Underwriting Guidelines (USDA Loans)

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2 DOCUMENT OVERVIEW Purpse The fllwing dcument describes the respnsibilities and requirements f the Carringtn Mrtgage Services, LLC (CMS) USDA Certified Underwriter when reviewing and underwriting United States Department f Agriculture Office f Rural Develpment (USDA) mrtgage lan applicatins. Table f Cntents Dcument Overview... 2 USDA Underwriting Overview USDA Lan Prgrams and Cmpliance Overview USDA Guarantee Prgram Overview Prperty Eligibility USDA Lan Eligibility Overview LDP and GSA Prcurement/Nn-Prcurement Requirements USDA Case Number Dcumenting Clearances Unifrm Residential Lan Applicatin Lan Applicatin Requirements Face-T-Face Interview Overview Identity and Scial Security Number Validatins Identity Verificatin Scial Security Number Validatin Occupancy Types Overview Primary Residence Brrwers, C-Brrwers, C-Signers, and Nn-Purchasing Spuses Brrwers and C-Brrwers Ineligible Brrwers Nn-Purchasing Spuse Cmmunity Prperty States Previus Financial Crimes Plicy Transactin Types Overview Purchase Mrtgage Refinance Mrtgages Principal Curtailment Refinance Transactins with Escrw Credits Leasehld Estates Overview Leasehld Estate Requirements Lease Requirements CMS Plicies & Prcedures Page 2 f 208

3 Maximum Mrtgage Limits Requirements Lan-t-Values Calculating Cmbined Lan-t-Value Maximum Interest Rates Allwed fr GRH Prgram Minimum Brrwer Investment Overview Acquisitin Cst Seller Cntributin Limitatins Cntributins/ Cntributrs Inducements t Purchase Premium Pricing Secndary Financing Dwn Payment Assistance Allwable Brrwer Paid Clsing Csts Requirements Guarantee Fee Overview Up-Frnt Mrtgage Insurance Premiums Examples Mnthly/Annual Premium USDA Risk Management Overview Requesting the Lan Guarantee Certificate Requesting the Guarantee Certificate Insuring an USDA Guarantee Lan Requirements Risk Cntrls Verificatins Sent t Pst Office Bxes Fraud/Red Flags Appraisal Transfer Appraisal Assignment USDA Dcumentatin Overview Minimum Dcumentatin Requirements Dcumentatin Requirements t Clse an USDA Lan Dcumentatin Requirements t be Eligible fr Underwriting Dcument Images Electrnic Signatures Requirements USDA Autmated Underwriting Overview Eligibility Requirements USDA TOTAL Mrtgage Screcard Eligible Lan Types Eligible Lan Types Ineligible Lan Types Autmated Underwriting Decisins Overview Obtaining Access t GUS CMS Plicies & Prcedures Page 3 f 208

4 Apprve/ Accept Using GUS Using GUS Final Underwriting Submissin t RD Prperty Tax and Insurance Other Data Tlerances Lan Resubmissin Requirements Credit Dcumentatin Requesting the Cnditinal Cmmitment fr Guarantee GUS Rati Requirements Credit Exceptins Debt Rati Waivers Appraisal Waivers GUS Resubmissin Requirements GUS Resubmissin Requirements Establishing Brrwer Credit Reputatin Overview USDA Credit Overview Requirements Credit Reprt Red Flags Age f Credit Reprt Three Repsitry Merged In-File Credit Reprt (Trimerge) Residential Mrtgage Credit Reprt (RMCR) Nn-Traditinal Credit Insufficient Credit Thin Credit Undisclsed Debt Credit Scres Overview Credit Scre Risk Factrs Credit Scre Requirements Selecting Credit Scre Credit Histry Evaluatin Overview Number and Age f Accunts Payment Histries Credit Utilizatin Inquiries Disputed Trade lines Credit Cmpnents Verificatin f Credit Requirements Student Lans Rent Histry Installment and Revlving Accunts Day Accunts Husing Payment Histry Business Lans Bankruptcy/ Freclsure/ Deed-in-Lieu Shrt Sales Direct Verificatin f Other Debts Shrt Sales Cnsumer Credit Cunseling Services (CCCS) CMS Plicies & Prcedures Page 4 f 208

5 Extenuating Circumstances Majr Adverse Credit GUS Accept GUS Refer r Refer with Cautin Unacceptable Credit Ecnmic Event Credit Payment Shck Disputed Trade lines Credit Reprt Nn-Purchasing Spuse Rural Develpment Lans Delinquent Federal Debt Judgments and Tax Liens Child Care Expenses (k) Lans/Persnal Asset Lans Child Supprt, Alimny, Garnishments USDA Emplyment and Incme Evaluatin and Dcumentatin Overview Dcumentatin Age Requirements Stability f Incme and Emplyment Requirements Annual Incme Limits Adjusted Incme Repayment Incme Requirements Tax Infrmatin Authrizatin IRS Frm 4506-T/Tax Transcripts Requirements Dcumentatin Requirements and Standards Dcumentatin Requirements Dcumentatin Standards Incme Types Overview Wage Earner Bnus r Overtime Cmmissin Emplyment by a Relative Self-Emplyed Incme Overview Incme Dcumentatin and Evaluatin by Tax Returns Meal Deductins Dcumentatin Requirements Rental Incme Overview Calculatin f Rental Incme Other Incme Overview Alimny, Child Supprt and Maintenance Payments Aut Allwances and Expense Accunt Payments Child Care Expenses Disability Incme Emplyer Differential Payments CMS Plicies & Prcedures Page 5 f 208

6 Emplyment Gaps VA Benefits, Schlarships, Tuitin Family Size -Dependent Deductin Future Emplyment Husehld Assets Interest and Dividend Incme Military Incme Nn-Taxable Incme Nte Incme Public Assistance Prgrams Sectin 8 Husing Vuchers Retirement, Pensin, Annuity Incme and IRA Distributins Seasnal Incme Scial Security Incme Teachers Trust Incme Unin Members VA Benefits Unacceptable Surces f Incme Surces f Unacceptable Incme USDA Liabilities and Debt Ratis Overview Debt Rati Waivers Mnthly Husing Expenses Ttal Qualifying Primary Husing Expense-t-Incme Rati Payment Shck Calculatin Mnthly Debt Obligatins Debt Pay Off/Pay Dwn Prjected Obligatins Ttal Qualifying Debt-t-Incme Ratis Cntingent Liabilities Other Cnsideratins Cmpensating Factrs Cmpensating Factrs fr Refinance Transactins C-Brrwers USDA Assets Overview Dcumentatin Age Requirements Minimum Dwn Payment and Cash t Clse Requirements Asset Surces Overview Bank Accunts Earnest Mney Depsits Emplyer Assistance Plans Equity frm Other Assets Freign Assets Gift Funds Incme Tax Refund Life Insurance Cash Value Lan Frm A Relative Real Estate Cmmissin frm Sale f Subject Prperty CMS Plicies & Prcedures Page 6 f 208

7 Repayment Of A Persnal Lan Retirement Accunts Stcks / Bnds Sweat Equity Systematic Savings Trade Equity Cash Reserves Requirements Unacceptable Surces f Assets Requirements USDA Prperty Types and Appraisal Dcumentatin and Review Overview USDA Appraisal and Prperty Cnditins Assessment Requirements Appraisal Independence Overview Appraisal and Appraisal Management Cmpany (AMC) Third Party Organizatin Fees Appraisal Dcumentatin Age f Appraisal Required Appraisal Frms Phtgraphs Changes in Purchase Price Fr Yur Prtectin Get a Hme Inspectin Selecting an Appraiser Overview Appraisal Transfer Overview Secnd Appraisal REO Appraisal Appraisals in Remte Areas/New Cnstructin Appraisal Fees Overview Setting Prperty Related Cnditins Unifrm Appraisal Dataset (UAD) Overview Cnditin Quality Unacceptable Appraisal Practices Requirements Prperty and Prject Types Prperty Type Classificatins Eligible Prperty/ Prject Types Ineligible Prperty/ Prject Types Eligible Prperty Types Single Family Residence Manufactured Hmes Mdular Hme, Pre-cut Hme, Panelized Hme Mixed-Use Prperty Cndminium CMS Plicies & Prcedures Page 7 f 208

8 Planned Unit Develpment (PUD) Leasehld Estates Appraisal Prcedures Fr Leasehld Estates Envirnmental Hazards Requirements Lcatins Near High-Pressure Gas and Liquid Petrleum Transprtatin Lines. 145 Overhead High-Vltage Transmissin Lines Operating and Abandned Oil and Gas Wells Operating and Abandned Statinary Fuel Strage Tanks Grund Subsidence Prperties Affected by Lead Base Paint Asbests Insulatin Chinese Drywall Heavy Traffic Railrad Tracks and Other High Nise Surces Prperties Affected By Airprt Nise and Hazards Water and Sewage Systems Private Water Systems Cisterns Hauled Water Cmmunity Water and Sewer Systems Shared Wells Individual Sewage Systems Private Rads Requirements Certificatins Overview Utilities Carbn Mnxide (CO) Detectrs Prperty Inspectin Termite Inspectin New Cnstructin Prperty Requirements Prpsed Cnstructin Under Cnstructin Existing Cnstructin (less than ne year ld) New Cnstructin Exhibits and Inspectin Checklist Stages f Cnstructin Prcessing Prcedures fr New Cnstructin Lan-t-Value Rati HUD Apprved Ten Year Warranty Cmpanies Thermal Requirements Cnditinal Cmmitment Site Built Using Building Permits and Certificates f Occupancy Municipalities That D Nt issue Building Permits and/r Certificates f Occupancy Mve-On Manufactured Hmes Manufactured Hmes Certificatin Label and Data Plate Manufactured Hme Prperty Eligibility Requirements Manufactured Hme Ineligible Prperty Fundatin Systems Engineer s Certificatin n Fundatin Cmpliance New Cnstructin CMS Plicies & Prcedures Page 8 f 208

9 Engineer s Certificatin n Fundatin Cmpliance Existing Cnstructin Fld Zne Inspectins fr Manufactured Hmes Termite Prtectin/Inspectin Perimeter Enclsures Cndminium Prjects PUD Prjects Title Maximum Mrtgage Amunt Manufactured Hmes (cntinued) Transfer f Manufactured Hmes t Real Prperty Cndminium Prjects Overview Cndminium Requirements Cntinuing Prject Eligibility Ineligible Cndminium Prjects Warranty Prcess fr Units in Apprved Cndminium Prjects Cmpliance Inspectins Overview Initial Inspectin Framing Inspectin Final Inspectin New Cnstructin Exhibits Builder's Certificatin f Plans, Specificatins, and Site (HUD Frm ) Termite Cntrl Carpet Identificatin Manufacturer's Warranties and Insulatin Certificate Ten Year Insured Prtectin Plan Warranty Certificate Of Occupancy Appraisal Review Overview The Subject Prperty Neighbrhd Analysis Site Analysis Imprvement Analysis Sales Cmparisn Apprach Cst Apprach Incme Apprach Recnciliatin Natural Disasters Overview Inspectin Requirements Escrw Accunts USDA Cndminium Prject Matrix USDA New Cnstructin Required Exhibits and Inspectins Checklist CMS Plicies & Prcedures Page 9 f 208

10 Dcument Overview (cntinued) Revisin Histry Date Versin Descriptin f Change 03/27/ Added Dcument Images requirements. Revised Student Lans t align with USDA 3555 requirements Revised Unacceptable Surces f Assets t add cryptcurrency 08/01/ Revised the Surces f Unacceptable Incme sectin. 06/27/ Revised Refinance Transactins with Escrw Credits t permit netting f escrws (frmerly nt permitted). 12/12/ Revised Annual Incme Limits, Unpermitted Additins and Gift Funds sectins. 10/31/ Added Rent Histry sectin. 08/30/ /15/ Revised Brrwers and C-Brrwers sectin Added new Ineligible Brrwers sectin Revised Cisterns sectin Revised the GUS Resubmissin Requirements, Establishing Brrwer Credit Reputatin, 30 Day Accunts, Majr Adverse Credit > Unacceptable Credit, Annual Incme Limits, Repayment Incme, Stability f Incme and Emplyment, Surces f Unacceptable Incme, Mnthly Debt Obligatins, List f Ineligible Prperty/Prject Types, Envirnmental Hazards, and Private Water Systems sectins. 11/06/ Minr Change t add Appraisal Independence Requirement fr Appraisal Transfers. 07/24/ In the USDA Lan Eligibility sectin, mdified the fllwing: Added the Previus Financial Claims sub-sectin. Remved the Additinal Requirements fr Cmmunity Prperty States sub-sectin. Updated the Purchase Mrtgage sub-sectin. In the USDA Emplyment and Incme Evaluatin and Dcumentatin, updated the Scial Security Incme sub-sectin. In the USDA Liabilities and Debt Ratis sectin, updated the Cntingent Liabilities sub-sectin. In the USDA Assets sectin, remved the Cash n Hand subsectin. In the Prperty and Prject Types sectin, updated the fllwing sub-sectins: Manufactured Hme Prperty Eligibility Requirements Manufactured Hme Ineligible Prperty CMS Plicies & Prcedures Page 10 f 208

11 Dcument Overview (cntinued) Revisin Histry (cntinued) Date Versin Descriptin f Change 06/22/ Updated the Nn-Traditinal Credit sectin t align with the USDA requirements. Updated Qualifying Brrwers with Nn-Traditinal Credit sectin t include that rati waivers may apply fr refinance transactins with RD apprval. Remved existing Insufficient Credit cntent and add statement Insufficient credit refers t brrwers wh d nt have credit scres and d nt meet the minimum tradelines required fr nn-traditinal credit, which is nt acceptable fr USDA. Added Thin Credit requirements fr GUS autmated underwriting Updated the Student Lans requirements. Added sectin fr Transfer f Manufactured Hmes t Real Prperty 06/10/ Added that CMS des nt permit the netting f escrws n USDA lans t the Refinance Transactins with Escrw Credits sectin. 05/01/ In the USDA Liabilities and Debt Ratis sectin, added the Cmpensating Factrs fr Refinance Transactins sub-sectin. 04/10/ In the USDA Lan Eligibility sectin, mdified the fllwing: Added the Dcumenting Clearances sub-sectin. Updated the fllwing sub-sectins: Scial Security Number Validatin Purchase Mrtgage Refinance Mrtgages Principal Curtailment In the USDA Emplyment and Incme Evaluatin and Dcumentatin, updated the Dcumentatin Standards subsectin. In the USDA Assets sectin, mdified the fllwing: Updated the Asset Surces sub-sectin. Added the Freign Assets sub-sectin. In the USDA Prperty Types and Appraisal Dcumentatin and Review sectin, mdified the fllwing: Added the Changes in Purchase Price sub-sectin. Updated the Cndminium Requirements sub-sectin. 03/13/ In the USDA Lan Eligibility sectin, updated the Risk Cntrls subsectin t remve the prperty flipping requirements. 02/17/ In the USDA Lan Eligibility sectin, updated the Brrwers and C-Brrwers sub-sectin. In the USDA Autmated Underwriting sectin, updated the Credit Exceptins sub-sectin. In the USDA Liabilities and Debt Ratis sectin, added the Payment Shck Calculatin sub-sectin. 01/02/ In the Asset Surces sectin, updated the Bank Accunts subsectin. 12/09/ In the Prperty and Prject Types sectin, added the Hauled Water sub-sectin. CMS Plicies & Prcedures Page 11 f 208

12 Dcument Overview (cntinued) Revisin Histry (cntinued) Date Versin Descriptin f Change 10/08/ In the USDA Lan Eligibility sectin, updated the Identity Verificatin sub-sectin. In the USDA Autmated Underwriting sectin, updated the fllwing sub-sectins: Bankruptcy/Freclsure/Deed-in-Lieu Shrt Sales 09/18/ In the USDA Lan Eligibility sectin, updated the Nn- Purchasing Spuse sub-sectin. In the USDA Autmated Underwriting sectin, updated the GUS Refer r Refer with Cautin sub-sectin. 07/22/ In the Eligible Prperty Types sectin, updated the Manufactured Hmes sub-sectin. 06/02/ Mved Maximum Interest Rates Allwed under the Maximum Mrtgage Limits sectin 05/05/ In the Self-Emplyed Incme sectin, added the Meal Deductins sub-sectin. 04/04/ In the Ineligible Prperty/Prject Types sectin, added Singlewide manufactured hmes. Updated the Manufactured Hmes sectin t remve the 1992 verlay. 02/20/ New dcument. CMS Plicies & Prcedures Page 12 f 208

13 USDA UNDERWRITING Overview This dcument describes hw t review and underwrite USDA Office f Rural Develpment (USDA) mrtgage lan applicatins. USDA LOAN PROGRAMS AND COMPLIANCE Overview This sectin describes the eligible lan prgrams and cmpliance requirements necessary t btain a USDA lan guarantee and Cnditinal Cmmitment. CMS must ascertain whether the specific prvisins f the lan prgram are permissible under all applicable laws and regulatins. CMS must als take the necessary steps t verify the cntinued validity f the lan prgram prvisins under applicable laws and regulatins, and must ntify any investrs in the event it believes that any prvisins might be restricted r impermissible under such laws r regulatins. The requirements utlined in this sectin represent USDA cre requirements fr underwritten lans. The GUS Underwriting Mdified TOTAL Screcard finding reprt decisin and recmmendatins fr reduced dcumentatin may be fllwed, unless therwise nted in this dcument. Requirements that vary frm ne lan prgram t anther are described in the CMS Prduct Matrices. Waivers d nt apply t state specific cmpliance restrictins. USDA Guarantee Prgram Overview This sectin describes the USDA Guarantee 502 lan prgram. The prgram is designed t prvide mrtgage financing fr lw and very lw incme individuals in rural areas that are unable t btain financing frm a private surce. The USDA prgram is a part f the USDA Rural Develpment s effrts t imprve the quality f life in rural areas. The basic requirements f the brrwer t qualify fr a USDA 502 lan are as fllws: Be unable t btain sufficient credit frm anther surce; Agree t persnally ccupy the dwelling; Meet citizenship r eligible nncitizen requirements; Demnstrate bth the willingness and ability t repay the lan. Prperty Eligibility Fr a prperty t be eligible fr the USDA Guarantee the prperty must be lcated in a qualified area. T cnfirm a prperty is eligible fr the prgram g t: CMS Plicies & Prcedures Page 13 f 208

14 USDA LOAN ELIGIBILITY Overview This sectin prvides eligibility standards that all apply t the USDA guarantee lan prgrams. LDP and GSA Prcurement/Nn-Prcurement Requirements If any party t the transactin appears n either list, the fllwing must ccur: It must be verified that the persn n the list is the same persn in the transactin. If evidence can be prvided prving that he r she is nt the same persn listed, the prcess may cntinue. The fllwing are examples acceptable dcumentatin: Evidence f residency fr the brrwer fr the past seven years t verify brrwer has nt lived at the address listed n the LDP r GSA. Evidence that the brrwer's full name differs frm the name n the list (e.g., Dcument brrwer has a different middle initial). If the persn listed is the same persn in the transactin, then that persn must be remved frm the transactin. USDA Case Number The USDA Case number is autmatically assigned frm USDA s Cnditinal Cmmitment. The case number cnsists f the State Cde (3 digits), the Cunty Cde (3 digits) and the Brrwer s ID. All 3 can be fund n the Cnditinal Cmmitment, which is received after the underwriter submits t USDA Rural Husing fr apprval. The underwriter will enter the USDA case number withut any dashes r spaces in the fllwing rder: State Cde (with an additinal 0 added in frnt), Cunty cde, and then the Brrwer s ID fr a ttal f 15 digits. The case number des nt expire, but the cnditinal cmmitment which it is tied t expires after 90 days. Dcumenting Clearances USDA cnditin fr SAM clearance: USDA- LDP/GSA Review Prvide evidence f clear LDP and GSA fr all parties in transactin. Must include screen prints frm SAM fr all GSA verificatins f all parties. Dcumentatin f the clearance must be cmpleted thrugh the SAM website ( fr all USDA lans as USDA des nt permit thirdparty verificatins such as the DataVerify reprt. Nte: T search mre than ne name at a time, the SAM website permits multiple name searches (up t six names at nce) thrugh the Advanced Search Exclusin ptin. CMS Plicies & Prcedures Page 14 f 208

15 Unifrm Residential Lan Applicatin Lan Applicatin Requirements The lan applicatin submitted fr underwriting must be reviewed during the underwriting prcess t ensure it is cmplete: A full tw-year histry f emplyment and residency is required (unless therwise exempted by the lan prgram) and all persnal infrmatin fr each brrwer (scial security number, date f birth, address, and educatin) must be cmplete. All declaratin questins must be marked as well as whether the applicatin was taken face-t-face, by telephne, r by mail. All applicatins must be signed by the brrwers. The interviewer's name and emplyer must be cmpleted in all cases. The final applicatin fr clsing must adhere t the requirements abve, including the brrwer's cmplete and accurate financial infrmatin relied upn by the USDA Certified Underwriter, and the applicatin must be signed and dated by all brrwers. The final applicatin must include all debt incurred during the applicatin prcess and thrugh lan clsing f the mrtgage. During the underwriting prcess, all transactins must be reviewed fr reasnability, including the feasibility f ccupancy claims and the verall financial picture f the brrwers. An adequate explanatin must be btained and dcumented in the lan file if cnflicting infrmatin exists between r within dcuments, All dcuments in the riginatin file relevant t underwriting must be reviewed fr signs f alteratin r fabricatin. An adequate explanatin must be btained and dcumented in the lan file if cnflicting infrmatin exists between r within dcuments. Face-T-Face Interview Overview The brrwer must be given the ptin t cmplete the applicatin face-t-face fr all lan transactins. The file must be dcumented accrdingly t verify that this ptin was prvided if the applicant declines a face-t-face applicatin. The supprting dcumentatin must be cmpleted and maintained in all purchase files when the applicatin is cmpleted by mail, telephne, vide cnferencing, r electrnically. CMS Plicies & Prcedures Page 15 f 208

16 Identity and Scial Security Number Validatins Identity Verificatin Scial Security Number Validatin The brrwer's identity must always be established even thugh a face-t-face interview is nt a requirement. The brrwer must prvide ne piece f acceptable identificatin t the clsing agent as evidence f his r her identity at clsing. The fllwing are acceptable frms f identificatin: Passprt (gvernment issued, valid, and unexpired) Resident Alien Card (gvernment issued, valid, and unexpired) Driving License (state issued, valid, and unexpired) State ID Card (state issued, valid, and unexpired) The brrwer's Identify Certificatin must be cmpleted and returned by the clsing agent. The frm must clearly indicate which f the abve dcumentatin was prvided as identificatin. T be eligible fr Agency assistance, the applicant must be a U.S. citizen, a U.S. nncitizen natinal, r a qualified alien and prvide acceptable evidence f eligible immigratin status. Any applicant wh is nt a U.S. citizen, a U.S. nn-citizen natinal, r a qualified alien shuld be rejected. Aliens and alien nn-citizen natinals must prvide acceptable evidence that they are qualified aliens. The Rural Develpment (RD) has entered int an Interagency Agreement with the Department f Hmeland Security, U. S. Custms and Immigratin Service (USCIS) t allw access t the Systematic Alien Verificatin fr Entitlements (SAVE) prgram database. This prgram enables USDA t btain nline immigratin status infrmatin t determine a nn-citizen applicant s prgram eligibility. In mst cases, SAVE will prvide immediate respnses cncerning the immigratin status f an applicant. Nte: A nn U.S. Citizen wh applies fr a USDA lan guarantee must prvide dcumentatin t dcument they are a qualified alien. Applicants with nine digit alien verificatin numbers must be verified thrugh the RD SAVE system. Upn receipt f dcumentatin f immigratin status the USDA Certified Underwriter will submit it t RD fr verificatin. Brrwers classified under Diplmatic Immunity, Temprary Prtected Status, Deferred Enfrced Departure, r Humanitarian Parle are nt eligible fr FHA financing. All brrwers must prvide evidence f a valid Scial Security number regardless f the Lan transactin. Acceptable dcumentatin fr Scial Security number includes the fllwing: Valid scial security card Current pay stub W-2 frm The Scial Security number prvided fr the brrwers will be validated by CMS. The validatin prcess is intended t recncile cnsistency with the numbering frmat, the brrwers names, and dates f birth. Nte: Any use f a Scial Security r Individual Taxpayer Identificatin Number fr purpses f filing taxes that was nt issued legally t an applicant is cnsidered fraud. As such, the applicant will nt be eligible fr a lan thrugh Carringtn and evidence f such fraud will be reprted as required under Carringtn plicy. CMS Plicies & Prcedures Page 16 f 208

17 Occupancy Types Overview If a brrwer indicates that the subject prperty will be his r her primary residence, the viability f the brrwer ccupying the prperty must be assessed. Fr refinance transactins, the current address reprted n the Unifrm Residential Lan Applicatin (Fannie Mae frm 1003) must be cmpared t the addresses listed n the credit reprt. Any red flags r incnsistencies fund within the last 12 mnths must include a full explanatin. Primary Residence A primary residence is a prperty that is physically ccupied by the brrwer as his r her principal residence. A primary residence is a prperty that: The brrwer ccupies the prperty as his r her principal residence. The brrwer ccupies the prperty fr the majr part f the year. The lcatin is cnvenient t the brrwer's principal place f emplyment. The address is f recrd fr ne r mre f the fllwing: federal incme tax reprting, vter registratin, driver's license, ccupatinal licensing, etc. The brrwer must ccupy the prperty within 30 days f clsing. An applicant wh wns a dwelling generally is nt eligible fr a Sectin 502 lan, except fr refinancing an existing Sectin 502 r 504 lan fr a rate reductin, n cash ut refinance lan. Hwever, if the applicant s dwelling is structurally unsund, functinally inadequate, t small t accmmdate the needs f the husehld, r the brrwer s current hme is at least 50 miles away frm the subject prperty funds may be prvided t purchase a new ne. Increase in Family Size The brrwer may be permitted t btain anther primary residence with an FHA mrtgage if the number f legal dependents increases where the present huse n lnger meets the family's needs. The brrwer must prvide satisfactry evidence f the increase in dependents and the prperty's failure t meet the family's needs. The brrwer must pay dwn the utstanding mrtgage balance n the present prperty t 75% LTV r less. A current residential appraisal must be used t determine LTV cmpliance. Tax assessments, market analyses by real estate brkers, etc. are nt acceptable prf f LTV cmpliance. Vacating a Jintly Owned Prperty If the brrwer is vacating a residence that will remain ccupied by a cbrrwer, the brrwer is permitted t btain anther USDA mrtgage. In all ther cases, existing USDA guaranteed mrtgages must be paid ff befre brrwers may btain anther USDA lan. CMS Plicies & Prcedures Page 17 f 208

18 Brrwers, C-Brrwers, C-Signers, and Nn-Purchasing Spuses Brrwers and C-Brrwers A brrwer must be an individual. Title must be in the brrwer s name at applicatin fr refinance transactins. Ineligible Brrwers The fllwing nn-individual legal entities are ineligible brrwers: Crpratins General Partnerships Limited Partnerships Real Estate Syndicatins Investment Trusts Nn-ccupant brrwers are nt eligible Trusts (including Inter-vivs and Living Trusts) Limited Liability Cmpany (LLC) Nn-Purchasing Spuse Nn-purchasing spuses may be required t sign either the security instrument r dcumentatin evidencing that he r she is relinquishing all rights t the prperty if required by state law in rder t perfect a valid and enfrceable first lien, as is the case in sme cmmunity prperty states. If the nn-purchasing spuse executes the security instrument, he r she is nt cnsidered a brrwer fr underwriting purpses and need nt sign the lan applicatin r nte. In all ther cases, the nn-purchasing spuse is nt t appear n the security instrument r therwise take title t the prperty. Nn-purchasing spuse may be added t title n a purchase transactin r may remain n title when refinancing. N ther party ther than the brrwer r their spuse may be permitted t have a vested interest t the prperty. Cmmunity Prperty States If the prperty is lcated in a cmmunity prperty state r the brrwer resides in a cmmunity prperty state, the fllwing requirements must be fllwed: A credit reprt fr the nn-purchasing spuse is required t determine any jint r individual debts and t determine the debt-t-incme rati. The credit reprt fr the nn-purchasing spuse must nt be a jint reprt, it must be btained separately. Authrizatin frm the nn-purchasing spuse must be btained and dcumented t pull a separate credit reprt. The lan must be rejected if the nn-purchasing spuse refuses t prvide authrizatin fr the credit reprt. In rder t d the recrds check, the Credit Cmpany must be given nnpurchasing spuse infrmatin, including names, address, birth date, and any ther significant infrmatin requested. If the nn-purchasing spuse des nt have a Scial Security number, the fact that the nn-purchasing spuse has n credit histry and n public recrds against him r her must be verified by the credit reprting cmpany. CMS Plicies & Prcedures Page 18 f 208

19 Brrwers, C-Brrwers, C-Signers, and Nn-Purchasing Spuses (cntinued) Nn-Purchasing Spuse (cntinued) Except fr debt bligatins specifically excluded by state law, the debts f the nn-purchasing spuse must be cnsidered in the qualifying ratis. If the debts are the sle respnsibility f the nn-purchasing spuse, d nt cnsider debt in the debt-t-incme rati. See the Cmmunity Prperty State-Specific Infrmatin sectin belw fr bligatins excluded by state law in Arizna, Nevada, and Wiscnsin. Prir t r at clsing, all defaulted federal debt, pen judgments and liens, including thse f the nn-purchasing spuse, must be satisfied. Use the greater f the mnthly payment amunt r 5% f utstanding balance f all debts and include in the debt rati calculatin t calculate the mnthly bligatin f the nn-purchasing spuse. Disputed debts f the nn-purchasing spuse d nt need t be cunted with acceptable dcumentatin f the dispute. The credit histry f the nn-purchasing spuse shuld nt be the sle basis fr declining the lan. Cmmunity Prperty States- The fllwing states are cmmunity prperty states: Arizna Califrnia Idah Luisiana Nevada New Mexic Texas Washingtn Wiscnsin Previus Financial Crimes Plicy CMS will nt make a lan t any individual wh has ever been cnvicted f a felny r within the past five (5) years if cnvicted f a misdemeanr where mney r prperty was taken r used in an illicit manner. Guilty r N Cntest pleas are included in this restrictin. Examples f such crimes include but are nt limited t fraud, embezzlement, frgery r identity theft. CMS Plicies & Prcedures Page 19 f 208

20 Transactin Types Overview CMS will accept lans made fr the fllwing purpses as defined in this sectin. Purchase Mrtgages Rate/Term Refinance Mrtgages Purchase Mrtgage A purchase mrtgage lan invlves the purchase f a Mrtgaged Premises, as defined by a sale and purchase agreement executed by the brrwer and seller, which represents a first and/r secnd lien n the prperty. The seller must be the wner f recrd. All purchase transactins must include a cmplete purchase agreement, including all addenda. All purchase agreement terms must be cnsidered in the underwriting decisin and any evidence f undisclsed elements f the transactin must be investigated. Examples f undisclsed elements are evidence f straw buyers (changes in purchaser n the purchase agreement) r pssible undisclsed seller cncessins, such as making mrtgage payments n behalf f the brrwer fr the first few mnths f the lan. In purchase transactins where the seller is a crpratin, partnership, r any ther business entity, the brrwer must nt be an wner f the business entity selling the subject prperty. Lans where the purchase agreement has been assigned are nt eligible. The subject prperty may nt be rented back t the seller fr any perid f time after the lan clsing. Prf that the prperty seller has wned the prperty fr 12 mnths r a chain f title fr the last 12 mnths is required. Acceptable surces fr the chain f title include the fllwing: Cpies f recrded deeds Tax statements 12-mnth chain f title n the title cmmitment If a prperty was previusly sld within the last 12 mnths, ensure the transactin is legitimate. Sme characteristics f fraudulent transactins include but are nt limited t freclsure bailuts, distressed sales, and inflated values due t stated imprvements that are nt supprted. Purchase transactins d nt allw fr cash back t the brrwer at clsing ther than an amunt representing the earnest mney depsit paid by the brrwer in advance. If the brrwer receives cash back fr the earnest mney depsit, the USDA Certified Underwriter must cnfirm that the minimum brrwer cntributin requirement assciated with the selected mrtgage prduct (if applicable) has been met. CMS Plicies & Prcedures Page 20 f 208

21 Transactin Types (cntinued) Purchase Mrtgage (cntinued) Identity f Interest Transactins (nn-arm s length transactin) An identity f interest transactin is a transactin fr the purchase f a principal residence between ne f the fllwing: Parties with a familial r business relatinship Business affiliates Nte: An identity f interest transactin des nt include an emplyer/emplyee transactin when the emplyee is purchasing the seller's principal residence. Refinance Mrtgages The maximum amunt f financing is determined by the fllwing: Occupancy Use f the lan prceeds Hw and when the prperty was purchased CMS investrs will purchase the fllwing refinance transactin types: Streamline Refinance Credit Qualifying Streamline Refinance f existing USDA insured mrtgages, with r withut an appraisal. A full review and evaluatin f the brrwer's incme, assets and credit is perfrmed. Rate Reductin Refinance - A n cash-ut refinance f an existing USDA lan. Streamline Refinance A streamline refinance is intended t lwer the mnthly principal and interest payments f a current USDA guaranteed mrtgage with n cash back t the brrwer. Dcumentatin requirements are significantly reduced under this refinance ptin. Streamline refinances require the brrwer s t be credit qualified. Streamline refinances can be cmpleted with r withut an appraisal. Except fr health, safety, and lead-based paint related repairs, cmpletin f repairs is nt required n Streamline Refinance transactins. A termite certificatin is nly required when a prblem has been nted by the appraiser. Net Tangible Benefit It must be determined that there is a net tangible benefit t the brrwer as a result f the Streamline Refinance. The net tangible benefit is defined as ne f the fllwing: A 5 percent reductin t the P & I f the mrtgage payment plus the annual MIP. Refinancing frm an ARM t a fixed rate mrtgage. CMS Plicies & Prcedures Page 21 f 208

22 Transactin Types (cntinued) Refinance Mrtgages (cntinued) The fllwing table defines the permissible minimum threshlds t define net tangible benefit: T Frm Fixed Rate One-Year ARM Fixed Rate One-Year ARM Hybrid ARM Reductin f at least 5% f P&I and MIP New interest rate n greater than 2% abve the current interest rate f the ARM New interest rate at least 2% belw the current interest rate f the fixed rate mrtgage Reductin f at least 5% f P&I and MIP Hybrid ARM During Reductin f at least New interest rate at Fixed Perid (e.g. fr 3/1 Hybrid ARM, first 3 years 5% f P&I and MIP least 2% belw the current interest rate f the fixed rate is fixed rate perid) mrtgage Hybrid ARM During New interest rate n Adjustable Perid greater than 2% (Adjustable perid abve the current is perid when rate interest rate f the adjusts annually) ARM Reductin f at least 5% f P&I and MIP Reductin f at least 5% f P&I and MIP New interest rate at least 2% belw the current interest rate f the fixed rate mrtgage Reductin f at least 5% f P&I and MIP New interest rate at least 2% belw the current interest rate f the fixed rate mrtgage A maximum principal curtailment f $2,000 is permitted at the clsing table and must be n the HUD-1. If the amunt exceeds $2,000, then the fllwing steps must ccur: 1. Recalculate the lan. 2. Draw new dcuments, submit fr re-apprval, and btain the brrwer s signature. Nte: The principal curtailment may nt be dne after clsing. CMS Plicies & Prcedures Page 22 f 208

23 Transactin Types (cntinued) Refinance Mrtgages (cntinued) Rate Reductin Refinance A rate and term refinance mrtgage represents a lien that is used t pay ff the existing mrtgage r lien with a new lan. Cash remval, ther than incidental, is nt permitted. A rate and term refinance transactin is a lan where prceeds are distributed fr ne r mre f the fllwing reasns: Pay ff the utstanding principal balance f an existing first lan plus any required per diem interest. Allwable clsing csts and prepaid expenses. Payff f the utstanding principal balance f a USDA lien. Buyut f a c-wner. Nte: A refinance transactin that results in a buyut f the ther party's interest in his r her primary residence is cnsidered a rate and term refinance. If the new lan is t refinance an existing mrtgage r t buy ut an ex-spuses r ther c-wner's equity, the specified equity t be paid t the ex-spuse is cnsidered prperty-related indebtedness and is eligible fr inclusin in the new mrtgage. The divrce decree, settlement agreement, r ther type f bna fide equity agreement must be prvided t dcument the equity awarded t the ex-spuse r c-mrtgagr. A maximum principal curtailment f $2,000 is permitted at the clsing table and must be n the HUD-1 Settlement Statement. If the amunt exceeds $2,000, the fllwing steps must ccur: Recalculate the lan. Resubmit the lan t Mdified Ttal Screcard. Draw new dcuments, submit fr re-apprval, and btain the brrwer s signature. Nte: The principal curtailment may nt be dne after clsing. CMS Plicies & Prcedures Page 23 f 208

24 Transactin Types (cntinued) Refinance Mrtgages (cntinued) Restructured Lan/Shrt Payff A restructured lan r shrt payff is a mrtgage lan in which the terms f the riginal transactin have been changed resulting in either abslute frgiveness f debt r a restructure f debt thrugh either a mdificatin f the riginal lan r riginatin f a new lan that results in ne f the fllwing: Frgiveness f a prtin f principal and/r interest n either the first r secnd mrtgage. Applicatin f a principal curtailment by r n behalf f the investr t simulate principal frgiveness. Cnversin f any prtin f the riginal mrtgage debt t a sft subrdinate mrtgage. In many cases, a brrwer may nt disclse that their existing mrtgage lan has been restructured. The credit reprt may shw a restructured lan as settled fr less than wed. If the credit reprt des nt specify settled fr less than wed, scrutinize the mrtgage balance reprted n the credit reprt versus the payff balance. If the tw balances d nt match and the difference is mre than unpaid interest r prepayment penalties, the lan may have been restructured. Restructured lans/shrt payffs are eligible fr financing as a rate/term refinance. The lan must cmply with all USDA prduct guidelines and be paying ff a USDA guaranteed lan. The lan may nt currently be delinquent and there can be n late payments in the last 12 mnths. CMS Plicies & Prcedures Page 24 f 208

25 Transactin Types (cntinued) Principal Curtailment Principal curtailments are permitted in the fllwing cases: Lender Paid Transactins n transactins where the lan riginatr is paid by the lender, CMS permits a principal curtailment n purchase and refinance lans unless nted belw as a result f excess premium rate credit. The excess premium must be identified n the HUD-1 Settlement Statement and is limited t the amunt f the excess premium rate credit belw. The premium rate credit is the amunt assciated with the lwest pricing rate ptin that allws fr sme r the entire brrwer s clsing csts t be paid s the brrwer des nt have t pay thse clsing csts ut f pcket. If the premium rate credit is less than r equal t $2,000 fr lan amunts up t $350,000, r $4,000 fr lan amunts exceeding $350,000, then n additinal dcumentatin is required. Fr premium credits exceeding these threshlds, evidence that the next lwer pricing ptin wuld require the brrwer t pay clsing csts ut f pcket must be dcumented in the file (e.g., GFE, Pricing/Rate Sheet, etc.). If the brrwer was nt prvided with the lwest pssible rate while accmmdating the custmer request, the lan is nt eligible. Brrwer Paid Transactins n transactins where the lan riginatr is paid by the cnsumer, principal curtailments are nt permitted. The premium rate credit must nt exceed the amunt f the third-party csts. Refinance Transactins with Escrw Credits CMS permits the netting f escrws n USDA lans. Refer t the CMS Clsing Plicy and Netting Escrw Requirements fr additinal infrmatin. CMS Plicies & Prcedures Page 25 f 208

26 Leasehld Estates Overview A Leasehld Estate is an interest in real prperty held by virtue f a lease. Leasehld refers t land that is leased t the individual wh wns appurtenant structures n the land. The leasehld estate may cnsist f bth the imprvement and the land; hwever, in mst cases, the imprvement is purchased in fee simple, subject t grund rent. Grund rent is rent paid fr the right t use and ccupy land. When the term f the lease expires, all rights t pssessin and use revert back t the lessr/fee simple wner and the Leasehld Estate terminates. Leasehld Estate Requirements Prperties that are secured by Leasehld Estates are acceptable prvided they cnfrm t all f the fllwing requirements: The applicant must be unable t btain fee-simple title t the prperty, and the rent charged fr the lease must nt exceed the rate being paid fr cmparable leases. The lease is fr the rental f a prperty with a fee wnership interest. The lessr must wn the fee-simple title (this prvisin des nt apply t a lessr wh is an American Indian pssessing a leasehld interest n tribal alltted r trust land). Residential prperties in the area cnsisting f leasehld r grund rent estates are readily marketable and acceptable in the subject area. The leasehld is in full frce and effect and is nt subject t any prir lien r encumbrance by which the leasehld culd be terminated r subjected t any charge r penalty. The remaining term r exercised renewal f the lease with any renewals enfrceable by the mrtgage des nt terminate earlier than ten years after the maturity date f the lan. Nt eligible n manufactured hmes. CMS Plicies & Prcedures Page 26 f 208

