the mortgage. However, in the event of foreclosure, the
claim for mortgage insurance benefits must be reduced by the amount
remaining in the buydown escrow account.

b\. The agreement must not permit reversion of undistributed escrow
funds to the provider if the property is sold or the mortgage is prepaid
in full. The agreement may provide that assistance payments continue to
buyers who assume the mortgage. Unless the borrower establishes the
escrow account, unexpended escrow funds may not be provided to the
borrower in cash.

c\. The escrow funds must be held in an escrow account by a financial
institution supervised by a federal or state agency. Payments must be
made by the escrow agent to the lender or its servicing agent. However,
if the escrow payments are not received for any reason, it is the
borrower\'s responsibility to make the total payment set forth in the
mortgage note. FHA has no objection to the lender holding and
administering the escrow funds for up to 60 days when there is an
outstanding forward commitment to sell the mortgage.

[]{#__RefHeading___Toc175360998 .anchor}**2-15 ADJUSTABLE RATE MORTGAGES
(ARMs)**. [\<TOP\>](#_top) Borrowers must qualify for one-year ARMs
using the mortgage payments based upon the contract or initial interest
rate plus 1 percentage point (i.e., the anticipated maximum second-year
interest rate) if the loan-to-value ratio is 95 percent or greater.

[]{#__RefHeading___Toc175360999 .anchor}**2-16 CONDOMINIUM
UNITS--UTILITY EXPENSES**. [\<TOP\>](#_top) With proper documentation,
such as that which is available from the utility company, the portion of
a condominium fee that is clearly attributable to utilities may be
subtracted from the Homeowners Association (HOA) dues before computing
ratios.

[]{#__RefHeading___Toc175361000 .anchor}**2-17 CONSTRUCTION--PERMANENT
MORTGAGE PROGRAM**. [\<TOP\>](#_top) A construction-permanent mortgage
combines the features of a construction loan, a short-term interim loan
for financing the cost of construction, and the traditional long-term
permanent residential mortgage. For mortgage insurance and LTV purposes,
we consider it to be a purchase transaction. The mortgage lender makes
the loan directly to an approved borrower/homebuyer. There is one
closing that occurs prior to the start of construction. At closing,
funds are disbursed to cover purchase of the land, with the balance of
the mortgage proceeds placed in an escrow account to be disbursed as
construction progresses. The loan is insured after construction is
complete.

Program Information.

Disbursement of Funds. It is the lender\'s responsibility to obtain
written approval from the borrower before each draw payment is provided
to the builder.

Construction Period Fees. Unless a separate agreement has been made
specifying responsibility, construction loan interest, commitment fees,
inspection fees, title update charges, real estate taxes, hazard
insurance, and other financing charges incurred during the construction
period are to be paid by the builder.

Interest Rate. The permanent mortgage loan interest is established at
closing. However, a lender may offer a \"ceiling/floor,\" whereby the
borrower may \"float\" the interest rate during construction. The
agreement must provide that, at the point of interest rate lock-in, the
permanent mortgage will not exceed a specific maximum interest rate
based on market fluctuations, as well as permit the borrower to lock-in
at a lower rate depending on the market. The borrower must qualify for
the mortgage at the maximum rate at which the permanent mortgage may be
set.

Disclosure. The lender must provide a disclosure to the borrower
explaining that the loan is not eligible for FHA mortgage insurance
until after either a final inspection or issuance of a certificate of
occupancy by the local governmental jurisdiction (whichever is later),
and that FHA has no obligation until the mortgage is endorsed for
insurance.

Amortization. Amortization must begin no later than the first of the
month following 60 days from the date of either the final inspection or
issuance of certificate of occupancy, whichever is later.

Endorsement. The lender must submit a request for endorsement after
final inspection or issuance of certificate of occupancy (but within 60
days of the date the latter of these events occur). During construction,
the loan is not FHA-insured.

Remitting UFMIP. FHA must receive the UFMIP within 15 days of closing or
other time period as may be prescribed by FHA.

Maximum Mortgage Amount. The maximum mortgage amount is determined by
applying LTV limits to the lesser of the appraised value or the
acquisition cost. The acquisition cost includes the contractor\'s price
to build, cost of the land, and allowable closing costs. (If the land
has been owned more than six months or was received as an acceptable
gift, the value of the land may be used instead of its cost.)

Equity in the Land. Equity in the land may be used for the borrower\'s
cash investment. However, if the advancement of the permanent loan
results in the borrower receiving cash out in excess of \$250, the
maximum LTV is limited to 85 percent. If the contractor of the
improvements is also the seller of the land, the total acquisition cost
for maximum mortgage purposes is the purchase price to the borrower.

Other Underwriting Considerations. The following criteria must be met
for a loan to be considered a construction/permanent loan and to be
eligible for FHA mortgage insurance:

The borrower must own or be purchasing the lot (or, if owned by the
contractor, the lot must be included in the total contract price).

\(1\) The borrower must have secured or will secure the loan in his or
her own name.

\(2\) The borrower has contracted with a builder to construct the
improvement. (This program is not available to a borrower acting as his
or her own general contractor, unless the borrower is a licensed builder
by profession. In this case, the acquisition cost must be determined by
the actual documented cost to construct the improvements.)

\(3\) The balance on the loan, when it is fully drawn, must be verified.
The construction escrow account, if one was established, must be fully
extinguished; any remaining funds must be applied to the outstanding
balance of the permanent loan.

\(4\) If the borrower purchased the lot within the past 6 months, he or
she must provide a copy of the HUD-1 or other settlement statement
showing the acquisition cost. If the borrower owns the lot
free-and-clear, the borrower must provide a copy of the Warranty Deed
showing no vendor\'s lien, a copy of the release of lien, or a copy of
the HUD-1 or other settlement statement showing ownership.

\(5\) If the initial draw on the loan was for the purpose of paying off
the lot, a statement verifying the amount must be provided.

The borrower must provide a copy of the fully executed sales agreement,
which includes the contractor\'s price to build. (A Mechanic\'s and
Material man's lien is not sufficient.)

If the borrower is including extras over and above the contract
specification and/or is paying out-of-pocket costs over and above the
interim loan, the borrower must provide a breakdown of the extras and
the cost of each and canceled checks and paid receipts for all
out-of-pocket construction costs.

Documentation Requirements. The loan is to be closed using standard FHA
documentation, with the addition of a Construction Rider to the Note and
a Construction Loan Agreement. These construction documents may be in
any form acceptable to the lender, but they must provide that all
special construction terms end when the construction loan converts to a
permanent loan. After conversion, only the permanent loan terms (using
standard documents) continue to be effective, thus making the permanent
loan eligible for FHA mortgage insurance.

Prior to endorsement, the DE underwriter must be provided with the
following:

Certification, signed by the borrower after conversion to the permanent
loan, that the mortgaged property is free-and-clear of all liens other
than the mortgage.

Verification that the construction loan has been fully drawn down.

Copies of canceled checks and paid receipts for all the borrower\'s
out-of-pocket construction costs.

[]{#__RefHeading___Toc175361001 .anchor}**2-18 MORTGAGE INSURANCE FOR
DISASTER VICTIMS \[Section 203(h)\]**. [\<TOP\>](#_top) FHA provides
mortgage insurance to assist victims of Presidentially-declared
disasters. Under this program, individuals or families whose residences
were destroyed or damaged to such an extent that reconstruction or
repair is necessary are eligible for 100 percent financing for the
purchase of a home. The Federal Emergency Management Agency (FEMA)
provides listings of the specific affected counties and cities and
corresponding declaration dates. This information can be found on the
Internet at http://www.fema.gov/disasters.