27 Leasehld Estates (cntinued) Lease Requirements The lease must be in writing and cmply with the fllwing requirements: The lessr s cnsent t allw the Agency s mrtgage; The right f the Agency t freclse and sell the prperty withut restrictins that adversely affect the market value f the prperty; The right f the Agency t bid at a freclsure sale r t accept vluntary cnveyance f the prperty in lieu f freclsure; The right f the Agency t ccupy, sublet, r sell the prperty shuld the leasehld be acquired thrugh freclsure, vluntary cnveyance, r abandnment; The right f the applicant t transfer the leasehld and Agency mrtgage t an eligible transferee wh will assume the Agency s debt, if the brrwer defaults r is unable t cntinue with the lease; Advance written ntice f at least 90 days t the Agency f the lessr s intentin t cancel r terminate the lease; Prvisins are negtiated with the lessr befre the leasehld interest is apprved regarding the Agency s bligatin t satisfy unpaid rent r ther charges accrued befre r during the time the Agency has pssessin f r title t the leasehld. During negtiatins, the Lan Originatr shuld cnsider the length f time it will take t freclse, hw much the Agency wuld be respnsible fr, and when the Agency wuld have t pay; Prvisins t ensure fair cmpensatin t the brrwer fr any part f the prperty taken by cndemnatin; and The unexpired term f the lease must be at least 150 percent f the term f the mrtgage, unless the lan is guaranteed by a public authrity, Indian Tribe, r Indian Husing Authrity. Fr guaranteed lans, the unexpired term f the lease must be at least 2 years lnger than the mrtgage term. In n case may the unexpired term f the lease be less than 25 years. Maximum Mrtgage Limits Requirements The maximum lan amunt is determined by qualifying ratis and cunty maximum incme limits. Maximum lan amunt cannt exceed 100% f the appraised value. Maximum lan amunt including financed guarantee fee cannt exceed 102% f the appraised value. On purchase transactin, if the sales price is lwer than the appraised value, clsing csts may be financed int the lan amunt up t a maximum f 100% f the appraised value. CMS Plicies & Prcedures Page 27 f 208

28 Lan-t-Values Calculating Cmbined Lan-t-Value Maximum Interest Rates Allwed fr GRH Prgram Purchase Transactins The maximum cmbined lan t value fr a purchase transactin is calculated as fllws: Principal balance f the first mrtgage (excluding financed Guarantee Fee) Divided by The lwer f the appraised value r sales price Rate/Term and Cash-ut Transactins The maximum cmbined lan t value fr a Rate/Term refinance transactin is calculated as fllws: Principal balance f the first mrtgage (Excluding financed Guarantee Fee) Divided by The appraised value USDA Rural Develpment des nt establish the interest rate fr the lan. CMS and ur custmer must negtiate the interest rate; hwever, Rural Develpment des establish a maximum rate that may be charged. The maximum rate is based n the 90 day FANNIE MAE 30 year Remittance rate + 60 basis pints and runded up t the next ¼%. Example: Fannie Mae 90 day 30 year fixed A/A 3.07% Add 60 basis pints +.60 Ttal 3.67% Runded up t next ¼% 3.75% maximum These rates can be fund n the Fannie Mae website Histrical Daily Required CMS shuld dcument the interest rate n the Frm under item 4 and 5. If the rate is nt lcked at the time f submissin f the applicatin t Rural Develpment, CMS must prvide a lck sheet with the clsing dcuments t verify the rate did nt exceed the maximum allwed rate as f the date f the lck. If the interest rate increases abve what was submitted n the Frm , CMS must submit t Rural Develpment new underwriting dcumentatin with the increased rate PRIOR t clsing. CMS Plicies & Prcedures Page 28 f 208

29 Minimum Brrwer Investment Overview There is n minimum brrwer cash investment required fr USDA guarantee purchase lans. Acquisitin Cst The acquisitin cst is calculated as fllws: Sales price + Cst f any required repairs paid by the brrwer + all brrwer-paid clsing csts The difference between the ttal cst t acquire the prperty and the mrtgage amunt can be prvided frm any f the fllwing surces: Brrwer's wn funds Seller cncessins. Any additinal csts fr prepaid expenses, MIP paid in cash, and discunt pints may be reduced by premium pricing. CMS Plicies & Prcedures Page 29 f 208

30 Seller Cntributin Limitatins Cntributins/ Cntributrs Cntributins are any csts that are typically the respnsibility f the brrwer, but paid by anther individual. Cntributrs may include direct participants such as the prperty seller, builder, develper r real estate agent. Financing cntributins subject t the maximum 6% cntributin limitatin include, but are nt limited t, the fllwing: 1. Discunt pints 2. Buy dwn funds 3. Seller-paid clsing csts 4. Prepaid expenses 5. Guarantee Fee Inducements t Purchase A dwnward adjustment t the prperty's sales price by the amunt f the Inducement t Purchase must be made t reflect the amunt f the lesser f the adjusted sales price r appraised value. Inducements t Purchase include, but are nt limited, t the fllwing: Persnal prperty items such as cars, bats, riding lawn mwers, furniture, televisins Mving csts Vacatins Autmbiles Other items cnsidered giveaways Decrating allwances, repair allwances, and ther csts as determined by the Hme Ownership Center Excess rent credit The seller r builder paying a prtin f the brrwer's sales cmmissin n the sale f the brrwer's present hme If the real estate brker is invlved in bth transactins and the seller paid a real estate cmmissin exceeding the amunt typical fr the area and the brrwer is nt paying a sales cmmissin n the sale f his r her present hme. In this type f situatin, the excess amunt paid by the seller is cnsidered an Inducement t Purchase. Cntributins in excess f actual csts Depending n lcal custm, certain csts may be cnsidered part f the real estate transactin and their value will nt be subtracted frm the sales price. Examples include ranges, refrigeratrs, dryers, washers, carpeting, and windw treatments. CMS Plicies & Prcedures Page 30 f 208

31 Seller Cntributin Limitatins (cntinued) Premium Pricing T reduce the brrwers' required funds fr clsing, the funds received frm premium pricing may be applied twards clsing csts and prepaid expenses. Premium pricing may be cnsidered as part f a brrwer's wn funds and des nt need t be included as part f the 6% seller cntributin limit. Premium pricing must never be used t pay any part f the brrwer's required dwn payment r fr payment f debts, cllectin accunts, escrw shrtages, missed mrtgage payments, judgments, etc. The HUD-1 Unifrm Settlement Statement and Gd Faith Estimate f Clsing Csts must itemize all charges being paid n the brrwer's behalf. It is nt acceptable t disclse a lump sum amunt. Any remaining funds due the brrwer frm a premium pricing agreement must be applied t the principal balance f the lan. Secndary Financing Dwn Payment Assistance Must establish that a Gvernment Entity prvided the brrwer s required minimum cash investment. The mrtgage must dcument that the Gvernment Entity incurred prir t r at clsing an enfrceable legal liability r bligatin t fund the brrwer s required minimum cash investment. Acceptable frms f dcumentatin are: Cancelled check, evidence f wire transfer r ther draw request shwing that prir t r at the time f clsing the Gvernment Entity had authrized a draw f funds, r Letter frm the Gvernment Entity, signed by an authrized fficial, establishing that the funds prvided twards the brrwer s required minimum cash investment were funds legally belnging t the Gvernment Entity at r befre clsing. RD will permit the secndary financing cmpnent t be made by a Gvernmentapprved mrtgagee r Gvernment-apprved nn-prfit n behalf f the Gvernment Entity prvided the mrtgagee r nn-prfit is nt a prhibited surce and the Gvernment Entity hlds the secndary financing prir t endrsement f the first mrtgage. Mrtgagees must dcument that the secndary financing is held by the Gvernment Entity prir t submissin f the mrtgage t RD. Allwable Brrwer Paid Clsing Csts Requirements Clsing csts are the actual expenses related t the purchase r financing f the prperty that will be paid by the brrwer. Csts necessary t clse the lan may be charged t the brrwer with the fllwing restrictins: All csts must be disclsed n the Gd Faith Estimate. Tax service fees may nt be charged t the brrwer. The brrwer must agree in writing t the charge f curier service/express mail fee prir t settlement. All state-specific requirements n the cllectin f fees and charges must be fllwed (e.g., New Jersey, Vermnt). CMS Plicies & Prcedures Page 31 f 208

32 Guarantee Fee Overview The USDA guarantee mrtgage prvides CMS with prtectin against lsses as the result f hmewners defaulting n their mrtgage lans. CMS bears less risk because USDA will pay a claim in the event f a hmewner s default. All lans require an Up-Frnt Guarantee Fee and/a Mnthly Guarantee Fee. Up-Frnt Mrtgage Insurance Premiums The Up-Frnt Guarantee Fee must be either financed int the lan amunt r paid in cash at clsing. The Up-Frnt fee cannt be split with part f the amunt financed and the remainder paid at clsing. On a purchase transactin, the ttal Up-Frnt Guarantee Fee cst must als be paid by either the brrwer r by the seller. It cannt be a shared cst. Examples USDA s 2% guarantee fee can be financed int the maximum lan amunt. Fllwing are few examples f different scenaris t shw hw t crrectly calculate this fee. Example #1 Purchase Price $250,000 Appraised Value $258,000 Brrwers want t finance $8,000 in clsing csts in the lan since the appraisal is higher than the purchase price. In additin, they will finance USDA s guarantee fee. Lan Amunt $258,000 divided by.98 = ttal lan amunt f $263, Subtract ttal lan amunt $263, frm lan amunt $258,000 = $5, USDA Guarantee Fee Ttal Lan Amunt $263,265 X 2% = $5, USDA Guarantee Fee Example #2 Purchase Price $300,000 Appraised Value $300,000 There is n rm t finance clsing csts; hwever, the brrwers wuld like t finance the USDA guarantee fee. Lan Amunt $300,000 divided by.98 = Ttal lan amunt f $306, Subtract ttal lan amunt $306, frm lan amunt $300,000 = $6, USDA Guarantee fee Ttal lan amunt $306,122 X 2% = $6, USDA Guarantee Fee Example #3 Purchase Price $175,000 Appraised Value $190,000 There is a $15,000 difference between the appraisal and the purchase price; hwever, the brrwers nly want t finance $10,305 in clsing csts plus the USDA fee. Purchase Price $175,000 + $10,305 clsing csts = Lan Amunt $185,305 Lan Amunt $185,305 divided by.98 = ttal lan amunt $189, Subtract ttal lan amunt $189, frm lan amunt $185,305 = $3, Ttal Lan Amunt $189, X 2% = $3, CMS Plicies & Prcedures Page 32 f 208

33 Guarantee Fee (cntinued) Mnthly/Annual Premium A mnthly premium is paid in the mnthly mrtgage payment with the principal, interest, taxes, and insurance. The mnthly guarantee fee is calculated by multiplying average utstanding balance by the premium factr rate shwn n the Up-Frnt and Annual Guarantee Fee chart n the CMS Prduct Matrix. USDA Risk Management Overview This sectin discusses the requirements that must be fllwed t ensure the issuance f the USDA Lan Guarantee. This certificate is essential when ffering the lan in the secndary market. Requesting the Lan Guarantee Certificate Requesting the Guarantee Certificate CMS must submit a fully executed frm RD t RD fr the issuance f the Lan Guarantee Certificate. The dcument must be signed by the CMS authrized representative and all applicants that are a party t the nte. An additinal frm must be utilized if mre than tw applicants are n the lan. Original signatures are nt required. CMS must cmplete the entire frm with accurate lan infrmatin and dcument the interest rate agreed t by the applicants (s). Electrnic signatures are nt accepted. Insuring an USDA Guarantee Lan Requirements The USDA Guarantee Prgram has been designed t give the lender certainty f the issuance f the Guarantee Certificate by requiring all files t be submitted t the lcal RD ffice fr apprval prir t clsing. The lan shuld nt be delivered t RD fr apprval withut meeting all the requirements necessary. Reasns that a lan may nt be apprved and guaranteed by USDA include, but are nt limited t, the fllwing: The lan amunt exceeds the applicants qualifying ratis r the cunty maximum incme limits. LDP and Prcurement/Nn-prcurement search shwed a default that was nt cleared. CAIVRS shwed a default that was nt cleared. Fraud is detected. Lan churning is detected. CMS Plicies & Prcedures Page 33 f 208

34 Risk Cntrls Verificatins Sent t Pst Office Bxes If a verificatin frm is frwarded t a Pst Office Bx and the brrwer indicates this is the necessary address, the infrmatin must be cnfirmed thrugh additinal fllwup. If it is determined that the infrmatin prvided is the crrect address fr verificatins, the file must cntain a statement frm the persn that verified this infrmatin stating that he r she independently cntacted the institutin and verified this requirement. Dcumentatin verifying this requirement must be prvided in the lan package. Fraud/Red Flags Fraud is the intentinal misrepresentatin f facts that are material t the underwriting decisin n a lan. Fraud may be cmmitted fr prfit r simply t qualify an therwise ineligible brrwer fr a lan. CMS has a Zer Tlerance Plicy n fraud r misrepresentatin. Examples f fraud r misrepresentatin include, but are nt limited t, the fllwing: Frging signatures. Assisting in preparing incme dcumentatin/verificatins. Falsifying bank statements and/r assets. Nt disclsing brrwer's liabilities. Misrepresenting ccupancy f the prperty in questin. Nt disclsing r acting upn the knwn instances f fraud r misrepresentatin. Clluding with the appraiser t inflate values. T detect and avid fraud, certain details in a lan package that signal cautin, knwn as red flags, must be reviewed carefully. When evaluating a file, it is very imprtant t check fr cnsistency and perfrm crss checking. All related infrmatin in a file must be reviewed and cmpared. Any incnsistencies must be cnsidered a red flag. Red flags alert riginatin persnnel t situatins that warrant cautin and may require sme fllw-up t ensure that the infrmatin is valid. The fllwing are cmmn red flags: Lan Applicatin There is a significant increase r unrealistic change in cmmuting distance. Significant r cntradictry changes frm handwritten t typed lan applicatin. CMS Plicies & Prcedures Page 34 f 208

35 Risk Cntrls (cntinued) Fraud/Red Flags (cntinued) Credit Reprt Pattern f delinquencies that are incnsistent with credit explanatins. Undisclsed bankruptcies, freclsures, r debts. Emplyment data and r residence data that significantly cnflicts with the lan applicatin. Multiple Scial Security numbers assciated with the brrwer based n numerus pssible nn-applicant accunts r Scial Security number variatins. If this is fund, determine whether the infrmatin is indicating the pssibility that the brrwer's Scial Security number is inaccurate, invalid, r the brrwer is using multiple Scial Security numbers. If any f these issues are fund, the file must be referred t Quality Cntrl fr further review and validatin. Numerus Authrized User accunts. Credit reprt warning messages must be carefully reviewed. Fr example, if the warning message indicates that the brrwer's Scial Security number is related t a deceased individual, then further validatin must be cmpleted. Multiple names assciated with the brrwer and his/her Scial Security number. Nicknames that is unrelated t the brrwer's name. The abve items may indicate inaccurate Scial Security numbers; hwever, it is imprtant t carefully review the brrwer's Scial Security number infrmatin thrughut the file and determine whether a simple errr ccurred (e.g., typgraphical errr, transpsitin f tw numbers, etc.) befre referring the file fr further review and validatin. CMS Plicies & Prcedures Page 35 f 208

36 Risk Cntrls (cntinued) Fraud/Red Flags (cntinued) Victim f Identity Theft A brrwer wh has been identified as a victim f identity theft may be denied credit fr a reasn ther than the identity theft. If the file cntains infrmatin that cntains incnsistent Scial Security number infrmatin, the fllwing must be reviewed: Verify that the credit reprt was run under the brrwer's crrect Scial Security number. If the credit was run under an incrrect Scial Security number, rerun credit using the accurate Scial Security number. If dcumentatin received during the prcessing and underwriting f the lan indicates a different Scial Security number than the ne being used n the lan applicatin, a valid explanatin and dcumentatin must be prvided by the brrwer t address the discrepancy. A new credit reprt must als be run n the number discvered during the review. If the credit reprt includes cmments that the brrwer has used a different Scial Security number, a valid explanatin and dcumentatin must be prvided by the brrwer regarding the additinal Scial Security number. If the credit reprt indicates that the Scial Security number has nt been issued, additinal dcumentatin and verificatin must be btained t shw that the number is valid. Invalid r impssible Scial Security numbers: three r mre leading zers zers in psitins 4 and 5 fur trailing zers leading numbers f 73 r 79 leading numbers f 8 r 9 Tax Identificatin numbers instead f Scial Security numbers are used CMS Plicies & Prcedures Page 36 f 208

37 Risk Cntrls (cntinued) Fraud/Red Flags (cntinued) Incme The name r Scial Security number des nt match the brrwers. The incme n the applicatin is verstated. The brrwer's address r prfessin des nt agree with the infrmatin submitted n the lan applicatin. The federal incme tax return is incmplete (missing schedules, infrmatin, etc.). Schedule A shws unexplained real estate taxes paid fr nn-hme wners. A brrwer with substantial cash in the bank shws little r n related interest incme shwn n Schedule B. Schedule B des nt reflect dividend incme fr brrwer claiming stck investments. The grss incme listed n Schedule C des nt agree with the ttal incme accrding t the 1099 Statements. Schedule E lists additinal prperties that are nt n the lan applicatin. Financial statements n business prepared by smene ther than the persn that cmpleted previus tax returns. Pay Stubs A large emplyer has a handwritten r typed pay stub. Pay stub des nt cntain the name f the brrwer r emplyer. The Scial Security number f the brrwer is nt crrect. N pay perid. N check issue date. Des nt include a current incme breakdwn r a year t date figure. Tax deductin nt detailed including Scial Security, Medicare, etc. The cmpany address is a P.O. Bx. The emplyer address is different than address prvided by brrwer. Subsequent pay stubs, year t date incme, and withhldings d nt ttal up crrectly. Incnsistent name spelling and address f brrwer. Incnsistent pay dates and/r pay days. Incnsistent payrll check numbers. Payrll deductins disclse additinal liabilities nt included n the lan applicatin. CMS Plicies & Prcedures Page 37 f 208

38 Risk Cntrls (cntinued) Fraud/Red Flags (cntinued) W-2 Frms Assets A large emplyer has a handwritten r typed W-2 frm. Runded dllar amunts. Business identificatin number is the same as the brrwer's Scial Security number. Taxes paid are lw cmpared t incme stated n W-2 frm. Incnsistencies in name spelling, address, emplyer's address, and Scial Security number, etc. Regular payrll depsits that d nt agree with reprted incme. There is n evidence that the earnest mney depsit is debited t the checking accunt. Incnsistent name spelling and address f brrwer. Bank statements reveal lans r deductins fr liabilities nt disclsed n the lan applicatin. Tax Returns Brrwer's address r prfessin des nt agree with the infrmatin submitted n the lan applicatin. The federal incme tax return is incmplete (missing schedules, etc.). Schedule A indicates there are real estate taxes r mrtgage interest paid but des nt list prperty wned. A brrwer with substantial cash in the bank shws little r n related interest incme shwn n Schedule B. Schedule B des nt reflect dividend incme fr brrwer claiming stck investments. Grss incme listed n Schedule C des nt agree with the ttal incme accrding t frm Schedule E lists additinal prperties that are nt listed n the lan applicatin. Verificatin f Emplyment There is evidence f white ut r ther alteratins. Any alteratins must be cnfirmed with the emplyer t verify that the infrmatin is valid. The VOE is cmpleted by an inapprpriate verificatin surce such as a secretary r a relative. This culd be an indicatin that the brrwer is selfemplyed. The accuntant fr the business must verify that the brrwer des nt have any wnership interest in the business and all incme infrmatin must be verified by pay stubs and W2 frms. CMS Plicies & Prcedures Page 38 f 208

39 Risk Cntrls (cntinued) Fraud/Red Flags (cntinued) Verificatin f Depsit Appraisal Brrwer's funds are security fr a lan. The bank accunt is nt in the brrwer's name r is a jint accunt with anther party. An interested party t the transactin (seller, buyer, brker, etc.) rders the appraisal. Tenant shwn as cntact n a refinance f an wner-ccupied prperty. Appraisal dated prir t date f applicatin. Fr sale r rent sign in the subject prperty phts. Presence f cnstructin permits in subject phtgraph where n repairs are mentined by the appraiser r brrwer. The wner listed n the appraisal reprt and is nt the seller listed n the sales cntract. Owner-ccupied refinance transactin when the brrwer is nt listed as the ccupant. Ownership infrmatin n the appraisal reprt des nt match wner f recrd n the title reprt. Cllateral Valuatin Practices and Declining Value A market may experience a decline in prperty values. One f the ptential prblems in a declining market is the verstatement f prperty values in appraisal reprts. This may result in the brrwer nt having an accurate prperty valuatin, and vervaluatin f a prperty culd increase lan lsses shuld the mrtgage lan subsequently default. Ownership Validatin Carefully review and analyze the sale r transfer histry f the subject prperty. Identify the current wner. Cnfirm that the wner f recrd is the seller f the prperty listed n the sales cntract fr purchase transactins and/r the brrwer fr refinance transactins. Discrepancies in during the wnership validatin prcess shuld be reviewed by the Direct Endrsement USDA Certified Underwriter. CMS Plicies & Prcedures Page 39 f 208

40 Risk Cntrls (cntinued) Fraud/Red Flags (cntinued) Lan Churning Lan churning is defined as the practice f lenders encuraging multiple refinances during a shrt perid f time. CMS prhibits the churning f lans. The fllwing are examples f lan churning: Applicant purchasing and/r refinancing multiple wner-ccupied prperties within a 12-mnth perid. Funding a refinance r hme equity transactin then applying fr a subsequent purchase transactin. Slicitatin by a Lan Officer t refinance a six-mnth ARM every six mnths. Slicitatin f the refinance f a hme equity lan multiple times. Prperty Flipping and 90-Day Rule CMS defines Prperty Flipping as a predatry lending practice whereby a recently acquired prperty is resld fr a cnsiderable prfit with an artificially inflated value, ften accmplished with the help f the appraiser. Mst flipping ccurs within a matter f days after acquisitin and usually with nly minr csmetic imprvements made t the subject prperty. Dcumenting Seller Acquisitin Date The seller's acquisitin date is the date when the seller made settlement n the purchase f the prperty. In rder fr a purchase transactin t be eligible, the current seller must be the wner f recrd and must have acquired subject prperty at least 90 days prir t the executin f the current sales agreement. The current sale date r re-sale date f the subject prperty is the latest date n which the sales cntract is executed. The executed date is the mst recent signature date (f either seller r buyer) n the cntract. Satisfactry dcumentatin regarding cmpliance with all time perid restrictins must be included. N additinal dcumentatin is required t supprt the time perid restrictins as lng as the appraisal shws that the mst recent sales date fr the subject prperty (data t include the actual acquisitin date and sales price) ccurred at least ne year previusly and dcumentatin is btained t shw the seller as the current wner. If cnflicting infrmatin exits, it must be reslved and dcumented accrdingly in the lan file. CMS Plicies & Prcedures Page 40 f 208

41 Risk Cntrls (cntinued) Fraud/Red Flags (cntinued) Freclsure Sales If the seller purchased the prperty at a freclsure sale, but the deed transferring the prperty was nt recrded until several mnths later, the date f the warranty deed cnveying subject prperty t seller must be used as the acquisitin date and the file must be dcumented with an explanatin as in the fllwing example: Date f freclsure sale is April Date deed recrded is July Acquisitin date is April A cpy f the seller's winning bid fr the prperty and the ther dcuments frm the Sheriff shwing the prperty was sld t the seller at the auctin must be btained. Restrictins n Prperty Re-Sales The seller must be the wner f recrd. The sale r assignment f the sales cntract is nt permitted. Dcumenting the Owner f Recrd It is mandatry t btain dcumentatin t shw that the seller is the wner f recrd and t include this dcumentatin in the file. Dcumentatin may include the fllwing: Prperty sales histry reprt. Cpy f the recrded deed frm the seller. Cpy f the prperty tax bill. Preliminary Title Reprt, which must be checked t ensure that the seller is the wner f recrd n the subject prperty as indicated n the sales cntract and the date the prperty was acquired. If the appraisal shws that the mst recent sale f the subject prperty ccurred at least ne year ag, and dcumentatin is btained t shw the seller is the current wner (dcumentatin must include the actual date f acquisitin and sales price), n additinal dcumentatin is required t supprt the time perid restrictin. If cnflicting infrmatin exists, it must be reslved and dcumented in the lan file. CMS Plicies & Prcedures Page 41 f 208

42 Risk Cntrls (cntinued) Fraud/Red Flags (cntinued) If the lan file des nt cntain dcumentatin regarding the wner f recrd and the purchase date at the time f the underwriting review the fllwing cnditin shuld be added: Ownership infrmatin must meet all USDA requirements regarding prperty flipping. Final apprval shuld nt be given withut receipt f acceptable wnership dcumentatin. Acceptable evidence may include a cpy f the deed, AVM reprt, r cpy f a tax bill evidencing wnership infrmatin in rder t prceed with a final apprval status. At the time f final apprval, the fllwing cnditin shuld be added: Evidence (seller's name) is nted n the title reprt as the. Owner f recrd n r befre. ( Date) 1 Seller's Name Fill in seller's name frm sales agreement 2 Fill in the date 6 mnths prir t the new sales agreement cntract date CMS Plicies & Prcedures Page 42 f 208

43 Appraisal Transfer Appraisal Transfer An appraisal rdered by ne lender may be assigned t anther lender. If the brrwer changes lenders the transfer may be necessary. The USDA Certified Underwriter is required t determine whether the brrwer was denied credit and the reasn fr the denial (if applicable). If the appraisal has already been cmpleted, the lender must als assign the appraisal t the requesting lender. The brrwer must prvide written authrizatin and this must be prvided t the transferring lender. The appraisal must be cmpleted by an FHA apprved appraiser. A cpy f the FHA Cnnectin Screen cnfirming the FHA appraiser's apprval status must be included in the file. The appraisal must have been independently rdered (i.e. thrugh an AMC) t be acceptable t CMS. If the FHA appraisal has already been cmpleted, this must be included in the file and the USDA Certified Underwriter perfrms the standard appraisal review t determine cmpliance with minimum prperty standards. Appraisal Assignment If an USDA lan is in prcess with anther lender and it is assigned t a Client after the appraisal has been cmpleted: A written request permitting the transfer request must be btained frm the brrwer. A cpy f the appraisal reprt with all applicable addenda must be requested frm the transferring lender. Nte: The appraisal des nt need t be retyped t reflect the Client as the lender. The Client may rder a secnd appraisal t facilitate the cntinued lan prcessing and eliminate r reduce delays, nly in the fllwing situatins: The first appraisal cntains material deficient as determined by the USDA Certified Underwriter. The appraiser that cmpleted the first appraisal is n CMS exclusinary list f appraisers. The initial lender failed t prvide a cpy f the appraisal t the Client in a timely manner causing a clsing delay, thus psing ptential harm t the brrwer (events that are utside the brrwer's cntrl, such as lss f interest rate lck, purchase cntract deadline, freclsure prceedings and late fees). If a secnd appraisal is rdered: The explanatin fr why the secnd appraisal was rdered must be dcumented by the USDA Certified Underwriter and retained in the lan file. Bth appraisals must be retained in the lan file. CMS Plicies & Prcedures Page 43 f 208

44 USDA DOCUMENTATION Overview This sectin describes the fllwing infrmatin: The required dcumentatin fr each lan submitted fr mrtgage underwriting and issuance f the USDA Guarantee. The specific requirements fr prcessing and underwriting USDA Guarantee mrtgages. Minimum Dcumentatin Requirements Dcumentatin Requirements t Clse an USDA Lan The fllwing describes the minimum dcumentatin required in rder t clse an USDA Guarantee Lan: GUS Autmated Underwriting Findings Gd Faith Estimate f Clsing Csts and Addendum Final Unifrm Residential Lan Applicatin (1003) Original signed USDA Certified Underwriter Transmittal Summary (1008) Original Fully executed Unifrm Residential Lan Applicatin (1003) Screen prints f the fllwing request/searches: Credit reprt CAIVRS Search LDP/Prcurement/Nn-Prcurement Search Credit dcumentatin Surce f Funds Statement Asset dcumentatin Gift Letter and supprting dcumentatin, if applicable Prf f dwn payment, if applicable Escrw letter, if applicable Incme dcumentatin Recent pay stub W-2 frms CMS Plicies & Prcedures Page 44 f 208

45 Minimum Dcumentatin Requirements (cntinued) Dcumentatin Requirements t Clse an FHA Lan (cntinued) Evidence f a valid scial security number Prf f Citizenship r Qualified Alien Status Cmplete, fully executed sales cntract Fully executed Amendatry Language Frm and Real Estate Certificatin (Truth Statement), if nt included in sales cntract Cpy f Fr Yur Prtectin: Get a Hme Inspectin Disclsure fr purchase transactins Executed Ntice t Hmewner/Assumptin f Insured Mrtgage Executed Imprtant Ntice t Hmebuyer (Verify the updated versin f the frm is being used by the 9/30/2007 expiratin date) Cmplete riginal FHA appraisal with all exhibits Re-inspectin reprt, termite certificatins and all ther prperty certificatins, if applicable New cnstructin exhibits, if applicable IRS frm 4506-T Ntice Regarding Refinance Transactins, if applicable Executed Infrmed Cnsumer Chice Disclsure Evidence f brrwer's identity Cmpliance Dcumentatin Brrwers Signature Authrizatin Truth In Lending Disclsure Statement State/Prduct Disclsure Statements General Lan Applicatin Acknwledgement-Disclsure Bklet Affiliated Business Arrangement Disclsure Servicing Disclsures CMS Plicies & Prcedures Page 45 f 208

46 Minimum Dcumentatin Requirements (cntinued) Dcumentatin Requirements t be Eligible fr Underwriting Credit Dcuments: The fllwing list describes the minimum dcumentatin required fr a lan t be cnsidered cmplete and eligible fr underwriting: Apprve/Accept Lans Cmplete Unifrm Residential Lan Applicatin (1003) Cmplete HUD/VA Addendum t URLA Part IV must be signed by the brrwer indicating cnsent t Scial Security number validatin) GUS USDA Certified Underwriter Mdified TOTAL Screcard Findings Three Merge In-file Credit Reprt Credit recnciled and entered accurately in the applicable riginatin system Incme dcumentatin as required by GUS USDA Certified Underwriter Cmpleted Self-emplyed Incme Analysis (if applicable) IRS frm 4506-T/Tax Transcripts Asset dcumentatin as required by GUS USDA Certified Underwriter Appraisal, if required Cmplete and accurate Gd Faith Estimate f Clsing Csts Truth-in-Lending, indicating date mailed fr all purchase Lans Disclsure bklet pages 3 and 4 cmpleted and signed Signature Authrizatin frm cmpleted and signed Prduct specific disclsures cmpleted and signed State specific disclsures cmpleted and signed Dcument Images CMS permits the use f any available technlgy t prduce cpies f the dcuments in the mrtgage lan file, such as a phtcpier, facsimile machine, dcument scanner, r camera. Cpies f dcuments prvided by the brrwer may be phts r scanned versins f the riginal dcuments and can be delivered t CMS in hardcpy r via r ther electrnic means. Dcument images must be typical f what the actual dcument wuld lk like and must have gd image quality, be legible, and nt have brders shwing phne/mbile backgrund cntent. CMS Plicies & Prcedures Page 46 f 208

47 Electrnic Signatures Requirements Electrnic signatures are permitted n dcuments that are nt included as part f the Unifrm Residential Appraisal Reprt and third-party dcuments such as the sales cntract and cntract addenda, FHA Real Estate Certificatin, which may be signed with an electrnic signature. CMS is respnsible fr ensuring the security and authenticity f the electrnic signature in cnfrmity with all applicable federal laws. The fllwing table cntains the dcuments, as applicable t the lan transactin, which may nt cntain an electrnic signature: Nte: The exceptins are nted with Electrnic signature permitted. FHA Insurance Case Binder Dcument Requirements Unifrm Residential Lan Applicatin (URLA) Credit histry dcumentatin Asset Verificatin dcumentatin (including gift letters and relevant dcuments) Incme verificatin dcumentatin Amendatry Clause executed by all parties (Electrnic signature permitted) Real Estate Certificatin executed by all parties (Electrnic signature permitted) Evidence f satisfactin f valuatin cnditins (if applicable) Frm NPCA-1, Wd Destrying Insect Infestatin Reprt, r State mandated infestatin reprt, if applicable Lcal Health Authrity's Apprval fr individual water and sewer systems (if applicable) Evidence f 10-Year Warranty Plan Cverage, if applicable All ther cntract addenda (Electrnic signature permitted) Autmated Underwriting Feedback Certificate/Findings Reprt (if applicable) Supprting dcuments, such as: Secndary lien exhibits Buy dwn agreements Attachments, mems and clarificatins, if applicable Cpy f the Mrtgage Nte and all applicable riders and allnges CMS Plicies & Prcedures Page 47 f 208

48 Electrnic Signatures (cntinued) Requirements (cntinued) FHA Insurance Case Binder Dcument Requirements Cpy f the Security Instrument (Mrtgage r Deed f Trust) with all applicable riders HUD-1 Unifrm Settlement Statement/Gd Faith Estimate fr pre-clsing HUD-1 Addendum fr purchases Escrw Instructins, if applicable Evidence f Scial Security Number (such as n a printed pay stub, W- 2, 1099, SS card, Medicare card, etc.) Evidence f Tax Identificatin Number fr nn-prfit brrwers Unifrm Residential Appraisal Reprt (URAR) (Electrnic signature permitted) Lcatin map, and phtgraphs f prperties, building sketch Inspectin Reprt(s) VA fr the Department f Veteran Affairs (VA), Certificate f Reasnable Value (CRV) VA a, Master Certificate f Reasnable Value (MCRV) HUD-apprved lcal building authrity inspectin, if applicable NPCA-99a and NPCA-99b, Subterranean Termite Treatment Reprt VA CRV-VA and MCRV- VA a, including all attachments and endrsements (if applicable) CMS Plicies & Prcedures Page 48 f 208

49 USDA AUTOMATED UNDERWRITING Overview This sectin discusses the USDA Guaranteed Underwriting System (GUS) autmated underwriting. The Originatr and CMS remain accuntable fr cmpliance with USDA guidelines, as well as fr any USDA eligibility requirements, credit, capacity, and dcumentatin requirements. The Originatr and CMS are reminded that system updates t Mdified Ttal Screcard may lag behind changes t USDA prduct eligibility and underwriting plicy. This may cause inaccurate messages related t btaining RD apprval and issuance f the USDA Guarantee, and ther prduct eligibility elements f the lan. The Originatr and CMS, hwever, are respnsible fr cmpliance with current USDA guidelines. Eligibility Requirements The fllwing are lan prgrams that are eligible fr submissin t thrugh the GUS autmated underwriting system. 30 year Fixed Rate Purchase #502 Prgram 30 year Fixed Rate N Cash Out Refinance #502 Prgram 30 year Fixed Rate Streamline Refinance #502 Prgram USDA TOTAL Mrtgage Screcard USDA Rural Develpment created the USDA TOTAL Screcard, a credit assessment engine, t assess the credit wrthiness f USDA brrwers and t predict the default prbability fr the applicants. This autmated underwriting system wrks tgether with FHA TOTAL Mrtgage Screcard t analyze USDA lans. The Underwriting Findings Reprt shws the recmmended level f underwriting and dcumentatin required in determining lan eligibility. Any manual dwngrades frm the autmated underwriting decisin require cmpliance with standard dcumentatin requirements. Refer t the CMS Prduct Matrices fr additinal infrmatin. The entire Underwriting Findings Reprt must be placed in the file when submitting t the lcal RD ffice fr apprval and issuance f the Guarantee Certificate. Eligible Lan Types Eligible Lan Types The fllwing lan types are eligible fr the USDA Guarantee Prgram: Purchase Transactins Rate and Term Refinance Streamline Refinance Ineligible Lan Types The fllwing lan types are nt eligible: Secnd Hme Investment Prperty Cash ut Refinances CMS Plicies & Prcedures Page 49 f 208

50 Autmated Underwriting Decisins Overview GUS is an autmated underwriting system develped by the USDA Rural Develpment t help USDA Certified Underwriters make infrmed credit decisins n Guaranteed Rural Husing lans. There are fur cmpnents that make up GUS: Mdified Ttal Screcard Rules Based Engine Interface that ccurs thrugh Fannie Mae s Credit Interface System (CIS) Applicatin Pages Mdified TOTAL Screcard evaluates the brrwer's credit histry, incme, cash reserves, and ther cmpnents f credit wrthiness t determine whether the brrwer is acceptable as a mrtgage credit risk and may be prcessed with reduced dcumentatin r if the lan applicatin shuld be referred t the USDA Certified Underwriter fr review and evaluatin. The Rules Based Engine applies the GRH regulatin (1980-D) and supplemental ANs and determines if the mrtgage lan request meets all ther USDA Rural Develpment requirements. Obtaining Access t GUS Each CMS underwriter must be certified t underwrite USDA lans and have access t GUS. T becme certified the underwriter must cmplete mandatry training ffered by RD. This training is t assure cmpliance with and understanding f Agency regulatins and prvide an verview f the expectatins f mrtgage lans input int GUS. Apprve/ Accept A recmmendatin f Accept indicates that the lan is cnsidered t have acceptable credit characteristics and that the lan meets USDA lan prgram eligibility requirements. Lans with a Refer r Refer with Cautin require manual underwriting. All GUS Underwriting Findings Reprt cnditins must be fllwed and the lan file must be dcumented accrdingly. The credit reprt must als be reviewed t cnfirm that the data evaluated by GUS with respect t the brrwer's credit histry is accurate and that the lan meets USDA requirements. CMS Plicies & Prcedures Page 50 f 208

51 Using GUS Using GUS Rural Develpment is cmmitted t serving the credit needs f rural cmmunities by issuing Lan Nte Guarantees n lans that meet eligibility requirements. We rely n lenders t use a thrugh examinatin f primary and cntributry risk factrs in a mrtgage applicatin t reach an underwriting recmmendatin. The respnsibility f lan data integrity remains with the lender. The lan level data used t render a risk assessment and underwriting recmmendatin in GUS must match the data prvided fr a lan guarantee request. Accurate lan data is the respnsibility f the apprved lender. The apprved lender s underwriter must review the credit, qualifying ratis and appraisal t ensure the applicant s credit and capacity meets the standards f the SFHGLP. The underwriter must ensure all lan level data is valid prir t final submissin t the Agency when requesting a cmmitment fr lan nte guarantee. Adverse mdificatins f data must be cmmunicated with RD prir t lan clsing t ensure issuance f a Lan Nte Guarantee. Final Underwriting Submissin t RD The Underwriter must read all findings prvided in the Final GUS Underwriting and Findings Reprt. Findings btained with a preliminary submissin may differ frm the final reprt btained when the authrized user submits the applicatin file t RD fr cmmitment f a lan nte guarantee. GUS has been built with a quality cntrl feature that randmly selects sme ACCEPT files fr full dcumentatin submittal. Lenders print the final underwriting reprt and retain it as permanent dcumentatin in the case file. This infrmatin will be required when the Agency cnducts a cmpliance review. Prperty Tax and Insurance Apprved lenders must ensure that an accurate estimate fr the prperty tax/insurance cmpnent f an applicant s mnthly mrtgage payment is utilized when submitting lan applicatins fr Cnditinal Cmmitment. Care must be taken t assure a realistic estimate is used fr cmputing the mnthly escrwed amunt. The escrwed amunt fr real estate taxes is based n the assessed value f imprved land (i.e. value f bth the prperty and cmpleted dwelling) fr new cnstructin and the actual taxes Assessed fr existing prperties. The Underwriter shuld cntact the taxing authrity which has jurisdictin ver the prperty t btain an estimate f the taxes t be assessed fr newly cnstructed dwellings. Minr changes t the escrw prtin f the mnthly husing expense d nt require the mrtgage applicatin t be recnsidered. It is nt necessary t perfrm an updated underwriting analysis when mnthly tax and insurance estimates d nt increase the payment-t-incme principal, interest, taxes and insurance (PITI) and debt-t incme Ttal debt (TD) ratis by mre than tw-percentage pints at lan clsing. A small increase t mnthly tax and insurance payments wuld nt typically cause a substantial change in risk classificatin f the prpsed real estate lan. This tlerance nly applies t situatins where tax and insurance data prvided n the lan applicatin at the time f cmmitment differs frm the amunt recrded at lan clsing. This threshld plicy shuld nt be cnstrued t allw lender manipulatin f escrw variables t btain apprvals. CMS Plicies & Prcedures Page 51 f 208

52 Using GUS (cntinued) Other Data Tlerances Bth Fannie Mae and Freddie Mac allw specific data tlerances fr repayment incme, debt-t-incme (DTI) ratis, assets, reserves, etc. RD des nt allw these types f tlerances f data fr a lan nte guarantee, ther than prperty tax and insurance discussed abve. If the lan data changes nce a Cnditinal Cmmitment fr Lan Nte Guarantee is issued by RD, the underwriter must ensure that the lan cntinues t meet all SFHGLP requirements. If the lan data is adversely affected, the lender must fllw the re-submissin plicy nted belw. Lan Resubmissin Requirements The Underwriter is respnsible fr the integrity f the data used t btain an underwriting evaluatin in GUS. Data entered in GUS must crrespnd t dcumentatin retained in the case file. If data changes during the Lan applicatin stage, after Cnditinal Cmmitment r prir t lan clsing, the GUS underwriting recmmendatin culd be cmprmised. The underwriter is respnsible fr resubmitting the lan t GUS when material changes are discvered. Material changes shuld be knwn prir t lan clsing. Under the fllwing cnditins, the underwriter must resubmit the lan thrugh GUS fr an updated evaluatin. Failure t fllw the guidelines prvided culd jepardize issuance f a Lan Nte Guarantee: Brrwers were either added r deleted frm the lan applicatin r critical infrmatin has changed. A decrease in the brrwer s incme and/r cash assets/reserves. An increase in lan amunt r interest rate n the mrtgage lan request. Any changes that wuld negatively affect the brrwer s ability t repay the mrtgage. Infrmatin regarding the prperty changes such as a change in sales price r value. The underwriter must request the lan be released frm Rural Develpment. The underwriter will then mdify the data and resubmit the lan thrugh GUS fr an updated final evaluatin underwriting recmmendatin. Sme data changes d nt affect the utcme f an underwriting recmmendatin. Lan data changes that d nt represent an adverse effect n the underwriting recmmendatin d nt require resubmissin and/r mdificatin. Once a lan has been sent t the Agency as a Final Submit, the fllwing data changes d nt require that the GUS lan applicatin be updated: A decrease in lan interest rate A decrease in lan amunt A decrease f mrtgage r persnal liabilities An increase f assets CMS Plicies & Prcedures Page 52 f 208