The procedures described are in effect whenever a disaster is declared
by the President and remain in effect for one year from the date of the
President\'s declaration.

A. Program and Underwriting Requirements.

The borrower\'s previous residence must have been in the disaster area
and must have been destroyed or damaged to such an extent that
reconstruction or replacement is necessary. The borrower must provide
conclusive evidence of this fact. Documentation showing a permanent
residence in the affected area before the disaster includes a valid
driver\'s license, a voter registration card, utility bills, etc.
Documentation regarding destruction of the residence includes an
insurance report, an inspection report by an independent fee inspector
or government agency, or conclusive photographic evidence showing the
destruction or damage. The borrower may have been the owner of the
property or a renter of the property affected.

The borrower is eligible for 100 percent financing of the sales price
and no down payment is required. (However, closing costs and prepaid
expenses not paid by the seller must be paid by the borrower in cash or
paid through premium pricing.)

Maximum mortgage amounts are the same as for Section 203(b)/203(h). A
list can be accessed from the lender Web page on HUD's Website at
www.hud.gov or on FHA Connection at https://entp.hud.gov/clas/.

The program is limited to one-unit detached homes or units in an
approved condominium project. \"Spot units\" in condominiums are
eligible also. Two-, three-, and four-unit properties may not be
purchased under the Section 203(h) program.

The borrower\'s mortgage loan application must be submitted to the
lender within one year of the President\'s declaration of the disaster.

ARMS may be used with the Section 203(h) program.

B. Using Section 203(k) with 203(h) for Rehabilitation Mortgages. The
requirement for a dwelling to be completed more than one year preceding
the date of the application for mortgage insurance under Section 203(k)
does not apply to properties in the disaster area. Damaged residences
are eligible for Section 203(k) mortgage insurance regardless of the age
of the property. The residence needs only to have been completed and
ready for occupancy for eligibility under Section 203(k). The percentage
of financing is determined by the type of mortgage being made (i.e.,
normal LTV ratios apply to Section 203(k) mortgages made in these
areas).

Homes that have been demolished, or will be razed as part of the
rehabilitation work, are eligible provided the existing foundation
system is not affected and still will be used. The complete foundation
system must remain in place.

[]{#__RefHeading___Toc175361002 .anchor}**2-19 ENERGY-EFFICIENT HOMES
(EEH)**. [\<TOP\>](#_top) The benchmark qualifying ratios may both be
exceeded by up to 2 percentage points when the borrower is purchasing or
refinancing an EEH. These higher housing expense- and
obligations-to-income ratios are justified due to the anticipated energy
costs savings and become 31 percent and 43 percent, respectively. The
appropriate HOC determines if a property qualifies for EEH designation.
The original documentation attesting to energy efficiency is required on
resales.

All properties meeting the Council of American Building Officials (CABO)
1992 Model Energy Code (MEC) are considered energy efficient and
eligible for the two percentage points increase in the qualifying
ratios.

[]{#__RefHeading___Toc175361003 .anchor}**2-20 ENERGY EFFICIENT MORTGAGE
(EEM) PROGRAM**. [\<TOP\>](#_top) The FHA EEM Program is for existing
properties. An EEM recognizes the energy savings of a home that has
\"cost effective\" energy saving improvements, which increase the energy
efficiency of a home. Because the home is energy efficient, the
occupant(s) will save on utility costs and, thus, be able to devote more
income to the monthly mortgage payment. Energy efficiency improvements
can include energy saving equipment and active and passive solar
technologies.

Under the FHA EEM Program, a borrower can finance into the mortgage 100
percent of the cost of eligible energy efficient improvements, subject
to certain dollar limitations, without an appraisal of the energy
efficient improvements. To be eligible for inclusion into the mortgage,
the energy efficient improvements must be \"cost effective\" (i.e., the
total cost of the improvements, including maintenance costs, must be
less than the total present value of the energy saved over the useful
life of the improvements). The mortgage includes the cost of the energy
efficient improvements, in addition to the usual mortgage amount
normally permitted.

A. Basic Program Requirements.

1\. Existing one- and two-unit properties are eligible. Three- and four-
unit existing properties are not eligible.

2\. The cost of any improvement to the property that will increase the
property\'s energy efficiency and that is determined to be \"cost
effective\" is eligible for financing into the mortgage. Its cost may be
added to the mortgage amount up to the greater of:

a\. 5 percent of the property\'s value (not to exceed \$8,000); or

b\. \$4,000.

\"Cost effective\" means that the total cost of the improvements,
including any maintenance costs, is less than the total present value of
the energy saved over the useful life of the energy improvement. The FHA
maximum loan limit for the area may be exceeded by the cost of the
energy efficient improvements.

3\. The cost of the energy improvements, including maintenance costs,
and the estimate of the energy savings must be determined based upon a
physical inspection of the property by a home energy ratings system
(HERS) representative or energy consultant.

The HERS representative or energy consultant must be an independent
entity; it cannot be related, directly or indirectly, to the seller of
the property or the prospective borrower. The contractor selected by the
borrower to install the energy efficient improvements may not be
related, directly or indirectly, to the HERS representative or energy
consultant. The HERS representative or energy consultant may be a
utility company; a local, state, or federal government agent; an entity
approved by a local, state, or federal government agency specifically
for the purpose of providing home energy ratings on residential
properties; or a nonprofit organization experienced in conducting home
energy ratings of residential properties.

4\. The home energy rating report prepared by the HERS representative or
energy consultant must be in writing and provided to the prospective
borrower and lender. The report must contain the following information:

a\. Address of the property.

b\. Name of the current owner(s) of the property.

c\. Date of the property inspection.

d\. Description of the energy features currently in the property. This
description must include, at a minimum, a description of the insulation
R values in ceilings, walls and floors; infiltration levels and barriers
(caulking, weatherstripping and sealing); a description of the windows
(storm windows, double pane, triple pane etc.) and doors; and a
description of the heating (including water heating) and cooling
systems.

e\. Description of the modifications recommended to improve the energy
efficiency of the property.

f\. Estimated costs of the energy improvements, their useful life, and
the costs of any maintenance over the useful life.

g\. Present estimated annual utility costs before installation of the
energy efficient improvements.

h\. Estimated annual utility costs after installation of the energy
efficient improvements.

i\. Estimated annual savings in utility costs after installation of the
energy efficient improvements.

j\. Printed name(s) and signature(s) of the person(s) that inspected the
property and prepared the report, as well as the date of preparation of
the report.

k\. The following certification statement, signed by the person(s) who
inspected the property and prepared the report, must accompany the
report:

\"I certify, that to the best of my knowledge and belief, the
information contained in this report is true and accurate and I
understand that the information in this report may be used in connection
with an application for an energy efficient mortgage to be insured by
the Federal Housing Administration of the United States Department of
Housing and Urban Development.\"

For streamline refinance transactions, the borrower\'s monthly payment
for principal and interest for the refinance mortgage (which will
include the cost for the energy efficient improvements) must be lower
than the monthly principal and interest on the current mortgage.

B. Escrow Account Specifications. An escrow account may be established
for no more than three months after loan closing to allow for
installation of the energy efficient improvements. The lender, a utility
company, a nonprofit organization, or a government agency may administer
the escrow account. The escrow account must be insured and be
established at a financial institution supervised by a federal agency.

C. Processing and Underwriting Requirements.

1\. The lender will process the mortgage loan application and qualify
the borrower using our standard underwriting requirements and qualifying
ratios. If the borrower elects to have an EEM and add the cost of the
energy efficient improvements to the mortgage, the lender must take the
following additional steps:

a\. Obtain a report prepared by a HERS representative or energy
consultant showing the estimated costs of installing the energy
efficient improvements, including any maintenance costs, and the
estimated annual savings in utility costs that will result from the
installation of the energy efficient improvements.

b\. Using the HERS or energy consultant\'s report, the lender must
determine that the energy efficient improvements are \"cost effective\"
by calculating the present cost of the energy improvements, including
maintenance costs (if any) over the useful life of the improvements and
the present value of the energy savings over the useful life of the
energy improvements. If the energy efficient improvements meet the
\"cost effective\" test (i.e., present cost of improvements is less than
the present value of the energy savings), the lender may add 100 percent
of the cost of the energy efficient improvements (subject to the dollar
limits described above in B. 4.) to the otherwise allowable maximum
mortgage amount. No appraisal of the energy efficient improvements is
necessary, and the borrower need not meet any further credit standards.
If the energy efficient improvements meet the \"cost effective\" test,
the full cost of the improvements can be added to the borrower\'s base
loan amount, without a determination of value and without further credit
qualification.

c\. The lender calculates the UFMIP on the full mortgage amount, which
will include the cost of the energy improvements.

D. Escrow Account. We will insure the mortgage before the energy
efficient improvements are installed provided the lender establishes an
escrow account and deposits into it the funds to pay for the energy
efficient improvements. The escrow account shall be for a period of no
more than 90 days. If the improvements are not installed within 90 days,
the lender must apply the funds held in escrow to a prepayment of the
principal balance of the mortgage. The escrow account may be established
by the lender and administered by the lender, a utility company, a
nonprofit organization, or a government agency. However, the lender is
responsible for assuring FHA that the escrow has been cleared. Lenders
shall execute Form HUD 92300 Mortgagee Assurance of Completion to
indicate that the escrow for the energy efficient improvements has been
established. Subsequently, the lender is responsible for notifying FHA
that the improvements have been made and that the escrow has been
cleared. The installation of the improvements may be inspected by the
lender, the HERS, or an FHA fee inspector. The borrower may be charged
an inspection fee in accordance with the appropriate HOC fee schedule.

Home Energy Rating Report. The lender must include a copy of the home
energy rating report, performed by the HERS representative or energy
consultant, in the closing package, when requesting insurance
endorsement.

21. []{#__RefHeading___Toc175361004 .anchor}**Advance Mortgage Payments
    Prohibited**. [\<TOP\>](#_top) We do not permit, as a condition for
    making a FHA insured mortgage, a lender to collect from the borrower
    advance payment(s) of the mortgage. Borrowers are not to be required
    to write post-dated checks, give cash, or otherwise make mortgage
    payments to the lender in advance of the borrowers mortgage payment
    requirements under the security instruments.

# CHAPTER 3 DOCUMENTATION AND OTHER PROCESSING REQUIREMENTS

This chapter describes the documentation requirements for each loan
submitted for mortgage insurance and the specific requirements lenders
must observe in processing and underwriting FHA-insured mortgages. The
lender is responsible for asking sufficient questions to elicit a
complete picture of the borrower\'s financial situation, source of funds
for the transaction, and the intended use of the property. All
information must be verified and docuemtned. The lender must also verify
and document the identity of the loan applicant(s).

# SECTION 1: UNDERWRITING DOCUMENTATION

[]{#__RefHeading___Toc175361007 .anchor}**3-1 APPLICATION PACKAGE**.
[\<TOP\>](#_top) The application package must contain all documentation
supporting the lender\'s decision to approve the mortgage loan. When
standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory
statements, consistent with other information in the application, to
clarify or to supplement the documentation submitted by the borrower.

All documents may be up to 120 days old at the time the loan closes (180
days for new construction) unless this or other applicable HUD
instructions specify a different timeframe, or the nature of the
document is such that its validity for underwriting purposes is not
affected by being older than the number of prescribed days (e.g.,
divorce decrees, tax returns). Updated, written verifications must be
obtained when the age of the documents exceed these limits. Verification
forms or documents used as an alternate to these verifications must pass
directly between the lender and the provider without being handled or
transmitted by any third party or using any third party's equipment. No
document used in the processing or underwriting of a loan may be handled
or transmitted by or through an interested third party to the
transaction.

The Verification of Deposit (VOD) and Verification of Employment (VOE)
may be faxed documents or printed pages from the Internet if they
clearly identify their sources (e.g., contain the names of the
borrower's employer or depository/investment firm). The lender is
accountable for ascertaining the authenticity of the document by
examining information included in a document's headers and footers. The
lender should verify the authenticity of printed Web pages by examining
the pages for similar information. A printed Web page also must show its
uniform resource locator (URL) address, as well as the date and time the
document was printed.

Lenders may not accept or use documents relating to the credit,
employment or income of borrowers that are handled by or transmitted
from or through interested third parties (e.g., real estate agents,
builders, sellers) or by using their equipment.

The following documents are generally required for mortgage credit
analysis in all transactions except for certain streamline refinances:

A. Loan Application. Uniform Residential Loan Application (URLA), signed
and dated by all borrowers and the lender, and the Addendum to the URLA
(form HUD-92900-A).

B. Mortgage Credit Analysis Worksheet. Form HUD 92900-WS or
HUD-92900-PUR, as appropriate.

C. Social Security Number Evidence. For all borrowers, including US
citizens, the lender is required to document a valid SSN for each
borrower, co-borrower, and co-signer on the mortgage. All individuals
eligible for legal employment in the US must have a SSN. Each borrower
must provide the lender with evidence of his or her own valid SSN as
issued by the Social Security Administration (SSA). This applies to
purchase money loans and all refinances, including streamline
refinances. While the actual social security card is not required, the
lender is required to validate the SSN. Lenders may use various means
for validating the SSN including examining the borrower's pay stubs,
passport, valid tax returns, and may use service providers including
those with direct access to the SSA. The lender is also required to
resolve any inconsistencies or multiple SSNs for individual borrowers
that are revealed during loan processing and underwriting. (Also see
paragraph 2-2 B).

D. Credit Report. The lender must obtain a credit report on all
borrowers who will be obligated on the mortgage note (except for
streamline refinance transactions).

E. Verification of Employment (VOE). VOE and the borrower's most recent
pay stub are to be provided. "Most recent" means at the time the initial
loan application is made. If the document is not more than 120 days old
when the loan closes (180 days old on new construction), it does not
have to be updated.

Alternative Documentation. As an alternative to obtaining a VOE, the
lender may obtain the borrower's original pay stub(s) covering the most
recent 30-day period, along with original IRS W-2 Forms from the
previous two years. The pay stub(s) must show the borrower\'s name,
social security number, and year-to- date earnings. Any copies of the
W-2 Form not submitted with the borrower\'s income tax returns are
considered \"original\" W-2's. (These original documents may be
photocopied and returned to the borrower.) The lender also must verify
by telephone all current employers. The loan file must include a
certification from the lender that original documents were examined and
the name, title, and telephone number of the person with whom employment
was verified. For all loans processed in this manner, the lender also
must obtain a signed copy of Form IRS 4506 Request for Copy of Tax Form,
Form IRS 8821, or a document that is appropriate for obtaining tax
returns directly from the IRS. The lender also may use an electronic
retrieval service for obtaining W-2 and tax return information.