53 Using GUS (cntinued) Credit Dcumentatin The lender s permanent case file will include dcumentatin verifying: Credit histry Annual Incme determined fr prgram eligibility in accrdance with sectin f RD Instructin 1980-D Stable and Dependable Incme determined fr repayment and qualifying purpses in accrdance with sectin (c) f RD Instructin 1980-D. GUS des nt determine stable and dependable incme. It remains the respnsibility f the apprved lender t determine stable and dependable incme utside f the GUS evaluatin. Assets Cllateral requirements Any ther dcumentatin supprting the mrtgage lan request. Requesting the Cnditinal Cmmitment fr Guarantee Underwriting Recmmendatin: Accept Minimal dcumentatin prvisins apply t GUS underwriting recmmendatins that receive an ACCEPT. The lender must submit the fllwing three cmpleted dcuments t btain a Cnditinal Cmmitment, when the GUS underwriting recmmendatin is ACCEPT upn final submissin: Unifrm Residential Appraisal Reprt (URAR) fr single family dwelling units r its equivalent, r cndminiums r manufactured hmes [FNMA Frm 1004 r Freddie Mac Frm 70]. Standard Fld Hazard Determinatin Frm [FEMA Frm 81-93]. Request fr Single Family Husing Lan Guarantee [Frm RD ]. This frm must be fully executed by the lender r their representative, and all applicants. The frm must represent the request f the lender. If an interest rate is flating at cmmitment request, the lender shuld include the lck in date fr cnfirmatin by Rural Develpment. The data n this frm must match the data entered int GUS. If the lan applicant is a qualified alien, a buy dwn is invlved, r there is a nnpurchasing spuse lcated in cmmunity prperty state additinal dcuments may be required. During the review prcess, shuld data appear t be questinable, RD reserves the right t request further supprtive infrmatin. Files may be selected fr full file review. When receiving an underwriting recmmendatin f ACCEPT the lan may be selected by GUS requiring full dcumentatin f a file in lieu f minimal dcumentatin nted abve. This randm and targeted selectin is fr quality cntrl purpses. A message n the lender s final pass f underwriting will cnfirm when a full dcumentatin file is required. Full file dcumentatin reviews are t cnfirm the data input int the GUS file accurately reflects that f the lender s file and dcumentatin. Rati r credit waiver dcumentatin is nt required when the file is selected fr quality cntrl review. The quality cntrl review is t ensure the lender s lan level data in GUS matches that verified in the lender s permanent file. CMS Plicies & Prcedures Page 53 f 208

54 Using GUS (cntinued) Requesting the Cnditinal Cmmitment fr Guarantee (cntinued) Underwriting Recmmendatin: Refer r Refer with Cautin Full dcumentatin prvisins, as required fr manually underwritten mrtgage lan applicatins, apply t GUS underwriting recmmendatins f REFER r REFER WITH CAUTION. GUS lans receiving an underwriting recmmendatin f REFER r REFER WITH CAUTION will require further review by the lender. Risk factrs have been identified based upn the data entered int GUS. The underwriter must perfrm a manual underwriting evaluatin f the mrtgage lan applicatin t determine if the brrwer is creditwrthy in accrdance with RD standard credit plicies and guidelines fund at RD Instructin 1980-D and supplemental ANs. Credit dcumentatin, mitigating circumstances, and cmpensating factrs cnsidered in the manual underwriting analysis shuld be recrded in the permanent case file. Cmpensating factrs cnsidered in the evaluatin f the mrtgage lan applicatin must be dcumented n the underwriting analysis and summary [typically the Unifrm Underwriting Transmittal Summary FNMA Frm 1008/Freddie Mac Frm 1077 r equivalent]. Lans shuld nt be denied slely n the basis f a risk evaluatin generated by GUS. Mitigating circumstances accrding t RD standard guidelines may be cnsidered. GUS Rati Requirements Ratis: FICO s under 640 All lans are manually underwritten Max ratis are 29/41, rati waivers d nt apply FICO s 640 thrugh 679 With GUS Apprve/Eligible, ratis are nt limited With GUS Refer/Eligible r dwngraded lans, max ratis are 29.41, rati waivers d nt apply FICO s 680 and higher With GUS Apprve/Eligible, ratis are nt limited With GUS Refer/Eligible r dwngraded lans, max ratis are: 29/41 withut a rati waiver, r 32/44 with a rati waiver, which requires ne f the fllwing cmpensating factrs: Prpsed PITI is equal t r less than the applicant s verified husing expense fr the 12 mnth perid preceding lan applicatin, r Three mnths PITIA reserves, r All emplyed applicants have been cntinuusly emplyed with their current primary emplyer fr a minimum f 2 years (cannt be used fr self-emplyed) GUS Ineligible findings are nt permitted. GUS Refer w/cautin (this is subject t lender discretin) shuld be dne as an exceptin nly with management review. CMS Plicies & Prcedures Page 54 f 208

55 Using GUS (cntinued) Credit Exceptins Credit histry prblems d nt always reflect an unwillingness t meet financial bligatins. If the lender believes that the applicant is creditwrthy, the lender shuld dcument n the underwriter s analysis the reasns that an exceptin is justified. Exceptins shuld be made nly in the fllwing types f situatins. Temprary situatin. The circumstances that caused the credit prblems were temprary in nature, beynd the applicant s cntrl, and the circumstances have been remved and reslved fr the 12 mnths prir t applicatin. Examples include a temprary lss f jb, delay r reductin in benefits, illness, r dispute ver payment fr defective gds r services. Reduced husing expenses. The lan will significantly reduce the applicant s husing expenses, which will result in imprved debt repayment ability. A significant reductin in husing expenses wuld be 50 percent r mre. It remains the lender s respnsibility t underwrite the mrtgage applicatin request. The individual lan file shuld cntain clear evidence that the lender evaluated the credit infrmatin fr each applicant and arrived at a cnclusin that the applicant s credit histry (even if brief r nn-traditinal) demnstrates an ability t handle financial bligatins successfully. N Agency-granted waiver r cncurrence is required fr credit exceptins. Applicants must prvide supprting dcumentatin that meets these requirements t ensure the lender s permanent lan file is well dcumented and supprted. The lender must retain the underwriter s dcumentatin as part f the case file that supprts the decisin t waive dergatry credit.. Fr all lans that d nt have a GUS apprval, dcumentatin will als be nted n the underwriting transmittal summary t include the supprting dcumentatin prvided by the applicant(s) t explain the reasn(s) fr dergatry infrmatin (e.g. undisclsed debts, judgments, bankruptcies, etc.). The lender must determine if the explanatin and supprtive dcumentatin makes sense and whether it is cnsistent with ther infrmatin in the credit reprt. The applicant(s) dcumentatin shuld cnfirm the nature f the event that led t the dergatry credit deficiencies and illustrate that they had n reasnable ptins ther than t default n their financial bligatins. The event, the severity f the resulting hardship, and the extent f the applicant(s) effrts t reslve the situatin shuld be taken int cnsideratin when making an underwriting decisin. Dcumentatin prvided by the applicant(s) may pen new questins. The lender s underwriter must use careful underwriting judgment in evaluating lan requests invlving dergatry credit. The lender is nt authrized t make an exceptin in the case f an applicant with a delinquency n a Federal debt, r with an utstanding judgment btained by the United States in a Federal curt, ther than the United States Tax Curt. Evidence f payment arrangements is acceptable fr IRS Federal tax judgments. The apprved lender s underwriter must determine if the elapsed prtin f the repayment perid is f apprpriate duratin. An applicant(s) wh has been delinquent during the repayment perid is ineligible fr a guaranteed lan. Debt Rati Waivers RD allws applicant s with principal, interest, taxes and insurance (PITI) and ttal debt (TD) ratis that exceed 29/41 t request RD cncurrence t allw higher ratis based n acceptable cmpensating factrs. The underwriter must dcument their request fr a debt rati waiver and acceptable cmpensating factrs t supprt their request n the underwriting analysis. Exceptin: Lenders are nt required t submit a debt rati waiver request fr GUS Accept lan files. CMS Plicies & Prcedures Page 55 f 208

56 Using GUS (cntinued) Appraisal Waivers RD des nt allw appraisal waivers. GUS Resubmissin Requirements GUS Resubmissin Requirements Mrtgage lan dcuments shuld be delivered electrnically thrugh the USDA's autmated system f receiving dcuments. This is the preferred methd. In cases when the system may be unavailable r a transitin t the system is ccurring, dcuments may be phtcpied, scanned, ed, faxed r delivered by regular r express mail thrugh the state general delivery bx. CMS shuld utilize the autmated methd available. It is nt necessary t cllect an riginal Frm A phtcpy, scanned, ed r faxed Frm is acceptable. Sme data changes d nt affect the utcme f an underwriting recmmendatin. Once a mrtgage lan has been sent t the Agency as "Final Submit, " the fllwing data changes d nt require that the GUS lan applicatin be updated: A decrease in lan interest rate A decrease in lan amunt A decrease f mrtgage r persnal liabilities An increase f assets The bureau update f a credit reprt due t the expiratin f the credit reprt (expires at 120 days prir t clsing) after a "Final Submit" has ccurred by CMS and a Cnditinal Cmmitment has been issued: yet prir t lan clsing as lng as n adverse impact has ccurred that wuld affect the utcme f the underwriting recmmendatin. CMS must retain the updated credit reprt in the permanent lender's case file. Establishing Brrwer Credit Reputatin Overview An applicant s credit scre may be validated with at least tw eligible trade lines. Such trade lines cnsist f credit accunts (revlving, installment, etc.) with at least twelve mnths f repayment histry reprted n the credit reprt. At least ne applicant whse incme r assets are used fr qualificatin must have a valid credit reprt scre r have at least tw histrical trade line references that have existed fr at least 12 mnths t establish a credit reputatin. Fr applicants withut an established credit histry and unable t establish the required number f eligible trade lines t validate the credit scre, alternative methds may be used t evidence an applicant's willingness t pay, such as a nn-traditinal mrtgage credit reprt r multiple independent verificatins f trade references. Nn-traditinal credit may nt be used t enhance pr payment recrds r lw credit scres. GUS applicatins receiving an Accept underwriting recmmendatin, but which fail t meet the credit scre validatin test using a traditinal credit reprt, must be dwngraded t a Refer by the lender. In these instances the use f a nntraditinal credit histry will be required in rder t prceed. Refer t Nn Traditinal Credit fr additinal infrmatin. CMS Plicies & Prcedures Page 56 f 208

57 USDA Credit Overview This sectin cntains standards that apply t all CMS lan prgrams. The requirements utlined in this sectin represent USDA cre requirements fr manually underwritten Lans. Waivers d nt apply t state specific cmpliance restrictins. Requirements The lan file must cntain ne f the fllwing types f credit reprts fr each brrwer: A three repsitry, merged in-file reprt frm an independent creditreprting agency. Hwever, a tw-repsitry merged in-file reprt will be accepted if that is the extent f the infrmatin that is available. If a merged in-file reprt is upgraded t a Residential Mrtgage Credit Reprt (RMCR), the riginal merged in-file reprt must remain in the file. Full Residential Mrtgage credit Reprt (RMCR), which cnfrms t all applicable Fannie Mae, Freddie Mac, VA and FHA requirements. If a retyped credit reprt is prvided, all prir credit reprts must be included in the lan file. The retyped credit reprt/supplement must indicate the reasn and authrizatin fr any changes, additins, and/r deletins. All credit reprts must include FACT Act messages and at least ne repsitry fraud alert prduct (Hawk, FACS+, r SafeScan). When the credit reprt shws a victim statement under the FACT Act, the steps taken t validate that the lan applicatin is nt the result f identity theft must be dcumented in writing. The actins must be reasnable and cmpliant with applicable laws. Credit reprt alerts must be reasnably reslved and all supprting dcumentatin must be included in the lan file. Nte: Althugh due diligence is required, it des nt release the Brker frm respnsibility regarding misrepresentatin. Credit Reprt Red Flags The brrwer's credit use and limits must be reviewed t ensure cnsistency with the reprted incme, assets, and applicatin infrmatin when analyzing a credit reprt. The brrwer's address histry must be reviewed fr cnsistency with ther file dcumentatin. All discrepancies must be adequately explained and questinable explanatins must be researched. Age f Credit Reprt The fllwing dcumentatin age limitatins apply: 120 days at nte date fr existing prperties. 180 days at nte date fr new cnstructin. CMS Plicies & Prcedures Page 57 f 208

58 USDA Credit (cntinued) Three Repsitry Merged In-File Credit Reprt (Trimerge) All data in the credit reprt must fllw the belw requirements: The credit data must be btained frm r verified by surces ther than the brrwer. The credit data must be in an easy-t-read frmat that is understandable withut the need fr cde translatins. The credit reprt must cntain the fllwing infrmatin: Infrmatin gathered frm three natinal repsitries cvering each area the brrwer has resided during the past tw years must be included and identified. In the event that three repsitries are nt available, it must be stated in the reprt. All available public recrds infrmatin and their surce, including judgments, freclsures, tax liens, and bankruptcies must be included in the reprt. The persn/cmpany wh rdered the reprt and the persn/cmpany wh was billed fr it must be identified. The dates the accunts were last updated with the creditr must be indicated. If the accunt has a balance, the date that it was last updated must be within 60 days f the reprt. Fr each debt listed, the creditr's name, date pened, amunt f highest credit, current status, required payment, unpaid balance, and payment histry must be prvided. The histrical status must be in a number f times past due frmat. The preferred frmat used is 0x30, 0x60, 0x90 days late. Statements such as current, as agreed, r satisfactry are nt acceptable by themselves. All inquiries made within the last 90 days must be listed in the reprt. When c-brrwers have individually btained credit, separate repsitry inquiries are necessary. CMS Plicies & Prcedures Page 58 f 208

59 USDA Credit (cntinued) Residential Mrtgage Credit Reprt (RMCR) All data in the credit reprt must fllw the belw requirements: The credit data must be btained frm r verified by surces ther than the brrwer. The credit data must be in an easy-t-read frmat that is understandable withut the need fr cde translatins. The credit reprt must cntain the fllwing infrmatin: Tw natinal repsitries cvering each area in which the brrwer has resided during the past tw years must be cntacted by the reprting agency. The full name, address, and telephne number f the cnsumer-reprting agency must be identified. The persn/cmpany wh rdered the reprt and the persn/cmpany wh was billed fr it must be identified. The names f the repsitries used must be shwn and must include a certificatin that the standards prescribed by Fannie Mae, Freddie Mac, VA and HUD fr a "Residential Mrtgage Credit Reprt" has been met. Verificatin f the brrwer's current emplyment and, if pssible, incme must be prvided by the reprting agency The brrwer's previus emplyment and incme must be described if it has changed in the past tw years. If any infrmatin was nt verified by an emplyer interview, the reprt must indicate the reasn fr the lack f verificatin. All credit and legal activity that has ccurred in the last seven years must be cntained in the reprt. All available public recrds infrmatin and their surce, including judgments, freclsures, tax liens and bankruptcies must be included in the reprt. The dates that the accunts were last updated with the creditr must be indicated. If the accunt has a balance, the date that the last update must be within 60 days f the reprt. Fr each debt listed, the creditr's name, date pened, high credit amunt, current status, required payment, unpaid balance, and payment histry must be prvided. The histrical status must be in a "number f times past due" frmat. Statements such as "current", "as agreed", r "satisfactry" are nt acceptable by themselves. Preferably the frmat t be used is "0x30, 0x60, 0x90" days late. All inquiries made within the last 90 days must be listed in the reprt. If there is incmplete infrmatin r if the agency discvers infrmatin that indicates the pssibility f undisclsed credit r public recrds, the agency must interview the brrwer. When c-brrwers have individually btained credit, separate repsitry inquiries are necessary. Must include FACT Act messages and at least ne repsitry fraud alert prduct. CMS Plicies & Prcedures Page 59 f 208

60 USDA Credit (cntinued) Nn-Traditinal Credit Sme applicants may nt have an established credit histry, but credit verified thrugh alternative surces may indicate a willingness t pay recurring debts. Neither the lack f a credit histry nr the applicant s decisin t nt use traditinal credit can be used as a basis fr rejectin. Fr these applicants, CMS may develp a Nn-Traditinal Mrtgage Credit Reprt (NTMCR). A NTMCR may be used as a substitute fr a Residential Mrtgage Credit Reprt (RMCR) r Multi-Merged Credit Reprt (MMCR) r Three-Repsitry Merged Credit Reprt (TRMCR). An NTMCR may nt be used t ffset dergatry references fund in the applicant s RMCR r MMCR/TRMCR; it shuld nt be utilized t enhance the credit histry f an applicant with a pr payment recrd r t manufacture a credit reprt fr an applicant withut a verifiable credit histry. Nntraditinal credit references be verified by a credit bureau and reprted back t CMS as a nntraditinal mrtgage credit reprt in the same manner as traditinal credit references. Three trade references are required when at least ne f the trade references includes verificatin f rental husing payments r mrtgage lan payments. If unavailable, at least fur trade references must be used t determine if an applicant has a sufficient credit histry. Acceptable frms f dcumentatin fr a NTMCR include: Rental rating, if present, must be n a standard VOR frm; Nn-traditinal credit reprt fr the fllwing nn-traditinal credit surces that include the creditr s name, date the accunt was pened, accunt balance, mnthly payment due, and payment histry reprted in 0x30, 0x60, 0x90 frmat. Subjective statements such as satisfactry r acceptable are nt an acceptable frmat fr repayment histry cnfirmatin. Rural Develpment will accept reprts by prviders wh develp bill payment histries. Acceptable trade-line surces include an pen and recent 12-mnth payment recrd f the fllwing: Rent payments; Utility payment recrds (if utilities were nt included in any rent payments) such as gas, electricity, water, land-line hme telephne service r cable TV; Insurance payments (excluding thse paid thrugh payrll deductins) such as medical, autmbile, life and husehld, r renter s insurance; Payments t child care prviders made t a business prviding such a service; Schl tuitin; Payments t lcal stres (department, furniture, appliance and specialty stres); Payments fr the uninsured prtins f any medical bills; Internet/cell phne services; Autmbile leases; A persnal lan frm an individual (ther than a family member) with repayment terms in writing and supprted by cancelled checks r mney rder receipts t dcument repayment; CMS Plicies & Prcedures Page 60 f 208

61 USDA Credit (cntinued) Nn-Traditinal Credit (cntinued) A dcumented 12-mnth histry f saving by regular depsits (at least quarterly/nn-payrll deducted/n NSF checks reflected), resulting in a reserve accunt equal t three mnths f prpsed mrtgage payments (PITI) as a cash reserve pst-clsing; r Any ther reference which gives insight int the applicant s willingness t make peridic payments n a regular basis fr credit bligatins. Payments made t relatives fr credit surces are ineligible as a nn-traditinal trade reference. Exercise cautin when evaluating applicants with nn-traditinal credit histries. Generally these applicants may be cnsidered a higher risk than applicants wh have credit scres meeting the criteria in these guidelines. Applicants may nly have ne 30 day delinquency n any nn-traditinal trade line within the last 12 mnths. 60 and 90 day delinquencies, as well as reprts f discnnectin ntices r cllectin accunts/curt recrds (ther than medical) filed in the past 12 mnths are unacceptable. Ratis fr husing expense and debt-t-incme expense shuld be minimal. Qualifying Brrwers with Nn-Traditinal Credit Manual underwriting requirements apply t brrwers with nn-traditinal credit. The maximum debt ratis are 29% / 41% which may be exceeded fr refinance transactins with a rati waiver apprved by Rural Develpment. Refer t the Liabilities and Debt Ratis sectin. Nte: Fr additinal nn-traditinal credit requirements please see the CMS USDA Prduct Matrix. Insufficient Credit Insufficient credit refers t applicants wh d nt have credit scres and d nt meet the minimum tradelines required fr nn-traditinal credit, which is nt acceptable fr USDA. CMS Plicies & Prcedures Page 61 f 208

62 USDA Credit (cntinued) Thin Credit Undisclsed Debt Qualifying Brrwers with Thin credit: Thin credit applies t brrwers with a credit scre. CMS allws thin credit t be used fr brrwers with the fllwing GUS results: GUS Accept OR Refer Validate FICO scre(s) by verifying at least ne (1) brrwer has three (3) trade lines n credit reprt with 12 mnth histry. Otherwise, dwngrade t Refer and fllw the Nn-Traditinal Credit guidelines. When a debt r bligatin (ther than a mrtgage) is revealed during the applicatin prcess that was nt disclsed n the lan applicatin and/r the credit reprt and was nt cnsidered by autmated underwriting, the fllwing must be met: The mnthly payment amunt f the debt must be verified. Direct verificatin f the debt is nt required. Any funds brrwed are nt being used fr the brrwers cash investment int the transactin must be determined. If debt accunts are listed n the brrwer's applicatin, but nt reprted n the credit reprt, all accunt infrmatin must be manually entered and the lan must be resubmitted t GUS. Any autmated verificatin messages relating t these additinal debt accunts must be fllwed. Verify all accunts listed n the applicatin by the brrwer with a credit reference if the lan is manually underwritten. CMS Plicies & Prcedures Page 62 f 208

63 Credit Scres Overview A credit scre represents a cmprehensive view f a brrwer's credit histry risk factrs. All f the credit infrmatin that is stred in the brrwer's credit file is taken int cnsideratin when assigning a credit scre. While sme f the infrmatin in the credit file may be mre predictive f default risk than ther infrmatin, the relatinship, r interactin f the varius factrs that are present are cnsidered. This apprach is mre predictive f default risk than an evaluatin f each f the factrs in islatin. The majrity f merged in-files will include a credit scre fr each brrwer, which can range frm 300 t 950. There are minimum requirements that must be met in rder t scre a persn's credit prfile. If these requirements are nt available, a scre will nt be prvided. The higher the credit scre, the lwer the risk f default. Fr example, a scre f 725 indicates that this credit prfile was a better than average risk and therefre a detailed review f the credit reprt shuld nt be necessary. In additin, the scre in cmbinatin with the dates and severity f late payments shuld be cnsidered befre requesting a credit explanatin letter frm a brrwer. The scre can always be used as a measure fr determining the reasnableness f the request. Fair Isaac C. develped the Credit Bureau Scre mdels. There are many characteristics that are a part f the scring mdel and a persn's repayment habit is nly ne cmpnent f this mdel. While the mdels are very similar, each repsitry uses a different name. Experian FICO V2 Equifax Beacn 5.0 Trans Unin FICO Risk Scre Classic 04 Credit Scre Risk Factrs The fllwing factrs are cnsidered when assigning a credit scre t a brrwer: Number and Age f Accunts The credit histry that cnsists f lder, established accunts is cnsidered a lwer risk. Hwever, d nt autmatically cnsider a newly established credit histry as a higher risk since ther lwer risk factrs in the brrwer's credit reprt may ffset the risk f the less established credit histry. Payment Histry The brrwer's payment histry is a significant factr in determining the credit scre. The fllwing types f infrmatin that are evaluated includes: Data n late r missed payments. Public recrd and cllectin items. Frequency, recency, and severity f any delinquent payments (including recurring r islated instances). Presence f bankruptcies, freclsures, and utstanding liens r judgments. CMS Plicies & Prcedures Page 63 f 208

64 Credit Scres (cntinued) Credit Scre Risk Factrs (cntinue) Credit Utilizatin The amunt the brrwer wes n all accunts is evaluated, taking int cnsideratin the fllwing factrs: The balance n each accunt. The number f accunts with balances. Each balance in relatin t the amunt riginally wed. The relatinship f the accunt balance t the ttal available credit line. Recent Attempts t Obtain New Credit While evaluating the attempts t btain new credit, the number f new accunts, the length f time since an accunt was pened, the number f recent inquires, and the length f time since the inquiries were made must be cnsidered. Credit Scre Reasn Cdes Credit scres are usually accmpanied by reasn cdes identifying varius risk factrs affecting the brrwer's credit scre. The use f reasn cdes aids in the evaluatin f a brrwer's credit histry. Equifax TransUnin Experian Reasn Statement A/01 Amunt wned n accunts is t high B/02 Level f delinquency n accunts C/03 Prprtin f lan balances t lan amunts is t high I/33 T many bank natinal revlving accunts 04 D/04 Lack f recent installment lan infrmatin Y/32 T many accunts with balances E/05 T many cnsumer finance cmpany accunts F/06 Accunt payment histry is t new t rate G/07 T many inquiries last 12 mnths H/08 T many accunts recently pened J/09 Prprtin f balance t credit limits is t high n bank revlving and ther revlving accunts K/10 Amunt wed n revlving accunts is t high L/11 Length f time revlving accunts have been established M/12 Time since delinquency t recent r unknwn N/13 Length f time accunts have been established O/14 Lack f recent bank revlving infrmatin P/15 Lack f recent revlving accunt infrmatin Q/16 N recent nn-mrtgage balance infrmatin R/17 Number f accunts with delinquency S/18 Number f accunts with delinquency CMS Plicies & Prcedures Page 64 f 208

65 Credit Scres (cntinued) Credit Scre Risk Factrs (cntinue) Equifax TransUnin Experian Reasn Statement T/19 T few accunts currently paid as agreed 19 Date f last inquiry t recent V/20 Time since dergatry public recrd r cllectin t shrt W/I Amunt past due n accunts X/22 Amunt past due n accunts U/I Serius delinquency, dergatry public recrd r cllectin Number f bank r natinal revlving accunts with balances I/O N recent revlving balances I/O I/O Length f time installment lans have been established I/O I/O Number f revlving accunts I/O 27 T/27 T few accunts currently paid as agreed I/O Number f established accunts N recent bankcard balances 19 Date f last inquiry t recent Z/30 Time since mst recent accunt pening is t shrt 31 I/O T few accunt with recent payment infrmatin 34 I/O 34 Amunt wed n delinquent accunts Y32 Lack f recent installment lan infrmatin I/33 Prprtin f lan balances t lan amunts is t high I/O Amunt wed n delinquent accunts 45 Payment due n accunts I/O I/O Serius delinquency Length f time pen installment lans have been established Number f cnsumer finance cmpany established relative t length f cnsumer finance histry Serius delinquency and public recrd r cllectin filed Dergatry public recrd r cllectin filed I/O 98 Lack f recent aut lan infrmatin 98 Length f time cnsumer finance cmpany lans have established 97 Lack f recent aut lan infrmatin I/O Lack f recent aut finance lan infrmatin I/O I/O I/O Lack f recent cnsumer finance cmpany accunt infrmatin CMS Plicies & Prcedures Page 65 f 208

66 Credit Scres (cntinued) Credit Scre Risk Factrs (cntinue) Credit Reprt ECOA Cdes ECOA cdes are identified n the credit reprt. The ECOA cdes are identified by a letter. This letter will be next t the accunt when viewing an instant merge reprt. ECOA CODES U Undesignated I Individual J Jint A Authrized User 1,2 S Shared C C-Maker B C-Signer M Maker T Terminated X Deceased,2 1 Nt designated by the Creditr Individual accunt Jint accunt Authrized user t smene else's accunt Jint accunt Jint respnsibility fr the accunt Respnsibility nly in case f default n accunt Individual accunt Clsed accunt Deceased individual Status used t identify an accunt that an applicant/c-applicant is nt respnsible fr. Authrized user accunts cannt be used t satisfy Minimum Credit Standards. 2 Is cnsidered a red flag. Additinal infrmatin may be needed. Credit Scre Requirements A Fair Isaac credit scre fr all brrwers must be included in each traditinal credit reprt. The credit scre is used as a cmpnent in evaluating the credit quality f the lan. Credit vendrs peridically update the credit scre mdels. The credit reprt vendr must use the mst current versin f their credit scre mdel in their reprt. A traditinal credit histry review must be cmpleted fr the file. Nte: Fr minimum credit scres see the CMS USDA Prduct Matrix. CMS Plicies & Prcedures Page 66 f 208

67 Credit Scres (cntinued) Selecting Credit Scre The credit scre selected fr lan qualificatin must fllw the steps belw: 1. Select the credit scre fr each individual brrwer. 2. Select the credit scre used fr lan qualificatin. Selectin The credit scre must be selected fr each brrwer by using ne f the fllwing methds: The lwer scre f tw repsitries. The middle scre f three repsitries. If mre than ne credit scre is supplied frm the same repsitry, the lwest scre must be used in all cases. Lan Qualificatin Scre Number f Available Repsitry Scres Scre Used 3 Middle scre 2 Lwer f the tw 1 See Prduct Matrices fr eligibility If tw repsitries reprt identical scres, that scre will be used fr qualificatin Always use the lwest selected credit scre amng all brrwers. All brrwers must meet the minimum credit scre and all ther credit evaluatin requirements. CMS Plicies & Prcedures Page 67 f 208

68 Credit Histry Evaluatin Overview The manner in which the brrwer has managed his r her previus credit can be used as an indicatr f future perfrmance. Many factrs are cnsidered when perfrming a subjective evaluatin f a brrwer's credit histry. Mre significance shuld be given t the brrwer's payment experience within the past tw years. An acceptable credit histry f ne brrwer des nt ffset the unacceptable credit histry f anther brrwer. An acceptable credit histry is nt cnsidered a cmpensating factr. An acceptable credit reprt is a requirement and critical in making an investment quality lan. Insufficient credit histry cannt be ffset by capacity r cllateral strengths. All credit reprts, regardless f the manner f underwriting (manual r autmated) must be reviewed by the USDA Certified Underwriter. The credit reprt must be reviewed t cnfirm that all data is accurate, cmplete, and prperly dcumented. An Accept decisin must be dwngraded t a Refer if serius inaccuracies are discvered during the review. The USDA Certified Underwriter must review the credit reprt t verify cmpliance with all requirements. If dergatry credit r delinquent credit items are discvered during the lan prcess that are nt reflected n the credit reprt, and therefre nt cnsidered by autmated underwriting, the lan must be dwngraded t a Refer and manually underwritten. Refer t the CMS Prduct Matrices fr eligibility. Dergatry credit items that may nt appear n a credit reprt, but may be discvered in the credit evaluatin prcess that wuld result in a dwngrade culd include bankruptcies, freclsures, cllectin accunts, charge-ffs, tax liens, r judgments. If a lan receives a Refer recmmendatin r is manually underwritten, standard underwriting requirements apply. The brrwer's credit risk must be assessed by reviewing the credit factrs belw: Nte: These characteristics must be evaluated in cmbinatin with ne anther, nt in islatin. Credit repayment histry Line utilizatin Prprtin f balances t limits n revlving accunts Patterns f debt cnslidatin Recent inquiries and newly pened accunts Number f pen accunts and length f credit histry Public recrd infrmatin There is cmpelling evidence that the credit scre f the brrwer, based n empirically-derived statistical mdels, prvides an accurate bjective evaluatin f these same factrs. The credit scre, alng with ther credit infrmatin such as previus mrtgage/rental payment, bankruptcy, freclsure, and majr adverse credit histry can prperly classify the credit quality f the lan. CMS Plicies & Prcedures Page 68 f 208

69 Credit Histry Evaluatin (cntinued) Number and Age f Accunts The credit reprt must be reviewed t determine the fllwing: Whether the brrwer has an lder r newly established credit histry. Whether there are a significant number f recently pened accunts r a mix f new and lder accunts. Credit histries that include lder established accunts typically represent lwer credit risk. Hwever, an lder, established credit histry that includes a significant number f recently pened accunts may indicate that the brrwer is verextended, and therefre represents a higher credit risk. A newly established credit histry des nt autmatically represent a higher credit risk, since making payments as agreed n newly pened accunts represents less f a risk than nt making payments as agreed n lder, established accunts. The purpse f any recently acquired debts must be ascertained as the indebtedness may have been incurred t btain part f the required cash investment n the prperty being purchased. Payment Histries Credit histries that include n late payments, cllectins, r charged-ff accunts, freclsures, deeds-in-lieu, bankruptcies, r ther public recrds infrmatin represent a lwer credit risk. Credit histries that include recent late payments represent a higher credit risk than thse with late payments that ccurred mre than 24 mnths ag. If there are payments that were 30-, 60-, r 90-days (r lnger) past due, it must be determined whether the late payments represent islated incidences r frequent ccurrences. Delinquent payments must be evaluated in the cntext f the brrwer's verall credit histry, including the number and age f accunts, credit utilizatin, and recent attempts t btain new credit. Credit histries that include freclsures, deeds-in-lieu, and public recrds infrmatin represent a higher credit risk. The greater the number f such incidences and the mre recently they ccurred, the higher the credit risk. The presence f significant dergatry credit infrmatin, bankruptcies, judgments, liens, cllectin accunts, freclsures, deeds-n-lieu, r a cnsistent pattern f delinquent accunts, dramatically increases the likelihd f a future default and represents a high credit risk. Hwever, this des nt mean that the brrwer's credit will nt be acceptable, rather it is an indicatin that the cause and significance f the dergatry infrmatin, verificatin that sufficient time has elapsed, and cnfirmatin that the brrwer has since re-established an acceptable credit histry must be determined. Credit Utilizatin The credit reprt must be reviewed t evaluate the brrwer's use f revlving credit by cmparing the current balance n each accunt t the amunt f credit that is available t determine whether the brrwer has a pattern f using revlving accunts up t (r appraching) the credit limit. Revlving credit spending patterns indicate a credit risk. Credit histries that include revlving accunts with a lw balances-t-limits rati typically represent a lwer credit risk, while thse that include accunts with a high balances-t-limits rati represent a higher credit risk. CMS Plicies & Prcedures Page 69 f 208

70 Credit Histry Evaluatin (cntinued) Inquiries Depending n the autmated underwriting assessment, written explanatins fr credit inquiries may r may nt be required. If the autmated underwriting system des nt require a written explanatin, CMS will nt require a written explanatin; hwever, all brrwers must cmplete an Undisclsed Debt Certificatin at clsing. If a lan is run thrugh GUS, the USDA Certified Underwriter is still respnsible fr verifying that n new recent significant debts have been incurred and als that n new debts were incurred fr the purpse f btaining any part f the required cash investment fr the prperty being purchased. Any new debt payments fund resulting frm these inquiries must be verified and included in the qualifying ratis. When a lan is manually underwritten, the brrwer must explain in writing all inquiries shwn n the credit reprt in the last 90 days. Nte: Review the CMS Prduct Matrices fr availability f manually underwritten lans. Disputed Trade lines When an applicant s credit reprt indicates a trade line r public recrd is in dispute, a GUS underwriting recmmendatin f Accept may need t be dwngraded by The lender t a Refer. A dwngrade is nt required if any f the fllwing cnditins are met in regards t the disputed item listed n the credit reprt: The trade line has a zer dllar balance, The trade line is marked paid in full r reslved, r The trade line has a balance wed f less than $500 and is mre than 24 mnths ld. In the event a GUS underwriting recmmendatin is dwngraded t a Refer the lender must remit a fully underwritten case file t the Agency. Fr manually underwritten lan files all disputed trade lines with utstanding balances/payments that have been excluded frm the debt ratis must have evidence in the permanent lan file t supprt a justifiable dispute. Evidence may include crrespndence frm the applicant/their attrney t the creditr. CMS Plicies & Prcedures Page 70 f 208

71 Credit Cmpnents Verificatin f Credit Requirements The payment histry f the brrwer's husing bligatin hlds significant imprtance in evaluating credit. The autmated underwriting assessment f the lan determines the dcumentatin that is required. The fllwing must be verified directly by a credit reference r verified n the credit reprt: All accunts, revlving and installment, reprted by the brrwer n the applicatin. The balance, rating, and terms f the accunt. If the accunt has nt been updated n the credit reprt within 60 days f the date f the credit reprt, a supplement t the credit reprt r a separate written verificatin frm (canceled checks fr mst recent 12 mnths, verificatin f mrtgage) must be btained. Written verificatins f mrtgage, rent, r credit must be sent directly t the creditrs. The return address n the verificatin must be the Client address. The hand carrying f verificatins is strictly prhibited. Student Lans Rent Histry Student lans. CMS must include the payment as fllws: Fixed payment lans: A permanent amrtized, fixed payment may be used in the debt rati when CMS retains dcumentatin t verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed. Nn-Fixed payment lans: Payments fr deferred lans, Incme Based Repayment (IBR), Graduated, Adjustable, and ther types f repayment agreements which are nt fixed cannt be used in the ttal debt rati calculatin. One percent f the lan balance reflected n the credit reprt must be used as the mnthly payment. N additinal dcumentatin is required. Manually underwritten lans. Sme first time hmebuyers d nt have a verifiable husing r rental payment histry (e.g. brrwer lives with parents and pays n rent). In such cases, a rent histry is nt required. A signed rent-free letter is required frm the prperty wner wh prvides the brrwers husing, including the address and time perid f residency. CMS Plicies & Prcedures Page 71 f 208

72 Credit Cmpnents (cntinued) Incme Based Repayment IBR payments f $0 are nt eligible t be used in the debt rati. The applicant must prvide dcumentatin f the IBR payment plan frm the lan servicer. The fllwing apply: If the IBR payment is less than $100 and 1 percent f the ttal lan balance Is mre than $100, a minimum payment f $100 must be included in the debt ratis. If the IBR payment is less than $100, and 1 percent f the ttal lan balance is less than $100, a minimum payment f 1% f the lan balance must be included in the debt ratis. If the current IBR payment is ver $100, use that payment amunt in the debt ratis. Installment and Revlving Accunts Installment debts with mre than six mnths repayment remaining must be included in the debt rati. Installment debts with less than six mnths repayment may cntinue t be included in the debt rati at the discretin f the underwriter. Fr GUS lans, the Liability Type must be changed frm Installment t Revlving in rder t include the debt in the ratis. Revlving debts with reprted lan balances n the credit reprt must have a mnthly payment included in the debt ratis. If a payment is nt listed the underwriter estimates a mnthly payment f 5% f the lan balance. If the applicant prvides dcumentatin frm the creditr t cnfirm a lwer mnthly payment is due, this payment may be used. Evidence t supprt the lwer payment used must be retained in the lenders permanent case file. Revlving accunts with n utstanding balance d nt require an estimated payment. 30 Day Accunts 30-day accunts require the applicant t pay ff the utstanding balance n the accunt each mnth. UW must verify the utstanding balance is paid in full n every 30-day accunt each mnth fr the past 12 mnths. 30-day accunts that are paid mnthly in full are nt included in the applicant's lng term debt rati. If the credit reprt reflects any late payments in the last 12 mnths, a lng term mnthly payment will be included. CMS will utilize 5% f the utstanding balance as the applicant's mnthly debt. CMS will utilize the credit reprt t dcument the applicant paid the balance n the accunt mnthly fr the previus 12 mnths. CMS Plicies & Prcedures Page 72 f 208

73 Credit Cmpnents (cntinued) Husing Payment Histry Mrtgage: If the mrtgage histry des nt appear n the credit reprt fr the mst recent 12 mnths and the applicant s credit scre is 680 r belw, it must be verified. Acceptable surces f verificatin include a VOM r canceled checks. The current balance, current status, mnthly payment amunt and payment histry fr the last 12 mnths must be btained. If the applicants credit scre is 680 and abve n rental r mrtgage verificatin is required. A mrtgage is cnsidered current as lng as it is paid within the mnth due alng with any late charges assessed fr payments made beynd the 15-day grace perid. If mrtgage payments are made beynd the mnth due (30-day delinquencies, a letter f explanatin and supprting dcumentatin must be prvided. If the mrtgage trade line is mre than 45 days ld frm the date f the credit reprt, a mrtgage reference must be updated. If a mrtgage has any 30, 60, r 90 days late within the past 12 mnths, the lan may receive an Ineligible recmmendatin requiring manual underwriting. The circumstances f the excessive late payments must be dcumented. The late payments shuld be the result f extenuating circumstances and a similar recurrence n a mrtgage is nt likely t happen again in the future. Payment histry n any prperty (regardless f ccupancy) is cnsidered mrtgage credit. Landlrd: GUS Accept: Cmply with all f the verificatin messages fr apprved cnditins listed n the findings. Autmated underwriting will waive the requirements fr a landlrd reference based upn the verall risk assessment. GUS Refer r Refer with Cautin: Cmply with underwriting guidelines and dcumentatin fr manually underwritten lans. Determine the brrwer's mst recent 12-mnth payment histry fr his/her current husing bligatin by verificatin f ne f the fllwing: Canceled checks cvering the mst recent 12-mnth perid plus cpy f the lease t verify due date. Credit reprt reference with cmplete infrmatin cvering the last 12 mnths. Written Verificatin f Rent (VOR) frm a management cmpany is acceptable in lieu f cancelled checks, a private party VOR is unacceptable. Business Lans Business debts (e.g., car lan) reprted n the applicant s persnal credit reprt may be excluded frm the debt rati if this debt is paid thrugh a business accunt. Acceptable evidence t cnfirm includes 12 mnths f canceled business checks r bank statements frm the business accunt. CMS Plicies & Prcedures Page 73 f 208

74 Credit Cmpnents (cntinued) Bankruptcy/ Freclsure/ Deed-in-Lieu GUS Accept: Cmply with all f the verificatin messages fr apprved cnditins n the findings reprt. Bankruptcies: A bankruptcy requires a minimum f three years must have elapsed since the date f discharge. A Chapter 13 bankruptcy in prgress requires a 12 mnth paid as agreed histry and apprval in writing frm the curt. The Credit Reprt must dcument the date f the discharge r a cpy f the discharge papers is required. Must have re-established acceptable credit r chsen nt t incur new credit bligatins. Freclsures r Deeds in Lieu: A minimum f three years must have elapsed since the date f freclsure cmpletin. The seasning time is measured frm the recrding date finalizing the freclsure. Evidence f cmpletin f the freclsure must be in the lan file. The Credit Reprt verifying the freclsure is nt acceptable. If the freclsure was n a prperty guaranteed by USDA, the brrwer is nt eligible fr new financing. Brrwer(s) with a prir CMS Freclsure r Deed in Lieu are nt permitted. Nte: If an applicant has a real estate mrtgage discharged in a Chapter 7 bankruptcy, but the lender has yet t cnclude their freclsure actin, the applicant is still in wnership f the prperty. The title must be quit claimed t the lender in rder t relieve the applicant frm wnership f the prperty, as well as remve respnsibility fr real estate taxes and hmewner assciatin dues. Until the title is transferred ut f the applicant s name, they may nt meet the requirements in rder t be eligible fr a guaranteed lan. CMS Plicies & Prcedures Page 74 f 208

75 Credit Cmpnents (cntinued) Shrt Sales A brrwer is nt eligible fr a new USDA guaranteed mrtgage if he/she pursued a shrt sale agreement n his/her principal residence simply t: Take advantage f declining market cnditins. Purchase a similar r superir prperty within a reasnable cmmuting distance at a reduced price as cmpared t current market value. Brrwer Current at the time f Shrt Sale A brrwer is cnsidered eligible fr a new USDA guaranteed mrtgage if, frm the date f lan applicatin fr the new mrtgage, all: Mrtgage payments n the prir mrtgage were made within the mnth due fr the 12-mnth perid preceding the shrt sale. Installment debt payments fr the same time perid were als made within the mnth due. Brrwer in Default at the time f Shrt Sale: A brrwer in default n his/her mrtgage at the time f the shrt sale (r prefreclsure sale) is nt eligible fr a new USDA guaranteed mrtgage fr three years frm the date f the pre-freclsure sale. Brrwer(s) with a prir CMS Shrt Sale are nt permitted. Direct Verificatin f Other Debts The underwriter must verify the previus 12 mnths repayment histry f additinal debts disclsed by the applicant that d nt appear n a credit reprt. Debts pen fr less than 12 mnths must still be verified. Written third party verificatins that meet stated guidelines and/r canceled checks r mney rder receipts are acceptable. The underwriter must apply due diligence t every GUS lan file regardless f the underwriting recmmendatin. The GUS underwriting Findings Reprt requires lenders t include all liabilities listed n the credit reprt r verified utside f the credit reprt in GUS. If installment and/r revlving debts nt listed n the credit reprt were manually entered int GUS by the lender, an Accept recmmendatin must be dwngraded t a Refer. A Refer must be dwngraded t a Refer with Cautin. A manual underwrite must be cmpleted fr lan files with these characteristics. Nte: Obligatins such as NPS debts, curt rdered payments fr child supprt/ alimny/ garnishments/etc., r business debts d nt require a manual dwngrade in GUS. These debts wuld nt appear n a credit reprt and therefre are nt cnsidered in the credit scre calculatin. Shrt Sales CMS may make an exceptin fr a brrwer in default n his/her mrtgage at the time f the shrt sale if the: Default was due t circumstances beynd the brrwer s cntrl, such as death f primary wage earner, lng-term uninsured illness, r an ecnmic event. Refer t the Extenuating Circumstances sectin fr additinal infrmatin. A review f the Credit Reprt indicates satisfactry credit prir t the circumstances beynd the brrwer s cntrl that caused the default. CMS Plicies & Prcedures Page 75 f 208

76 Credit Cmpnents (cntinued) Cnsumer Credit Cunseling Services (CCCS) Brrwers wh have gne thrugh credit cunseling r wh are still in credit cunseling must meet all underwriting requirements. The requirements belw must be fllwed: One year f the payut perid has elapsed under the plan. The brrwer s payment perfrmance has been satisfactry and all payments have been made n time. The brrwer has received written permissin frm the Cunseling Agency t enter int the mrtgage transactin. Nte: GUS Accept lans are nt subject t additinal dcumentatin because the credit scres already reflect degradatin in the applicant s credit histry. The underwriter must ensure all liabilities are accurately reflected in GUS. Extenuating Circumstances Exceptins t the recvery time fr a bankruptcy, freclsure, r pre-freclsure/shrt sale may be granted if it was the result f extenuating circumstances that were beynd the brrwer s cntrl. Death f a wage earner, a serius illness, and experiencing an Ecnmic Event that resulted in a significatin incme reductin are examples f extenuating circumstances. Divrce is nt cnsidered an extenuating circumstance. Majr Adverse Credit GUS Accept All verificatin messages fr apprved cnditins listed n the findings must be fllwed. Autmated underwriting may waive certain requirements. If n message is prvided, fllw Manual Underwrite guidelines. GUS Refer r Refer with Cautin Cmply with underwriting guidelines and dcumentatin fr manually underwritten lans. Past due, cllectins liens, and charge-ff accunts can indicate a brrwer's disregard fr credit bligatins and must be cnsidered in the underwriting analysis. All manual underwrites require an AUS t be run and refer eligible findings upladed int the LOS. The AUS findings must be upladed even when the Underwriter knws the lan will be manually underwritten upfrnt r the lan will be dwngraded t a manual underwrite. A written explanatin fr the reasns fr majr adverse credit, as well as any minr dergatry credit within the past tw years must be prvided by the brrwer. The reasns fr a lan apprval when the brrwer has majr adverse credit must be dcumented in the lan file. CMS Plicies & Prcedures Page 76 f 208

77 Majr Adverse Credit (cntinued) Unacceptable Credit Regardless f GUS findings, indicatrs f unacceptable credit per RD Instructin D, sectin 345(d) are nt permitted withut acceptable reslutin. This includes: Charge ffs within 36 mnths, which includes freclsure r Chapter 7 bankruptcy Outstanding tax liens r delinquent gvernment debts (regardless f age) Accunts cnverted t cllectin within 12 mnths (regardless f whether paid) Outstanding cllectins, regardless f age (nte cllectins ver 12 mnths may be paid ff r in a repayment plan and will n lnger be cnsidered unacceptable) Judgments (including Federal judgments r liens) that are currently utstanding r were paid ff within the last 12 mnths Mre than 1x30 n all accunts in the last 12 mnths Mre than 1x30 rental late in the last 36 mnths Acceptable reslutin may nly be met by ne f the fllwing: Credit waiver Dcumentatin must be prvided t prve that the circumstances surrunding each adverse credit item were (1) temprary in nature, (2) beynd the applicant s cntrl, and (3) have been remved. All three must be addressed. Explanatin alne is nt acceptable, and USDA cncurrence f the credit waiver is required. Dispute The applicant must dcument a justifiable dispute because f defective gds r services. Explanatin r disputing the tradeline with the bureaus alne is nt acceptable. CMS Plicies & Prcedures Page 77 f 208

78 Majr Adverse Credit (cntinued) Ecnmic Event An Ecnmic Event is defined as an ccurrence beynd the brrwer s cntrl that results in a Lss f Emplyment, Lss f Incme, r a cmbinatin f bth, As a result, the brrwer was unable t make his mnthly mrtgage payments and ultimately lst his hme thrugh shrt sale, freclsure r filed bankruptcy. Brrwers wh experienced an Ecnmic Event and receive a Refer r Refer with Cautin finding frm Mdified Ttal Screcard due t freclsure, shrt sale, bankruptcy r ther negative impact n their credit may be eligible t purchase a prperty with a USDA guaranteed mrtgage. In additin t meeting standard USDA requirements, the fllwing supprting dcumentatin is required: Certain credit impairments were the result f a Lss f Emplyment r a significant lss f Husehld Incme beynd the brrwer s cntrl, The brrwer has demnstrated a full recvery frm the event, and The brrwer has cmpleted husing cunseling. The nset f the Ecnmic Event is the mnth f the Lss f Emplyment/Incme. The recvery frm the Ecnmic Event is the re-establishment f satisfactry credit fr a minimum f 12 mnths. Credit CMS will evaluate the brrwer s credit t determine whether the dergatry credit was the result f an Ecnmic Event r an inability t manage debt r a disregard fr managing financial bligatins. Brrwers with an inability t manage debt r a disregard fr their financial bligatins are nt eligible fr extenuating circumstances due t an Ecnmic Event and must fllw standard USDA guidelines. A brrwer wh experienced an Ecnmic Event is deemed t have satisfactry credit when the fllwing are present: There are n late payments n husing, installment debt r majr dergatry credit issues n revlving accunts, Any pen mrtgage is current and has been paid as agreed fr the previus 12 mnths. If the mrtgage was brught current thrugh a temprary r permanent lan mdificatin, all payments must be dcumented supprting timely receipt in accrdance with the mdificatin agreement, The brrwer exhibited a satisfactry credit histry prir t the nset f the Ecnmic Event, The brrwer s dergatry credit ccurred after the nset f the Ecnmic Event, and The brrwer has re-established credit with a minimum f 12 mnth histry paid as agreed after the Ecnmic Event. Brrwers with nn-traditinal credit may be eligible t purchase a prperty with a USDA guaranteed mrtgage when the fllwing exits: N husing r rental histry delinquencies, Maximum 1x30 day late payment due t ther creditrs, and N cllectin accunts/curt recrds reprting with the exceptin f medical cllectins and/r identity theft. CMS Plicies & Prcedures Page 78 f 208

79 Majr Adverse Credit (cntinued) Payment Shck Payment shck is a risk layer fr underwriters t cnsider in their lan analysis when the PITI rati exceeds 29% and the prpsed mrtgage payment is 100% r greater than the applicant s current husing expense r the applicant has n histry f rent r husing expense. Calculatin: Prpsed PITI Current Husing Expense - 1 = x 100 = Payment Shck percent Payment shck is nt a risk layer fr any lan if the PITI rati is 29 percent r belw. Disputed Trade lines When an applicant s credit reprt indicates a trade line r public recrd is in dispute, a GUS underwriting recmmendatin f Accept may need t be dwngraded by The lender t a Refer. A dwngrade is nt required if any f the fllwing cnditins are met in regards t the disputed item listed n the credit reprt: The trade line has a zer dllar balance, the trade line is marked paid in full r reslved, r The trade line has a balance wed f less than $500 and is mre than 24 mnths ld. In the event a GUS underwriting recmmendatin is dwngraded t a Refer the lender must remit a fully underwritten case file t the Agency. Fr manually underwritten lan files all disputed trade lines with utstanding balances/payments that have been excluded frm the debt ratis must have evidence in the permanent lan file t supprt a justifiable dispute. Evidence may include crrespndence frm the applicant/their attrney t the creditr. Credit Reprt Nn-Purchasing Spuse When an applicant resides r the prperty is lcated in a cmmunity prperty state, a credit reprt fr the NPS must be btained. The debts f the NPS must be included in the applicant s debt rati, except fr thse specifically excluded by state law. The NPS s credit histry is nt a reasn t deny the lan applicatin. GUS will nly retrieve credit reprts fr applicants. Lenders must btain a credit reprt utside f GUS fr the NPS. On the Asset and Liabilities applicatin page the underwriter must enter the debt bligatins (except thse excluded by state law) f the NPS. In the Ntes data field lenders must identify the debt as spusal debt r NPS debt. Lender must retain the NPS credit reprt in their permanent lan case file and submit a cpy f the reprt t the Agency. The manual entry f NPS debts by the lender will nt require an underwriting recmmendatin f Accept t be dwngraded t a Refer. Cmmunity prperty states include: Arizna, Califrnia, Idah, Luisiana, Nevada, New Mexic, Texas, Washingtn and Wiscnsin. Puert Ric allws prperty t be wned as cmmunity prperty as d several Indian jurisdictins. Alaska is an pt-in cmmunity prperty state; prperty is separate unless bth parties agree t make it cmmunity prperty thrugh a cmmunity prperty agreement r a cmmunity prperty trust. CMS Plicies & Prcedures Page 79 f 208

80 Majr Adverse Credit (cntinued) Rural Develpment Lans If the Agency has incurred a lss n a Sectin 502 r 504 guaranteed lan fr the applicant, the Agency must determine if the lss was beynd the applicant s cntrl. A previus lss may be nted n the credit reprt, identified by the applicant as part f the lan applicatin, and/r by the Agency when perfrming an internal crss preference prir t the issuance f a cnditinal cmmitment r lan nte guarantee. Delinquent Federal Debt If a brrwer is currently delinquent n any federal debt (e.g., VA guaranteed mrtgage, Title I lan, federal student lan, etc.), r has a lien secured by his r her prperty fr any federal debt wed, as revealed by public recrds, credit infrmatin r HUD's Credit Alert Interactive Vice Respnse System (CAIVRS), regardless f the autmated underwriting recmmendatin, ne f the fllwing must be met: The accunt must be brught current. The accunt is paid ff. A satisfactry repayment plan is made between the brrwer and the federal agency. Judgments and Tax Liens Child Care Expenses All tax liens and curt rdered judgments (including Federal judgments r liens) must be satisfied prir t clsing, regardless f the autmated underwriting recmmendatin. If the brrwer has been making regular and timely payments n the judgment r tax lien and the creditr is willing t subrdinate t CMS lan, the judgment r tax lien can remain pen. A subrdinatin agreement must be prvided. The lan shuld be prcessed with the mnthly payment included in the brrwer's debt-t-incme rati. A letter f explanatin must be prvided if the credit reprt shws federal r state tax liens. A curt rdered judgment is nt required t be paid ff if the brrwer has an agreement with the creditr t make regular timely payments. Dcumentatin f the agreement and evidence f timely payments are required. Child care expenses are nt required t be cnsidered as a recurring liability when calculating debt-t-incme ratis. Child care expenses are utilized t calculate the adjusted grss incme in determining prgram eligibility. 401 (k) Lans/Persnal Asset Lans Lans against persnal assets such as 401(k) accunts, retirement funds, r ther liquid assets are nt cnsidered in the debt rati. Child Supprt, Alimny, Garnishments Applicants bligated t pay child supprt, alimny, garnishments, r ther curt rdered debts must have these payments included in the debt rati. If the applicant has a release f liability frm the curt/creditr, the debt can be excluded. The underwriter may use select pages frm the applicable agreement/curt rder t dcument the required mnthly payment due and the duratin f the debt. The manual entry f these bligatins in GUS will nt require an underwriting recmmendatin f Accept t be dwngraded t a Refer. CMS Plicies & Prcedures Page 80 f 208

81 USDA EMPLOYMENT AND INCOME EVALUATION AND DOCUMENTATION Overview This sectin prvides standards that apply t all CMS lan prgrams. The requirements utlined in this sectin represent USDA cre requirements fr manually underwritten lans. Debt Rati Waivers d nt apply t state specific cmpliance restrictins. Dcumentatin Age Requirements The fllwing dcumentatin age limitatins apply: 120 days prir t the nte date fr existing prperties. 180 days prir t the nte date fr new cnstructin. Stability f Incme and Emplyment Requirements CMS requires the fllwing: A minimum f tw years emplyment histry. Cntinuance f incme fr three years. Incme used t qualify a brrwer must cme frm a stable surce. CMS cnsiders bth the length f time a brrwer is emplyed with any ne emplyer and the stability and reliable flw f incme. If dcumentatin f a cnsistent level and type f incme is prvided by the brrwer and the ability t pay his/her bligatins despite changes in the surce f that incme, it can be presumed that the brrwer's incme level is stable. The amunt f incme claimed by the brrwer must be reasnable fr the brrwer's jb title, educatin, age, assets, and gegraphic lcatin. Special attentin must be paid t the incme feasibility by reviewing the credit reprt, credit prfile, and examining the bank statement fr incme/depsit patterns. A level r upward trend in earnings must be established. Any decreases r significant increases culd affect the stability f the brrwer's incme and require an acceptable explanatin. If an acceptable explanatin cannt be prvided, the incme must be cnsidered questinable and must nt be used t qualify the brrwer. Brrwers wh change jbs fr advancement and maintain a stable earning capacity and gd credit histry, as well as brrwers with demnstrated jb stability, will be eligible. Educatin r training t enhance jb pprtunities and incme will receive favrable cnsideratin. If a brrwer des nt meet the emplyment histry requirement fr tw full years prir t the date f applicatin and was previusly in schl r the military, a cpy f his r her diplma/transcripts r discharge papers must be btained. CMS Plicies & Prcedures Page 81 f 208

82 Stability f Incme and Emplyment (cntinued) Annual Incme Limits Adjusted Incme USDA limits the amunt f annual incme an applicant(s) when determining eligibility fr the prgram. Annual incme is the basis fr determining adjusted incme. Annual incme includes the ttal grss incme f the brrwer, c-brrwer, and any ther adult (age 18 and up) husehld members, any amunt anticipated t be received frm a surce utside f the family during the 12-mnth perid, and all amunts derived during the 12-mnth perid frm assets t which any member f the family has access. If a cst f living allwance r a prpsed increase in incme has been estimated t be in effect n r befre the Cnditinal Cmmitment issuance date, this amunt must be included as incme. The underwriter is t cunt nly the first $480 f earned incme frm adult full time students wh are nt the brrwer, c-brrwer, r spuse. The incme frm an applicant's spuse, unless the spuse has been living apart frm the applicant fr at least three (3) mnths (fr reasns ther than military r wrk assignment), r curt prceedings fr divrce r legal separatin have been cmmenced will be included in the calculatin f annual incme. Rental incme is included regardless f duratin. Include ttal rental real estate incme reprted n mst recent IRS frm 1040 Schedule E fr previus 12 mnths. If n schedule E, cancelled checks, mney rder receipts, bank statements, r ther dcuments may be used t supprt rent amunts received. Business Lsses are cunted as $0 fr the annual incme calculatin and may nt be deducted frm husehld incme. Fster Care Incme received fr the care f fster children r fster adults wh live in the husehld is cnsidered a "Special-Purpse Payment" intended t defray specific expenses related t the fster care and shuld nt be cnsidered as incme. The full amunt f peridic payments received frm Scial Security (including Scial Security received by adults n behalf f minrs r by minrs intended fr their wn supprt), annuities, insurance plicies, retirement funds, pensins, disability r death benefits, and ther similar types f peridic receipts. Hwever, deferred peridic amunts frm supplemental incme and scial security benefits that are received in a lump sum amunt r in prspective mnthly amunts are nt cunted. The adjusted incme is used t determine if the husehld incme is within the maximum incme limits fr the prgram. The adjusted incme allws fr deductins assciated with varying husehld expenses such as disability assistance, medical expenses, and childcare expenses. Medical expenses are nt an allwable deductin with nnelderly husehlds. The incme fr all husehld members is cnsidered when calculating the adjusted incme. This includes the applicant, c-applicant, spuse, ther adult, dependents (children under 18), and full time students ver 18. Ntes: 1. Fr additinal requirements see the CMS USDA Prduct matrix. 2. Incme limits are published fr each cunty and can be accessed n line at: CMS Plicies & Prcedures Page 82 f 208

83 Stability f Incme and Emplyment (cntinued) Repayment Incme Repayment incme is determined by the stable and dependable incme f the brrwers nly. The repayment incme is used t calculate the DTI. Brrwer must have a histry f receiving the incme and there must be a reasnable expectatin the incme will cntinue. Fster care fr children r adults and supplemental Nutritin Assistance Prgram payments are ineligible fr repayment cnsideratin. Refer t RD Instructin 1980-D fr additinal requirements and allwable repayment incme surces. Business lsses must be deducted frm repayment incme. Requirements CMS may cnsider reasnable allwances fr applicants with less than 12 mnths jb time with their current emplyer under the fllwing circumstances: 1. the applicant has recently changed jbs but remains in the same line f wrk, 2. the applicant frequently changes jbs but demnstrates incme cntinuity, 3. the applicant is a recent graduate, as evidenced by cllege transcripts, r a recent member f the military, as evidenced by discharge papers, entering the civilian wrkfrce, 4. the applicant has recently re-entered the wrkfrce after an absence t care fr a family member r minr child, extended medical illness, r ther circumstance reasnable t the lender; and 5. the applicant will begin a new jb with a guaranteed, irrevcable cntract frm the emplyer indicating a start date within 60 days f lan clsing (CMS must verify the applicant will have sufficient incme, r cash reserves, t supprt mrtgage payments and ther bligatins during the time between lan clsing and the start f emplyment), this type f allwance is cmmnly represented by an applicant entering a teaching psitin with a cntract frm the schl district. CMS Plicies & Prcedures Page 83 f 208

84 Tax Infrmatin Authrizatin IRS Frm 4506-T/Tax Transcripts Requirements All brrwers whse incme is used t qualify must sign and date a cmpleted and unexpired Tax Infrmatin Authrizatin frm (IRS frm 4506-T) at clsing, authrizing CMS r its assigns, t btain incme infrmatin. The IRS frm 4506-T must be prcessed and tax transcripts btained t validate against the brrwer's tax returns and/r W-2s. The 4506T must be prcessed by CMS thrugh a CMS apprved vendr. CMS des nt accept tax returns stamped by the IRS. The infrmatin prvided by the IRS n Frm 4506-T must be evaluated during the underwriting prcess and must be included in the lan package. Significant differences must be reviewed, reslved, and detailed cmments regarding the reslutin dcumented n the Transmittal Summary (Fannie Mae frm 1008/Freddie Mac frm 1077) by the USDA Certified Underwriter. Validated tax transcripts must be included in the initial submissin package when submitting the lan t CMS. In sme cases and after reviewing the lan, CMS may require that a signed IRS frm 4506-T with Bx 8 checked t btain Frm W-2 r Frm 1099 series transcripts. This may be required when the brrwer was nt required t file tax returns. IRS FORM 4506-T Lans Underwritten r Submitted t CMS Investrs fr Underwriting Tax Return Filed Befre April 15 Tax Return Filed On r After April 15 GUS Accept Brrwer has filed last year's tax return; hwever, the tax transcript is nt available. Prvide a cpy f last year's tax transcript shwing, N Recrd f Return Filed. Prvide last year's tax transcript. If the brrwer has filed fr an extensin, the fllwing must be prvided: Evidence that the extensin was filed. A cpy f the cancelled check payable t the IRS fr any mnies wed A cpy f last year's tax transcript shwing, N Recrd f Return Filed. CMS Plicies & Prcedures Page 84 f 208

85 Dcumentatin Requirements and Standards Dcumentatin Requirements All lans require the cmpletin f ne f the fllwing ptins t satisfy the minimum dcumentatin requirements: 1. Optin 1: 2. Optin 2: Mst recent paystub Written Verificatin f Emplyment IRS frm 4506-T/Tax transcripts Mst recent paystub Original W-2 frms fr the past tw years IRS frm 4506-T/Tax transcripts Verbal Verificatin f Emplyment Dcumentatin Standards The fllwing is the minimum required incme dcumentatin: Paystub Paystubs W-2 frms Written Verificatin f Emplyment Verbal Verificatin f Emplyment (Verbal VOE) Incme Tax Returns Incme Calculatin Wrksheet The brrwer's mst recent paystub is required fr all lans, regardless if underwritten thrugh autmated underwriting r if manually underwritten. Mst recent paystub must indicate the fllwing: 30 days year-t-date incme. If the emplyer des nt prvide paystubs with year-t-date incme, the lan must be dwngraded t a manual underwrite. A cpy f 12 mnth paychecks and bank statements supprting the payrll depsits are required in additin t a cpy f emplyer s ledger fr the previus 12 mnths. Brrwer as the emplyee. Time perid cvered. Brrwer's grss earnings fr the pay perid and year-t-date. If the brrwer is paid hurly, the number f hurs must be nted n the paystub. CMS Plicies & Prcedures Page 85 f 208

86 Dcumentatin Requirements and Standards (cntinued) Dcumentatin Standards (cntinued) Paystubs must be cmputer generated, nt handwritten. If the emplyer des nt prvide an acceptable cmputer-generated paystub, the mst recent year's incme tax returns are required with a written Verificatin f Emplyment cmpleted in entirety and an IRS frm 4506-T. Additinally, lans with handwritten paystubs require a dwngrade t manual underwrite. Cpies f 12 mnth paychecks and bank statements supprting depsits are required in additin t a cpy f emplyer s ledger fr the previus 12 mnths. Paystubs that are issued electrnically, via , r dwnladed frm the Internet are acceptable and must include the fllwing infrmatin: Internet Unifrm Resurce Lcatr (URL Internet address) identifying the surce f the infrmatin. Date and time printed. Verbal verificatin f emplyment. Infrmatin identifying the place f rigin and/r the authr f the dcumentatin, all f which must be cnfirmed n the verbal verificatin. Dcuments dwnladed directly frm the Internet t a Wrd dcument r Excel spreadsheets are nt acceptable. Written Verificatin f Emplyment: Written verificatin f emplyment must cntain the fllwing infrmatin: Dates f emplyment. Psitin. Prspect f cntinued emplyment, when available. Prbability f cntinued emplyment must be verified as gd r better and evaluated based n the fllwing: Past emplyment recrd. Qualificatins fr the psitin. Previus training and educatin. Emplyer's cnfirmatin f cntinued emplyment. Base pay amunt and frequency: fr emplyees paid n an hurly basis, the verificatin must state the hurly wages, including the number f hurs wrked each week. Additinal salary infrmatin, which includes itemized bnus, vertime, tip, gratuity, r cmmissin incme, if applicable. If the cmmissin incme represents 25% r mre f the brrwer's incme, persnal incme tax returns with all schedules are required. A paystub and W-2 frm must supprt all written verificatins f emplyment. Written verificatins f emplyment are nt acceptable as standalne dcumentatin t substantiate the brrwer's current emplyment/incme regardless f the autmated underwriting requirements. CMS Plicies & Prcedures Page 86 f 208

87 Dcumentatin Requirements and Standards (cntinued) Dcumentatin Standards (cntinued) A written verificatin f emplyment must be mailed directly t the emplyer t the attentin f the persnnel department. Verificatins f emplyment must never be mailed t a Pst Office Bx r t a particular persn's attentin. If the brrwer indicates this is necessary, the file must cntain verificatin that the emplyer was independently cntacted and verified this requirement. The hand carrying f verificatins is strictly prhibited. Electrnic verificatin systems are acceptable hwever the infrmatin received must cntain the same level f infrmatin, per standard USDA guidelines. Verbal Verificatin f Emplyment: Verbal verificatin f emplyment must cntain the fllwing infrmatin: Date f verificatin Brrwer's date f emplyment Brrwer's emplyment status and jb title Name, phne number and title f verifier Name and title f assciate making the call T cmply with a verbal verificatin f emplyment (r telephne cnfirmatin) requirement, the phne number and address fr the brrwer's emplyer must independently be btained via a telephne bk, directry assistance, r by cntacting the applicable licensing bureau. The emplyer must be cntacted within 10 Business Days f the clsing date t cnfirm the brrwer's current emplyment status. If using a third party service t verify emplyment (e.g., The Wrk Number, Quick Cnfirm, etc.), the date f request shwn n the frm must be within 10 business days f the Nte date (r funding date fr escrw states). The date that the emplyment was verified must be within 35 calendar days f the Nte date. Incme Tax Returns: The fllwing standards apply with using Incme Tax Returns t verify incme. CMS may request additinal infrmatin such as business licenses, business tax returns, prfit and lss statements, and/r balance sheets if it is necessary t further supprt the determinatin f the stability f the brrwer's incme. CMS Plicies & Prcedures Page 87 f 208

88 Dcumentatin Requirements and Standards (cntinued) Dcumentatin Standards (cntinued) Persnal Incme Tax Returns must be: Cmplete with all schedules and W-2 frms, IRS Frms 1099, K-1 schedules, etc. Signed and dated Brrwer s cpy filed with the IRS Year-t-date Prfit and Lss and Balance Sheet must be: Prepared by an accuntant Required if the lan applicatin is taken beynd 90 days f the end f the business tax year Business Incme Tax Returns must be: Cmplete with all schedules Signed and dated Brrwer s cpy filed with the IRS Incme Tax Returns nt filed fr prir year: Brrwers that d nt have the prir year's tax returns and have filed an extensin must have the fllwing: Cpy f the filing extensin Year-end prfit and lss fr last year Year-t-date prfit and lss fr the current year Prir tw year's incme tax returns W-2 frms Prir tw year's business tax returns, if applicable Cancelled check fr estimated taxes due A 4506t must be prcessed cnfirming n returns filed CMS Plicies & Prcedures Page 88 f 208

89 Dcumentatin Requirements and Standards (cntinued) Dcumentatin Standards (cntinued) Amended Tax Returns Tax Returns Filed Prir t the Lan Applicatin Date Tax returns filed prir t applicatin are acceptable fr underwriting purpses. Bth the riginal filed return and the amended return are required. If the file was amended 60 days r less prir t the applicatin, evidence f payment must als be prvided. Tax Returns Filed After the Lan Applicatin Date Tax returns filed after the applicatin date may be acceptable when accmpanied by the fllwing: A letter f explanatin regarding the reasn fr the re-file Evidence f filing Payment and the ability t pay the tax if the check has nt cancelled The riginal tax return and the amended tax return must be clsely reviewed fr cnsistency with previus filings t determine whether the use f the amended return is warranted. In additin, if the brrwer requires the amended incme fr qualificatin, an exceptin must be submitted and apprved fr the use f the amended incme. A cpy f the riginal and amended tax returns must be submitted with the exceptin. When using an amended return after applicatin the USDA Certified Underwriter must prvide justificatin and cmmentary n the Transmittal Summary (frm 1008) regarding its use. Preliminary Title Reprt/Title Cmmitment A preliminary reprt/title cmmitment is a reprt prepared prir t issuing a plicy f title insurance that shws the wnership f a specific parcel f land, tgether with the liens and encumbrances. The fllwing are the minimum requirements fr the preliminary reprt/title cmmitment: Effective Date: Nt t exceed 90 days at time f funding Cmplete name and address f the Title Agent Preliminary reprt/title cmmitment file number Prpsed Insured: Carringtn Mrtgage Services, LLC Prpsed Cverage: Equal t the Nte lan amunt Plicy Type: Full r Shrt Frm ALTA plicy (Shrt frm plicies that are nt ALTA plicies, such as Limited plicies, are nt acceptable) Vested Interest: T be reviewed fr accuracy Prperty Address & Legal Descriptin: T be reviewed fr accuracy Estate f Interest: Fee Simple r Fee Exceptins: Liens, restrictins and interests f thers are t be cleared and/r paid thrugh the clsing Prperty Taxes: Paid current r paid thrugh the clsing CMS Plicies & Prcedures Page 89 f 208

90 Incme Types Overview Incme types are defined as fllws: Wage Earners Self Emplyed Incme Rental Incme Nn-Taxable Incme Other Incme Special Cnsideratins Wage Earner Wage earners receive a wage r salaries frm an emplyer in return fr a service rendered and have less than 25% wnership interest in the business. Cmpensatin may be based n an hurly, weekly, bi-weekly, mnthly, r semi-mnthly basis. CMS requires a minimum f tw years emplyment histry and likelihd f cntinuance f incme fr three years. If the brrwer's earnings are regular, use the mnthly grss incme t qualify. If a brrwer's hurs fluctuate, average the past tw years plus year-t-date earnings. Secnd Jb r Multiple Jb Emplyment A brrwer must have at least tw-years, uninterrupted histry n all secnd r multiple jbs and have a strng likelihd f cntinuance in rder t use fr qualificatin purpses. Incme received fr less than tw-years may be cnsidered n a case-by-case basis. Otherwise, the incme may be cnsidered as a cmpensating factr nly. Bnus r Overtime Bnus r vertime incme is cmpensatin in additin t any emplyee's straight salary r hurly wage. CMS accepts bnus r vertime incme if bth regular and cntinuus with a tw-year histry. This amunt must be averaged. If the incme has been received less than tw years, but is likely t cntinue, vertime/bnus incme may be cnsidered. The use f the incme must be justified and dcumented. CMS Plicies & Prcedures Page 90 f 208

91 Incme Types (cntinued) Cmmissin Cmmissin incme is defined as a fee r percentage paid t an emplyee fr perfrming a service. CMS accepts stable cmmissin incme with a tw-year histry. If cmmissin incme represents 25% r mre f the brrwer's incme, the mst recent tw years' persnal incme tax returns deducting nn-reimbursed business expenses as reprted n IRS Frm 2106 are required. This amunt must be averaged ver the mst recent tw years. A current paystub r 1099 statement must be btained and it must be cnfirmed that the current earnings supprt the incme n the tax return. A brrwer with less than a tw-year histry f cmmissin incme may be cnsidered prvided the USDA Certified Underwriter is able t make a sund ratinalizatin fr acceptance and can dcument the likelihd f the incme t cntinue. Cmmissin incme received less than ne year is nt cnsidered effective incme. Exceptins may be made n a case-by-case basis in situatins in with sufficient dcumentatin t supprt its use (i.e., salary changed t cmmissin with a similar psitin with the same emplyer). A brrwer may als qualify when the prtin f a brrwer's earnings nt attributed t cmmissin is sufficient t qualify the brrwer fr the mrtgage. Emplyment by a Relative A brrwer emplyed by a family member r emplyed by a family held business is eligible prvided that the fllwing dcumentatin requirements are met: Written Verificatin f Emplyment cmpleted by the business accuntant. The accuntant must verify that the brrwer is nt self-emplyed by indicating the percentage f interest in the business. The accuntant must be a disinterested third party. Persnal incme tax returns fr the mst recent tw years with all W-2 frms. Mst recent, cmputer-generated paystub. If the pays stub is nt cmputer generated, a signed payrll ledger must be prvided by the accuntant. CMS Plicies & Prcedures Page 91 f 208

92 Self-Emplyed Incme Overview CMS defines a self-emplyed brrwer as an individual wh has 25% r greater wnership interest in a business r receives an IRS frm 1099 t dcument his r her incme. Examples f self-emplyed individuals include cntract wrkers, real estate agents, individuals relying n investments as their primary surce f incme etc. Incme Dcumentatin and Evaluatin by Tax Returns The fllwing evidence is required fr brrwer s self-emplyment incme: At least tw cnsecutive years f self-emplyment in the same business entity in the same lcatin. Onging, stable incme. A level r upward trend in earnings must be established. Any decreases r significant increases culd affect the stability f the brrwer's incme and wuld require a satisfactry explanatin. If a satisfactry explanatin cannt be prvided, the incme will be cnsidered questinable and shuld nt be used t qualify the brrwer. Self-emplyment f less than tw years may be cnsidered n a case-by-case basis. T be cnsidered, a brrwer with less than tw years f self-emplyment must meet the fllwing qualificatins: Been emplyed in the same ccupatin r related field prir t becming selfemplyed. Must demnstrate at least tw years f previus experience in this field. Als acceptable is ne year f experience and ne year f prfessinal training/educatin in an area related t the ccupatin. Self-emplyment f less than ne year will nt be cnsidered fr qualifying purpses. The brrwer's earning trend ver the previus tw years must be established. If the brrwer can prvide additinal quarterly tax returns, the analysis can als include incme thrugh the perid cvered by the quarterly tax filings. If the brrwer des nt file quarterly taxes, the incme shwn n the prfit & lss statements may be included in the analysis, prvided the incme stream based n the prfit & lss statement is cnsistent with the previus years' earnings. If the prfit & lss statements submitted fr the current year shw an incme stream cnsiderably greater than what is supprted by the previus years' tax returns, the analysis f incme must be predicted slely n the incme verified thrugh the tax returns. T determine if the business can be expected t cntinue t generate sufficient incme fr the brrwer's needs, the business's financial strength, surces f incme and the general ecnmic utlk fr similar businesses in the area must be carefully analyzed. Annual earnings that are stable r increasing are acceptable; hwever, if a business shws a significant decline in incme, this wuld nt be acceptable, even if current incme and debt ratis meet guidelines. Tax Infrmatin Authrizatin (IRS frm 4506T) signed by the brrwers is required fr all lans. CMS Plicies & Prcedures Page 92 f 208

93 Self-Emplyed Incme (cntinued) Meal Deductins The maximum permitted meal deductin regardless f jb type is 50%. Dcumentatin Requirements The fllwing dcumentatin is required: Mst recent tw year's persnal tax returns with all schedules Incme Analysis Wrksheet Mst recent tw years business tax returns with all schedules (except fr sle prprietrships) Year-t-date Prfit & Lss if the applicatin is taken after 90 days f the business year-end Quarterly tax filings (if filed) Depending n when the Persnal Tax Return was filed, the dcumentatin abve is required with the fllwing fr all lan applicatins: Applicatin Date Dcumentatin January 1 March 31 Mst recent, available tw years tax transcripts. Mst recent tw years persnal tax returns. Mst recent tw years business tax returns, if applicable. Year-end prfit and lss and balance sheet fr the last year. April 1 June 15 Mst recent, available tw years tax transcripts. Mst recent tw years persnal tax returns. Mst recent tw years business tax returns, if applicable. Year-end prfit and lss and balance sheet fr the last year. Year-t-date prfit and lss and balance sheet fr the current year. June 16 Octber 15 Mst recent, available tw years tax transcripts. Cpy f the filing extensin with any tax payments made. Current year prfit and lst. Year-end prfit and lss and balance sheet fr the last year. Year-t-date prfit and lss and balance sheet fr the current year. Mst recent tw years persnal tax returns. Mst recent tw years business tax returns, if applicable. W-2s fr crpratins. 1009s fr cmmissin. Canceled checks fr estimated taxes due. After Octber 15 Mst recent tw years persnal tax returns. Mst recent year(s) available tax transcripts fr the number f years required. Mst recent years persnal tax return (year-end prfit and lss statement will nt be accepted). Mst recent tw years business tax returns, if applicable. Year-t-date prfit and lss and balance sheet fr the current year. CMS Plicies & Prcedures Page 93 f 208

94 Rental Incme Overview Calculatin f Rental Incme The sectin describes acceptable rental incme frm each surce. Rental incme fr qualificatin purpses may be derived frm ne f the fllwing surces: Owner-ccupied prperty tw- t fur-unit Other real estate wned A retained dwelling must meet the requirements f sectin (a). Manufactured hmes that are nt n permanent fundatins are cnsidered functinally inadequate husing. Mnthly grss rent received must be reduced by a vacancy factr f 25 percent befre subtracting the mnthly principal, interest, taxes, insurance, and hmewner assciatin dues, etc. fr annual incme. Repayment Incme fr rents received 24 mnths r mre: Psitive net rental incme received may be cnsidered as stable and dependable by the underwriter and included in the repayment incme. Negative net rental incme determined t be stable and dependable is treated as a recurring liability. Mrtgage liabilities assciated with the prperty may be mitted frm the debt ratis. Repayment Incme fr rents received less than 24 mnths: N rental incme may be included fr repayment purpses. Crrespnding mrtgage liabilities must be included in the debt ratis. Annual Incme: Psitive net rental incme must be included in annual incme. Negative net rental incme is treated as $0. Rental incme fr repayment purpses may be verified by 24 mnths f canceled checks, mney rder receipts, r bank statements. Fr rental amunts received fr 24 mnths r greater, the actual average incme reprted n the applicant s incme tax IRS Frm 1040 Schedule E (depreciatin may be added back int calculatin) fr the past tw years may be used in lieu f net rental incme that is subject t a vacancy factr. CMS Plicies & Prcedures Page 94 f 208

95 Other Incme Overview This sectin describes ther surces f incme. If any f the fllwing types f incme are used t qualify the brrwer, a histry f regular receipt and the prbability f cntinuance fr at least three years must be dcumented: Alimny Child Supprt and Maintenance Payments Aut Allwances and Expense Accunt Payments Dependent Deductin Disability Incme Emplyer Differential Payments Emplyment Gaps Family Assets ver $5,000 Future Emplyment Interest and Dividend Incme Leave f Absence Military Incme Nn-Taxable Incme Nte Incme Public Assistance Incme Retirement, Pensin, Annuity and IRA Distributins Seasnal Incme Scial Security Incme Teachers Trust Incme Unin Members VA Benefits CMS Plicies & Prcedures Page 95 f 208

96 Other Incme (cntinued) Alimny, Child Supprt and Maintenance Payments Alimny and separate maintenance incme will be cnsidered, when based n a divrce decree, curt rdered separatin agreement, curt decree, r anther legal agreement prviding the payment terms cnfirming that the incme will cntinue fr the first three years f the mrtgage. Additinal cnfirmatin must be btained t dcument the age f the child and the incme cntinuance if the age f the child is nt clearly defined. The fllwing dcumentatin must be prvided: Cpy f divrce decree r curt rder. Satisfactry prf f regular receipt f mnthly payments that include ne f the fllwing fr the mst recent 12 mnths: Signed federal incme tax returns Legal Separatin Agreement Vluntary Payment Agreement Canceled checks Bank statements r depsit slips shwing the regular depsit f these funds Payment histry frm the curt Aut Allwances and Expense Accunt Payments If a brrwer has been receiving autmbile allwances fr the past tw years, this incme will be cnsidered stable incme, prvided all assciated business expenditures are included in the calculatin f the brrwer's ttal Debt-t-Incme Rati. The emplyer must prvide verificatin that these payments will cntinue. The mst recent tw years persnal incme tax returns with all schedules are required t dcument incme. When the brrwer files an IRS frm 2106, any funds in excess f the brrwer's mnthly expenses are added t the brrwer's mnthly incme. The brrwer's mnthly car payment must be included in the brrwer' ttal mnthly bligatins. The car payment may nt be ffset by the aut allwance. When the brrwer des nt reprt the allwance n IRS frm 2106, the full amunt f the allwance is added t the brrwer's mnthly incme. The full amunt f the lease r financing expenditure fr the autmbile must be added t the brrwer's ttal mnthly bligatins. A cpy f the mst recent year's W-2 frm and current paystub must be prvided. Fr qualifying purpses, an average f the incme ver the tw years shuld be develped. If the calculatins reveal a lss, it must be treated as a recurring debt. CMS Plicies & Prcedures Page 96 f 208