If the employer will not give telephone confirmation of employment or if
the W-2 indicates inconsistencies (e.g., FICA payments not reflecting
earnings), standard employment documentation must be used.

F. VOD. VOD and most recent bank statements are to be provided. "Most
recent" means at the time the initial loan application is made. Provided
the document is not more than 120 days old when the loan closes (180
days old on new construction), it does not have to be updated.

Alternative Documentation. As an alternative to obtaining a VOD, the
lender may obtain from the borrower original bank statement(s) covering
the most recent three-month period. Provided the bank statement shows
the previous month\'s balance, this requirement is met by obtaining the
two most recent, consecutive statements.

G. Federal Income Tax Returns. Federal income tax returns (both
individual returns and business returns) for the past two years,
including all applicable schedules, for self-employed borrowers, are
required. Commissioned individuals must provide individual federal
income tax returns for the past two years. The lender must obtain signed
Forms IRS 4506, IRS 8821, or whatever form or electronic retrieval
service is appropriate for obtaining tax returns directly from the IRS
for any loan for which the borrower\'s tax returns are required.

H. Sales Contract. The sales contract and any amendments or other
agreements and certifications are to be included in the case binder.
Either an original or a certified true copy of the sales contract
received by the lender is required.

I. Real Estate Certification. Real estate certification, signed by the
buyer, seller, and selling real estate agent or broker (if not contained
within the purchase agreement) are required. Also see paragraph 3-3,
below.

Verification of Rent or Payment History of Present/Previous Mortgages.
This document must be in the form of a direct verification from the
landlord or mortgage servicer or through information shown on the credit
report.

Uniform Residential Appraisal Report (URAR). The URAR and Valuation
package must be included in the endorsement binder except for streamline
refinances made without appraisals.

L. Explanatory Statements. Explanatory statements or additional
documentation necessary to make a sound underwriting decision are to be
included in the case binder.

[]{#__RefHeading___Toc175361008 .anchor}**3-2 DOCUMENTATION STANDARDS**.
[\<TOP\>](#_top)

A. Application Forms. Application forms must be signed and dated by all
borrowers applying for the mortgage and assuming responsibility for the
mortgage debt.

B. Verifications. Rather than requiring borrowers to sign multiple
verification forms, the lender may ask the borrower to sign a general
authorization form that gives the lender blanket authority to verify
information needed to process the mortgage loan application, such as
past and present employment records, bank accounts, stock holdings, etc.
If the lender uses such an authorization, he or she must attach a copy
of the authorization to each verification sent. Additionally, lenders
may use self-adhesive signature labels for laser printed verifications.
Each label must completely and clearly indicate its use and must contain
the Privacy Act notification.

C. Documents Signed in Blank. Lenders may not have borrowers sign
documents in blank, or on blank sheets of paper.

[]{#__RefHeading___Toc175361009 .anchor}**3-3 REAL ESTATE
CERTIFICATION**. [\<TOP\>](#_top) The borrower, seller, and the selling
real estate agent or broker involved in the sales transaction must
certify that the terms and conditions of the sales contract are true to
the best of their knowledge and belief and that any other agreement
entered into by any of the parties in connection with the real estate
transaction is part of, or attached to, the sales agreement.

If the sales contract contains a provision that there are no other
agreements between parties and that the terms of the sales contract
constitute the entire agreement between the parties, the certification
specified in the above paragraph is not needed if all parties are
signatories to the sales contract submitted at the time of underwriting.

[]{#__RefHeading___Toc175361010 .anchor}**3-4 AMENDATORY CLAUSE**.
[\<TOP\>](#_top) An amendatory clause must be included in the sales
contract when the borrower has not been informed of the appraised value
by receiving a copy of Form HUD-92800.5B, Conditional Commitment/DE
Statement of Appraised Value or VA-CRV before signing the sales
contract. The amendatory clause must contain the following language:

\"It is expressly agreed that notwithstanding any other provisions of
this contract, the purchaser shall not be obligated to complete the
purchase of the property described herein or to incur any penalty by
forfeiture of earnest money deposits or otherwise unless the purchaser
has been given in accordance with HUD/FHA or VA requirements a written
statement by the Federal Housing Commissioner, Department of Veterans
Affairs, or a Direct Endorsement lender setting forth the appraised
value of the property of not less than \$\_\_\_\_\_\_\_\_\_. The
purchaser shall have the privilege and option of proceeding with
consummation of the contract without regard to the amount of the
appraised valuation. The appraised valuation is arrived at to determine
the maximum mortgage the Department of Housing and Urban Development
will insure. HUD does not warrant the value or the condition of the
property. The purchaser should satisfy himself/herself that the price
and condition of the property are acceptable.\"

The actual dollar amount to be inserted in the amendatory clause is the
sales price stated in the contract. If the borrower and seller agree to
adjust the sales price in response to an appraised value that is less
than the sales price, a new amendatory clause is not required. However,
the loan application package must include the original sales contract
with the same price as shown on the amendatory clause, along with the
revised or amended sales contract. The Amendatory Clause is not required
on HUD REO sales, sales where the seller is Fannie Mae, Freddie Mac, the
Department of Veterans Affairs, Rural Housing Services, other Federal,
State and local government agencies, mortgagees disposing of REO assets,
or sellers at foreclosure sales and those sales where the borrower will
not be an owner-occupant (e.g., sales to nonprofit agencies).

## SECTION 2: PROCESSING REQUIREMENTS

[]{#__RefHeading___Toc175361012 .anchor}**3-5 POWER OF ATTORNEY**.
[\<TOP\>](#_top) Power of attorney may be used for closing documents,
including page four of the Addendum to the URLA and the final URLA if it
is signed at closing. Any power of attorney, whether specific or
general, must comply with state law and allow for the mortgage note to
be enforced legally in that jurisdiction. It is the lender\'s
responsibility to assure that clear title can be conveyed in the event
of foreclosure.

Except for the conditions described below, the initial loan application
may not be executed by using a power of attorney (i.e., it must be
signed by all borrowers). Either the initial loan application or the
final, if one is used, must contain the signatures of all borrowers.

A. Military Personnel. Power of attorney may be used for military
personnel on overseas duty or on an unaccompanied tour. The lender
should obtain the service person\'s signature on the application by mail
or fax machine.

B. Incapacitated Borrowers. Power of attorney may be used for
incapacitated borrowers who are unable to sign the mortgage application.
The lender must provide evidence that the signer has authority to
purchase the property and to obligate the borrower. Acceptable evidence
includes a durable power of attorney specifically designed to survive
incapacity and avoid the need for court proceedings. The incapacitated
individual must occupy the property to be insured (except on eligible
investment property).

[]{#__RefHeading___Toc175361013 .anchor}**3-6 LOAN APPLICATION DOCUMENT
PROCESSING**. [\<TOP\>](#_top) Due to various disclosure requirements
and our long-standing belief that borrowers are best served when
certifications they must make are divulged as early as possible in the
loan application process, the application for mortgage insurance must be
signed and dated by the borrower(s) before the loan is underwritten.
However, we also recognize the burden on lenders and borrowers of having
various documents re-signed by the borrower after the loan application
has been taken.

To alleviate this burden, lenders are permitted to process and to
underwrite the loan after the borrower completes an initial URLA and
initial Addendum. If the lender asks the borrower to complete an initial
Addendum, based on the preliminary information obtained at loan
application, it is not necessary to have a final loan application or
final Addendum signed before underwriting. The underwriter must
condition the loan approval for the final URLA and final Addendum to be
signed and dated by the borrower(s) anytime before or at closing.

Page one of the initial Addendum must be signed by the interviewer; page
one of the final Addendum may be signed by anyone authorized to bind the
company in its business dealing with HUD. Page four of the Addendum must
be signed by the borrower at closing.

The underwriter must have the final Addendum and URLA before
underwriting the loan application, whether or not the borrower signs it.
If the lending institution uses only one loan application that serves as
both the initial and final, the institution still must obtain a
completed final Addendum before underwriting the loan. A copy of any
initial and final application must be submitted as part of the
endorsement package. A satisfactory letter of explanation from the
borrower addressing any significant variances between the initial
application and final application is also required.

If the lender chooses not to complete an initial Addendum (i.e., the
lender asks the borrower to sign a completed Addendum before the loan is
underwritten), simultaneous appraisal and mortgage credit review is
permissible, if the lender discloses to the borrower that the lender's
DE underwriter may adjust the appraised value. The disclosure statement
below becomes part of the official file submitted to FHA for endorsement
and must be signed by the borrower(s).

\"I (we) understand that my (our) application for an FHA-insured
mortgage is being processed under the Direct Endorsement (DE) program.
The lender has advised me (us) that the appraiser has assigned a value
of \$\_\_\_\_\_\_\_\_\_ to the property being purchased. I am (we are)
aware that the official determination will be made by the DE underwriter
when he/she reviews the report. It is understood that I (we) may elect
to cancel the application or renegotiate with the seller if the DE
underwriter reduces the value below the amount set forth in the sales
contract or requires additional repairs for which the seller will not be
responsible.\"

[]{#__RefHeading___Toc175361014 .anchor}**3-7 SEVEN-UNIT LIMITATION**.
[\<TOP\>](#_top) Qualified investor entities are limited to a financial
interest (i.e., any type of ownership, regardless of type of financing)
in seven rental dwelling units, when the subject property is part of,
adjacent to or contiguous to a property, subdivision or group of
properties owned by the investor. Each dwelling unit in two-, three-,
and four-family properties counts toward the seven-unit limitation. The
rental units in an owner-occupied two-, three-, or four-unit property
also count toward this limitation. The lender is responsible for
assuring compliance with this regulation (see 24 CFR 203.42 for
additional information). Waivers to the seven-unit limitation can only
be initiated by the jurisdictional HOC for good cause.

[]{#__RefHeading___Toc175361015 .anchor}**3-8 HOTEL AND TRANSIENT USE**.
[\<TOP\>](#_top) The lender must obtain a hotel and transient use
certification (Form HUD-92561), signed by the borrower, for every
application on a two-, three-, or four-family dwelling. This
certification also is required for a single-family dwelling that is one
of a group of five or more dwellings held by the same borrower.
Fulfilling this requirement assures FHA that the property will not be
used for hotel or transient purposes, or otherwise rented for periods
less than 30 days.

[]{#__RefHeading___Toc175361016 .anchor}**3-9 SALES CONTRACTS AND LOAN
CLOSING**. [\<TOP\>](#_top) Except for houses sold by FHA under its Real
Estate Owned (REO) program, we are not a party to the sales agreement.
When a sales contract contains conditions that, if performed, would
violate our requirements, the lender must obtain an addendum or
modification to the sales agreement that would allow for conformance to
those requirements. Nevertheless, failure to perform a condition of the
contract will not be grounds for denying loan endorsement, provided the
loan closes in compliance with all regulations and policies. For
example, the sales contract may require the seller to pay an amount in
excess of our present limits. Provided the lender closes the loan in
accordance with our requirements, endorsement will not be withheld. The
sales contract need not refer to FHA financing to be valid.

[]{#__RefHeading___Toc175361017 .anchor}**3-10 LENDER RESPONSIBILITY AT
CLOSING**. [\<TOP\>](#_top) The lender is required to resolve all
problems regarding title to the real estate and to review all documents
to assure compliance with all conditions of the commitment, close the
loan before the expiration of the FHA-issued certificate of commitment
or DE approval and expiration of the credit documents, and to submit the
loan documents for insurance within 60 days of loan closing or
disbursement, whichever is later.

The following are required at closing:

A. Signatures. Signatures of all individuals appearing on the loan
application must appear on the mortgage note. All owners of the property
to be vested in title must sign the security instruments (i.e.,
mortgage, deed of trust, or security deed). In order to create a valid
first lien, to pass clear title, or to waive inchoate rights, any
individual whose signature is required by state law must sign the
security instruments and/or note. All applicants must sign and date all
closing documents where appropriate.

B. Closing in Compliance with Loan Approval. The loan must close in the
same manner in which it was underwritten and approved. Except for the
conditions described in paragraph 2-2 D, additional signatures on the
security instruments and/or mortgage note of individuals not reviewed
during mortgage credit analysis may be grounds for withholding
endorsement.

SECTION 3: FAIR HOUSING AND OTHER FEDERAL REQUIREMENTS

[]{#__RefHeading___Toc175361018 .anchor}**3-11 FEDERAL STATUTES AND
REGULATIONS**. [\<TOP\>](#_top) Federal statutes and regulations
concerning fair housing and equal credit opportunities apply to FHA\'s
single-family mortgage insurance programs. Lenders and FHA must abide by
these statutes and regulations for new originations and assumption
transactions. These regulations include:

A. Fair Housing Act (42 USC 3605). This act prohibits discrimination
against individuals based on their race, color, religion, sex, handicap,
familial status, or national origin for the availability of residential
real estate related transactions, i.e., making or purchasing loans or
providing other financial assistance: 1) for purchasing, constructing,
improving, repairing, or maintaining a dwelling, or 2) secured by
residential real estate. HUD is responsible for enforcing the Fair
Housing Act. Information regarding this act may be obtained from the HUD
Office of Fair Housing and Equal Opportunity, 451 Seventh Street, S.W.,
Washington, DC 20410-2000.

The Fair Housing Act prohibits the following:

1\. Discrimination in Making Loans and Providing Other Financial
Assistance. Prohibited practices include, but are not limited to,
failing or refusing to provide information regarding the availability of
loans or other financial assistance; application requirements,
procedures or standards for the review and approval of loans or
financial assistance; or providing information that is inaccurate or
different from that provided to others because of race, color, religion,
sex, handicap, familial status, or national origin.

2\. Discrimination in the Terms and Conditions for Making Available
Loans or Other Financial Assistance. Unlawful conduct includes: a) using
different policies, practices or procedures in evaluating or in
determining creditworthiness of any person in connection with the
provision of any loan or other financial assistance secured by
residential real estate, or b) determining the type of loan or other
financial assistance to be provided, or fixing the amount, interest
rate, duration or other terms for a loan or other financial assistance,
because of race, color, religion, sex, handicap, familial status, or
national origin.

B. Equal Credit Opportunity Act (ECOA) (15 USC 1601 et seq.). ECOA
prohibits discrimination in the extension of credit on the basis of
race, color, religion, national origin, sex, marital status, or age;
because all or part of the borrower\'s income derives from public
assistance; or because the borrower has in good faith exercised any
right under the Consumer Credit Protection Act. The act and Regulation B
of the Board of Governors of the Federal Reserve System (12 CFR Part
202) outline rules to be observed in evaluating the creditworthiness of
borrowers. Under no circumstances can the source of confidential credit
information be disclosed to third parties, except as required by law.