97 Other Incme (cntinued) Child Care Expenses Child care expenses fr the care f minr children age 12 and under must have dcumentatin t supprt the amunts paid. Third party verificatins prvided by a licensed childcare facility r prvider n fficial letterhead are acceptable when they include the name f the child enrlled, the date f enrllment, the mnthly payment due, and payment histry. Letters prepared by relatives r private individuals must include the same infrmatin as a third party verificatin alng with evidence f payments made (e.g., canceled checks, mney rder receipts, bank statements, etc.). The underwriter may calculate the annual amunt paid fr eligible childcare. Applicants that have nt yet placed their child int care r have n evidence t supprt payments made will be unable t qualify fr this deductin. Befre and After schl care prgrams that enable the applicant r a member f their husehld t be emplyed r attend schl t cmplete their educatin are an eligible deductin. Child supprt payments r private schl tuitin paid by an applicant are nt eligible child care expenses. Disability Incme Disability benefit payments (e.g., Scial Security disability insurance benefits, maternity/parental, r Veterans disability cmpensatin benefits, etc.) may be treated as acceptable, stable incme as lng as it is prperly dcumented. A review date n a Scial Security award letter fr disability is nt cnsidered a defined expiratin date. The brrwer's current eligibility fr the disability benefits must be cnfirmed by btaining a statement frm the benefit's payer (e.g., insurance cmpany, emplyer, r ther qualified and disinterested party). Permanent Disability If the incme des nt have a defined expiratin date, the incme may be cnsidered stable, predictable, and likely t cntinue. Additinal dcumentatin evidencing cntinuance f the incme des nt need t be prvided by the brrwer. Temprary Disability r Wrkman's Cmpensatin: Benefits that have a defined expiratin date must have a remaining term f at least three years frm the date f the mrtgage applicatin in rder t be used fr qualifying the brrwer. If a brrwer is currently receiving shrt-term disability payments that will decrease t a lesser amunt within the next three years because they are being cnverted t lng-term benefits, the lng-term benefits must be used as qualifying incme. If a brrwer is currently n temprary disability (including maternal/parental leave), the brrwer must prvide a letter f intent t return t wrk and the emplyer must prvide a letter r ther cmmunicatin f the brrwer's right t return t wrk and a descriptin f the emplyment terms (same as prir t leave). The temprary disability benefits must be used fr lan qualificatin and must nt terminate prir t the brrwer returning t wrk, unless the brrwer(s) has liquid reserves sufficient t ffset reduced incme, cvering the gap between the benefits expiratin and the return t wrk dates. A cpy f the brrwer's disability plicy r benefits statement is required t dcument incme. Fr autmated underwriting, if a lan receives an Ineligible decisin due t debt-tincme rati, the lan may be Manually Underwritten. The brrwer(s) must have liquid reserves sufficient t ffset reduced incme, cvering the gap between the benefits expiratin and the return t wrk dates. CMS Plicies & Prcedures Page 97 f 208

98 Other Incme (cntinued) Emplyer Differential Payments Repayment Incme: The amunt f these payments may be cnsidered in repayment incme when the lender verifies frm the emplyer they are likely t cntinue int the first three years f the mrtgage. D nt ffset the mrtgage payment with this amunt. Annual Incme: The amunt f these payments shuld be included as grss incme when calculating the annual incme. Emplyment Gaps The stability f incme must be assessed fr gaps f emplyment and the likelihd f cntinuance shuld be factred int the underwriting decisin Emplyment gaps ver 30 days in the last tw years must have written explanatins prvided by the brrwer. VA Benefits, Schlarships, Tuitin Repayment Incme: Direct cmpensatin frm the U.S. Department f Veterans Affairs (VA), (i.e., regular payments fr a service related disability), can be included as repayment incme upn VA verificatin. Educatin benefits paid t a Veteran fr use in meeting the csts f tuitin, fees, bks and equipment may be cnsidered fr repayment incme per (e)(7). Annual Incme: Direct cmpensatin payments and the remainder f educatinal grants, schlarships r VA benefits available fr subsistence after deducting expenses fr tuitin, fees, bks and equipment must be cnsidered as annual incme. Family Size - Dependent Deductin If it is unclear if an applicant may claim a minr child as a husehld member fr the purpse f the adjusted husehld incme calculatin, Internal Revenue Service (IRS) Publicatin N. 501 cnsiders the custdial parent as the ne authrized t claim the dependent n a Federal incme tax return. Lenders may prvide a divrce decree, custdy agreement and/r Federal incme tax returns as evidence the applicant is authrized t claim the dependent. Future Emplyment Incme frm future emplyment may be used in certain cases. A brrwer wh will be starting a new jb must be n the jb within 60 days after clsing. The brrwer must have a guaranteed nn-revcable cntract fr emplyment with a guaranteed start date. The fllwing dcumentatin is required: Fully executed cntract with the emplyer. Written Verificatin f Emplyment frm the new emplyer verifying all terms f the emplyment and the start date. Sufficient incme r cash reserves t supprt the mrtgage payments and any ther bligatins during the interim between lan clsing and the start f emplyment. CMS Plicies & Prcedures Page 98 f 208

99 Other Incme (cntinued) Husehld Assets Sectin (d)(3)(iii) requires net family assets with a cumulative ttal f $5,000 r greater t be cnsidered in the annual incme calculatin. The greater f the actual incme derived frm all net family assets r a percentage f the value f such assets based n the current passbk savings rate must be cnsidered when calculating annual incme. Verificatin dcuments must cincide with the type f asset identified fr incme purpses. Sectin (a) defines net family assets as the value f equity in real prperty, savings, IRA s, demand depsits, the market value f stcks, bnds, ther frms f capital investments and business r husehld assets dispsed f fr less than fair market value fr tw years preceding the date f lan applicatin (dispsitin f a trust cnsidered but nt inclusin in a freclsure r bankruptcy). 401ks are nt cnsidered in net family assets. Interest and Dividend Incme A tw-year average f the interest and dividend incme may be used t qualify if supprted by the brrwer's assets after settlement. The asset prviding the interest and dividend incme may nt be liquidated fr cash t clse unless that prtin used is deducted and the interest and/r dividend amunt is recalculated based n the unused prtin f the asset. Interest and dividend incme is eligible after deducting that prtin listed n Schedule B f IRS frm 1040, which is derived frm a partnership r S crpratin. The fllwing dcumentatin is required: Mst recent tw years persnal incme tax returns with all schedules r mst recent 24 mnths persnal bank statements, r mst recent tw years' IRS frm Prf f assets t supprt the interest r dividend incme will cntinue fr at least three years. Military Incme Military persnnel may be entitled t ther types f pay in additin t their base pay. Hazard and prficiency pay, ratins, and clthing and quarters allwance may be cunted as incme if it is verified as regular and cntinuus. If a letter frm the cmmanding fficer is btained indicating that n base husing will nt be prvided and quarters pay will cntinue is prvided, this incme may be included as qualifying incme. Nn-Taxable Incme Incme is typically taxable unless it is specifically exempted by law. Nn-taxable incme may be shwn n the brrwer's tax return, but is nt taxed. The amunt by which the incme is "grssed-up" must be dcumented and supprted. The nntaxable status f the incme must be likely t cntinue fr three years. The brrwer's current tax rate based n last year's tax return shuld be used t calculate the current tax rate. Depending n the brrwer's tax rate, 15% r 25% percent must be used. See the IRS website fr details n filing requirements. If the brrwer is nt required t file a federal incme tax return, 15% percent shuld be used as the tax rate. CMS Plicies & Prcedures Page 99 f 208

100 Other Incme (cntinued) Nte Incme Onging revenue received frm nte incme is recgnized by CMS as eligible fr lan qualificatin. A cpy f the Nte must dcument the amunt, frequency, and duratin f payments and will cntinue fr three years. One f the fllwing must be prvided fr the mst recent 12 mnths: Persnal incme tax returns with all schedules Bank statements r depsit slips shwing nte incme depsited Cancelled checks Public Assistance Prgrams If incme received frm gvernment assistance prgrams can be prperly dcumented that the incme has been received fr the past tw years and will cntinue fr three years, it may be cnsidered as acceptable incme. A cpy f the letter frm the gvernment agency prviding the incme amunt, frequency, and duratin and cntinuance must be prvided. Incme received frm gvernment assistance prgrams must be grssed up by 125%. See the Seasnal Unemplyment sectin fr details regarding the use f unemplyment incme. Sectin 8 Husing Vuchers Repayment Incme: The mnthly subsidy may be treated in ne f the fllwing manners fr repayment incme: 1. If the subsidy is paid directly t the applicant it may be grssed up by 25 percent t cmpensate fr its nntaxable status, r 2. If the subsidy is paid directly t the lan servicer, it may be deducted frm the mnthly PITI payment t determine the debt-t-incme rati. Lenders wh utilize GUS fr this type f repayment incme must use ptin (1) abve. Annual Incme: D nt include this subsidy in annual incme. CMS Plicies & Prcedures Page 100 f 208

101 Other Incme (cntinued) Retirement, Pensin, Annuity Incme and IRA Distributins Retirement and pensin incme may be used t qualify prvided the surce f the incme, including payment amunt, receipt f the incme, and evidence f three years cntinuance f the mnthly annuity payment, 401k r IRA mnthly distributins are dcumented. Evidence f cntinuance f crprate, gvernment, r military retirement/pensin need nt be dcumented. All frms f retirement r pensin incme require a direct verificatin frm the surce f the incme. This can include ne f the fllwing: Letter frm the rganizatin prviding the incme Cpy f retirement award letter In additin, ne f the fllwing is required fr the mst recent 12 mnths: Persnal incme tax returns with all schedules W-2P frms r IRS frm 1099 Cpy f bank statement shwing the depsit Cpy f mst recently received retirement, pensin and/r scial security check Seasnal Incme Seasnal Emplyment A brrwer's incme may fluctuate frm year t year because his r her ability t wrk may be dependent upn weather cnditins. Due t these fluctuatins, incme will be averaged ver the past tw years based n the fllwing incme dcumentatin: Written Verificatin f Emplyment Paystubs fr the mst recent 30-day perid wrked W-2 frms fr the mst recent tw years Persnal incme tax returns with all schedules fr mst recent tw years Seasnal Unemplyment Unemplyment benefits, such as thse received by seasnal wrkers, must have been received fr the past tw years, and are predictable and likely t cntinue. Due fluctuatins in incme, this amunt will be averaged ver the past tw years based n the fllwing incme dcumentatin: Persnal incme tax returns with all schedules fr the mst recent tw years CMS Plicies & Prcedures Page 101 f 208

102 Other Incme (cntinued) Seasnal Incme (cntinued) Seasnal Part-time r Seasnal Secnd Jb Seasnal part-time r secnd jb emplyment may be acceptable if the brrwer has wrked at the jb uninterrupted fr tw years. Due t fluctuatins in incme, this amunt will be averaged ver the past tw years based n the fllwing incme dcumentatin: Written Verificatin f Emplyment Paystubs fr the mst recent 30-day perid wrked W-2 frms fr the mst recent tw years Persnal incme tax returns with all schedules fr mst recent tw years Letter frm emplyer cnfirming that brrwer will be re-hired fr the next seasn (seasnal part-time) If incme received cannt meet this requirement, it shuld nly be cnsidered a cmpensating factr. Scial Security Incme Evidence f cntinuance f Scial Security retirement incme des nt need t be dcumented; hwever, evidence f three years cntinuance f Supplemental Scial Security incme (children r surviving spuse) must be dcumented. A cpy f the Scial Security Administratin award letter must be prvided t dcument incme. Scial Security incme received by the brrwer n behalf f anther husehld member may nly be included in repayment incme if the husehld member is a minr. Teachers When a brrwer is emplyed as a teacher, the annual salary must be verified. If mnthly r weekly base pay is prvided, the emplyer must verify the number f pay perids per year. Stipends r supplemental incme must be dcumented as regular and cntinuus. Fr teacher incme paid ver a 10-mnth perid and if financing is btained during the summer mnths when incme is nt received, the fllwing dcumentatin is required: Final year-end paystub frm schl Written Verificatin f Emplyment Verbal Verificatin f Emplyment Cpy f guaranteed cntract indicating that brrwer is paid ver a 10-mnth perid CMS Plicies & Prcedures Page 102 f 208

103 Other Incme (cntinued) Trust Incme If cnstant trust incme payments will cntinue fr at least three years, this incme may be cnsidered fr qualificatin. A cpy f the Trust Agreement must be prvided t dcument the fllwing: Ttal amunt f designated trust funds Terms f payment Duratin f trust What prtin, if any, f incme t brrwer is nt taxable Unin Members Unin members may hld several jbs during a year. Unin members must be emplyed at the time f clsing. Verificatin f incme fr a unin member requires the fllwing dcumentatin: Written Verificatin f Emplyment frm Unin cnfirming the fllwing: Brrwer is in gd standing with unin. Brrwer emplyed by same emplyer and incme used fr qualificatin. If unin cannt prvide cnfirmatin, a written Verificatin f Emplyment with present emplyer is required. Current paystub frm present emplyer. If there have been mre than ne emplyer in the current year, the last paystub frm each emplyer will be required t adequately reflect year-t-date earnings. Cmplete persnal incme tax returns with all schedules and all W-2 frms fr the last tw years. Due t fluctuatins in incme, incme must be averaged ver the past 24 mnths, unless incme has declined and then the mst recent 12 mnths will be averaged. VA Benefits VA Benefits incme may be used t qualify prvided evidence f regular receipt and cntinuance fr three years. A letter r Distributin frm frm the Department f Veteran Affairs evidencing VA Benefits and cntinuance fr at least three years must be prvided. CMS Plicies & Prcedures Page 103 f 208

104 Unacceptable Surces f Incme Surces f Unacceptable Incme The fllwing incme surces are nt acceptable fr purpses f qualifying the brrwer: Any unverified surce f incme Fster Care incme Incme determined t be temprary r ne-time in nature Retained earnings in a cmpany Rental incme received frm the brrwer's single family primary residence r secnd hme Retained earnings in a cmpany Stck ptins Trailing spuse incme Unverifiable incme Incme derived frm State apprved marijuana dispensary, even if W2 wages CMS Plicies & Prcedures Page 104 f 208

105 USDA LIABILITIES AND DEBT RATIOS Overview The Liabilities and Debt Ratis standards apply t all CMS lan prgrams. This sectin utlines the requirements that represent USDA cre requirements fr manually underwritten lans. Waivers d nt apply t state specific cmpliance restrictins. Ratis are used t cmpare the brrwer's anticipated mnthly husing expense and ttal mnthly bligatins t stable mnthly grss incme. These ratis indicate limitatins n the brrwer's ability t meet expenses invlved in hme wnership. Mrtgage rati requirements are discussed under the fllwing tpics: Mnthly Husing Expenses Debt Obligatins Cmpensating Factrs Debt Rati Waivers RD allws applicant s with principal, interest, taxes and insurance (PITI) and ttal debt (TD) ratis that exceed 29/41 t request RD cncurrence t allw higher ratis based n acceptable cmpensating factrs. Lenders must dcument their request fr a debt rati waiver and acceptable cmpensating factrs t supprt their request n the underwriting analysis. Exceptin: The underwriter is nt required t submit a debt rati waiver request fr GUS Accept lan files. Mnthly Husing Expenses Mnthly husing expenses are required t calculate the anticipated ttal mnthly husing expense-t-incme rati. Husing expense-t-incme ratis cmpare mnthly husing expenses t stable grss mnthly incme. The fllwing are mnthly husing expenses: Interest payments fr lans with Interest Only feature Principal and Interest payment n the first mrtgage Hazard insurance premiums Real estate taxes Mrtgage insurance premium Hmewners' assciatin dues Dcumented payments n subrdinate financing Leasehld payments Grund rent Special assessments CMS Plicies & Prcedures Page 105 f 208

106 USDA Liabilities and Debt Ratis (cntinued) Ttal Qualifying Primary Husing Expense-t- Incme Rati Primary husing expense-t-incme ratis cmpare mnthly husing expenses t mnthly stable incme. Fr lans underwritten by autmated underwriting and receiving an Accept decisin r when significant cmpensating factrs exist and can be dcumented, the first mrtgage qualificatin ratis may exceed prgram requirements. Primary Husing Expense-t-Incme Rati Limits Type Lan t Value Limitatins Fixed Rate All 29% grss mnthly incme Temprary Buy dwn All 29% grss mnthly incme (qualify at the full nte rate) ARM All 29% grss mnthly incme Nte: Temprary buy dwn funds may cme frm the seller, lender r ther third party. Temprary buy dwn funds may nt cme frm the brrwer. Payment Shck Calculatin Payment shck is the percentage f payment increase f the prpsed payment cmpared t the existing payment. Payment shck is calculated by dividing the difference between the prpsed payment and the existing payment by the existing payment. Example: Existing Payment - $1250 Prpsed Payment - $3000 Difference - $1750 Calculatin: $ $1250 = $1750 / $1250 = 1.40 r 140% CMS Plicies & Prcedures Page 106 f 208

107 USDA Liabilities and Debt Ratis (cntinued) Mnthly Debt Obligatins The brrwer's ability t repay mrtgage debt is critical in evaluating the verall quality f the lan. CMS assess the brrwer's liabilities relating t the number f active accunts, usage, and repayment histry. Evaluatin f the brrwer's capacity includes an assessment f the brrwer's financial bligatins in relatin t incme. The ttal mnthly debt bligatins cnsidered is the sum f all husing expenses plus any ther mnthly expenses incurred by the brrwer. Any additinal debt btained as a result f a recent inquiry n the credit reprt must be included in the mnthly debt bligatin. See the Debt Payff/Pay Dwn sectin fr infrmatin n paying ff r paying dwn debt t qualify. Mnthly Debt Obligatins Expenses include the fllwing: Mnthly primary husing expense. Installment debt with six mnths r mre remaining. All revlving debt regardless f utstanding balance (in the absence f a stated payment, use 5% f the utstanding balance r a minimum $10 payment). Installment debt with less than six mnths remaining where the mnthly payment will have a significant impact n the brrwer's ability t repay the mrtgage debt in its initial mnths. Aut lease payments, regardless f the number f remaining mnthly payments. Principal and/r interest n shrt term ntes. Principal and/r interest payments n balln ntes. Mrtgage payments and related expenses n any nn-incme prducing real estate. Aggregate net negative rental incme fr, all rental prperties. Alimny, child supprt and maintenance payments with ten mnths r mre remaining. Vluntary payment need nt be included. Unreimbursed Emplyee Expenses that exceed the actual amunt f the allwance r expense payments (incme) will be treated as recurring debt. Nte: See the Nn-Purchasing Spuse sectin fr infrmatin n the inclusin f a nn-purchasing spuses' mnthly debt in the mnthly debt bligatins and debt-tincme rati calculatin. CMS Plicies & Prcedures Page 107 f 208

108 USDA Liabilities and Debt Ratis (cntinued) Debt Pay Off/Pay Dwn Fr qualificatin purpses, the pay ff r pay dwn f installment debt is permitted. If debts are being paid ff r paid dwn t qualify the brrwer, the payff must be dcumented and the surce f funds verified with sufficient funds remaining fr clsing csts and reserves. Significant installment debt (i.e., debt with high balances r large mnthly payments) may be included in the debt-t-incme rati at the discretin f the USDA Certified Underwriter. If an accunt is paid in full prir t clsing, the payff f revlving accunts is permitted fr qualificatin purpses. The pay ff and zer balance must be dcumented directly frm the creditr. The payff must nt be reflected n the HUD-1 Settlement Statement. Prjected Obligatins Debt payments, such as a student lan r balln nte scheduled t begin r cme due within 12 mnths f the mrtgage lan clsing must be included in the mnthly debt bligatins fr qualificatin. Debt payments d nt have t be included in the mnthly debt bligatins if the brrwer prvides written evidence that the debt will be deferred (nt frbearance) t a perid beynd 12 mnths f the mrtgage lan clsing. Balln ntes that cme due within 12 mnths f the mrtgage lan clsing must be cnsidered in the underwriting analysis. Ttal Qualifying Debt-t-Incme Ratis Debt-t-incme ratis cmpare all mnthly bligatins/debt payments t mnthly stable incme. In evaluating the ttal debt-t-incme rati, the degree and frequency f credit usage and its impact n the brrwer's ability t repay the lan must be cnsidered. Husing Expense Rati Limits Type Lan t Value Limitatins Fixed Rate All 41% grss mnthly incme Temprary Buy dwn All 41% grss mnthly incme ARM All 41% grss mnthly incme CMS Plicies & Prcedures Page 108 f 208

109 USDA Liabilities and Debt Ratis (cntinued) Cntingent Liabilities When an individual is held respnsible fr payment f a debt if anther party, jintly r severally bligated, defaults n the payment, this is cnsidered a cntingent liability. Nt all cntingent liabilities will have t be taken int cnsideratin when determining the amunt f the brrwer's recurring mnthly debt bligatins. The mst cmmn types f cntingent liabilities are described belw: Mrtgage Assumptins A cntingent liability must be included in the brrwer s recurring mnthly debt bligatins when the brrwer remains bligated n an utstanding mrtgage that meets ne f the fllwing factrs: Has been sld r traded within the last 12 mnths withut a release f liability. Is t be sld n assumptin withut a release f liability being btained. Cntingent Liability n C-signed Obligatins If an individual is a c-signer/c-bligr n a car lan, student lan, mrtgage, r any ther bligatin, cntinent liability applies and the debt must be included in the underwriting analysis. The brrwer and the individual making the payments must bth be liable fr the debt repayment. If written evidence is prvided dcumenting that the primary bligr has been making regular payments during the previus 12 mnths, and des nt have a histry f delinquent payments n the lan during that time, the payment des nt have t be included in the brrwer's mnthly bligatins. If jint bligatins are listed in the final divrce decree and/r separatin agreement as being the respnsibility f the ex-spuse then they can be mitted frm the qualifying DTI calculatin. The divrce decree r separatin agreement must be finalized by the curt and recrded. A divrce decree alne des nt allw fr the exclusin f debt awarded t the ex-spuse. Brrwer is still liable fr any adverse payment histry r utstanding debt assciated with these jint accunts that are dated prir t the divrce r separatin agreement. Liabilities Paid by the Business When the brrwer indicates n the lan applicatin that certain liabilities are paid by the business (des nt include sle prprietr Schedule C), it must be cnfirmed that the bligatin was paid frm cmpany funds and meets the fllwing requirements: Accuntant verifies that the lans are paid by the business. Minimum f 12 mnths f canceled checks is required dcumenting the debt is paid by the business. CMS Plicies & Prcedures Page 109 f 208

110 USDA Liabilities and Debt Ratis (cntinued) Other Cnsideratins Cndminium Fees: The prtin f the cndminium fee that is clearly attributable t utilities may be subtracted frm the mrtgage payment befre calculating ratis as lng as prper dcumentatin is prvided. New Cnstructin Tax Escrw: In supplemental tax states, taxes are based n the reasnable estimate f the imprvement value, nt the existing tax based n the unimprved r land value. This reduces the payment shck t brrwers when taxes are adjusted upn cmpletin f the imprvement. CMS Plicies & Prcedures Page 110 f 208

111 USDA Liabilities and Debt Ratis (cntinued) Cmpensating Factrs CMS recgnizes that there may be justificatin fr exceeding the qualifying ratis limits. Fr manually underwritten lans, higher husing expense and ttal bligatins-t-incme ratis may be cnsidered as lng as there are sufficient cmpensating factrs and ratinale that justify their use. Less flexibility is warranted fr transactins invlving layering f risk. Cmpensating Factr Husing Expense Payments Dwn Payment Accumulated Savings Previus Credit Histry Minimal Husing Expense Increase Substantial Nn-Taxable Incme Ptential fr Increased Earnings Primary Wage-Earner Relcatin Guideline Descriptin The brrwer has successfully demnstrated the ability t pay husing expenses greater than r equal t the prpsed mnthly husing expenses fr the new mrtgage ver the past mnths. The brrwer makes a large dwn payment f 10% r higher tward the purchase f the prperty. The brrwer has demnstrated; An ability t accumulate savings, and A cnservative attitude tward using credit. A brrwer s previus credit histry shws that he/she has the ability t devte a greater prtin f incme t husing expenses. There is nly a minimal increase in the brrwer s husing expense. The brrwer has substantial nn-taxable incme. Nte: This applies if n adjustment was previusly made when cmputing ratis. The brrwer has a ptential fr increased earnings, as indicated by jb training r educatin in his/her prfessin. The hme is being purchased because the primary wage-earner is relcating, and the secndary wageearner has an established emplyment histry, is expected t return t wrk, and has reasnable prspects fr securing emplyment in a similar ccupatin in the new area. Nte: The USDA Certified Underwriter must dcument the availability f the ptential emplyment. CMS Plicies & Prcedures Page 111 f 208

112 USDA Liabilities and Debt Ratis (cntinued) Cmpensating Factrs (cntinued) Cmpensating Factr Substantial Cash Reserves Guideline Descriptin The brrwer has substantial dcumented cash reserves (at least three mnths wrth) after clsing. The lender must judge if the substantial cash reserve asset is liquid r readily cnvertible t cash, and can be dne s absent retirement r jb terminatin, when determining if the asset can be included as cash reserves, r cash t clse. Funds and/r assets that are nt t be cnsidered as cash reserves include equity in ther prperties, and prceeds frm a cash-ut refinance. The lender may use a prtin f a brrwer's retirement accunt, subject t the fllwing cnditins. T accunt fr withdrawal penalties and taxes, nly 60% f the vested amunt f the accunt may be used. The lender must dcument the existence f the accunt with the mst recent depsitry r brkerage accunt statement. In additin, evidence must be prvided that the retirement accunt allws fr withdrawals under cnditins ther than in cnnectin with the brrwer's emplyment terminatin, retirement, r death. If withdrawals can nly be made under these circumstances, the retirement accunt may nt be included as cash reserves. If any f these funds are als t be used fr lan settlement, that amunt must be subtracted frm the amunt included as cash reserves. Similarly, any gift funds that remain in the brrwer's accunt fllwing lan clsing, subject t prper dcumentatin, may be cnsidered as cash. Nte: Reserves frm retirement accunts and gifts as described abve may be cnsidered as cash reserves when scring the mrtgage applicatin thrugh Mdified TOTAL Screcard. CMS Plicies & Prcedures Page 112 f 208

113 USDA Liabilities and Debt Ratis (cntinued) Cmpensating Factrs fr Refinance Transactins Fr manually underwritten refinance lans, CMS must thrughly dcument the cmpensating factrs that justify an exceptin. Higher repayment rati exceptins are feasible when an applicant demnstrates cmpensating factrs indicating the capacity, willingness and ability t pay mrtgage payments in a timely manner. The presence f cmpensating factrs des nt strengthen a rati exceptin when multiple layers f risk, such as marginal credit histry, are present in an applicatin. The fllwing are examples f cmpensating factrs: Cmpensating Factr Previus Credit Scre Husing Expense Payments Previus Credit Histry Accumulated Savings Cash Reserves Previus Emplyment Histry Guideline Descriptin The brrwer has credit scre f 680 r higher. Credit scres f 680 and higher can be dcumented as a standalne cmpensating factr fr a debt rati waiver request, if n additinal risk layers are present (e.g., adverse credit, r payment shck, etc.). The brrwer has successfully demnstrated the ability t pay husing expenses equal t r greater than the prpsed mnthly husing expense fr the new mrtgage ver the past 12 mnths. The brrwer has demnstrated a cnservative attitude tward the use f credit. The brrwer has demnstrated an ability t accumulate savings cmparable t the difference between current husing csts and prjected csts. Cash reserves pst-clsing. The use f retirement accunts as cmpensating factrs and as cash reserves is limited t 60% f the vested amunt f the retirement asset t ffset ptential withdrawals by the applicant(s). Retirement accunts that restrict withdrawals t circumstances invlving the brrwer s emplyment separatin, retirement r death shuld nt be cnsidered as a cmpensating factr r as cash reserves. The brrwer has cntinuus emplyment with the current primary emplyer. C-Brrwers Additinal qualifying criteria are nt impsed n transactins with nn-ccupying cbrrwers. All brrwers' incme, credit and assets are used in the lan qualificatin. CMS Plicies & Prcedures Page 113 f 208

114 USDA ASSETS Overview This sectin prvides standards that apply t all CMS lan prgrams. Generally, requirements that vary frm ne lan prgram t anther are described in the prduct matrices. The requirements utlined in this sectin represent USDA cre requirements fr manually underwritten lans. USDA Mdified TOTAL Screcard decisin and recmmendatins fr reduced dcumentatin may be fllwed unless therwise nted in this dcument r n the prduct matrices. Waivers d nt apply t state specific cmpliance restrictins. Dcumentatin Age Requirements The fllwing dcumentatin age limitatins apply: 120 days prir t the nte date fr existing prperties. 180 days prir t the nte date fr new cnstructin. Minimum Dwn Payment and Cash t Clse Requirements There is n minimum cash investment required frm a brrwer n a USDA guaranteed mrtgage. All cash t clse must be dcumented and verified, unless specifically waived by the lan prgram r autmated underwriting. CMS Plicies & Prcedures Page 114 f 208

115 Asset Surces Overview Every brrwer must cmplete the Surce f Funds Statement, which prvides directin t determine and verify acceptable surces f equity. The fllwing is a list f acceptable surces: Bank Accunts Individual Accunts Jint Accunts Trust Accunts Earnest mney Depsits Emplyer Assistance Plans Emplyer's Guarantee Plans Equity frm Other Assets Freign Assets Gifts Lans Secured by Other Assets Prceeds frm 1031 Tax deferred Exchange Sale f Other Assets Sale f Real Estate Gifts f Equity Wedding Gifts Incme Tax Refund Life Insurance Premium Pricing Real estate cmmissins Rent credits Retirement Accunts Stcks/Bnds Secured lans Sweat equity Systematic Savings Trade equity CMS Plicies & Prcedures Page 115 f 208

116 Asset Surces (cntinued) Bank Accunts T dcument the brrwer's assets, ne f the fllwing items must be prvided: The tw mst recent cnsecutive mnthly bank statements. Bank Statements must be dated within 45 days f the initial lan applicatin. Nte: The previus mnth's balance must be reflected n the bank statements. This applies t all assets. Bank accunts include funds n depsit in savings accunts, checking accunts, certificates f depsit, mney market accunts, and individual retirement accunts (IRAs). Individual Accunts: Funds in the brrwer's wn individual bank accunt are acceptable. Jint Accunts: Funds held in a jint checking r jint savings accunt are acceptable since the brrwer has access t all funds in the accunt at all times. A 100% Access Letter is required frm the jint accunt hlder nt n the lan. Trust Accunts: Funds disbursed frm a trust accunt where the brrwer is the beneficiary are acceptable if the brrwer has immediate access t the funds. The trust manager r trustee must verify the value f the trust accunt and cnfirm the cnditins under which the brrwer has access t the funds. When using the trust incme fr qualifying, effect f the withdrawal must be dcumented. Any accunts that cannt be immediately accessed by the brrwer, including accunts where the brrwer is nt the beneficiary (e.g., custdial accunts r In Trust Fr accunts) are nt cnsidered acceptable assets. Bank Statements: Bank statements must clearly identify the fllwing: Name and address f the depsitry r investment institutin. Name f accunt hlders. Accunt number. Time perid cvered by the statement. Fr depsitry accunt, all depsit and withdrawal transactins. Fr a financial prtfli accunt, all purchase and sale transactins. Ending accunt balance. CMS Plicies & Prcedures Page 116 f 208

117 Asset Surces (cntinued) Bank Accunts (cntinued) Brrwers can submit bank statements btained frm the Internet as lng as the fllwing infrmatin is included: Internet Unifrm Resurce Lcatr (URL) addresses identifying the surce f the infrmatin. Name f the depsitry r investment institutin. Accunt number. Time perid cvered by the statement. Fr depsitry accunt, all depsit and withdrawal transactins. Fr a financial prtfli accunt, all purchase and sale transactins. Ending accunt balance. The statements can be ed frm the Internet r printed and faxed t CMS. Statements that have been dwnladed int a Wrd dcument r Excel spreadsheet are nt acceptable. Review f Accunt Statements Any indicatins f brrwed funds must be investigated. Indicatins f Brrwed funds include: A recently pened accunt A recently received large depsit An accunt balance that is cnsiderably greater than the average balance ver the previus few mnths. When there is a recently pened accunt r a large increase in an existing accunt (within six mnths f cntract signing), the surce f funds must be explained by the brrwer and verified. Unverified funds are nt acceptable surces fr the dwn payment, clsing csts and / r reserves. Examine asset dcumentatin fr signs f fabricatin r alteratin. Analyzing the dcumentatin t calculate interest, and reviewing depsits against incme levels and surces are necessary t validate the dcuments. Earnest Mney Depsits Earnest mney depsit n the sales cntract can be cnsidered an asset if the depsit Is nt already reflected in a liquid asset accunt. If the funds have cleared the applicant s accunt, place the amunt as an Other Credit in Sectin VII f the lan applicatin. Fr GUS transactins, lenders shuld nly enter the earnest mney nce; n the Asset and Liabilities r Transactin Details page. CMS Plicies & Prcedures Page 117 f 208

118 Asset Surces (cntinued) Emplyer Assistance Plans If the emplyer pays the fllwing t attract r retain valuable emplyees, the payment is cnsidered emplyee cmpensatin and an adjustment t the maximum mrtgage amunt is nt required. Emplyee's clsing csts Mrtgage Insurance Premiums Any prtin f the cash investment If the emplyer prvides this benefit after lan settlement, the brrwer must prvide evidence f sufficient cash fr clsing. Nte: A salary advance cannt be cnsidered as assets t clse since it represents an unsecured lan. Equity frm Other Assets Lans Secured by Other Assets: Brrwed funds secured by an asset wned by the brrwer are an acceptable surce f equity. Examples that may be used t secure funds include certificates f depsit, savings plans, stcks, bnds, real estate wned by the brrwer, and life insurance plicies. The fllwing dcumentatin is required: The terms f the lan Verificatin that the party prviding the secured lan is nt a party t the sale r financing f the prperty (ther than a financial institutin) Cnfirmatin that the funds have been transferred t the brrwer Evidence that the lan is secured by an asset wned by the brrwer Value f the asset (e.g., cpy f the appraisal, cpy f Blue Bk value) Mnthly payment fr the lan must be included in the debt-t-incme rati. When the lan des nt require mnthly payments, a reasnable mnthly payment must be calculated and cnsidered as a debt. Lans secured by the brrwer's wn financial assets such as depsit funds, investment r retirement accunts r life insurance plicies in which repayment may be btained thrugh extinguishing the asset d nt require cnsideratin f repayment fr qualifying purpses. Hwever, in such circumstances, the asset securing the lan may nt be included with brrwer assets fr clsing r therwise cnsidered available t the brrwer. CMS Plicies & Prcedures Page 118 f 208

119 Asset Surces (cntinued) Equity frm Other Assets (cntinued) Sale f Other Assets If funds are derived frm the sale f assets ther than real estate, they must be verified by the fllwing dcumentatin based n the lesser f the sales price r value: Prf f wnership Supprt fr the value f the asset (published value estimates, appraisal (If the sale was an aut, an appraisal frm an aut dealer is required t supprt the value; Kelly Blue Bk is nt an acceptable surce.) Evidence f transfer f wnership (e.g., a cpy f the bill f sale) Evidence f receipt f the purchase prceeds (e.g., depsit slip r bank statement) Evidence that a party t the prperty sale r the mrtgage financing transactin did nt purchase the asset Sale f Real Estate The net prceeds that will be generated frm the sale f an existing prperty must be established. The transactin must be an arm s length transactin. Bth the actual sale and the sufficiency f net prceeds must be dcumented with the fllwing infrmatin: A cpy f the executed cntract f sale fr the prperty A fully executed HUD-1 Unifrm Settlement Statement evidencing the net prceeds received by the brrwer If the brrwer is being transferred by his r her cmpany under a guaranteed sales plan, btain an executed buyut agreement and accmpanying settlement statement indicating that the emplyer r relcatin service takes respnsibility fr the utstanding mrtgage debt If the actual fees fr the sale f the hme are knwn, use the fllwing frmula t calculate the equity in the prperty: Sales Price minus (sales csts plus payff f all utstanding liens) = equity If the actual fees invlved in the hme sale are nt knwn, an estimate f the equity in a prperty can be determined, using the fllwing frmula: Sales Price minus (10% f sales price (fr csts / brker fees) plus payff f all utstanding liens) = equity If a sales price has nt been established, anticipated equity may be calculated with the fllwing frmula: Listing Price minus (10% f listing price plus payff f all utstanding liens) = equity The 10% adjustment factr may need t be changed depending n market cnditins in the area f the sale. True net equity (prceeds) must be verified upn sale f the prperty regardless f the adjustment factr used. CMS Plicies & Prcedures Page 119 f 208

120 Asset Surces (cntinued) Freign Assets Freign assets being used fr dwn payment, clsing csts and reserves must be held in a United States accunt prir t clsing. If the assets are derived frm a sale f a freign asset r frm assets held in a freign bank accunt, the assets must be prfessinally translated by an independent, certified third party and placed in a United States banking institutin. Evidence f certificatin may be requested if nt prvided. The sale f the freign asset and cnversin f freign currency must be fully dcumented and verified. Gift Funds Dcument thrugh an executed gift dnr letter and establish the gift des nt have t be repaid. If gift funds are nt verified in the applicant s accunt at the time f applicatin, btain prf f transfer frm the dnr t the applicant Gift funds are cnsidered the applicant s persnal funds, but remaining funds may nt be cnsidered as cash reserves. Incme Tax Refund An incme tax refund nt yet received may be used as funds fr dwn payment r clsing csts. The brrwer must prvide a cpy f the actual signed tax return t verify the anticipated refund. Verificatin f receipt f the refund is required and must be dcumented by a cpy f the refund check r electrnic depsit. Life Insurance Cash Value When a brrwer uses the cash value f a life insurance plicy as funds fr dwn payment and/r clsing csts, the value must be verified by a written statement frm the life insurance cmpany. The statement must specify the amunt f net cash value currently available t the brrwer. Verificatin f receipt f the funds is required. Nte: Brrwers cannt receive a lan fr clsing csts and prepaids. Lan Frm A Relative Family members may lend the brrwer up t 100% f the cash investment n a secured r unsecured basis. The lan payment must be included in the debt tincme rati. The fllwing dcumentatin is required: An executed cpy f the lan dcument verifying the lan terms Transfer and receipt f the funds as part f the brrwer's assets verificatin If the relative brrwed the funds, dcumentatin must be prvided by the bank verifying the surce f funds was financed with a bank lan. If the bank cannt prvide verificatin f the lan, ther evidence must be prvided that the funds were brrwed frm an acceptable surce. Unacceptable surces f dnr's brrwed funds Any party t the transactin, including the lender Cash received frm any surce A lan in which the brrwer is a c-bligr with the dnr fr the brrwed gift funds All FHA guidelines must be fllwed regarding the lan, brrwer qualificatin and secnd mrtgage limitatins (if applicable). The USDA Certified Underwriter must cnditin the lan t be recrded as a secnd lien, when applicable and must cmply with CLTV limitatins fr prduct. CMS Plicies & Prcedures Page 120 f 208

121 Asset Surces (cntinued) Real Estate Cmmissin frm Sale f Subject Prperty The brrwer is a licensed real estate agent entitled t a real estate cmmissin frm the sale f the prperty being purchased, and then he/she may use that amunt fr the cash investment, with n adjustment t the maximum mrtgage required. A family member entitled t cmmissin may als prvide it as gift funds t the brrwer. Repayment Of A Persnal Lan When funds are btained frm repayment f a persnal lan made by the brrwer, the fllwing dcumentatin is required: A written agreement between the brrwer and the recipient f the lan Verificatin evidencing the brrwer's ability t lend the funds Evidence the funds were withdrawn frm their accunt Verificatin that repayment has been made Prvide statements verifying the funds being withdrawn frm the recipient's accunt and depsited int the brrwer's accunt Retirement Accunts Funds frm individual retirement accunts (IRA, 401K, Kegh accunts) may be used as a surce f funds fr the dwn payment, clsing csts r reserves. A 401(k) accunt may nly be used t the extent the brrwer is vested in the accunt. The accunt balance and the vested amunt must be verified. When retirement accunts nly allw fr withdrawal in cnnectin with the brrwer's emplyment terminatin, retirement r death, the vested funds shuld nt be cnsidered as reserves. A cpy f the mst recent depsitry r brkerage accunt statement must be prvided. When funds frm these surces are being liquidated fr the lan transactin, the funds must be withdrawn and prf f withdrawal must be prvided. Subtract 40% frm the vested amunt (after the reductin f any persnal lans) t accunt fr any applicable withdrawal penalties r incme tax s that the net withdrawal is cunted (the prtin f the accunt secured by a persnal lan may nt be cnsidered available t the brrwer fr reserves). The lan prceeds received frm a lan secured against a retirement accunt may be cnsidered liquid funds available fr the transactin. When funds frm these surces are used t supprt the cash reserve requirement, it is nt required that the funds actually be withdrawn frm the accunt but the 40% deductin rule still applies when calculating the amunt f cash reserves. A higher amunt may be used with dcumentatin that a higher percentage may be withdrawn after subtracting any federal incme tax and withdrawal penalties. CMS Plicies & Prcedures Page 121 f 208