ECOA prohibits the lender from the following:

1\. Making any oral or written statement, in advertising or otherwise,
to borrowers or prospective borrowers that would discourage on a
prohibited basis a reasonable person from making or pursuing an
application.

2\. Inquiring whether income stated in an application is derived from
alimony, child support, or separate maintenance payments, unless the
creditor discloses to the borrower that such income need not be revealed
if the borrower does not want the lender to consider it in determining
the borrower\'s creditworthiness.

3\. Inquiring about the sex, race, color, religion, or national origin
of an applicant (except as provided in 12 CFR 202.13 regarding
information for monitoring purposes).

4\. Inquiring about birth control practices, or intentions concerning
the bearing and rearing of children, or capability to bear them.

Notice of Action Taken on Application. Regulation B requires that a
borrower be notified of action taken by the creditor within 30 days
after receiving the completed application. All applications submitted
for underwriting are considered completed applications for the purpose
of complying with the notification requirements of Regulation B. Actions
that are to be taken by HUD or the DE lender include:

Issuing a Firm Commitment or DE approval;

Rejecting the borrower for mortgage credit reasons; and

3\. Notifying the borrower of the lender\'s inability to process the
application because certain items are incomplete or were not submitted.

The maximum time limit for notification is 30 days after the date the DE
underwriter receives the application. Under no circumstances is the
processing of an application to be delayed in such manner that the
required notification to the borrower cannot be provided by the lender
within this limit. The notification to the borrower must be provided
within 30 days after a loan application is resubmitted or a
reconsideration request is received by the DE lender (or the appropriate
HOC for FHA-processed cases). For the purposes of complying with the
notification requirements of Regulation B, resubmissions and
reconsiderations are considered new applications.

Rejection/Denial of Loan. If a loan is rejected, the lender must
complete a rejection notice consistent with the requirements of
Regulation B. (On FHA-processed loans, FHA issues a rejection notice
directly to the lender.) At least one credit aspect must be rejected
before an overall rejection can be issued. The rejection notice must
provide specific reasons for the rejection. (Delinquent credit accounts
need not be listed.) The lender must retain case binders on rejected
loans for 26 months from the date the application is received by the DE
underwriter or rejected by the appropriate HOC. The rejection notice
must contain all the reasons for denial/ineligibility and any counter
proposals to effectuate loan approval, such as reduced mortgage amount,
etc.

C. Fair Credit Reporting Act (FCRA). This legislation is intended to
control collection and dissemination of information about granting
credit to the borrower. It is designed primarily to ensure that consumer
reporting agencies exercise fairness, confidentiality, and accuracy in
preparing and disclosing credit information.

The following conditions apply:

1\. When adverse action is taken based, in whole or in part, on a credit
report, the lender must disclose to the borrower the name, address, and,
if available, the telephone number of the credit reporting agency
issuing the report. The notice must indicate that the borrower is
entitled to request from the credit reporting agency information
reported to the lender that was used as a reason for rejection.

2\. The notice of adverse action must be given at the time of notice of
mortgage rejection, or within a reasonable time thereafter. Any such
notice should be retained in the application file.

D. Executive Order 11063. Executive Order 11063, as amended by Executive
Order 12259, prohibits discrimination in lending practices involving
housing and related facilities financed, insured, or guaranteed by the
federal government.

E. Section 527 of the National Housing Act. Section 527 prohibits denial
of a federally related mortgage loans on of the basis of sex.

F. Minimum Principal Loan Amount. Section 535 of the National Housing
Act prohibits lenders from requiring, as a condition of providing a loan
to be insured by FHA, that the loan amount equal or exceed a minimum
amount established by the lender. In addition, Section 330(a) of the
1990 National Affordable Housing Act prohibits a variation in mortgage
charge rates (\"tiered pricing\") that exceed 2 percent for FHA-insured
mortgages made by a lender on dwellings located within an area. (See 24
CFR Part 202.20 for additional information.)

G. Home Mortgage Disclosure Act (HMDA). HMDA and Regulation C of the
Federal Reserve Board require lenders to collect and to report
information pertaining to applications for mortgage loans, in addition
to data regarding originations and purchases of such loans.

1\. All institutions making FHA-insured mortgages must report
information pertaining to those mortgages or applications for mortgages.
Institutions exempt from the reporting requirements discussed below must
report their FHA mortgage application activity to HUD.

2\. All depository institutions having assets of at least \$10 million,
including assets of a parent company and located in a Metropolitan
Statistical Area (MSA), are required to report all types of loan
applications (i.e., conventional, HUD, VA, and RECD) to its regulator.
Reports from a subsidiary must be sent to the regulator designated for
its parent company. Depository institutions need not send an additional
report to HUD covering only its HUD mortgage insurance activity.

3\. All non-depository institutions having assets of at least \$10
million, including assets of a parent company and located in an MSA,
must report all types of loan applications (i.e., conventional, FHA, VA,
or RHS) to HUD, who is the designated regulator for non-depository
institutions.

4\. Loan correspondents and their sponsors both must report their loan
activity. The correspondent must report all loans closed in its name as
loan originations, even if the loans are simultaneously transferred to a
sponsor at the loan closing. The sponsor reports such loans as loan
purchases. For applications that are denied, however, the information
required by HMDA must be reported by the entity that made the
underwriting decision to deny the loan.

[]{#__RefHeading___Toc175361019 .anchor}**3-12 FHA-INSURED MORTGAGES FOR
HUD EMPLOYEES**. [\<TOP\>](#_top) The jurisdictional HOC must process
applications made by HUD employees, except for streamline refinance
applications. The lender is to process and underwrite the mortgage and
submit to the HOC for final signoff and approval. Such cases are to be
sent to the attention of the Processing and Underwriting Division
Director

# CHAPTER 4 ASSUMPTIONS

[]{#__RefHeading___Toc175361021 .anchor}**4-1 GENERAL**.
[\<TOP\>](#_top) All FHA insured mortgages are assumable. However, FHA
has placed certain restrictions on the assumability of FHA-insured
mortgages originated since 1986. Depending on the date of loan
origination, a creditworthiness review of the assumptor by the lender
may be required. Mortgages originated before December 1, 1986 generally
contain no restrictions on assumability. To determine what restrictions
to assumability have been placed on the mortgage, the lender must review
the legal documents of the mortgage. Additional details regarding
assumability are contained in HUD Handbook 4330.1 REV-5,
\"Administration of Insured Home Mortgages.\" Lenders should note that
some mortgages executed in years 1986 through 1989 contain language that
is not enforced due to later Congressional action. Mortgages from that
period are now freely assumable, despite any restrictions stated in the
mortgage.

[]{#__RefHeading___Toc175361022 .anchor}**4-2 RESTRICTIONS OF THE HUD
REFORM ACT OF 1989**. [\<TOP\>](#_top) Mortgages closed on or after
December 15, 1989 require credit qualification of those borrowers
wishing to assume the mortgage. This policy applies to borrowers who
take title to properties subject to the mortgage, without assuming
personal liability for the debt. It also applies to borrowers who assume
and agree to pay the mortgage. The creditworthiness review requirement
spans the life of the mortgage. Assumptions without credit approval are
grounds for acceleration of the mortgage, if permitted by applicable
state law and subject to HUD approval, unless the seller retains an
ownership interest in the property or the transfer is by devise or
descent.

In addition, private investors are prohibited from assuming insured
mortgages that are subject to the restrictions of the 1989 Act. This
restriction applies whether or not there is a release of liability by
the lender of the selling mortgagor.

[]{#__RefHeading___Toc175361023 .anchor}**4-3 RELEASE FROM LIABILITY**.
[\<TOP\>](#_top) The lender completes a form HUD-92210, Request for
Credit Approval of Substitute Mortgagor, or other similar form used by
the lender. Execution of this form does not formally release the
borrower from personal liability on the mortgage note.

The execution of form HUD-92210.1, Approval of Purchaser and Release of
Seller, or other similar form used by the lender, constitutes a formal
release of liability. Only the lender can execute the release of
liability. The lender is required to release all parties from liability
when the assuming borrower is found creditworthy.

The following requirements apply:

A. Mortgages Subject to the 1989 Act. Mortgages subject to the 1989 Act
require that the lender automatically prepare the release from
liability, thereby releasing the original owner when he or she sells by
assumption to a creditworthy assumptor who executes an agreement to
assume and to pay the mortgage debt, thus becoming the substitute
borrower.

The due-on-sale clause generally is triggered when any owner is deleted
from title, except when that party\'s interest is transferred by devise,
descent, or in other circumstances in which the transfer cannot legally
lead to exercise of the due-on-sale, such as a divorce in which the
party remaining on title retains occupancy.

B. Mortgages Not Subject to the 1989 Act. Mortgages executed before
December 15, 1989 require that the lender honor all former owners\'
written requests to process a formal release from liability. Lenders
must grant a release from liability if the assumptor is creditworthy and
agrees to execute a statement agreeing to assume and to pay the mortgage
debt.

[]{#__RefHeading___Toc175361024 .anchor}**4-4 CREDITWORTHINESS REVIEW
PROCESSING**. [\<TOP\>](#_top) Creditworthiness of the assumptor is
determined in accordance with standard mortgage credit analysis
requirements by the lender that is the holder or servicer of the
mortgage. The DE lender may also use an approved authorized agent to
process assumptions. Assumption creditworthiness review processing must
be completed within 45 days from the date the lender receives all
necessary documents. Allowable fees for assumption processing are
described in HUD Handbook 4330.1 REV-5, Chapter 4.

There are a number of servicing lenders that neither originate mortgages
nor are approved under the DE program. In these situations, if the
servicer is either a supervised or non-supervised financial institution,
it may contract with a DE-approved lender to underwrite its credit
qualifying assumptions. The DE underwriter must indicate his or her
CHUMS identification number on the mortgage credit analysis worksheet.
The fee is to be negotiated between servicer and DE lender. In addition,
supervised lenders with a HUD-approved authorized agent relationship may
have the agent underwrite its credit qualifying assumptions.

The following requirements apply:

A. Credit Review. The lender reviews the assumptor\'s credit if the
mortgage being assumed is held or serviced by a DE-approved lender.

B. Documentation Requirements. Same as those described in Chapter 3 of
this Handbook.

C. Secondary Financing. Secondary financing or other borrowed funds may
be used by the assuming borrowers, provided the repayment terms are
clearly defined and included in the underwriting analysis.

D. Seller Contributions. Cash contributions from the seller in order to
facilitate an assumption are not acceptable. The existing mortgage
balance must be reduced by the amount of the contribution. However, the
seller may pay the assumptor\'s normal closing costs (processing fee and
credit report) with no reduction to the mortgage.

E. Assumptions by Other Legal Entities. An assumption solely in the name
of a corporation, partnership, sole proprietorship, trust, etc., is not
acceptable if a creditworthiness review is required.

[]{#__RefHeading___Toc175361025 .anchor}**4-5 LTV REDUCTION
REQUIREMENTS**. [\<TOP\>](#_top) Certain mortgages, depending on when
originated, may require a reduction to the outstanding principal
balance, when assumed by investors or as secondary residences.

A. Investors. When assuming mortgages not subject to the 1989 Act,
originated by an owner-occupant pursuant to a VA Certifications of
Reasonable Value (CRV) issued, or for which a DE underwriter signed an
appraisal report on or after February 5, 1988, investors must pay down
the outstanding mortgage balance to a 75 percent LTV ratio, if the
owner-occupant requests a release of liability. Either the original or
the current appraised value of the property may be used to determine
compliance with the 75 percent LTV limitation. This requirement
continues throughout the life of the mortgage.

B. Owner-Occupants. When assuming a property as a secondary residence,
for which a VA CRV was issued, or for which a DE underwriter signed an
appraisal report on or after February 5, 1988 (but before January 27,
1991), owner-occupants must pay down the outstanding mortgage balance to
an 85 percent LTV ratio. Either the original appraised value or the
current appraised value of the property may be used to determine
compliance with the 85 percent LTV limitation.

Mortgages pursuant to a VA CRV, or a DE lender appraisal report or
master appraisal report issued or signed on or after January 27, 1991,
may not be assumed as secondary residences, except under the hardship
provisions described in paragraph 1-3. (This does not apply to mortgages
exempt from the investor prohibitions.)

[]{#__RefHeading___Toc175361026 .anchor}**APPENDIX I** [\<TOP\>](#_top)

SINGLE FAMILY HOC JURISDICTIONS

  ---------------------------------- ---- --------------------------------
  Philadelphia (800) 440-8647             Atlanta (888) 696-4687

  Connecticut                             Alabama

  Delaware                                Florida

  District of Columbia                    Georgia

  Maine                                   Illinois

  Maryland                                Indiana

  Massachusetts                           Kentucky

  Michigan                                Mississippi

  New Hampshire                           North Carolina

  New Jersey                              Puerto Rico

  New York                                South Carolina

  Ohio                                    Tennessee

  Pennsylvania                            Virgin Islands

  Rhode Island                            

  Vermont                                 

  Virginia                                

  West Virginia                           

                                          

                                          

  Denver (800) 543-9378                   Santa Ana (888) 827-5605

  Arkansas                                Alaska

  Colorado                                Arizona

  Iowa                                    California

  Kansas                                  Guam

  Louisiana                               Hawaii

  Minnesota                               Idaho

  Missouri                                Nevada

  Montana                                 Oregon

  Nebraska                                Washington

  New Mexico                              

  North Dakota                            

  Oklahoma                                

  South Dakota                            

  Texas                                   

  Utah                                    

  Wisconsin                               

  Wyoming                                 
  ---------------------------------- ---- --------------------------------

[]{#__RefHeading___Toc175361027 .anchor}**APPENDIX II** [\<TOP\>](#_top)

STATES WITH AVERAGE CLOSING COSTS AT or BELOW 2.10 PERCENT and ABOVE
2.10 PERCENT

  ------------------ ------- --------------------- ------- ----------------
  Average At or              Average Above 2.10            
  Below 2.10 Percent         Percent                       

  STATE                      STATE                         STATE

  Arizona                    Alabama                       Mississippi

  California                 Alaska                        Montana

  Colorado                   Arkansas                      North Carolina

  Guam                       Connecticut                   North Dakota

  Idaho                      District of Columbia          Nebraska

  Illinois                   Delaware                      New Hampshire

  Indiana                    Florida                       New Jersey

  New Mexico                 Georgia                       New York

  Nevada                     Hawaii                        Ohio

  Oregon                     Iowa                          Oklahoma

  Utah                       Kansas                        Pennsylvania

  Virgin Islands             Kentucky                      Puerto Rico

  Washington                 Louisiana                     Rhode Island

  Wisconsin                  Massachusetts                 South Carolina

  Wyoming                    Maryland                      South Dakota

                             Maine                         Tennessee

                             Michigan                      Texas

                             Missouri                      Vermont

                             Minnesota                     Virginia

                                                           West Virginia
  ------------------ ------- --------------------- ------- ----------------