122 Asset Surces (cntinued) Stcks / Bnds The value f stcks, bnds and ther securities must be dcumented with ne f the fllwing: Mst recent mnthly statements fr the past three mnths A quarterly statement Pht-cpy f the stck certificatin accmpanied by a dated newspaper stck list Gvernment savings bnds shuld be valued at their purchase price unless redemptin value can be verified. Verificatin f liquidatin and receipt is required when the funds frm the sale f stcks/bnds are used fr dwn payment, clsing csts r ther csts. Sweat Equity Sweat equity is labr perfrmed r materials furnished by the brrwer befre clsing takes place fr the prperty being purchased. Sweat equity may be cnsidered the equivalent f a cash investment t the extent f the estimated cst f the wrk r materials and as lng as all USDA requirements are met. Systematic Savings Brrwers shuld have the funds needed t clse the transactin. Hwever, a lan t a brrwer wh des nt have sufficient assets t clse may be submitted t Underwriting subject t the fllwing parameters: 80% f the required assets must be dcumented The ability f the brrwer t save based n his r her incme and debts must be dcumented The required assets must be dcumented and verified in the brrwer's accunt prir t clsing Cmpleted and executed Ntice t brrwers frm and the Systematic Savings Wrksheet Upn receipt f the abve dcumentatin, re-submit the lan fr review by the USDA Certified Underwriter t determine that all asset requirements have been satisfactrily met. CMS Plicies & Prcedures Page 122 f 208

123 Asset Surces (cntinued) Trade Equity The prperty seller may take a prperty wned by the brrwer as part f the dwn payment n the prperty being sld t the brrwer. The brrwer's equity cntributin must be a true value cnsideratin supprted by a current appraisal. The fllwing dcumentatin must be prvided: Cpy f the current appraisal n the prperty being traded A cpy f the trade-in cntract Title search prving that the brrwer wns the real estate and verifying any liens assciated with the prperty T calculate brrwer's equity, use the fllwing frmula: (lesser f current appraised value r trade-in price) minus (utstanding liens plus transfer fees and real estate cmmissin) = brrwer's equity The prperty seller must prvide prf f title transfer in additin t verificatin that either all liens have been satisfied r the brrwer is released f liability by an apprved assumptin. The transfer deed must be recrded. The abve rules apply t all trade-in transactins, including thse evidenced with tw separate cntracts in which buyer and seller reverse rles. If the prperty being traded has an FHA insured mrtgage, assumptin prcessing requirements and restrictins apply. Cash Reserves Requirements Cash reserves are nt required unless alternative credit is the sle surce f credit fr the applicant. A minimum f three mnths PITI cash reserves are required. CMS Plicies & Prcedures Page 123 f 208

124 Unacceptable Surces f Assets Requirements Surces f funds cnsidered ineligible fr asset evaluatin include the fllwing: Dnated funds in any frm, such as cash r bnds dnated by the seller, builder, r selling agent Prceeds f a persnal r unsecured lan unless prvided by a family member Cash advances n a revlving charge accunt r unsecured line f credit A gift that must be repaid in full r in part A gift that was received frm an unacceptable dnr Materials furnished by the brrwer that are nt part f a pre-clsing agreement with a builder The prceeds frm an IRS Tax Cde 1031 Exchange n an wner ccupied transactin Salary advances Cash fr which the surce cannt be verified (e.g., garage sales) Cryptcurrency (digital assets such as bitcins) Funds in a Custdial r In Trust Fr Accunt CMS Plicies & Prcedures Page 124 f 208

125 USDA PROPERTY TYPES AND APPRAISAL DOCUMENTATION AND REVIEW Overview This sectin prvides standards that apply t all USDA lan prgrams. Generally, requirements that vary frm ne standard lan prgram t anther are described in the individual prduct matrices. USDA Appraisal and Prperty Cnditins Assessment Requirements The appraisal and prperty cnditin assessment is used t determine the market value and acceptability f the prperty fr a USDA guaranteed mrtgage. The value serves as a basis fr determining the maximum guaranteed lan amunt. The appraisal is perfrmed fr the use and benefit f USDA, and the lender financing the transactin. In additin t prviding an estimate f value, the appraisal prvides an examinatin f the prperty fr any visible, bvius and/r apparent deficiencies that may affect the livability f that prperty in terms f basic needs, health and safety f the prperty's ccupants. USDA makes n warranties as t the value and/r cnditin f any prperty appraised fr USDA financing. Buyers/brrwers must determine fr themselves that the price f the prperty is "reasnable" and that its cnditin is "acceptable". The appraisal is nt a hme inspectin and buyers are encuraged t btain a detailed Hme Inspectin f the prperty. It is imprtant that brrwers, sellers, and real estate agents understand that the appraisal is an estimate f value and an acceptance f the cnditin f the prperty fr USDA guarantee purpses. Issuance f an appraisal des nt guarantee that the huse is free frm defects. USDA will nt assist financially in any repairs. An appraisal cannt be used fr any transactin ther than fr the current mrtgage transactin (i.e., the appraisal frm a purchase cannt be used fr a refinance f the prperty). CMS Plicies & Prcedures Page 125 f 208

126 Appraisal Independence Overview USDA requires each prperty cnsidered fr a USDA guarantee t have a FHA appraisal included with the lan package. The FHA Appraiser Independence requirements ensure and safeguard appraiser independence and enhance the verall appraisal prcess t prvide a greater level f integrity t the appraisal rdering prcess and appraiser cntact. Crrespndent Clients must cmply with the FHA Appraiser Independence requirements. FHA-apprved lenders are prhibited frm accepting appraisals prepared by FHA Rster appraisers wh are selected, retained r cmpensated in any manner by a mrtgage brker r any member f a lender's staff wh is cmpensated n a cmmissin basis tied t the successful cmpletin f a lan. Appraisal and Appraisal Management Cmpany (AMC) Third Party Organizatin Fees All appraisal rders must ensure that: FHA Appraisers are nt prhibited by the lender, AMC r ther third party, frm recrding the fee the appraiser was paid fr the perfrmance f the appraisal in the appraisal reprt FHA Rster appraisers are cmpensated at a rate that is custmary and reasnable fr appraisal services perfrmed in the market area f the prperty being appraised The fee fr the actual cmpletin f an FHA appraisal may nt include a fee fr management f the appraisal prcess r any activity ther than the perfrmance f the appraisal Any management fees charged by an AMC r ther third party must be fr actual services related t rdering, prcessing r reviewing f appraisals perfrmed fr FHA financing AMC and ther third party fees must nt exceed what is custmary and reasnable fr such services prvided in the market area f the prperty being appraised CMS Plicies & Prcedures Page 126 f 208

127 Appraisal Dcumentatin Age f Appraisal The appraisal reprt must be dated within 120 days f the date f the appraiser signature at clsing. CMS requires a new appraisal if the appraisal date will be mre than 120 days frm clsing. Required Appraisal Frms The appraisal frms that must be used fr lan riginatin purpses are as fllws: Unifrm Residential Appraisal Reprt (URAR): FNMA 1004/FHMLC 70 fr ne unit single family dwellings Manufactured Hme Appraisal Reprt and Addendum: FNMA 1004C/FHLMC 70B fr all manufactured hmes Individual Cndminium Unit Appraisal Reprt: FNMA 1073/FHLMC 465 fr all individual cndminium units Appraisals must be cmpleted by a FHA Rster Appraiser. There is n apprved appraiser list fr RD lan prgrams. Sectin (b)(1) requires the cst apprach sectin f the appraisal t be cmpleted when dwellings are less than ne year ld. Fr dwellings mre than ne year ld, the cst apprach sectin need be cmpleted nly t the extent necessary t cmply with site value analysis and the requirements f sectin (e). A Marshall and Swift cst apprach analysis is nt required fr any prperty. Appraisals are valid fr six mnths, effective frm the date f the appraisal, and must be valid at the time f a cnditinal cmmitment request Frm 1004 MC. All cmpleted appraisal reviews shuld include, but nt be limited t the fllwing: Clearly legible phtgraphs f the subject prperty frnt and rear scene Clearly legible phtgraphs f each sales cmparables frnt scene Lcatin map shwing the subject prperty and the sales cmparables Diagram f the flr plan detailing rm layut Exterir Building Sketch Lead-based Paint Certificatin Termite Certificatin Any ther certificatins, if applicable (rf, water, etc.) Certificate f Occupancy, if applicable Any state specific frms relating t prperty Other Fannie Mae appraisal frms, which are used fr streamlined appraisal r a qualitative sales cmparisn analysis, such as Fannie Mae frms 2055 r 2065, are nt acceptable. CMS Plicies & Prcedures Page 127 f 208

128 Appraisal Dcumentatin (cntinued) Phtgraphs Changes in Purchase Price Phtgraphs in the appraisal reprt must be clear and descriptive t be able t identify the prperty s cnditin and quality. Acceptable phtgraphs include clr riginal images frm phtgraphs r electrnic images. Phtgraphs must clearly represent the imprvements, any physical deteriratin f the prperty, amenities, cnditins and external influences that may have a material effect n the market value r marketability f the subject prperty. Lenders wh utilize the Agency s autmated underwriting system, GUS, will uplad the appraisal reprt at the Lender Uplad Dcument(s) page as an individual dcument. An appraisal reprt with interir and exterir inspectin f the subject prperty must include at least the fllwing: A frnt view f the subject prperty. A rear view f the subject prperty. A street scene identifying the lcatin f the subject prperty and shwing neighbring imprvements. The kitchen, main living area, bathrms, bedrms. Any ther rms representing verall cnditin, recent updates, such as restratin, remdeling and renvatin. Basement, attic and crawl space. Cmparable Sales, listings, and/r pending sales utilized in the valuatin analysis must include at least a frnt view f each cmparable utilized. Cndminium prjects shuld include additinal phtgraphs f the cmmn areas and shared amenities. If the purchase price changes after the appraisal is perfrmed, an addendum is required that indicates any changes, updates r crrectins. Fr Yur Prtectin Get a Hme Inspectin The FHA Cmprehensive Valuatin Package (CVP) Requirements include the apprpriate appraisal; attachments and HUD frm CN Fr Yur Prtectin: Get a Hme Inspectin. See chart belw utlining when Fr Yur Prtectin Get a Hme Inspectin is required: Prperty Type Prpsed/Under Cnstructin Existing Cnstructin Less than 1 Year Old Existing Prperty Rate/Term & Cash-Out Refinancing Streamline Refinancing With Appraisal HUD Real Estate Owned (REO) Fr Yur Prtectin: Get a Hme Inspectin frm HUD CN) N Yes, if previusly ccupied Yes N N Yes CMS Plicies & Prcedures Page 128 f 208

129 Selecting an Appraiser Overview Selected appraisers must be prperly licensed and certified and in gd standing in the jurisdictin/state where the prperty is lcated r by a natinally recgnized prfessinal appraisal rganizatin and have demnstrated verifiable educatin in the appraisal requirements established by FHA. An appraiser cannt perfrm an appraisal in an area where he r she is nt licensed r certified r while his r her appraisal license is suspended r expired. The appraiser must be prvided with a cmplete cpy f the ratified sales cntract, including all addenda, fr all real estate purchase transactins. Appraisal Transfer Overview If an appraisal was rdered by ne lender fr an applicant, but a different lender will cmplete the purchase transactin, it is acceptable fr the appraisal t be transferred t the new lender. The riginal lender must agree t the transfer. A letter frm the riginal lender that rdered the appraisal must be retained in the permanent lan file as evidence they have transferred this dcument t the new lender. The appraisal reprt must have been cmpleted within six mnths f the date the request fr a cnditinal cmmitment is submitted t RD. The appraisal must have been independently rdered (i.e. thrugh an AMC) t be acceptable t CMS. Secnd Appraisal The Client may rder a secnd appraisal in the circumstances belw: The first appraisal cntains material deficiencies as determined by the USDA Certified Underwriter. Appraiser perfrming the first appraisal is n CMS exclusinary list f appraisers. Failure f the initial lender t prvide a cpy f the appraisal t the Client in a timely manner causing a clsing delay, thus psing ptential harm t the Brrwer (events that are utside the Brrwer's cntrl, such as lss f interest rate lck, purchase cntract deadline, freclsure prceedings and late fees). If a secnd appraisal is rdered: The USDA Certified Underwriter must dcument and retain in the lan file the explanatin fr why the secnd appraisal was rdered. Bth appraisals must be retained in the lan file. REO Appraisal An appraisal that has been prepared fr REO purpses is nt acceptable fr a guaranteed purchase lan transactin. A new appraisal with the intent t arrive at an pinin f value fr a purchase transactin (nt a servicing actin/distressed sale) must be btained. CMS Plicies & Prcedures Page 129 f 208

130 Appraisal Transfer (cntinued) Appraisals in Remte Areas/New Cnstructin Remte rural areas, identified by State Directrs, can make it difficult t appraise a new cnstructin prperty. If the sales cmparisn apprach is nt necessary t develp a credible pinin r cnclusin regarding value, the lender s appraiser may decide t use the Scpe f Wrk Rule f the Unifrm Standards f Prfessinal Appraisal Practice (USPAP) and perfrm an appraisal withut cmpleting the Sales Cmparisn apprach t value. Appraisers must explain the exclusin f the Sales Cmparisn apprach t value and dcument their effrts t btain cmparable market data (i.e., cmplete Frm 1007 Marshall and Swift Square Ft Appraisal, dcument the cst analysis, nt cnsider external depreciatin based n the remteness f the site, and cnsider factrs that impact the site such as immediate prximity t a feedlt, factry, r similar cnsideratins). After a market is established in the remte rural areas, appraisers shuld n lnger invke either the Departure Rule r the Scpe f Wrk rule in lieu f the Sales Cmparisn apprach. The cst apprach sectin must be cmpleted when the dwelling is less than ne year ld. Fr dwellings mre than ne year ld, the cst apprach must be cmpleted nly t the extent necessary t cmply with the site value analysis and requirements f sectin (e). A Marshall and Swift cst apprach analysis is nt required in such cases. CMS Plicies & Prcedures Page 130 f 208

131 Appraisal Fees Overview Appraisal fees and their payment due dates are negtiated between CMS and the appraiser. This includes fees fr canceled assignments, missed appintments, etc. FHA des nt establish fees and due dates. FHA expects appraisal fees t be reasnable and custmary fr the area. Setting Prperty Related Cnditins All prperty related dcuments required as a cnditin f lan apprval must be reflected n the Cnditinal Cmmitment. In an effrt t prvide clear clsing instructins t the Clsing Agent (Title/Escrw Cmpany r Attrney), when any f these cnditins are required, the full name f the cnditin item shuld be entered int the riginatin system. Unifrm Appraisal Dataset (UAD) Overview USDA has adpted the Unifrm Appraisal Dataset (UAD) standard and requires UAD cmpliant appraisal reprts. UAD standardizatin des nt change existing FHA plicy n Minimum Prperty Requirements (MPR), prperty eligibility r appraisal inspectin requirements. The appraisal reprt must cntain an accurate descriptin f the imprvements and any factrs that may affect the market value r marketability f the subject prperty. The appraiser must incrprate the UAD quality rating (Q1, Q2, Q3, Q4, Q5, r Q6) that best describes the verall quality f the subject prperty and each cmparable prperty. Additinally, the appraiser must incrprate the UAD cnditin rating (C1, C2, C3, C4, C5 r C6) that best describes the verall cnditin f the prperty. Cnditin The appraiser must cnsider and describe the verall cnditin f the prperty imprvements. The appraiser shuld be specific abut needed repairs, additinal features, mdernizatin, etc., and shuld prvide supprting addenda, if necessary. The prperty must receive a cnditin rating. The cnditin rating must reflect a hlistic view f the cnditin f the prperty imprvements. If a prperty has deficiencies r defects that are severe enugh t affect the safety, sundness r structural integrity f the imprvements, then the prperty's cnditin must be rated C6. The appraisal reprt must cntain additinal cmmentary, descriptins, and explanatins as required, t understand the prperty cnditin. Prperties with a cnditin rating f C1, C2, C3, C4, r C5 are acceptable in "as is" cnditin. Prperties with a cnditin rating f C6 r C6 in "as is" cnditin r "subject t repairs" are nt acceptable. It is acceptable fr an appraisal t be cmpleted subject t repairs r alteratins required fr the subject prperty t be rated C5 (r better). If the appraisal is cmpleted subject t repairs r alteratins, the UAD cnditin rating must reflect the verall cnditin f the subject prperty as if the repairs r alteratins have been cmpleted (C5 r better). Prperties with a C6 cnditin at time f inspectin shuld be appraised subject t all repairs and alteratins necessary t bring the prperty int C5 (r better) cnditin. The cnditin rating n the appraisal reprt must shw C5 (r better) as if the repairs r alteratins have been cmpleted. CMS Plicies & Prcedures Page 131 f 208

132 Unifrm Appraisal Dataset (UAD) (cntinued) Cnditin (cntinued) A Fannie Mae Frm 1004D/Freddie Mac Frm 442 Appraisal update must be cmpleted prir t clsing r lan purchase fr any appraisal reprt "subject t repairs" prir t clsing r purchase. Rating Descriptin C1 C2 C3 C4 C5 C6 The imprvements have been very recently cnstructed and have nt previusly been ccupied. The entire structure and all cmpnents are new and the dwelling has n physical depreciatin. Nte: Newly cnstructed imprvements that feature recycled materials and/r cmpnents can be cnsidered new dwelling prvided that the dwelling is placed n a 100% new fundatin and the recycled materials and the recycled cmpnents have been rehabilitated/re-manufactured int like-new cnditin. Recently cnstructed imprvements that have nt been previusly ccupied are nt cnsidered "new" if they have any significant physical depreciatin (newly cnstructed dwellings that have been vacant fr an extended perid f time withut adequate maintenance r upkeep). The imprvements feature n deferred maintenance, little r n physical depreciatin, and require n repairs. Virtually all building cmpnents are new r have been recently repaired, refinished, r rehabilitated. All utdated cmpnents and finishes have been updated and/r replaced with cmpnents that meet current standards. Dwellings in this categry either are almst new r have been recently cmpletely renvated and are similar in cnditin t new cnstructin. The imprvements are well-maintained and feature limited physical depreciatin due t nrmal wear and tear. Sme cmpnents, but nt every majr building cmpnent, may be updated r recently rehabilitated. The structure has been well-maintained. The imprvements feature sme minr deferred maintenance and physical deteriratin due t nrmal wear and tear. The dwelling has been adequately maintained and requires nly minimal repairs t building cmpnents/mechanical systems and csmetic repairs. All majr building cmpnents have been adequately maintained and are functinally adequate. The imprvements feature bvius deferred maintenance and are in need f sme significant repairs. Sme building cmpnents need repairs, rehabilitatin, r updating. The functinal utility and verall livability is smewhat diminished due t cnditin, but the dwelling remains usable and functinal as a residence. The imprvements have substantial damage r deferred maintenance with deficiencies r defects that are severe enugh t affect the safety, sundness, r structural integrity f the imprvements. The imprvements are in need f substantial repairs and rehabilitatin, including many r mst majr cmpnents. CMS Plicies & Prcedures Page 132 f 208

133 Unifrm Appraisal Dataset (UAD) (cntinued) Quality CMS des nt prvide minimum specificatins fr materials and cnstructin. The appraiser must cnsider and describe the verall quality f the prperty imprvements. The selected quality rating must reflect a hlistic view f the quality f cnstructin. A quality rating f Q6 is nt acceptable. The issues that caused the Q6 rating must be cured prir t clsing. Items that may be required t be cured include: Mdifying the prperty t make it habitable fr year-rund ccupancy. Upgrading electrical, plumbing, and ther mechanical systems t cmmunity standards. Crrecting substandard r nncnfrming additins t the riginal structure. Curing any ther quality related items needed t make the subject prperty acceptable t typical buyers in the market area. CMS will clse n lans with an appraisal reprt with a Q1, Q2, Q3, Q4, r Q5 quality rating in either as is cnditin r subject t repairs. A Fannie Mae Frm 1004D/Freddie Mac Frm 442 Appraisal Update must be cmpleted prir t clsing r lan purchase fr any appraisal reprt subject t repairs prir t clsing r purchase. CMS Plicies & Prcedures Page 133 f 208

134 Unifrm Appraisal Dataset (UAD) (cntinued) Quality (cntinued) Rating Descriptin Q1 Q2 Q3 Q4 Q5 Q6 Dwellings with this quality rating are usually unique structures that are individually designed by an architect fr a specified user. Such residences typically are cnstructed frm detailed architectural plans and specificatins and feature an exceptinally high level f wrkmanship and exceptinally high-grade materials thrughut the interir and exterir f the structure. The design features exceptin high-quality exterir refinement and rnamentatin, and exceptinally high-quality interir refinements. The wrkmanship, materials, and finishes thrughut the dwelling are f exceptinally high quality. Dwellings with this quality rating are ften custm designed fr cnstructin n an individual prperty wner's site. Hwever, dwellings in this quality grade are als fund in high-quality tract develpments featuring residences cnstructed frm individual plans r frm highly mdified r upgraded plans. The design features detailed, high-quality exterir rnamentatin, highquality interir refinements, and detail. The wrkmanship, materials, and finishes thrughut the dwelling are generally f high r very high quality. Dwelling with this quality rating are residences f higher quality build frm individual r readily available designer plans in abve-standard residential tract develpments r n an individual prperty wner's site. The design includes significant exterir rnamentatin and interir that are well finished. The wrkmanship exceeds acceptable standards and many materials and finishes thrughut the dwelling have been upgraded frm "stck" standards. Dwelling with this quality rating meet r exceed the requirements f applicable building cdes. Standard r mdified standard building plans are utilized and the design includes adequate fenestratin and sme exterir rnamentatin and interir refinements. Materials, wrkmanship, finish, and equipment are f stck r builder grade and may feature sme upgrades. Dwellings with this quality rating feature ecnmy f cnstructin and basic functinality as main cnsideratins. Such dwelling feature a plain design using readily available r basic flr plans featuring minimal fenestratin (i.e., the design and dispsitin f windws and ther exterir penings f a building) and basic finishes with minimal exterir rnamentatin and limited interir detail. These dwellings meet minimum building cdes and are cnstructed with inexpensive stck materials with limited refinements and upgrades. Dwelling with this quality rating are f basic quality and lwer cst; sme may nt be suitable fr year-rund ccupancy. Such dwellings are ften built with simple plans r withut plans. Often utilizing the lwest quality building materials. Such dwelling are ften build r expanded by persns wh are prfessinally unskilled r pssess nly minimal cnstructin skills. Electrical, plumbing, and ther mechanical systems and equipment may be minimal r nnexistent. Older dwelling may feature ne r mre substandard r nncnfrming additins t the riginal structure. CMS Plicies & Prcedures Page 134 f 208

135 Unacceptable Appraisal Practices Requirements Belw is a list f actins and missins FHA cnsiders appraisal practices that are unacceptable. Be aware f these deficiencies and address them with the appraiser if detected. Failure t cnduct a cmplete physical inspectin f the subject prperty r the sales cmparables (The assigned appraiser must indicate he/she physically inspected the subjected prperty) Incmplete interir and exterir visual inspectins f the subject prperty r lack f a visual inspectin fr the exterir f the cmparables Lack f required phtgraphs and maps Failure t prvide cmplete appraisal infrmatin per USPAP Standards Nt prviding the cst apprach where applicable Nt cmpleting the incme apprach n a 3-4 unit dwelling Nt reprting land use restrictins Incnsistencies and calculatin errrs Series f errrs cnsidered individually may nt significantly affect the results f the appraisal but when cnsidered in the aggregate wuld be misleading Insufficient infrmatin included in reprt t enable users t understand the reprt prperly Nt reprting limiting cnditins that affect the appraisal, such as but nt limited t prximity t a municipal landfill, pending zning changes, necessary repairs, etc. Prviding incmplete r inaccurate descriptins f the neighbrhd Stating neighbrhd is primarily residential in nature when it is cmmercial in nature Failing t reprt the highest and best use f the prperty Failing t reprt special assessments such as cmmunity assciatin fees Prviding inaccurate analysis f the prperty characteristics, such as: Reprting prperty as a ranch when prperty is a split-level Reprting a split-level as a tw stry Failure t crrectly reprt the frm f wnership interest, such as: Listing the prperty as fee simple when it is a leasehld estate Incrrectly reprting r analyzing significant physical characteristics, such as: Describing a 3-bedrm huse as a 4-bedrm Reprting prperty has a garage when there is n garage Failing t nte a pr prperty design r prperty that des nt cnfrm t the neighbrhd CMS Plicies & Prcedures Page 135 f 208

136 Unacceptable Appraisal Practices (cntinued) Requirements (cntinued) Including inaccurate data abut the prperty site r cmparables, such as: Failure t recgnize the prperty is in a fld zne Failure t crrectly identify public water and sewer versus private systems Failure t accurately reprt all readily bservable prperty defects and adverse cnditins that affect the prperty marketability, such as: Defective cnstructin Fire r fld damage Termite/insect damage Rf has signs f leaking r excessive water Negative grading/pr drainage Observable evidence f fundatin damage Failure t reprt majr defects which may impair the health r safety f the prperty ccupants, such as: Obvius electrical inadequacies such as frayed wiring Lead Based Paint when prperty built prir t 1978 and there is evidence f defective paint (Chipping, flaking) Hazards such as txic chemicals, excessive nise r cntaminated water r sil Failure t reprt cnflicts f interest Use f data, particularly cmparable sales data that was prvided by parties wh have a financial interest in the sale r financing f the subject prperty withut the appraiser's verificatin f the infrmatin frm a disinterested surce. It wuld be inapprpriate fr an appraiser t use cmparable sales prvided by the real estate brker wh is handling the sale f the subject prperty, unless the appraiser verifies the accuracy f the data prvided with anther surce and makes an independent investigatin t determine that the cmparables prvided were the best nes available Nt disclsing that the seller was related t the appraiser Failure t btain timely and suitable cmparable data Nt verifying the sales infrmatin thrugh public recrds r with a cpy f the sales cntract Using listings instead f actual sales withut explanatins Cmparable sales ver 12 mnths ld Cmparables that are nt within a reasnable distance frm the subject Cmparables that are physically unlike the subject Value cnclusins nt supprted by data and analysis in appraisal reprt The appraiser makes adjustments t the cmparables which exceed 15% net and/r 25% grss f the sales price withut an explanatin. CMS Plicies & Prcedures Page 136 f 208

137 Unacceptable Appraisal Practices (cntinued) Requirements (cntinued) Failing t reprt verified sales cncessin like seller paid pints r clsing csts. Use f adjustments t the cmparable sales that d nt reflect the market's reactin t the differences between the subject prperty and the cmparables, r the failure t make adjustments when they are clearly indicated. CMS Plicies & Prcedures Page 137 f 208

138 PROPERTY AND PROJECT TYPES Prperty Type Classificatins Existing Cnstructin Cnstructin was cmpleted twelve mnths r mre prir t the date f the appraisal inspectin New Cnstructin Existing less than ne year ld - Cnstructin was cmpleted less than ne year prir t the date f the appraisal inspectin. This includes prperties that have previusly been ccupied and are being resld within the ne year after cnstructin was cmpleted. Prpsed Cnstructin The appraisal was cmpleted prir t the puring f the fting. These are prperties that have been apprved fr a mrtgage guarantee prir t the beginning f cnstructin Under Cnstructin Cnstructin is in prgress and the prperty is nt cmplete at the time f the appraisal inspectin. Eligible Prperty/ Prject Types Single-Family Residence (ne unit, attached r detached including twn hmes r rw hmes) Manufactured Hmes Mdular Hme, Pre-cut Hme, Panelized Hme Cndminium Planned Unit Develpment (PUD) Mve-n CMS Plicies & Prcedures Page 138 f 208

139 Prperty and Prject Types (cntinued) Ineligible Prperty/ Prject Types Cperative hmes r apartments Cmmercial prperties Cnd-Htel Husebats Mbile Hme Single-wide manufactured hmes Multi-family dwelling cntaining mre than fur units Prperties lcated within designated Castal Barrier Resurce System (CBRS) areas Prperties used fr cmmercial r industrial purpses Prperties with deed restrictins. See Eligible Prperty Types fr 55+ age restricted cmmunities. Shared lts (included cndminiums) with undivided interests Time share units/prjects Unimprved land Wrking farm, ranch r rchard Prperties listed fr sale at the time f applicatin State apprved medical marijuana prducing prperties Energy efficiency Leasehlds Prperties nt lcated in an eligible USDA area Prperties with sink hles Prperties serviced by hauled water Prperties with a wastewater stabilizatin pnd/lagn (aka sewage lagn) Prperties with individual water purificatin systems required t make the water safe fr human cnsumptin (des nt include systems installed t imprve the taste r sftness f the water) CMS Plicies & Prcedures Page 139 f 208

140 Eligible Prperty Types Single Family Residence An attached r detached single-family dwelling, including twn hmes r rw hmes. Manufactured Hmes Newly cnstructed manufactured hmes permanently affixed t the fundatin are eligible. New manufactured hmes must be purchased frm an USDA apprved dealer and meet HUD Manufactured Husing Cnstructin and Safety Standards. Manufactured hmes cmpleted within the previus 12 mnths are cnsidered new. This is measured frm the date the unit was manufactured (lcated n the data plate) t the date f the purchase cntract. Existing manufactured hmes are nly eligible if already RD Guaranteed r is REO frmerly serviced by a Husing and Cmmunity Facilities Prgram (HCFP)/USDA. Manufactured Hmes must be permanently affixed t the fundatin, built n r after June 15, 1976, and meet all RD requirements. Factry-built hmes cnstructed prir t June 15, 1976 are classified as mbile hmes and are nt eligible fr HUD Insuring r CMS financing. Mdular Hme, Pre-cut Hme, Panelized Hme A Mdular Hme is a factry-built hme cnstructed t the state, lcal r reginal building cdes where the hme will be lcated. A Mdular Hme is cnstructin in tw r mre three-dimensinal sectins, including interir and exterir finish, plumbing, wiring, and mechanical systems. Upn cmpletin, the Mdular hme is transprted t the prperty site t be jined tgether n a permanent fundatin. A Mdular Hme can be transprted n a steel undercarriage, but this is nt a permanent structural cmpnent f the imprvements, and must be remved at the time the huse is attached t the fundatin. The Mdular Hme assumes the characteristics f a site-built hme. Mdular hmes d nt have a Certificatin Label but d have a label attached t the hme identifying the state cde f cnstructin. Mdular Hmes are cnsidered the same as stick built single-family residences. CMS Plicies & Prcedures Page 140 f 208

141 Eligible Prperty Types (cntinued) Mixed-Use Prperty A Mixed-use Prperty is a prperty primarily used as a residence, but is als used fr a small, cmmercial purpse. Mrtgages that are secured by prperties that have a business use in additin t a residential use, such as a prperty with space set aside fr a daycare facility, a beauty r barber ship, a dctr's ffice, a small neighbrhd grcery r specialty stre, etc. are acceptable hwever special eligibility criteria must be met. Therefre, the appraiser must prvide an adequate descriptin f the mixed-use characteristics f the Mrtgaged Premises in the appraisal reprt. Mixed-use Prperty must meet the fllwing: The prperty must be a ne-unit prperty that the brrwer ccupies as his r her principal residence The prperty must be primarily residential in nature The mixed-use f the prperty must represent a legal, permissible use f the prperty under the lcal zning requirements The mixed use must be subrdinate t the prperty's residential use The mixed use f the prperty must nt exceed 25% f ttal flr area The prperty must nt have any existing (r plans fr) special use mdificatins that wuld require a significant expenditure t cnvert back if the prperty were again used slely fr residential purpses Cmmercial enterprises, barding huses, htels, mtels, turist huses, private clubs, sanitariums, and fraternity r srrity huses are ineligible Cndminium A cndminium is a real estate prject in which each unit wner has title t a unit in a building, an undivided interest in the cmmn elements f the prject, and smetimesexclusive use f certain cmmn elements. The unit wner des nt wn the land r imprvements. A cndminium prject is real estate that includes the separate wnership fee, r an acceptable Leasehld Estate f a specific residential unit with an undivided interest in the real estate designated fr cmmn wnership slely by unit wners. Fr requirements, see the Leasehld Estates sectin. A cndminium prject is created accrding t lcal and state statutes. The structure is tw r mre units with the interir airspace individual wned. The balance f the prperty (land and building) is wned in cmmn by the individual unit wners. Fr apprval prcedures and classificatin infrmatin, see the Cndminium Prjects sectin. CMS Plicies & Prcedures Page 141 f 208

142 Eligible Prperty Types (cntinued) Planned Unit Develpment (PUD) A PUD is a real estate prject in which each unit wner has title t a residential lt and building and a nnexclusive easement n the cmmn areas f the prject. The wner may have an exclusive easement ver sme parts f the cmmn areas (e.g., parking space). The individual unit wners wn a parcel f land imprved with a dwelling. This wnership is nt in cmmn with ther unit wners. The develpment is administered by a hmewners assciatin (HOA) that wns and is bligated t maintain the cmmn elements (i.e., greenbelts, recreatin facilities, and parking areas) within the develpment fr the cmmn use and benefit f the unit wners. The unit wners have an autmatic, nn-severable interest in the hmewners assciatin (HOA) and pay a mandatry assessment. Must be a single-family residence. FHA lans that are in attached PUD prjects required 100% f the insurable replacement cst f the unit s exterir and interir imprvements, whether riginally installed r subsequently upgraded. When the HOA Master/Blanket Plicy des nt prvide cverage fr the interir (r walls in cverage) f the prject units, then the brrwer is respnsible fr btaining a walls in plicy fr the individual unit. Cverage between the prject s Master r Blanket Plicy and the walls in Plicy must cver 100% f the insurable replacement cst f the unit s exterir and interir imprvements. Interir cverage must be 100% sufficient t repair the interir f the units, including any additins, imprvements, and betterments (e.g., kitchen cabinets, lighting, flring, plumbing fixtures such as tilets and tubs, etc.) t its riginal cnditin in the event f a lss. CMS Plicies & Prcedures Page 142 f 208

143 Leasehld Estates Appraisal Prcedures Fr Leasehld Estates The appraiser must determine the value f the prperty as thugh it were wned in fee simple and unencumbered by a lease and t what extent, if any the transfer f prperty rights impact the prperty's value. When appraising a prperty that is situated n leased land, the appraiser must determine an estimate f value fr the subject prperty as if in fee simple wnership and unencumbered by a lease. The value f the leased fee is then determined and deducted frm the estimated value f the unencumbered prperty. The resulting difference is the value f the leasehld estate. Each cmparable must either be a fee simple sale r an adjusted leasehld estate. If any f the cmparables are leasehld estates, an adjustment must be made t all leasehld cmparables by adding back the leased fee t the sales price t arrive at the fee simple value. This will require the appraiser t check the annual grund rent fr any leasehld cmparable. After all cmparables have been adjusted t reflect their value as fee simple, the recnciled value in fee simple is made fr the subject. The leased fee is determined in accrdance with the annual rent divided by the capitalizatin rate, and deducted frm the fee simple value t arrive at the value f the leasehld estate f the subject prperty. The appraiser enters the value f the leased fee n the back f the URAR in the Cst sectin by lining ut the wrds Estimated Site Value and writing in Leased Fee. The value in fee simple is still shwn belw n the line fr Indicated Value By Sales Apprach and just belw, n the line fr Final Recnciliatin f Appraisal, the appraiser shuld write in Subject n Leased Land with Annual Rent Of $ capitalized at % = $ Leased Fee. Under Recnciliatin, n the line fr final estimate, the wrd Market shuld be lined ut and replaced with the wrd leasehld s it reads, I estimate the value f the Leasehld Estate, as defined, f the subject prperty and the value f the Leasehld Estate shwn at the end f that line. CMS Plicies & Prcedures Page 143 f 208

144 Envirnmental Hazards Requirements The prperty must be free f all freseeable hazards and adverse cnditins that may affect the health and safety f the ccupants that may affect the structural sundness f the imprvements r may impair the custmary use and enjyment f the prperty. Envirnmental hazards include txic chemicals, radiactive materials, ther pllutin, hazardus activities, ptential damage frm sil r ther differential grund mvements, grund water, inadequate surface drainage, fld, ersin, excessive nise, defective lead base paint and ther hazards n r ff site. If the real estate brker, the prperty seller, the prperty purchaser, any emplyee f CMS, r any ther party t the mrtgage transactin reveals that an envirnmental hazard exists in r n the prperty r in the vicinity f the prperty, that infrmatin must be disclsed t the appraiser and the individual mrtgage file must be nted accrdingly. (Such infrmatin must be disclsed t the brrwer, and must cmply with any state r lcal envirnmental laws regarding disclsure.) When the appraiser has knwledge f any hazardus cnditin (whether it exists in r n the subject prperty r n any site within the vicinity f the prperty) - such as the presence f hazardus wastes, txic substances, asbests-cntaining materials, ureafrmaldehyde insulatin, radn gas, etc. it must be nted n the appraisal reprt and any influence that the hazard has n the prperty's value and marketability (if it is measurable thrugh an analysis f cmparable market data as f the effective date f the appraisal) must be cmmented n. Apprpriate adjustments in the verall analysis f the prperty's value must be made. The appraiser is nt cnsidered an expert in the field f envirnmental hazards. The typical residential real estate appraiser is neither expected nr required t be an expert in this specialized field. Hwever, the appraiser has a respnsibility t nte in the appraisal reprt any adverse cnditins that were bserved during the inspectin f the subject prperty r infrmatin that he r she became aware f thrugh the nrmal research invlved in perfrming an appraisal r infrmatin readily available thrugh lcal news surces. The rejectin f a lcatin is warranted nly in instances where the prperty is subject t hazards, nxius drs, ffensive sights r excessive nises t the pint f endangering the physical imprvements r seriusly affecting the safety f its ccupants. In general, a particular envirnmental hazard may have a significant effect n the value f the subject prperty. If the actual impact is nt measurable because the hazard is s serius r s recently discvered that an appraiser cannt arrive at a reliable estimate f market value because there is n cmparable market data (such as sales, cntract sales, r active listings) available t reflect the impact f the hazard, the prperty is nt acceptable. CMS Plicies & Prcedures Page 144 f 208

145 Envirnmental Hazards (cntinued) Requirements (cntinued) A mrtgage secured by a prperty that is affected by an envirnmental hazard is acceptable if the impact f the hazard is measurable thrugh an analysis f cmparable market data as f the effective date f the appraisal. The appraiser must reflect in the appraisal reprt any adverse effect that the hazard has n the value and marketability f the subject prperty r indicate that the cmparable market data reveals n buyer resistance t the hazard. In the situatin where the prperty is lcated in a neighbrhd affected by radn gas r the presence f hazardus wastes, the appraiser is expected t reflect any adverse effect r buyer resistance that is demnstrated and measurable thrugh the available cmparable market data. Therefre, when a prperty is lcated in a neighbrhd that has a relatively high level f radn gas r is near a hazardus waste site, the appraiser is expected t cnsider and use cmparable market data frm the same affected area because the sales prices f the settled sales, the cntract sales prices f pending sales, and the current asking prices fr active listings will reflect any negative effect n the value and marketability f the subject prperty. The appraiser is expressly required t cmment n the appraisal reprt abut any envirnmental hazard's influence n the prperty's value and marketability. The appraiser and/r USDA Certified Underwriter must make the final decisin abut the need fr inspectins and the adequacy f the prperty as security fr the mrtgage requested. Sund judgment must be exercised in determining the acceptability f the prperty. Fr example, since the appraiser is required t cmment n a hazard's effect n the subject prperty's marketability and value, the appraiser wuld have t nte when there is market resistance t an area because f envirnmental hazards r any ther cnditins that affect well, septic, r public water facilities. When the USDA Certified Underwriter has reasn t believe that a prperty's private well water might be cntaminated as the result f its prximity t hazardus waste sites, the Underwriter is exercising sund judgment if it btains a "well certificatin" t determine whether the water meets cmmunity standards. The appraiser must verify that the distance between the well and any surces f pllutin cmply with HUD r Lcal requirements. The USDA Certified Underwriter is relying n the appraiser's knwledge f USDA requirements t perfrm an accurate and detailed evaluatin f the prperty. Based n the appraisers' findings, the appraiser and/r the USDA Certified Underwriter shuld be making the apprpriate requirements fr crrectin. Lcatins Near High-Pressure Gas and Liquid Petrleum Transprtatin Lines N part f the structure can be less than 10 feet frm the uter bundary f the pipeline easement fr high pressure gas and liquid petrleum transmissin lines. When new cnstructin r subdivisin land planning is prpsed in areas utside the 10 ft limit, but within an area that extends 220 yards n either side f the center line f such high pressure transmissin line, the builder shall be required t prvide CMS with a written statement frm an authrized fficial f a gas pipeline cmpany: Certifying cmpliance f Title 49, Transprtatin f the Cde f Federal Regulatins. Certifying that the pipeline cmplies with all cdes and amendments theret. The builder must btain the written statements prir t HUD acceptance f applicatins fr cmmitments n individual prperty. CMS Plicies & Prcedures Page 145 f 208

146 Envirnmental Hazards (cntinued) Overhead High- Vltage Transmissin Lines The lcatin is unacceptable if the dwelling is lcated within 10 feet f the uter bundary f a high-vltage transmissin line easement r clser than the fall distance f any ple, twer r supprt structure f a high vltage transmissin line. This includes radi/tv transmissin twers, micrwave relay dishes r twers r satellite dishes. The appraiser may use twer height as the fall distance. Operating and Abandned Oil and Gas Wells Operating and abandned il and gas wells pse ptential hazards t husing, including ptential fire, explsin, spray and ther pllutin. Operating Wells Existing Cnstructin - N existing dwelling may be lcated clser than 300 feet frm an active r planned drilling site bundary. (This applies t the site bundary, nt t the actual well site / lcatin). New and Prpsed Cnstructin If an perating well is lcated in a singlefamily subdivisin, n new r prpsed cnstructin may be built within 75 feet f the perating well unless mitigatin measures are taken. Abandned Wells A letter may be btained frm the respnsible authrity within the state gvernment indicating the well was safely and permanently abandned. Once the letter is btained, the appraiser shuld als be given a cpy f it. The appraiser must nte the lcatin f the well and verify the existence f the letter n the appraisal reprt. When such a letter is prvided, the dwelling may be n clser than 10 feet frm the abandned well. If the state will nt issue the letter, the dwelling must be lcated at least 300 feet frm the abandned well. Hydrgen Sulfide Gas Wells (Sur Gas Wells) Hydrgen sulfide gas wells are extremely hazardus. See HUD Handbk , Sectin 2-2 (D. 4) "Special Case Prpsed, Existing, r Abandned Wells fr instructins. Operating and Abandned Statinary Fuel Strage Tanks Operating Strage Tanks Prperties within 300 feet f a statinary strage tank cntaining mre than 1000 gallns f flammable r explsive materials are ineligible. Abandned Undergrund Strage Tanks If an undergrund tank has been abandned, its remval r prper abandnment is required. The appraiser shuld use a VC cnditin t indicate the lcatin f the tank, and require evidence that the subject's vacated tank has been remved r prperly abandned. Generally, the lcal jurisdictin may have established requirements. If nt, the tank must be remved r abandned per the recmmendatins issued by the applicable State. CMS Plicies & Prcedures Page 146 f 208