INDEX

(Listed by subject and paragraph)

A

Alimony

As Liability 2-l1(A)

As Income 2-7(F), 2-9(C)(1)(h)

Amendatory Clause 3-4

Application 3-1(A)

Assumptions Chap.4

Attachment A 1-7

Auto Allowance 2-7(O)

B

Bank Statements 3-1(E)

Bankruptcy 2-3(E)

Borrower Identification 3-2(B)

Building on Own Land 1-8(D)

Buydowns 2-14

C

Cash-on-Hand 2-10(M)

Citizenship, not required 2-2(B)

Child Care Expenses 2-11(A)

Child Support

As Liability 2-11(A)

As Income 2-7(F)

Closing Costs 1-6(B)(1),1-7

Commission Income 2-7(D)

Community Property States 2-2(D)

Compensating Factors 2-13

Concessions

Financing 1-7(B)

Seller 1-7(A)

Contingent Liabilities 2-11(B)

Co-Borrowers

Non-Occupants 1-8(B)

On Title 2-2(A)

Cosigners 2-2(A)

Credit

Documents (Age of) 3-1

History 2-3

Credit Alert System (CAIVRS) 2-5(C)

Streamline Refinances 1-12

Assumptions 4-4

D

Debt-to-Income Ratio 2-12

Deposit Verification 3-1(E)

Depreciation 2-9(1)(b), 2-9(1)(c)

Disclosure Statement 3-11

Discount Points 1-9 (B)

E

Earnest Money 2-10(A)

Effective Income 2-5 (C)(3)

Employer Assistance 2-10(I)

Employment 2-7

Energy Efficient Homes 2-19

Energy Efficient Mortgage 2-20

Equal Credit Opportunity Act (ECOA) 3-11(B)

F

Fair Housing Regulations 3-11 (A)

Federal Obligations 2-4(B), 2-5(A)(B)

Foreclosure 2-3(D), 2-14(5)(A)

Funds for Closing 2-10

G

General Contractor 1-8(D)

Gift Funds 2-10(C)

Gross Income 2-12

H

Hotel and Transient Use 3-8

HUD-1 Settlement Statement 2-10(E)

HUD-Owned (PD) Properties 1-4(A)

I

Identity-of-Interest 1-8 (A)

Income

Alimony 2-7(F)

Commission 2-7(D)

Interest and Dividend 2-7(H)

Non-taxable Income 2-7(Q)

Overtime and Bonus 2-7(A)

Part-time and Seasonal 2-7(B)

Projected 2-7(R)

Ratios 2-12

Rental 2-7(M)

Retirement 2-7(E)

Salary and Wage 2-7

Self-Employed 2-9

Social Security 2-7(E)

Trust 2-7(P)

Unacceptable 2-6

Income Tax Returns 2-9, 4-1(F)

Corporate (IRS 1120) 2-9(C)(2)

Partnership (IRS 1065) 2-9(C)(4)

\"S\" Corporations (IRS 1120S) 2-9(C)(3)

Schedules B 2-9(C)(1)(E)

Income Verification 4-1(D)

Investor Mortgages 1-4, 1-5 (A)

L

Land Contracts 1-8(E)

Land Equity/Value 1-8(D)

LDP List 2-5(A)

Legal Documents 3-11

Living Trusts 2-2(F)

Loan-to-Value (LTV) Ratio

Co-borrowers and 1-8(B)

Identity-of-Interest 1-8(A)

Financing Concessions and

Maximum Financing 1-6

Payoffs of Land Contracts 1-8(E)

Purchase Transactions 1-7

Refinances 1-10

Subordinate Financing and 1-13

M

Maximum Mortgage Amount 1-6

Built on Own Land 1-8(D)

Co-Borrowers and 1-8(B)

Construction Stage of Property 1-6(B)(2)

Land Contracts 1-8(E)

Identity-of-Interest 1-8(A)

Owner-Occupied 1-6(B)(1)

Refinances 1-11

Secondary Residences 1-6(3)

Solar Energy System 1-7(C)(3)

Statutory Limits 1-6(A)

Three- and Four-Unit Properties 1-8(C)

Military Personnel 2-2(E), 4-5(A)

Minimum Investment 1-7

Mortgage Broker Fee 1-9(H)

Mortgage Credit Certificates 2-7(I)

Mortgage Limits 1-6

Mortgage Payment-to-Income Ratios 2-12

N

Nonprofit Organizations

As Borrowers 1-5

Providing Secondary Financing 1-13 (B)

Non-Purchasing Spouse 2-2(D)

Non-Realty Items 1-7(B), 1-9(C)

Note (Mortgage) 2-2(A)

O

Obligations

Not Considered 2-11(D)

Projected 2-11(C)

Recurring 2-11(A)

Occupancy Status 1-2

P

Payment Record 2-3(A)

Personal Property Items

In Mortgage Amount 1-7(B)

Sales of 2-10(G)

Power of Attorney 3-7

Prepaid Expenses

Paid by Seller 1-7(A)

As Settlement Costs 1-9(B)

Principal Residence 1-2

Projected Obligations 2-11(C)

Proposed Construction 1-6(2)

R

Ratios

Debt-to-income 2-12

Energy-efficient homes 2-12(C)

Mortgage payment-to-income 2-12

Loan-to-value 1-6(B)

Total fixed payment-to-income 2-12(B)

Real Estate Broker Fees 1-7, 1-9(G)

Real Estate Certification 3-3

Real Estate Commissions

As Assets to Close 2-10(P)

As Sales Concession 1-7(A)

Inducement to Purchase 1-7(B)

Recurring Obligations 2-11(A)

Refinance Transactions 1-10

Release from Liability 4-3

Rent Credit

As Assets 2-10(N)

Rental Income 2-7(M)

Repairs and Improvements 1-7(C)(1)

Residency Requirements 1-2, 2-2(B)

Residential Mortgage Credit Report 3-1(C)

Room and Board Income 2-7(M)

S

Sales Agreement 3-1(G), 3-4, 3-9

Sales Concessions 1-7(A)

Sales Proceeds 2-10(E)

Second Homes 1-3

Secondary Financing 1-13

On Assumptions 4-4(C)

Secondary Mortgages

Refinances of 1-11

Self-Employed Borrowers 2-9

Settlement Requirements 1-9

Seven-Unit Limitation 3-7

Signature Requirements 3-10(A)

Social Security Number 3-1(B),4-2 (B)

Solar Energy System 1-7(3)

Sources of Funds 2-10

Spouse Information 2-2(D)

Stability of Income 2-6

Statutory Limits 1-6(A)

Streamline Refinance 1-12

Subordinate Liens

On Streamline Refinances 1-12(d)(12)

Sweat Equity 2-10(O)

T

Tax Returns 2-9, 4-1(F)

Corporate (IRS 1120) 2-9(C)(2)

Partnership (IRS 1065) 2-9(C)(4)

\"S\" Corporations (IRS 1120S) 2-9(C)(3)

Schedules 2-9(C)(1)

Three- and Four-Family Units 1-8(C)

Title to Property

Changes to 1-12(C)(3), 5-2

Trade Equity 2-10(F)

U

URLA 3-1(A)

Underwriting

Buydowns 2-14

Debt-to-income ratios 2-12

Self-employed borrowers 2-9

V

Verifications 3-1

VA Benefits 2-7(K)

W

Weatherization 1-7(C)(2)