147 Envirnmental Hazards (cntinued) Grund Subsidence The danger f grund subsidence is a special hazard that is smetimes encuntered when buildings are cnstructed n uncntrlled fill r where the subsil is unstable and subject t slippage r expansin. This is especially cmmn in parts f the cuntry where there are mining areas. In mining areas, cnsider the depth r extent f the mining peratins and the site f perating r abandned mine shafts and tunnels t determine if the danger is imminent, prbable r negligible. The appraiser must nte any readily bservable cnditins which wuld indicate ptential subsidence prblems. Signs wuld include grund cracks, damaged fundatins, sinkhles, and settlement prblems in the terrain. If there is a danger f subsidence, the specific site must be deemed ineligible unless evidence is prvided t verify that the prbability f any subsidence is negligible. Prperties Affected by Lead Base Paint Fr all prperties built befre January 1, 1978, the appraiser must nte the cnditin and lcatin f all defective paint in the hme. All interir and exterir surfaces, such as walls, stairs, deck, prch, railing, eaves, windws, drs, fences, and detached garages and ther utbuildings and appurtenant structures must be inspected fr defective paint surfaces (i.e. chipping, peeling r flaking paint). If an area f paint n the prperty is defective, the appraisal shuld be cmpleted as Subject t repairs. The cmmitment must cntain the requirement that the surface must be treated must be thrughly washed, sanded (but nt machine sanded), scraped, r wire brushed s as t remve all defective paint befre repainting. The surface must receive, as a minimum, tw cats f a suitable nn-lead based paint. All defective paint n applicable surfaces must be remved r cvered with materials such as hardbard, plywd, plaster, r ther suitable materials. The fllwing requirements must be met when the hme is built prir t 1978: Brrwers must receive the EPA pamphlet "Prtect Yur Family frm Lead in Yur Hme" The prperty seller is respnsible fr prviding this disclsure t the hmebuyer Brrwer must sign and date the "Imprtance f Hme Inspectin" frm n, r befre the date f the sales cntract Refinance and new cnstructin are exempt frm this requirement The executed frm must be retained in the lan file CMS Plicies & Prcedures Page 147 f 208

148 Envirnmental Hazards (cntinued) Prperties Affected by Lead Base Paint (cntinued) The fllwing requirements regarding renvatin, repair and painting fr huses built prir t 1978 must be met: Prperty wners/landlrds wh renvate, repair, r prepare surfaces fr painting in pre-1978 rental husing must be certified and fllw lead-safe wrk practices as required by FHA s Renvatin, Repair and Remdeling Rule Cntractrs wh perfrm the repair must be certified; and, must fllw specific wrk practices t prevent lead cntaminatin Brrwers perfrming renvatin, repair r painting wrk n their wn hme are exempt frm FHA s Renvatin, Repair and Remdeling Rule but are encuraged t learn t perfrm lead-safe wrk practices A cpy f the EPA r state-lead training certificate in the name f the party wh perfrmed the wrk must be prvided. If the repair was made by the brrwer n their wn hme, a letter stating that the brrwer made the repair is required An inspectin t verify cmpletin f the repairs is required Cndminium Units The appraiser needs t inspect the interir f the unit and the exterir surfaces and appurtenant structures f the specific unit being appraised, and address the verall cnditin, maintenance and appearance f the cndminium prject. The lead based paint requirements relate nly t the unit being appraised, nt t the entire prject. Hwever, the appraiser shuld always cmment n the verall cnditin f the cndminium prject. Refinances Refinances with an appraisal are subject t this inspectin and abatement prcedure. Hwever, lead based paint requirements d nt apply t refinances withut appraisals. Prperties Built Between 1950 and 1978 with a VA-CRV Fr a prperty invlving a Veterans Administratin Certificate f Reasnable Value, in which the dwelling was built between 1950 and 1978, the Client is required t prvide evidence frm an FHA apprved inspectr that either n defective paint cnditins exist r that defective paint cnditins were fund and crrectin is required. Asbests Insulatin Asbests used as rf shingles r siding n a huse des nt pse a danger as wuld be if the material were deterirating within the cnfines f a hme. When used as a wrap fr ht water pipes, it is usually cvered and pses n danger. When the material is deterirating int a fine pwder and can be inhaled, it may pse a danger t ne's health. Asbests wrapping arund ht water pipes in the basement f a dwelling may be fund in lder hmes. If an appraiser ntices this, he/she shuld make a nte n the appraisal reprt that there appears t be asbests insulatin wrap arund the ht water pipes. If there is nt bvius deteriratin f the asbests such as punctures r ther damage, it shuld be left alne. If there is bvius damage, the appraiser shuld cnditin fr an inspectin by a prfessinal in that field is required. CMS Plicies & Prcedures Page 148 f 208

149 Envirnmental Hazards (cntinued) Chinese Drywall Drywall imprted frm China frm 2001 thrugh 2007 emits sulfur gases, which usually create a nxius dr, and crrdes cpper and ther metal surfaces, damaging air cnditining, electrical wiring, cpper, plumbing, appliances and electrnics. Chinese drywall can als cause adverse health effects. A prperty that cntains Chinese drywall that was imprted frm 2001 thrugh 2007 is nt acceptable. Heavy Traffic Prperties lcated n streets having heavy r fast traffic may be less desirable t the market because f the nise and danger frm the street. Prperty value may even be affected. Prperties backing a freeway f ther thrughfare that is heavily screened r instances where the traffic is well belw grade may nt be as adversely affected fr value, desirability, r marketability. Special cnsideratin shuld be given t determine if there is indicatin that adverse changes are taking place in the subject prperty market area due t heavy traffic and nise. The appraiser must quantify the effect f the nise n the prperty value and find that the prperty remains marketable. Railrad Tracks and Other High Nise Surces Prperties lcated near railrad tracks, and ther nise surces must meet the fllwing guidelines relating t high nise surces: Prpsed, under cnstructin and less than ne year ld Existing Cnstructin (ver 1 year f age) Nise expsure by itself shuld nt necessarily result in the rejectin f the prperty fr USDA guarantee financing. All marketability factrs must be cnsidered. It must be determined if there is evidence f acceptance in the market and if use f the dwelling is expected t cntinue. Special cnsideratin shuld be given t determine if there is indicatin that adverse changes in market attitude are taking place in the area. The appraiser must quantify the effect f the nise n the prperty value and find that the prperty remains marketable. CMS Plicies & Prcedures Page 149 f 208

150 Envirnmental Hazards (cntinued) Prperties Affected By Airprt Nise and Hazards Airprt Nise Prperties with airprt influences and nise must have evidence f prperties acceptance in the market and if use f the dwelling is expected t cntinue. Cntinued use f the dwelling indicates market acceptance. Special cnsideratin shuld be given t determine if there is indicatin that adverse changes in market attitude are taking place in the area. Special Airprt Hazard - Runway Clear Znes (a/k/a Runway Prtectin Znes) at Civil Airprts r Clear Znes r Accident Ptential Zne I at Military Airfields Prpsed, under cnstructin and prperties existing less than ne-year ld are nt acceptable if the prperty is lcated within a Runway Clear Zne at civil airprts r a Clear Zne r Accident Ptential Zne I at military airfields. Existing dwellings, mre than ne year ld, may be acceptable prvided the prspective purchaser is aware that the prperty is lcated in a Runway Zne / Clear Zne. This ntificatin must be prvided t the brrwer at the time f the lan applicatin. Sample Certificatin NOTICE TO PROSPECTIVE BUYERS OF PROPERTIES LOCATED IN RUNWAY CLEAR ZONES AND MILITARY AIRPORT CLEAR ZONES (In accrdance with 24 CFR (a)(3), ntice must be given t anyne interested either in buying an existing HUD prperty, r using HUD assistance t buy an existing prperty, which is lcated in either a Runway Clear Zne at a civil airprt r Clear Zne at a military installatin.) The prperty which yu are interested in purchasing at is lcated in the Runway Clear Zne/Clear Zne fr. Studies have shwn that if an accident were t ccur it is mre likely t ccur within the Runway Clear Zne/Clear Zne then in ther areas arund the airprt/airfield. Please nte that we are nt discussing the chances that an accident will ccur, nly where ne is mst likely t ccur. Yu shuld als be aware that the airprt/airfield peratr may wish t purchase the prperty at sme pint in the future as part f a clear zne acquisitin prgram. Such prgrams have been underway fr many years at airprts and airfields acrss the cuntry. We cannt predict if r when this might happen since it is a functin f many factrs, particularly the availability f funds, but it is a pssibility. We wanted t bring this infrmatin t yur attentin. Yur signature n the space belw indicates that yu are nw aware that the prperty yu are interested in is lcated in a Runway Clear Zne/Clear Zne. Date Signature f Prspective Buyer Type r Print Name f Prspective Buyer This ntificatin must be prvided t the prspective purchaser at lan applicatin and maintained as part f the Case Binder. CMS Plicies & Prcedures Page 150 f 208

151 Water and Sewage Systems Private Water Systems Individual water supply systems (wells) may be acceptable when cnnectin t a public r cmmunity water system is nt available and there is assurance f a cntinuing adequate supply f safe ptable water fr dmestic needs, and shall als include auxiliary uses fr lawn and garden maintenance. The appraiser is respnsible fr identifying the individual water system and apprpriately cnditining his/her appraisal fr all water testing requirements. The appraiser must cmment n availability f public services t the prperty. If public services are available, the bench-mark t require hk-up t public services is 3% r $8,000, whichever is less. Certificatins are nly required if the appraiser suspects a prblem with the system, r prblems are custmary in the area. In thse instances, the appraiser will cnditin fr a certificatin by the lcal health authrity r an individual determined t be qualified by the USDA Certified Underwriter. Individual water wells are wned and maintained by the hmewner, and are subject t cmpliance with all requirements f the lcal and r State Health Authrity having jurisdictin. Individual Water Systems/Wells shuld be lcated n the subject prperty site. If nt, they must be n an adjacent prperty, and evidence f water rights and recrded maintenance agreement must be prvided fr acceptance f the well as the primary surce f water fr an USDA insured prperty. HUD testing requirements are the minimum standards acceptable fr private wells. The test shuld include all micrbilgical and chemical test parameters. Prperties serviced by private wells must have an elevatin certificate shwing the well pening is abve the fld elevatin r the well must have a sanitary well cap that prevents the back flw f water entering the well. CMS Plicies & Prcedures Page 151 f 208

152 Water and Sewage Systems (cntinued) Private Water Systems (cntinued) Minimum Testing Requirements Water quality must be tested fr lead, (first flush) nitrate, nitrite, ttal nitrate/nitrite, ttal clifrms, and fecal clifrms r e cli. If state and lcal agencies impse additinal standards, they t must be met. A state-certified private labratry r their designee in accrdance with the State drinking water regulatins shuld take all test samples. Attached is a prtin f the chart taken frm Mrtgagee Letter shwing the CMS acceptable test results fr the maximum cntaminant levels that may be present in the well-water. FHA Minimum Water Quality Parameters U.S. EPA Drinking Water Recmmendatins fr Private Well Water Quality Testing Cntaminant HUD Requirement MCL Lead.015mg/l (First Draw) TT with Actin level f mg/l CFR Citatin Treatment by POU/POE Reverse Osmsis Activated Alumina Nitrate (as Nitrgen) 10 mg/l 10 mg/l In Exchange Reverse Osmsis Electrdialysis Nitrite 1 mg/l 1 mg/l In Exchange (as Nitrgen) Reverse Osmsis Ttal Nitrate / Nitrate Ttal Clifrms Fecal Clifrm r E. Cli 10 mg/l 10 mg/l In Exchange Reverse Osmsis < 10/100 ml < 10/100 ml Disinfectin Reverse Osmsis Zer Zer Disinfectin Reverse Osmsis Methd Name Atmic Absrptin; Furnace ICP Mass Spectrmetry Atmic Absrptin; Platfrm In Chrmatgraphy Autmated Cadmium Reductin In Selective Electrde Manual Cadmium Reductin In Chrmatgraphy Autmated Cadmium Reductin Manual Cadmium Reductin Spectrpht metric Same as abve Ttal Cl. Fermentatin Tech Ttal Cl. Membrane Filter Tech ONPG-MUG (Clilart) Clisure test Fecal Clifrm EC test Cli: EC + MUG test Cli: Nutrient Agar + MUG test Cli: ONPG- MUG (Clilart) E. Cli: Clisure test CMS Plicies & Prcedures Page 152 f 208

153 Water and Sewage Systems (cntinued) Private Water Systems (cntinued) Clearing the Water Test Results: In rder t clear this cnditin, the assciate respnsible must be sufficiently aware f all the requirements gverning water quality. If the result f the water test reveals that any f the items exceed the Maximum Cntaminant Levels (MCL), the prperty is nt acceptable unless that deficiency is satisfactrily addressed. Well Lcatin: Individual water supply systems (wells) shuld be checked t establish the distance frm the septic system. A well lcated within the fundatin walls f a dwelling is nt acceptable except in arctic r sub-arctic regins. Water which cmes frm any sil frmatin which may be plluted, cntaminated, fissured, creviced r less than 20 feet belw the natural grund surface is nt acceptable, unless acceptable t the lcal health authrity. Certificatin is required in the insuring package. Individual water supply systems are nt acceptable fr individual lts in areas where chemical sil pisning has been r is practiced if the verburden f sil between the grund surface and the water bearing strata is carse grained sand, gravel, r prus rck, r is creviced in a manner which will permit the recharge water t carry the txicants int the zne f saturatin. Distance frm Pllutin Surce The chart belw lists the standard required distances between the well and the septic systems and the special allwances CMS will make when these requirements cannt be met. Hwever, if any state r lcal regulatins require greater distances, thse distances must be met. If the lcality permits distance requirements that are less than thse required by FHA, the prperty may be cnsidered eligible prvided yu prvide dcumentatin that the prperty is in cmpliance with the applicable lcal r state distance requirements and meets the cnditins stated belw. Surce f Pllutin *Standard Minimum Hrizntal Distance (feet) Prperty Line 10 Septic Tank 50 Absrptin Field/Drain Field Well Depth and Casing Requirements: 100 New wells must be drilled n less than 20 feet deep, and cased. Casing shuld be steel r ther casing material that is durable, leak-prf, and acceptable t (either) the lcal health authrity and (r) the trade r prfessin licensed t drill and repair wells in the lcal jurisdictin. CMS Plicies & Prcedures Page 153 f 208

154 Water and Sewage Systems (cntinued) Private Water Systems (cntinued) Individual Residential Water Purificatin Equipment: CMS des nt permit the use f Water Purificatin Equipment as a means f remedying an therwise unacceptable water quality. Waivers fr Reduced Distances: Distance Between the Well and Septic Tank Drain Field FHA will accept lcal r state distance requirements prvided they d nt allw fr less than 75 feet between the well and the septic tank drain field. Distance Between Well and Prperty Line: FHA will accept the state r lcal distance requirements prvided the well is nt within 10 feet f any radway r the prperty line f ther than a single family residential prperty. That is the well cannt be within 10 feet f a cmmercial, industrial r multi-family building. Dcumentatin Requirements fr Waiver Acceptance: The appraiser must clearly shw the lcatin f the private well and the septic systems n the site sketch and the distance between the tw. If the appraiser is unable t determine the distance between the well and the drain field r if the well is within 10 feet f any prperty line, the appraiser will make a cmment n the appraisal reprt. The USDA Certified Underwriter can clear the appraiser's cnditin by btaining satisfactry evidence frm a qualified party that the distance requirements between the tw systems and frm the well t the prperty line have been met. Cisterns Prperties served by cisterns are nt acceptable. Hauled Water Prperties served by hauled water are cnsidered ineligible cllateral per CMS. Cmmunity Water and Sewer Systems A Cmmunity Water System r a Cmmunity Sewer System is a central system, wned, perated and maintained by a private crpratin r a nn-prfit prperty wners assciatin. If the prperty is served by a cmmunity water system, the appraiser must nte n the Unifrm Residential Appraisal Reprt the name f the water cmpany. The peratins persnnel are respnsible fr ensuring that the cmmunity system(s) are licensed and adequate t service the prperty. CMS Plicies & Prcedures Page 154 f 208

155 Water and Sewage Systems (cntinued) Shared Wells Shared wells may serve existing prperties which cannt feasibly be cnnected t an acceptable public r cmmunity water supply system. A shared well is acceptable prvided: It cntains a valve n each dwelling service line as it leaves the well It services n mre than fur living units r prperties There is a shared well agreement that is binding upn signatry parties and their successrs in title Individual Sewage Systems It is acceptable fr a prperty t have an individual sewage system if the prperty cannt cnnect t a public system. The individual sewage system must be acceptable t the lcal health authrity. This includes numerus types f sewage systems including cesspls, individual pit privies, and mund systems. Certificatins are nly required if the appraiser suspects a prblem with the system, r prblems are custmary in the area. In thse instances, the appraiser is t cnditin fr a certificatin by the lcal health authrity, a licensed sanitarian r an individual determined t be qualified by the USDA Certified Underwriter. The appraiser must cmment n availability f public services t the prperty. If public services are available, the bench-mark t require hk-up t public services is 3% r $8,000, whichever is less. In sme Hme Ownership Center jurisdictins, the appraiser will require a certificatin when the prperty has been vacant at the time f the appraisal. A certificatin is acceptable up t 90 days. Private Rads Requirements If the prperty is n a cmmunity-wned r privately wned and maintained street, there shuld be an adequate, legally enfrceable agreement fr maintenance f the street. A street that des nt meet city r state standards frequently requires extensive maintenance, and prperty values may decline if it is nt regularly maintained. If a prperty frnts n a street that is nt typical f thse fund in the cmmunity, the appraiser shuld cmment n the effect f that lcatin n the subject prperty's marketability and value. Streets shall prvide all-weather access t all buildings fr essential and emergency use, including access needed fr deliveries, service, and maintenance and fire equipment. All-weather surface is defined as a rad surface ver which emergency and the area's typical passenger vehicles can pass at all times. Private streets and shared driveways must be prtected by permanent recrded easements r be wned and maintained by a hmewners' assciatin. The recrded easement must be reviewed and apprved by the Underwriter. Evidence f a rad maintenance agreement is nt required. CMS Plicies & Prcedures Page 155 f 208

156 Certificatins Overview When the appraiser requires certificatins, such as termite, rfing, structural, electrical, plumbing, heating, r prperty inspectin, a qualified prfessinal frm that field must cmplete the inspectin and certificatin. If the subject prperty's state requires licensing r certificatin fr the prfessin, CMS is respnsible fr verifying the prfessinal's license r certificatin is current. LDP checks must be perfrmed n all certificatin cmpanies. If any f the inspectins result in necessary repairs, the repair bills shuld be itemized and the repairs verified as satisfactrily cmpleted with a clear certificatin issued. Utilities When utilities (water, gas, electric) are nt turned n at the time f initial appraisal inspectin, the appraiser must cnditin fr certificatins that will state that all f the utilities have been turned n and tested and that they appear t be in wrking rder. The certificatin can be dne with a re-inspectin by the appraiser (with the utilities turned back n) r by prfessinals in the specific fields (i.e. electricians, plumbers, etc. These prfessinals shuld be licensed in states where licensing applies.) Carbn Mnxide (CO) Detectrs The FHA appraiser is required t address the presence f a CO detectr fr states that require detectrs in residential prperties. Fr a cmplete list f state requirements, see the Natinal Cnference f State Legislatrs (NCSL) Carbn Mnxide Detectrs State Statutes page ( Prperty Inspectin If a hme inspectin is perfrmed, and is included in the lan file, and identifies the need fr repairs, which were nt identified in the appraisal reprt, the USDA Certified Underwriter is respnsible fr determining that the prperty meets FHA minimum prperty standards. If minimum prperty standards are nt met, the USDA Certified Underwriter must request the apprpriate dcumentatin, certificatins and/r repairs t ensure the prperty meets minimum prperty standards. Termite Inspectin Wd destrying insects and ther rganisms can cause serius prblems in the wd structural cmpnents f a huse. USDA requires maximum assurance that a hme is free f any infestatin. While HUD des nt require a cleared termite reprt n a Streamline refinance, the USDA Certified Underwriter may impse the cnditin based upn his r her discretin. The inspectin must be perfrmed by a state licensed pesticide business (registered pest cntrl technician). The Natinal Pest Cntrl Assciatin's HUD Frm NPMA-33 - Wd Destrying Insect Inspectin Reprt frm must be used fr existing cnstructin, unless the state mandates a specific frm. The frm NPMA-33 is valid fr 90 days frm the date f the inspectin The frm must be signed by the brrwer If any dcumentatin within the lan file indicates a termite/pest inspectin has been rdered, requested, required, and/r cmpleted (even if the brrwer elected t have an inspectin cmpleted), CMS requires a cpy f the termite/pest inspectin. CMS Plicies & Prcedures Page 156 f 208

157 Certificatins (cntinued) Termite Inspectin (cntinued) Existing Prperties: Purchases and refinances (except streamline refinances) must have a cmplete reprt that is nt mre than 90 days ld at the time f clsing. All structures within the legal bundaries f the prperty, including garages, must be inspected. Exceptins are minr detached structures such as a small shed. Cndminiums: The first flr units f a cndminium unit are subject t the same inspectin requirements as ther single-family hmes. The inspectin must include grund flr attached and/r detached garages, sheds, and ther structures that are a part f the subject. If a unit is n the secnd flr r abve, a termite inspectin reprt is nt autmatically required. If the appraiser detects evidence f pssible dry rt r infestatin by sme wd-destrying rganism, the appraiser must call fr the inspectin reprt. In rder t waive the repair requirements n a cndminium, btain a letter frm the Hmewners' Assciatin listing the date f scheduled repairs, name f the cntractr awarded the wrk and acknwledgment that the funds necessary t pay fr thse repairs have already been budgeted and /r cllected. This letter must be attached t the Hmebuyers Summary. Termite Damage: Active infestatins must be treated and all related damage must be prperly crrected. If either the pest cntrl inspectr r the appraiser indicates termite damage is present, an inspectin by an apprved fee cmpliance inspectr, a qualified hme building inspectr, r an engineer with expertise in structural related matters must be cnducted t determine the degree f damage and recmmend crrective actin, if necessary. If the damage is structural in nature, the inspectr must be qualified t cmplete structurally related inspectins and repairs. CMS is respnsible fr verifying the inspectr's qualificatins, including state licensing where required. If the termite inspectr chses t draw a diagram f the prperty, the certificate will cntain a grid shwing where the damage and /r infestatin exist. Fr thse states whse mandated frm des nt address damage but des indicate evidence f either active r previus infestatin, it shuld be assumed that sme degree f damage is present. CMS Plicies & Prcedures Page 157 f 208

158 Certificatins (cntinued) Termite Inspectin (cntinued) Clearing the Termite Inspectin Reprt Sectin I - Sectin I recmmendatins must be satisfied prir t clsing. All infestatin must be cleared and the damage crrected. Sectin II - Actin n Sectin II items shuld be at the USDA Certified Underwriter's discretin and that all items must be cnsidered t determine their impact n value. Items such as peeling paint, health and safety, and thse leading t structural unsundness (earth t wd cntact, dry rt, excessive misture, etc.), are general criteria items and shuld nt be waived. The inspectr will check the apprpriate bx in Sectin II f Frm NPMA-33 t indicate if any visible damage frm insects was nted. Hwever, the termite inspectr is nt expected t distinguish between structural and csmetic damage. Escrw hldback fr repair f termite damage is nt permitted. When the termite certificatin indicates the presence f termite related infestatin, the fllwing requirements fr crrective actin apply: Previus infestatins, currently inactive termites - n previus damage Neither structural inspectin nr certificatin is required. Previus infestatins, currently inactive termites - damage nted Obtain a statement frm ne f these qualified surces that the repairs have been cmpleted. Qualified Independent Cntractr HUD Fee Panel Inspectr Engineer with expertise in structurally related matters Qualified Hme Building Inspectr Active infestatin - n damage nted Treatment must be perfrmed. N structural inspectin required. Active infestatin - damage nted Treatment must be perfrmed and all repairs must be cmpleted. An inspectin must be made by ne f the fllwing surces: HUD Fee Panel Inspectr Engineer with expertise in structurally related matters Qualified Hme Building Inspectr CMS Plicies & Prcedures Page 158 f 208

159 Certificatins (cntinued) Termite Inspectin (cntinued) Termite Cntrl in New Cnstructin Prperties Fr new cnstructin treatments, Subterranean Sil Treatment Guarantee - HUD Frm NPCA 99-A is required, and Subterranean Sil Treatment Recrd-Frm HUD-NPMA 99-B -must be used, if applicable. If a state has mre stringent recrd keeping requirements than HUD-Frm NPCA-99-B, the state frm can be accepted in lieu f the NPCA-99-B, in which case the state frm wuld be attached t HUD-Frm NPCA-99-A. The acceptable methds f treatment fr prtectin against subterranean termite attacks are: Chemical sil treatment Pressure preservative treated wd Naturally termite resistant wd (i.e. redwd, cedar) Physical barriers (such as metal r plastic termite shields) The Natinal CABO Dwelling Cde permits the use f pressure preservative treated wd as a measure f termite prtectin. The seven areas requiring pressure treated wd by the CABO Dwelling Cde are: Wd jists r the bttm f a wd structure flr when clser than 18 inches (457 mm) r wd girders when clser than 12 inches (305 mm) t expsed grund in crawl spaces r unexcavated areas lcated within the periphery f the building fundatin All sills r plates that rest n cncrete r masnry exterir walls and are less than 8 inches (203 mm) frm expsed grund Sills and sleepers n a cncrete r masnry slab that is in direct cntact with the grund unless separated frm such slab by an impervius misture barrier The ends f wd girders entering exterir masnry r cncrete wall having clearance f less than 0.5 inch (12.7 mm) n tps, sides and ends Wd siding, sheathing and wall framing n the exterir f a building having a clearance f less than 6 inches frm the grund Wd structural members supprting misture-permeable flrs r rfs that are expsed t the weather, such as cncrete r masnry slabs, unless separated frm such flrs r rfs by an impervius misture barrier Wd furring strips r ther wd framing members attached directly t the interir f exterir masnry walls r cncrete walls belw grade except where an apprved vapr retardant is applied between the wall and the furring strips r framing members Pressure treated wd must be used in all framing members up t and including the tp plate f the first flr level wall. This includes the sub-flr and flr jists f the first flr. The use f pressure treated wd in nly the sill plate is nt acceptable and must nt be used as a physical barrier unless it can be inspected fr any termite shelter tubes arund the inside and utside edges and jints f a barrier. Field cut ends, ntches, and drilled hles f pressure treated wd must be re-treated in the field. CMS Plicies & Prcedures Page 159 f 208

160 Certificatins (cntinued) Termite Inspectin (cntinued) If the builder used pressure treated wd, Frm HUD-NPMA-99-A is nt necessarily required. In lieu f Frm HUD-NPMA-99-A, the builder must prvide a letter, n letterhead, stating that the huse is prtected frm termites by the use f pressure treated wd. The builder must prvide the buyer with a ne-year warranty against termites similar t that required n Frm HUD- NPMA-99-A. If the builder chses t use Frm HUD-NPMA-99-A he r she needs t check the bx next t wd under the sectin titled Type f Treatment and insert the fllwing statement: Cmplies with Mrtgagee Letter fr use f preservatively treated wd. If the building des nt require termite prtectin because there is n wd in the lcatins identified in the Mrtgagee Letter (such as when using all steel, masnry r cncrete building cmpnents), under Type f Treatment and in the space t the right f the blck titled, Sil the builder must add the fllwing: The use f pst-cnstructin sil treatment where the chemicals are applied nly arund the perimeter f the fundatin is nt acceptable in new cnstructin prperties. Existing Prperties (ver 1 year ld) Single Family A clear pest inspectin is required fr all hmes: TIP Zne 1 ver 1* year f age TIP Zne 2 ver 2* years f age TIP Zne 3 will be required at the discretin f the appraiser and USDA Certified Underwriter. New Cnstructin (prpsed cnstructin, under cnstructin and existing less than 1 year ld) TIP Znes 1 and 2 require termite sil treatment TIP Zne 3 requires sil treatment at the discretin f the appraiser and USDA Certified Underwriter. If there is a pssibility f termites at r near the general area f the site then treatment is required Frm HUD-NPMA-99-A - Subterranean Termite Sil Treatment Builder's Guarantee must be used. HUD-Frm NPCA-99-B - New Cnstructin Subterranean Termite Sil Treatment Recrd is used with Frm HUD-NPMA-99-A nly if the prperty is treated with a sil termiticide. The licensed pest cntrl cmpany is respnsible fr cmpleting HUD frm NPCA-99- B as apprpriate, and prviding it t the builder. The builder is respnsible fr attaching the frms tgether and distributing the cmpleted frms t the Client. Prvide ne cpy t the buyer at clsing and include a cpy in the case file. CMS Plicies & Prcedures Page 160 f 208

161 New Cnstructin Prperty Requirements Prpsed Cnstructin Prpsed Cnstructin prperties are thse prperties that are apprved fr mrtgage insurance prir t the beginning f cnstructin. Phts f the subject prperty generally reflect an empty lt. Under Cnstructin Under Cnstructin prperties are thse prperties that are under cnstructin and are nt cmplete at the time f the appraisal. Under Cnstructin status is in effect with the first placement f cncrete thrugh the pint f being 100% cmplete. Existing Cnstructin (less than ne year ld) The lender must retain evidence that a new cnstructin hme was built in accrdance with certified plans and specificatins (e.g., Internatinal Residential Cde, CABO, BOCA, etc.). One f the fllwing cmbinatins must be retained by the lender as evidence: Cpy f an eligible building permit that has been issued by an apprved lcal jurisdictin. The State Directr is respnsible fr making the determinatin f an eligible jurisdictin per RD Instructin 1924-A, sectin (f)(1)(iii)(c)(2). This determinatin must be published by the state as a supplement; r Certificate f Occupancy r cmpletin certificate issued by an apprved lcal jurisdictin as determined by the State Directr and published as a state supplement; r Certificatin frm a qualified individual r rganizatin (e.g., licensed architect, engineer, natinal cde certified plan reviewer, lcal building fficial, etc.) that has reviewed the plans and specificatins, and determined they meet all applicable building cdes and develpment standards. If the reviewer des nt have their wn certificatin frm, Frm RD Plan Certificatin, may be used. New Cnstructin Exhibits and Inspectin Checklist The lender must retain evidence that cnstructin inspectins were perfrmed thrughut the prject in accrdance with sectin (b)(2). Acceptable evidence may include ne f the fllwing: Certificate f Occupancy issued by an eligible lcal jurisdictin as determined by the State Directr and published, after a minimum f 3 cnstructin inspectins were perfrmed and a 1-year builder warranty plan issued acceptable t RD; r Cpies f 3 cnstructin inspectins perfrmed when: (1) ftings and fundatin are ready t be pured (2) shell is cmplete, but plumbing, electrical and mechanical wrk is still expsed and (3) final inspectin f cmpleted wrk prir t ccupancy and a 1-year builder warranty plan issued acceptable t RD (builders may utilize their wn frm, HUD-92544, r Frm RD ); r Final inspectin and a 10-year insured builder warranty plan acceptable t RD per RD Instructin 1924-A Exhibit L. Applicants that wish t build their wn hmes cannt self-warranty their wn wrk. CMS Plicies & Prcedures Page 161 f 208

162 New Cnstructin Prperty Requirements (cntinued) Stages f Cnstructin Exhibit 1 belw identifies specific cnditins that are required fr the different stages f new cnstructin. When requiring any f these items as a cnditin f lan apprval, it is necessary t enter the full title f the dcument. Entering the applicable letter r number is nt acceptable. EXHIBIT 1 Stage f Cnstructin B C H Prpsed Cnstructin* X X X X X X X X X X Under Cnstructin - High Rati (LTV greater than 90%) X X X X X X X X Under Cnstructin - Lw Rati (LTV less than r equal 90%) X X X Existing - Less Than One Year- High Rati (LTV greater than X X X X X X X X 90%) Existing - Less Than One Year- Lw Rati (LTV less than r equal 90%) X X CMS Plicies & Prcedures Page 162 f 208

163 New Cnstructin Prperty Requirements (cntinued) Stages f Cnstructin (cntinued) Explanatin f Exhibit 1 Cdes Specific Cmmitment Cnditins (Applicable when indicated n the frnt f the frm) B. Prpsed Cnstructin: The builder r mrtgagee must ntify the assigned Fee Inspectr as apprpriate (see items 11, 12 and 13 belw). C. Warranty: Frms HUD shall be executed between the builder and the purchaser. D. Sectin 223: This cmmitment is issued pursuant t Sectin 223(e). E. Health Authrity Apprval: Submit lcal health authrity apprval (n a frm r letter) indicating the individual water supply and/r sewage dispsal system is acceptable. 7. Cde Enfrcement: The lender shall submit a statement frm the public authrity that the prperty meets lcal cde requirements. If the mrtgage n the prperty is t be insured under Sectin 221(d) (2), a cde cmpliance inspectin is required. 8. Repairs: The lender shall ntify the riginal appraiser upn cmpletin f required repairs, unless therwise instructed. 9. Lender's Certificate f Cmpletin: The lender shall furnish a certificate that required repairs have been examined and were satisfactrily cmpleted. 10. Manufacturers Warranties must be prvided t the hmebuyer cvering heating/cling systems, ht water heaters, ranges, etc. F. Reserved. 11. Initial Inspectin (2 wrking days) is requested befre the "beginning f cnstructin" with frms in place. G. Prefabricatr's Certificate: The Lender shall prvide a prefabricatin certificate as required by the related engineering bulletin. H. Termite Cntrl (Prpsed Cnstructin): If sil pisning is used, the builder shall cmplete frm HUD-92052, Termite Sil Treatment Guarantee, and transmit a cpy t HUD r the Direct Endrsement USDA Certified Underwriter. The Mrtgagee will deliver the riginal and a cpy t the mrtgagr at clsing. 4. Fld Insurance Requirement: This prperty is lcated in a special fld hazard area and must be cvered by fld insurance in accrdance with HUD regulatin 24 CFR a. 5. Carpet Identificatin: (as listed in Certified Prducts Directry) Manufacturer recmmended maintenance prgram must be prvided t the hmebuyer. 6. Termite Cntrl (Existing Cnstructin): A recgnized termite cntrl peratr shall furnish certificatin using frm NPMA-33, r Statemandated frm, that the huse and ther structures within the legal bundaries f the prperty indicate n evidence f active termite infestatin. 12. Frame Inspectin (1 wrking day) is requested when the building is enclsed and framing, plumbing, heating, electrical, and insulatin is cmplete and visible. 13. Final Inspectin is requested when cnstructin is cmpleted and the prperty is ready fr ccupancy. 14. Insulatin Certificate must be psted in cnspicuus lcatin in the dwelling. 15. The Insured Prtectin Plan Warranty Agreement shall be executed between the builder and the hmebuyer. 16. The lender shall furnish a certificate f ccupancy r letter f acceptance frm the lcal building authrity. CMS Plicies & Prcedures Page 163 f 208

164 New Cnstructin Prperty Requirements (cntinued) Prcessing Prcedures fr New Cnstructin The builder must cmplete the HUD Frm Builder's Certificatin f Plans, Specificatins, and Site - The Builder's Certificatin f Plans and Specificatins. This frm alng with the plans and specificatins must be sent t the Client. If the answers t Questin 1b, 1d, and 1e n Frm HUD are "Yes", then the USDA Certified Underwriter is respnsible fr determining whether these hazards will affect the health r safety f the intended ccupants t the extent that the underwriting risk is unacceptable fr USDA guarantee. After the builder cmpletes the HUD-92541, send the frm t the appraiser alng with the request fr appraisal assignment. The Frm HUD cannt be cmpleted by the builder mre than 30 days prir t the date f the request fr the appraisal. The appraiser will cmplete the appraisal reprt and return it with a cpy f the HUD t the Client. Any incnsistencies r discrepancies between the site cnditins bserved and nted n the appraisal reprt by the appraiser and the infrmatin supplied by the builder n the HUD must be reslved by the USDA Certified Underwriter. The USDA Certified Underwriter must make the judgments, based upn the infrmatin presented by bth the builder and the appraiser, f whether the prperty meets USDA requirements, is marketable and is an acceptable underwriting risk fr USDA guarantee. A cpy f the HUD and the dcumentatin supprting the respnses t the questins n this frm must be included in the clsed case file binder alng with the appraisal reprt when submitting the case fr insurance endrsement. Lan-t-Value Rati The maximum lan-t-value rati allwed is permitted n new cnstructin prperties prvided: the prperty is inspected by USDA during cnstructin r the prperty is cvered by a HUD apprved ten-year warranty r a cpy f the building permit and the certificate f ccupancy are issued in lieu f the ten-year warranty If these cnditins are nt met the maximum lan-t-value rati may be limited t 90% f the lesser f the sales price r appraised value. New cnstructin hmes that d nt have acceptable evidence f cnstructin inspectins are limited t a 90 percent lan t value (LTV) plus the ne time upfrnt guarantee fee per sectin (b)(3). A ne year builder s warranty will nt be required. HUD Apprved Ten Year Warranty Cmpanies HUD Apprved Ten Year Warranty Cmpanies Thermal Requirements New cnstructin dwellings must meet the 2006 Internatinal Energy Cnservatin Cde (IECC). Typically the building cde, t which the hme was built, includes the thermal specificatin. When the lender secures evidence that the hme was built t an acceptable building cde, that requires a thermal specificatin f 2006 IECC r greater, the thermal requirement has been met. CMS Plicies & Prcedures Page 164 f 208

165 New Cnstructin Prperty Requirements (cntinued) Cnditinal Cmmitment The underwriter may submit cnditinal cmmitment requests fr prpsed new cnstructin dwellings. The term f Frm RD is permitted t crrespnd with the prjected date f cnstructin cmpletin (the Agency will determine the expiratin date f Frm RD ). The expiratin date f Frm RD shuld nt exceed ne year frm the issuance f the cmmitment unless the State Directr publishes a state supplement t allw a lnger term based upn special circumstances. Lan dcuments that are ver 180 days ld at the time f lan clsing (such as credit Reprts, incme verificatins, underwriting dcuments, and appraisal) must be updated and submitted t RD. Site Built Using Building Permits and Certificates f Occupancy Fr site built prperties that are under cnstructin r existing less than ne year, the Building Permit and the Certificate f Occupancy may be used in lieu f btaining a ten-year warranty. The use f the certificate f ccupancy and building permit is nt allwed fr cndminiums r manufactured husing due t special requirements applicable t these husing types. If a builder receives an fficial Building Permit frm the lcal jurisdictin prir t the start f cnstructin (puring f cncrete), USDA will accept the Building Permit in lieu f a ten-year warranty will nt be required fr maximum financing. USDA will als accept the Certificate f Occupancy (r its equivalent) issued by the lcal jurisdictin as evidence f all required inspectins. Municipalities That D Nt issue Building Permits and/r Certificates f Occupancy Fr thse lcal jurisdictins that d nt issue Building Permits prir t cnstructin and Certificates f Occupancy, prperties ne year ld r less must still must be cvered by an acceptable ten-year warranty plan. Mve-On A huse that has been mved t a new fundatin withut prir HUD apprval must be treated as if it were new cnstructin. Therefre, if the huse has been n the new fundatin fr less than ne year, it wuld nt be eligible fr maximum financing unless cvered by a HUD Apprved Ten Year Warranty. If the huse has been n the new fundatin fr mre than a year, it shuld be treated as any ther existing cnstructin that is ver a year ld. CMS Plicies & Prcedures Page 165 f 208

166 Manufactured Hmes Manufactured Hmes A manufactured hme is a structure that is cnstructed in a factry and transprtable in ne r multiple sectins t the permanent site. The hme is cnstructed t the Federal Manufactured Cnstructin and Safety Standards (als referred t as HUDcde) implemented June 15, A manufactured hme shuld nt be cnfused with a mdular hme r a mbile hme. Refer t the Prperty Types sectin fr mre detail. Factry-built hmes cnstructed prir t June 15, 1976 are classified as mbile hmes and are nt eligible fr HUD Insuring r CMS financing. Certificatin Label and Data Plate Manufactured hmes cnstructed t the HUD-cde display the Certificatin Label and the Data Plate. The Certificatin Label, als called the HUD Label, is lcated n the tail end f each transprtable sectin. The Data Plate is lcated inside f the hme. Per regulatins, the Data Plate is t be affixed n r near the main electrical breaker bx r ther readily visible/accessible lcatin. Remval f these items is illegal. Additinally, these items are nt replaceable. CMS will nt extend financing n manufactured hmes missing ne r bth f these items. The appraiser is t prvide phts f bth the Certificatin Label and Data Plate in the appraisal. Manufactured Hme Prperty Eligibility Requirements All manufactured hmes submitted t CMS fr financing must meet all f the fllwing criteria: Gvernment (FHA, USDA and VA) financing nly. Minimum flr area f 400 square feet. The manufactured hme must be the nly residence lcated n the subject prperty lt/parcel. Was cnstructed in cnfrmance with the Federal Manufactured Hme Cnstructin and Safety Standards and is evidenced by the Certificatin Label affixed t the structure in accrdance with 24 CFR Appraiser t cnfirm. Was designed t be used as a dwelling with a permanent fundatin and built t FHA/USDA/VA criteria. The manufactured hme was built and remains n a permanent chassis. Units must be purchased and built by an apprved dealer-cntractr. Each state maintains a list f the apprved dealer-cntractrs in their gegraphic area. There were n changes, additins, r mdificatins t the manufactured hme after it left the factry. The appraiser will need t cmment if there have been any additins r mdificatins t the hme. The prperty must be classified as real estate (but des nt need t be treated as real estate fr purpses f state taxatin). See Transfer f Manufactured Hmes t Real Prperty. The finished grade elevatin beneath the manufactured hme must be at r abve the 100-year return frequency fld elevatin. If a basement is used, the grade beneath the basement must be at r abve the 100-year return frequency fld elevatin. CMS Plicies & Prcedures Page 166 f 208

167 Manufactured Hmes (cntinued) Manufactured Hme Prperty Eligibility Requirements (cntinued) Prperty is either existing cnstructin (the manufactured hme has been permanently installed n the site fr mre than 12 mnths prir t the applicatin date) r new cnstructin (the manufacture hme has been permanently installed n the site fr less than 12 mnths prir t the signing f the purchase agreement). The mrtgage must cver bth the manufactured hme and the site. The maximum amrtizatin term is 30 years. Manufactured Hme Ineligible Prperty CMS will nt extend financing n manufactured prperties with the fllwing: Prperties cntaining mre than ne manufactured hme Manufactured hmes that d nt meet USDA r FHA s guidelines as stated in the Permanent Fundatins Guide fr Manufactured Husing (PFGMH) Manufactured hmes that d nt have the prper certificatins Manufactured hmes that d nt meet the criteria stated abve Manufactured hmes with additins Manufactured hmes with changes after leaving the factry and nt being recertified Manufactured hmes that have been relcated t a site ther than transprting frm the factry t the permanent fundatin Manufactured hmes classified as mbile hmes. Manufactured hmes that are cnsidered Cnstructin-Permanent (CP) lans and are prpsed cnstructin r under cnstructin. CP lans cmbine the shrt-term interim financing fr the cst f cnstructin alng with the lngterm permanent financing. Fundatin Systems The permanent fundatin systems fr all manufactured hmes must fllw FHA guidelines that were in effect at the time f certificatin as stated in PFGMH. The PFGMH can be fund at ( The appraiser is required t cnfirm the permanent fundatin system meets USDA guidelines. Engineer s Certificatin n Fundatin Cmpliance New Cnstructin Fr new cnstructin, an Engineer s Certificatin n Fundatin Cmpliance with the PFGMH is required and must cntain the fllwing: Be cmpleted by frm a prfessinal engineer r registered architect attesting t cmpliance with current guidelines. Bth f these individuals must be licensed in the state where the manufactured hme is lcated. Be site specific and cntain the engineer s r registered architect s signature state license/certificatin number. In states where seals are issued, the seal must be n the certificatin. CMS Plicies & Prcedures Page 167 f 208

168 Manufactured Hmes (cntinued) Engineer s Certificatin n Fundatin Cmpliance Existing Cnstructin Fr existing cnstructin, a cpy f the fundatin certificatin shwing the fundatin meets the guidelines in the PFGMH that were in effect at the time f certificatin is acceptable prvided there are n alteratins and/r bservable damage t the fundatin. An Engineer s Certificatin n Fundatin Cmpliance is nt required n the fllwing scenaris: Streamline refinances f an existing USDA guaranteed lan and there have been n mdificatins t the fundatin r the structure frm the effective date f the certificatin. Fld Zne New cnstructin manufactured hmes lcated in a fld zne must meet the current standards fr fld zne V in FEMA regulatins (44 CFR 60.e3). Fr existing cnstructin, the prperty must have met FEMA elevatin and cnstructin standards required by HUD in 24 CFR 55.1(c)(ii) at the time f cnstructin. Any manufactured hme lcated in Fld Znes A r V require ne the fllwing items t be eligible fr CMS financing: FEMA issued Letter f Map Amendment (LOMA): FEMA issue Letter f Map Revisin (LOMR); r Acceptable Elevatin Certificate based n the finished cnstructin, prepared by a state licensed/registered engineer r land surveyr, and indicate that the finished grade beneath the manufactured hme is at r abve the 100-year return frequency fld elevatin. If the manufactured hme has a basement, the grade beneath the basement must be at r abve the 100-year fld elevatin. Inspectins fr Manufactured Hmes Fr new cnstructin manufactured hmes (cmpleted less than 12 mnths frm applicatin date), the initial and final inspectins cmpleted by FHA Cmpliance Inspectrs, licensed engineer, r registered architect are required. The inspectins must be cmpleted per the requirements stated in HUD , REV-2, CHG-1, Architectural Prcessing and Inspectins fr Hme Mrtgage Insurance. The inspectr must have a cpy f the FHA required fundatin certificatin, related plans and specificatins at the time f inspectin and must be reprted using frm HUD-92051, Cmpliance Inspectin Reprt. Termite Prtectin/Insp ectin All manufactured hmes require termite prtectin and cntrl. Fr new cnstructin, chemical sil treatment, EPA registered bait treatments, pressure preservative treated wd, naturally termite resistant wd r any cmbinatin f the abve is accepted. CMS Plicies & Prcedures Page 168 f 208

169 Manufactured Hmes (cntinued) Perimeter Enclsures The perimeter beneath the manufactured hme must be enclsed. The perimeter enclsure must be a cntinuus wall, keeps ut water and vermin, separates the crawl space frm backfill and must be adequately secured t the perimeter f the unit t allw fr prper ventilatin f the crawl space. Fr new cnstructin and prperties built after May 21, 2009, the space beneath the manufactured hme must be enclsed by a cntinuus fundatin-type cnstructin designed t resist all frces t which it is subject withut transmitting frces t the building superstructure. Additinally, the enclsure must be adequately secured t the perimeter f the hme and be cnstructed f materials that cnfrm t HUD s Minimum Prperty Standards (i.e., cncrete, treated wd, masnry) and it must cnfrm t the PFGMH fr fundatins. Fr existing cnstructin, if the perimeter enclsure is nn-lad bearing skirting cmprised f lightweight material, there must be adequate backing t permanently attach and supprt the skirting. Examples are cncrete, treated wd and masnry. The appraiser must cnfirm the perimeter enclsure meets USDA guidelines. Cndminium Prjects CMS extends financing fr manufactured hmes lcated in a cndminium prject. Cndminium prjects are acceptable t RD when apprved by Fannie Mae (FNMA), Freddie Mac (FHLMC), HUD, r VA. Lenders must retain evidence in their permanent lan file f the prject s apprval by ne f these fur entities. Applicant s remain respnsible t btain individual hmewners insurance as applicable. PUD Prjects CMS extends financing fr manufactured hmes lcated in a PUD prject. Title All manufactured hmes and land must be classified as real estate. The title plicy must state specifically that the manufactured hme and the land are classified as real estate. Additinally, ne clear title plicy is required at the time f clsing. The purging f title is required prir t clsing if there are tw separate deeds n the prperty ne land deed and ne chattel deed r mtr vehicle title fr the unit). CMS will nt clse a lan n a manufactured hme in which the title has nt been purged. A certificatin f purged title fr the manufactured hme is acceptable t evidence the manufactured hme has been fficially cnverted frm chattel t real prperty. Maximum Mrtgage Amunt CMS des nt prvide financing fr CP transactins in which the subject is prpsed cnstructin r under cnstructin. CMS will extend financing fr a transactin in which the prperty status is existing cnstructin (cnstructin is cmpleted but was cmpleted less than 12 mnths frm the applicatin date) and the brrwer des nt currently have r previusly had any wnership interest in the unit r the land. USDA des nt limit the LTV r maximum lan amunt n a manufactured hme. Maximum financing is available n either a purchase r refinance. CMS Plicies & Prcedures Page 169 f 208

170 Manufactured Hmes (cntinued) Transfer f Manufactured Hmes t Real Prperty Manufactured hmes must be attached t the land and classified as real estate. The prcess f cnverting a manufactured dwelling unit t real estate is determined by state law, but will generally include cancelling the persnal prperty title and/r recrding ntice in the public recrds, summarized in Manufactured Hmes Title Requirements. Regardless f the state cnventin, CMS must be satisfied that the subject has been cnverted t real prperty, r will be cnverted by the title cmpany thrugh clsing. The fllwing are required fr every lan: ALTA 7 (r equivalent) endrsement must be issued with the lender s final title insurance plicy Security instrument will include a manufactured husing rider naming the make/mdel, dimensins, serial numbers, and HUD label numbers f the unit Prperty taxes fr qualifying must be based n the full value f the land and manufactured dwelling unit Cpies f any recrded ntices related t the manufactured hme must be included in the lan file CMS Plicies & Prcedures Page 170 f 208

171 Cndminium Prjects Overview Cndminium prjects create additinal risk because the Hmewners' Assciatin (HOA) has legal rights that culd adversely affect the mrtgagee's rights. Depending n the financial management f the HOA, the value f the prject (unit) can be adversely affected. Cndminium prjects must have been created and exist in full cmpliance with all state and lcal statutes where the prject is lcated and all ther applicable laws. The Client is nt aware f any circumstances that wuld make the prject ineligible fr apprval. Cndminium prjects may be cnstructed in individual legal phases. A prject review may be cmpleted n the entire prject r n a particular legal phase. Marketing r cnstructin phases are nt acceptable. Cndminium prjects with pending litigatin are nt eligible. Cndminium Requirements Cndminiums are acceptable t RD when the prject has been apprved by Fannie Mae (FNMA), Freddie Mac (FHLMC), HUD, r VA. Fr purchase transactins, lenders must retain evidence In their permanent lan file f the prject s apprval by ne f these fur entities. Fr refinance transactins, it is nt necessary t prvide evidence f the prject s apprval. Applicant s remain respnsible t btain individual hmewners insurance as applicable. Cntinuing Prject Eligibility The Client is nt aware f any change in circumstances since its review f the prject that wuld result in the prject n lnger satisfying CMS requirements Ineligible Cndminium Prjects Any prject nt already apprved by FNMA, FHLMC, HUD, r VA. New prjects where the seller is ffering sale/financing cntributins/cncessins in excess f established limitatins fr individual lans Prjects where 15% f the ttal units within the prject are mre than ne mnth delinquent n HOA fees, dues r assessment payments Prjects where a single entity wns mre than 10% f the ttal units in the prject Prjects with pending litigatin against the hmewners' assciatin, r its fficers, directrs, and prject builders and develpers Identificatin f Cndminium Htels/Mtels A careful analysis f the prject t determine eligibility is required, utilizing several reliable surces f infrmatin. These include, but are nt limited t, the appraisal, the cntract fr sale, and the applicable prject's Web site. Search the web t help determine if Cndminium prject is perating as a htel. The abve websites are a tl and due diligence is required t determine that prject is nt a Cndminium htel and ineligible. CMS Plicies & Prcedures Page 171 f 208

172 Cndminium Prjects (cntinued) Ineligible Cndminium Prjects (cntinued) The selectin f the appraiser is a key element in btaining an accurate appraisal reprt. The appraiser is expected t prvide an accurate descriptin f the prject t include any characteristics that may be an indicatin that the prject is ineligible. An appraiser wh is nt familiar with a specific real estate market may nt have adequate infrmatin available t perfrm a reliable appraisal. The appraisal reprt may identify prject characteristics that d nt definitively determine that the prject is a Cndminium htel; hwever, it prvides evidence that wuld require the lender t perfrm additinal research. These prject characteristics include, but are nt limited t: Prjects that include registratin services and ffer rentals f units n a daily basis Prjects that restrict the wner's ability t ccupy the unit Prjects with names that include the wrds htel r mtel Prjects with mandatry rental pling agreements that require the unit wners t either rent their units r give a management firm cntrl ver the ccupancy f the unit. These frmal agreements between the develper, Hmewners' Assciatin and/r the individual unit wners, bligate the unit wner t rent the prperty n a seasnal, mnthly, weekly, r daily basis. In many cases, the agreements include blackut dates, cntinuus ccupancy limitatins and ther such use restrictins. In return, the unit wner receives a share f the revenue generated frm the rental f the unit Central telephne service Rm service Units that d nt cntain full-sized kitchen appliances Daily cleaning service Advertising f rental rates Restrictins n interir decrating Franchise agreements Central key systems Lcatin f the prject in a resrt area The ccupancy f the prject (The prject may have a few r even n wner ccupants) Prjects cnverted frm a htel r mtel CMS Plicies & Prcedures Page 172 f 208

173 Cndminium Prjects (cntinued) Ineligible Cndminium Prjects (cntinued) In sme instances, a prject may be part f a Master Assciatin. A Master Assciatin is a Hmewners' Assciatin in a large cndminium prject that cnsists f representatives frm assciatins cvering specific areas within the prject. It is a secnd level assciatin that handles matters affecting the entire develpment, while the first level assciatin handles matters affecting their particular prtin f the subject develpment. If a prject is part f the Master Assciatin and the Master Assciatin perates as a htel, resrt, mtel, inn r ldge the entire prject is ineligible. As an example, a Master Assciatin cnsists f five cndminium prjects within a develpment. Each f the five prjects has its wn legal dcuments including Declaratin f Cndminium, By-Laws, Articles f Incrpratin and Master Deed. All five cndminium prjects are part f a Master Assciatin that als has legal dcuments. Althugh the individual prjects d nt have the amenities f a cndminium htel, the Master Assciatin ffers htel like amenities, as previusly defined; therefre, the entire prject is ineligible. While n single factr will determine if a prject is a cndminium htel, all factrs f the prject must be cnsidered. If there is any dubt as t whether a prject is a cndminium htel, cntact Crprate Underwriting fr discussin. In additin t the appraisal, thrughly examine the cntract fr sale t determine, amng ther infrmatin, if there are guaranteed rent-backs, references t rental pling r management agreements, and Securities and Exchange Cmmissin (SEC) filing references and/r prspectus dcuments. CMS Plicies & Prcedures Page 173 f 208

174 Cndminium Prjects (cntinued) Warranty Prcess fr Units in Apprved Cndminium Prjects If the subject prject is n the FHA Apprved List f Cndminiums, whether FHA apprved the cndminium prject (HRAP) r anther lender apprved the cndminium prject (DELRAP), the USDA Certified Underwriter must represent and warrant that all ther requirements fr delivering mrtgages t CMS investr, as described in the Cndminium sectins f this Client Guide have been met. Lender Certificatin fr Individual Unit Financing: Eligibility Requirements Prject must be CMS investr DELRAP apprved, DELRAP apprval by anther lender r HRAP: Cmply with cnditins f apprval Prject cnsists f at least 2 units Presale Existing Prjects: At least 50% f the ttal units in the prject must have been sld and cnveyed t individual wners New Cnstructin Less Than 12 Mnths: At least 50% f the ttal units in the prject must have been sld and cnveyed t individual wners Prpsed r Under Cnstructin: At least 30% f the ttal units in the prject must have been sld and cnveyed t individual wners Cnversin: At least 51% f the ttal units in the prject must have been sld and cnveyed t individual wners At least 50% f units are ccupied as a primary residence N single entity (the same individual, investr grup, partnership, crpratin, builder/develper) may wn mre than 10% f the ttal units in the prject, including develpers/builders wh subsequently rent vacant r unsld units OR fr prjects with fewer than 10 units, n single entity may wn mre than ne unit within the prject N mre than 15% f the ttal units can be mre than ne mnth delinquent n hmewners' assciatin fees, dues, r assessments Cmmercial space may cnstitute up t 25% f the ttal flr space in the prject, subject t the cmpliance with the fllwing: Any cmmercial space in the prject must be cmpatible with the verall residential nature f the prject, which is free f adverse cnditins t the unit wners FHA Cncentratin Prjects > 3 units: <= 50% may have FHA financing Prject <= 3 units: 1 unit may have FHA financing May submit fr HOC apprval if there is >50% and <100% FHA cncentratin and the prject is 100% cmplete fr at least ne year (final r temprary CO), 100% sld and cnveyed and has 10% reserves. CMS Plicies & Prcedures Page 174 f 208

175 Cndminium Prjects (cntinued) Warranty Prcess fr Units in Apprved Cndminium Prjects (cntinued) Legal Requirements Right f First Refusal language r cvenants in the cndminium legal dcuments are NOT permitted unless the first mrtgagees r its assignees rights will nt be adversely impacted t: Freclse r take title t a cndminium unit pursuant t the remedies in the mrtgage Accept a deed r assignment in lieu f freclsure in the event f default by a mrtgagr, r Sell r lease a unit acquired by the mrtgagee r its assignee The unit is part f a cndminium prject that prvides fr cmmn and undivided wnership f cmmn areas by unit wners Cndminium prjects must have been created and exist in full cmpliance with all state and lcal statutes where the prject is lcated and all ther applicable laws Insurance Requirements Litigatin Minimum $1 millin general liability insurance per ccurrence Prject must be insured n 100% replacement cst r guaranteed replacement cst Fidelity Insurance is required the HOA and management cmpany (if applicable) fr all prjects with greater than 20 units Walls-in (HO-6) cverage, if required N legal actin is pending against the cndminium hmewners' assciatin, r its fficers, directrs, and prject builders and develpers Dcumentatin The fllwing dcumentatin must be in each lan file: Lender Certificatin fr Individual Unit Financing signed by USDA Certified Underwriter FHA Hmewners' Assciatin Questinnaire Appraisal Reprt Site Cnds: Fannie Mae Frm 1073 Insurance Dcumentatin Pending Special Assessment Analysis, if applicable Printut f FHA Cnnectin Cndminium apprval (HRAP r DELRAP) Dcumentatin supprting Lender Certificatin that prject is in cntinued cmpliance with cndminium guidelines CMS Plicies & Prcedures Page 175 f 208

176 Cmpliance Inspectins Overview The Cmpliance Inspectin Reprt frm is required t ensure that the mrtgage risk in cnstructin is within acceptable limits. Inspectins d nt relieve the builder f his r her cntractual bligatins t the brrwer. At least three inspectins are required fr prpsed cnstructin, as fllws: Initial Inspectin An initial inspectin is required befre the "beginning f cnstructin", defined as placement f permanent cnstructin, with fundatin frms in place. An pen excavatin, withut a minimum f fundatin frms in place, must be re-inspected by the fee inspectr. Framing Inspectin A framing inspectin is required when the building is enclsed and the framing, plumbing, heating, electrical, and insulatin are is cmplete and visible. Final Inspectin A final inspectin is required when cnstructin is cmplete and prperty is ready fr ccupancy. Fewer than three inspectins apply based n the fllwing: Prperties cvered by insured ten-year prtectin plan may require nly a final inspectin Areas with knwn specific prblems t recur, r when there is a high incidence f cmplaints against the builder. The initial and intermediate inspectins shuld be required. The builder must advise USDA f cverage prir t the issuance f the cnditinal cmmitment fr this exceptin t apply r three inspectins will be required. Lcal authrities can make the initial and framing inspectins. A Fee inspectr must make the final inspectin. CMS Plicies & Prcedures Page 176 f 208

177 NEW CONSTRUCTION EXHIBITS Builder's Certificatin f Plans, Specificatins, and Site (HUD Frm ) Builder's Certificatin f Plans, Specificatins, and Site (HUD Frm 92541) The USDA Certified Underwriter is respnsible fr the review f this frm. If any further dcumentatin is required, it will be btained by the USDA Certified Underwriter and include with the certificatin. The USDA Certified Underwriter may cnditin fr the certificatin in the case f an MCRV cnversin fr a cndminium r a PUD. All the lines must be cmpleted and fully executed by the builder. Nte that the first signature can be the builder r an agent f the builder, but the secnd signature must be the builder. In the case f a crpratin, an fficer f the crpratin wuld sign. Termite Cntrl HUD- NPCA-99-A - Subterranean Termite Sil Treatment Builder's Guarantee HUD-NPCA-99-B - New Cnstructin Subterranean Termite Sil Treatment Recrd Must be executed by the builder and Termite Cmpany. The brrwer must be prvided a cpy at clsing. It may r may nt be accmpanied by the standard termite reprt frm in Califrnia. Carpet Identificatin Carpet manufacturer r seller certifies that the carpet meets USDA standards. Builder certifies t us that the manufacturer maintenance prgram has been prvided t the brrwer. Manufacturer's Warranties and Insulatin Certificate Builder certifies that the Manufacturer's warranties and the insulatin certificate stating R-value f insulatin have been given t brrwer. Ten Year Insured Prtectin Plan Warranty Acceptable evidence f cverage is a c cpy f the Applicatin fr Insurance executed by the builder alng with a cpy f the HUD-1 Unifrm Settlement Statement shwing the premium is paid at clsing. Certificate Of Occupancy Obtain a cpy f the Certificate f Occupancy when applicable, r the Building Inspectin Card t meet this cnditin. CMS Plicies & Prcedures Page 177 f 208

178 APPRAISAL REVIEW Overview The appraisal infrmatin must prvide a lgical basis fr evaluatin. The appraiser must present a cncise picture f the neighbrhd, site, and imprvements t supprt an indicated value. Value must be supprted by three cmparable sales f a similar nature. The USDA Certified Underwriter is respnsible fr determining that the appraiser has adequately supprted his r her pinin f the subject's prperty value. The cmpnents discussed belw are used t assess the adequacy f appraisal reprts. The Subject Prperty The first part f the appraisal reprt is used as fllws: Identify and describe the lcatin f the subject prperty Prvide infrmatin abut prperty taxes and special assessments Indicate the ccupancy status f the subject prperty Describe the subject prperty rights t be appraised Summarize financing data and sales cncessins Identify the brrwer, current wner, client and appraiser Prvide infrmatin pertinent t the subject purchase transactin, if applicable The appraiser must identify the subject prperty by its cmplete prperty address and cmplete and crrect legal descriptin; a pst ffice bx number is nt acceptable. The appraiser shuld indicate the nearest intersectin if a huse number is nt available. When the legal descriptin is lengthy, the appraiser may attach the cmplete and crrect (full) descriptin as an addendum t the appraisal reprt, r may refer simply t its lcatin in the public recrds. The appraiser must identify the subject prperty rights t be appraised as Fee Simple r Leasehld. In additin, the appraiser must indicate whether the subject prperty is lcated in a PUD r cndminium and enter the taxes and insurance expenses and cndminium r PUD cmmn expenses, as applicable. The USDA Certified Underwriter must verify that accurate mnthly prperty tax estimates are being used when qualifying brrwers n new cnstructin lans. Taxes must be estimated fr the cmpleted hme and the land, nt just fr the vacant land value. A realistic estimate fr the cmpleted prperty can be prvided by the appraiser r the assessr's ffice r frm cmparable sales. The appraiser must identify the type f transactin, state the ttal dllar amunt f the lan charges and/r cncessins that will be paid by the seller (r any ther party wh has a financial interest in the sale r financing f the subject prperty) and prvide a brief descriptin f the items n the appraisal reprt. Nte: Prperties with in-grund swimming pls are eligible prvided the pl is nt included in the value. The appraiser must prvide value as-is and a value as if the prperty did nt have a pl. The value f the pl must be established, justified and the market must have an acceptance f the pl. If the appraiser cannt establish and r demnstrate the value f the pl, the lan is nt eligible fr CMS financing. CMS Plicies & Prcedures Page 178 f 208

179 Appraisal Review (cntinued) Neighbrhd Analysis The purpse f a neighbrhd analysis is t identify the area - based n cmmn characteristics r trends - that is subject t the same influences as the subject prperty. The purpse is nt t rate r judge the neighbrhd. The sales prices f cmparable prperties in the identified area shuld reflect the psitive and negative influences f the neighbrhd. The appraiser shuld fcus n describing the varius cmpnents f a neighbrhd and reprting the factrs that have an impact n value in narrative frm. A neighbrhd analysis shuld cnsider the influence f scial, ecnmic, gvernment, and envirnmental frces n prperty values in the subject neighbrhd. Hwever, neither the racial cmpsitin nr the age f a neighbrhd is an appraisal factr. CMS des nt designate certain areas as being acceptable r unacceptable r in ther wrds, CMS des nt "red-line". Redlining can ccur when perceived prperty risks are based n imprper lcatin factrs, such as the arbitrary granting f unfavrable lan terms n the basis f gegraphic area r when the perceptins f risk are derived frm factrs that d nt predict risk, either reliably r nt at all. Race, fr example, is a factr that is nt predictive f risk. Racial redlining is illegal under federal law. Other factrs that serve as a prxy fr race are equally impermissible. The appraiser shuld explain any changes that have ccurred that might influence the marketability f the prperties within the neighbrhd. The appraiser als must cmment if there is market resistance t a neighbrhd because f the knwn presence f an envirnmental hazard r any ther factr. Tw neighbrhd characteristics that the appraiser shuld cnsider in selecting cmparable sales and in preparing the neighbrhd analysis are: General Appearance The general appearance f the prperties in the neighbrhd is a key factr. The appraiser must cnsider the extent t which the prperties are receiving prper maintenance. Appeal t Market Appeal t Market is the extent t which all aspects f the neighbrhd will appeal t the typical purchaser in the market. An individual prperty by itself cannt vercme a generally prevailing reluctance f the market t invest in a neighbrhd. On the ther hand, a relatively weak prperty in a strng, viable neighbrhd is likely t sustain its value, althugh it must be carefully analyzed. The appraiser must take int cnsideratin the varius aspects f a neighbrhd (based n bth prximity and value) by cmparing the characteristics fr the subject neighbrhd t thse fr cmpeting neighbrhds. Fr example, if the neighbrhd is characterized by a lack f maintenance r the absence f lcal gvernment services (which als might be typical fr cmpeting neighbrhds), the appraiser shuld include a cmment t that effect t prvide an adequate descriptin f the neighbrhd in his r her analysis. The appraisal reprt frms require the appraiser t address several imprtant factrs that are used t analyze the neighbrhd's impact n the prperty's marketability. Sme f the key factrs are discussed in the fllwing subsectins. CMS Plicies & Prcedures Page 179 f 208

180 Appraisal Review (cntinued) Neighbrhd Analysis (cntinued) Neighbrhd Characteristics: Mrtgages that are secured by residential prperties in urban, suburban, r rural areas are acceptable. An "urban" lcatin relates t a city, a "suburban" lcatin relates t the area adjacent t a city, and a "rural" lcatin relates t the cuntry r anything beynd the suburban area. Urban Prperties: Fr prperties in urban neighbrhds, the appraiser must prvide sales data available within ne mile f the subject prperty. Mrtgages in urban areas are smetimes underwritten n a blck-by-blck basis. Blck-by-blck underwriting and appraisal analysis are acceptable in cases in which rehabilitatin has started either in the blck where the subject prperty is lcated r in facing blcks visible t the subject prperty but has nt yet spread t the rest f the neighbrhd. This prvides fr mre weight being placed n the psitive influences f a neighbrhd in an urban area that is being rehabilitated. The acceptability f this is cnditined n the appraiser demnstrating lcal cnditins make it apprpriate and all essential factrs are cnsidered. When a security prperty is lcated in an urban neighbrhd that has vacant r barded up prperties, the appraiser wuld need t lk at cmparable prperties in the same neighbrhd t assure that any effect f the vacant r barded up prperties is taken int cnsideratin in develping the estimate f value fr the security prperty. Fr an urban area this may include residential multifamily prperties and ther prperties that are used t prvide cmmercial services (such as grceries and ther neighbrhd stres) in supprt f the lcal neighbrhd, industrial prperties, etc. Viable urban neighbrhds frequently are characterized by a successful mixing f different prperty uses and types. The presence f mixed prperty uses r a variety f prperty types within an area des nt mean that a prperty lcated in that area will be unacceptable. Since such mixed uses may be a characteristic f the market area, the appraiser shuld take them int cnsideratin when perfrming the analysis f the market area and defining the market area's bundaries. T assure that any psitive r negative effects f the mixed land uses are reflected in the sales cmparisn analysis, the appraiser shuld select cmparable sales frm within the same area whenever pssible. If this is nt pssible, the appraiser will need t make "lcatin" adjustments (if apprpriate) fr any sales that are nt subject t this type f characteristic. Suburban Prperties: Since suburban areas are usually well develped and cmparable sales typically are available in the subject neighbrhd, the appraiser wuld mst likely use cmparable prperties in the immediate vicinity f the subject prperty. Hwever, if the subject prperty is lcated in an area where there is a shrtage f recent cmparable sales, the appraiser must adequately dcument his r her analysis in the appraisal reprt and explain why such cmparable sales were used. CMS Plicies & Prcedures Page 180 f 208

181 Appraisal Review (cntinued) Neighbrhd Analysis (cntinued) Rural Prperties: Rural prperties are generally mre difficult t assess. Marketing times may be affected by their remte lcatin. Therefre, the prximity f cmparable sales is critical in determining a rural prperty's marketability. A mrtgage must be secured by a prperty that is residential in nature, based n the descriptin f the subject prperty, zning, and the present land use. Mrtgages that are secured by agricultural-type prperties (such as farms, rchards, r ranches), n undevelped land, r n land develpment-type prperties are unacceptable. Special cnsideratin must be given t prperties with utbuildings. Prperties with minimal utbuildings, such as a small barn r stable, that are f relatively insignificant value in relatin t the ttal appraised value f the subject prperty are acceptable if they are typical f ther residential prperties in the subject area. Outbuildings nt representing typical residential imprvements fr the lcatin and prperty type are acceptable if the appraiser attributes n value t them. Prperties with significant utbuildings, such as a large barn, a strage area r facilities fr farm-type animals, r a sil, might indicate that the prperty is agricultural in nature. It must be determined if the imprvements are residential r agricultural in nature, regardless f whether the appraiser assign any value t the utbuildings. It is nt uncmmn fr rural areas t cnsist f a variety f prperty types that may r may nt have different uses. It is als nt uncmmn fr urban neighbrhds t cnsist f a variety f prperty types that have different uses. Such mixed-use areas may r may nt reflect a successful blend f varius single-family residential and nnresidential uses. Neighbrhd Prperty Values: Ideally, prperty values shuld be stable r increasing, hwever, there may be areas f the cuntry experiencing a decline in prperty values. Declining values are a cncern due t the ptential fr equity ersin. The appraiser's rle is t substantiate the stability f the market and t prvide an estimated value f the subject prperty. In ding this, the appraiser is required t indicate n the appraisal reprt if prperty values in that market are increasing, stable, r declining. If values are declining, the appraiser must cmment n the reasn fr the decline and its effect n the prperty's marketability as well as rate (%) f decline. The reasns fr a decline in value and the prbability f its cntinuance are key cnsideratins in the prperty's acceptability. If the appraiser indicates the prperty is in a declining market, tw cmparable sales which clsed within 90 days f the date f the appraisal must be prvided. In sme markets, cmpliance with this requirement may be difficult r nt pssible due t the lack f market data and, in sme cases a detailed explanatin is required. The appraiser is expected t include at least tw sales that are as similar as pssible t the subject and which settled within 90 days in rder t shw recent market activity. CMS Plicies & Prcedures Page 181 f 208

182 Appraisal Review (cntinued) Neighbrhd Analysis (cntinued) In additin, the appraiser must: Include a minimum f tw active listings r pending sales Insure that active listings and pending sales are market tested and have reasnable market expsure t avid the use f verpriced prperties as cmparable sales. The appraiser shuld bracket the listings using bth dwelling size and sales price whenever pssible Adjust active listings must reflect list t sale price ratis fr the market Adjust pending sales t reflect the cntract purchase price whenever pssible r adjust pending sales t reflect list t sales price ratis Include the riginal list price, any revised list prices, and ttal days n the market. Prvide an explanatin fr days n the market that d nt apprximate time frames reprted in the Neighbrhd sectin f the appraisal r that d nt cincide with the days n the market in the Market Cnditins Addendum Recncile the adjusted values f active listings r pending sales with the adjusted value f the settled sales prvided. If the adjusted values f the settled cmparables are higher than the adjusted values f the active listings r pending sales, the appraiser must determine if a market cnditins adjustment is apprpriate. The final value shuld nt be based slely n the cmparable listing r pending sale data. Include an absrptin rate analysis per the Market Cnditins Addendum Data Requirements: The appraiser must verify data via lcal parties t the transactin: agents, buyers, sellers, lenders, etc. A Multiple Listing Service (MLS) by itself is nt cnsidered a verificatin surce. Unacceptable data surces include lcal and natinal media, and ther surces cnsidered nt readily verifiable. Appraisal results shuld be able t be replicated Knwn r reprted incentives r sales cncessins must be nted in the financing sectin fr any active r pending cmparables used. The USDA Certified Underwriter is respnsible fr reviewing the appraisal and determining if the appraised value is accurate and adequately supprts the value and marketability f the subject prperty. Demand/Supply: An versupply f husing is nt desirable, since it indicates that prperties are selling slwly with a lt f cmpetitin. The appraiser must cmment n the reasn fr the versupply and its effect n the value f the subject prperty. CMS Plicies & Prcedures Page 182 f 208

183 Appraisal Review (cntinued) Neighbrhd Analysis (cntinued) Marketing Time: Marketing time is the average time that it takes fr a reasnably priced prperty t sell in the subject neighbrhd. Marketing time f prperties in the subject neighbrhd shuld be less than six mnths t assure n lss f equity. When marketing time is greater than six mnths, the appraiser must cmment n the reasn fr the extended marketing perid and its effect n the value f the subject prperty. Price/Age Range and Predminant Value: The appraiser must indicate the price range and predminant value as well as the age range, and predminant age f prperties in the subject neighbrhd. These must reflect the high and lw prevailing ranges fr residential prperties cmparable t the prperty being appraised. A cmparisn f the predminant value fr the neighbrhd must favrably reflect the mrtgaged premises value. If the subject prperty sets the tp value fr the neighbrhd, it may be an indicatin the subject prperty represents an verimprvement. Future purchasers may be less willing t pay fr prperty features nt cmmn t the area and its appeal may be limited at its current value. Maximum financing may nt be apprpriate. A prperty at the lw end f the market's value may als be cause fr cncern. Careful evaluatin is required t determine whether the prperty in its current frm is likely t cntinue t be its highest and best use. Predminant Occupancy: The appraiser shuld categrize the predminant ccupancy status f the neighbrhd as "wner", "tenant", "vacant (0-5%)", r "vacant (ver 5%)" as part f his r her descriptin f the neighbrhd. T assure that any effects (psitive r negative) f a predminant tenant-ccupancy status will be reflected in the sales cmparisn analysis, the appraiser shuld select cmparables sales frm within the same neighbrhd whenever pssible. If the appraiser uses as cmparables sales that are utside f the subject neighbrhd, he r she may need t make "neighbrhd" r "lcatin" adjustments t the sales cmparisn analysis fr any sales that are nt subject t this same neighbrhd characteristic. CMS Plicies & Prcedures Page 183 f 208

184 Appraisal Review (cntinued) Neighbrhd Analysis (cntinued) Present Land Use f the Neighbrhd: Typically, dwellings best maintain their value when they are situated in neighbrhds that cnsist f ther similar dwellings. Hwever, the existence f different land uses and prperty types in a neighbrhd des nt mean that a mrtgage secured by prperty lcated in that neighbrhd is unacceptable. When different land uses and prperty types are present in a neighbrhd, that fact shuld be cnsidered a neighbrhd characteristic that the appraiser needs t take int cnsideratin when perfrming the neighbrhd analysis and defining the neighbrhd bundaries. In additin, if there is a significant amunt f vacant r undevelped land in the neighbrhd, the appraiser shuld include cmments t that effect t assure that he r she adequately describes the neighbrhd. The appraiser must cmment whether the present land use in the neighbrhd is likely t change r whether it is in the prcess f changing. If the subject prperty is underging transitin, the appraiser must describe the changes and cmment abut the impact n marketability and value f the subject prperty. CMS Plicies & Prcedures Page 184 f 208

185 Appraisal Review (cntinued) Site Analysis The prperty site shuld be f a size, shape, and tpgraphy that is generally cnfrming and acceptable in the market area. It must als have cmpetitive utilities, street imprvements, and ther amenities. Since amenities, easements, and encrachments may either detract frm r enhance the site's marketability, the appraiser must cmment n them if the site is nt typical fr the neighbrhd. Prperties n Excess Acreage: Excess acreage is defined as that which is larger than what is typical in the neighbrhd and capable f a separate use. Generally, the excess prtin can be subdivided and marketed as an individual parcel. Hwever, in small cmmunities and utlying areas, appraisers must use different criteria because the market may accept a wide variance in lt sizes. If the plt cntains excess land, the appraiser is required t describe the excess land but nt attribute any value. A cmpete and crrect legal descriptin f the prtin being appraised is required. The excess land must be excluded frm the mrtgage security. Zning: The appraiser is respnsible fr reprting the specific zning classificatin fr the subject prperty. The appraiser must include a general statement t describe what the zning permits--"single-family," "tw-family," etc.--when he r she indicates a specific zning such as R-1, R-2, etc. The appraiser must als include a specific statement if the imprvements d nt represent a legal and cnfrming use f the land. A prperty is generally unacceptable if the imprvements d nt cnstitute a legally permissible use f the land. Certain exceptins t this plicy can be made, as lng as the prperty is appraised and underwritten in accrdance with the fllwing special requirements: A mrtgage that is secured by a ne-t fur-family prperty r a unit in a PUD prject is acceptable if the prperty represents a legal, but nn-cnfrming, use f the land -- as lng as the appraiser's analysis reflects any adverse effect that the nn-cnfrming use has n the value and marketability f the prperty. A cndminium unit mrtgage, frm a prject that represents a legal but nncnfrming use f the land, is acceptable nly if the imprvements can be rebuilt t current density in the event f their partial r full destructin. (In such cases, the mrtgage file must include a cpy f the applicable zning regulatins r a letter frm the lcal zning authrity that authrizes recnstructin t current density.) A mrtgage secured by a single-family r a tw-family prperty that includes an illegal additinal unit r accessry apartment (which may be referred t as a mther-in-law, mther-daughter, r granny unit) is acceptable as lng as the illegal use cnfrms t the subject neighbrhd and t the market. The prperty must be appraised in cnfrmity with its legal use, that f a singlefamily r tw-family prperty (and the brrwer must qualify fr the mrtgage withut cnsidering any rental incme frm the illegal unit). CMS Plicies & Prcedures Page 185 f 208

186 Appraisal Review (cntinued) Site Analysis (cntinued) The appraiser must reprt that the imprvements represent an illegal use and demnstrate that the imprvements are typical fr the market thrugh an analysis f at least three cmparable prperties that have the same illegal use. The USDA Certified Underwriter must als make sure that the existence f the illegal additinal unit will nt jepardize any future hazard insurance claim that might need t be filed fr the prperty. A mrtgage secured by a three- r fur-family prperty that includes an illegal accessry apartment is unacceptable. A mrtgage secured by a prperty that is subject t certain land-use regulatins (such as castal tideland r wetland laws) that create setback lines r ther prvisins that prevent the recnstructin (r maintenance) f the prperty imprvements if they are damaged r destryed is unacceptable. (The intent f these types f land-use regulatins is t remve existing land uses and t stp land develpment-- including the maintenance r cnstructin f seawalls--within specific setback lines.) It is nt uncmmn fr residential prperties in rural lcatins t have an agricultural zning classificatin. Mrtgages secured by such prperties are acceptable as lng as the prperty is primarily residential in nature, the residential use is permissible under the zning and land use regulatins, the prperty imprvements represent the highest and best use f the site as imprved, and the prperty is a relatively typical residence fr the neighbrhd r market area. Highest and Best Use: The highest and best use f a site is that reasnable and prbable use that supprts the highest present value n the effective date f the appraisal. Fr imprvements t represent the highest and best use f a site, they must be legally permitted, be financially feasible, be physically pssible, and prvide mre prfit than any ther use f the site wuld generate. All fur f these criteria must be met if the imprvements are t be cnsidered as the highest and best use. A strict theretical highest and best use analysis identifies the perfect imprvements fr a site--assuming the site is vacant and available t be develped. The appraiser's highest and best use analysis f the subject shuld cnsider the prperty as it is imprved. This treatment recgnizes that the existing imprvements shuld cntinue in use until it is financially feasible t remve the dwelling and build a new ne, r renvate existing dwelling. If the use f cmparable sales demnstrates that the imprvements are reasnably typical and cmpatible with market demand fr the neighbrhd, and the present imprvements cntribute t the value f the subject prperty s that its value is greater than the estimated vacant site value, the appraiser shuld cnsider the existing use as reasnable and reprt it as the highest and best use. On the ther hand, if the current imprvements clearly d nt represent the highest and best use f the site as an imprved site, the appraiser must s indicate n the appraisal reprt. In such cases the prperty wuld nt be acceptable fr financing. CMS Plicies & Prcedures Page 186 f 208

187 Appraisal Review (cntinued) Site Analysis (cntinued) Utilities: Fr a prperty t be eligible fr a mrtgage, the utilities must meet cmmunity standards and have market acceptance. If public sewer and/r water facilities--thse that are supplied and regulated by the lcal gvernment are nt available 1, then cmmunity r private well and septic facilities must be available and utilized by the subject prperty. In general, if available, cnnectins must be made t public water/sewer systems r a cmmunity water/sewer system, if the cnnectin csts t the public r cmmunity system are reasnable (3% r less f the estimated value f the prperty). If cnnectin csts exceed 3%, the existing n-site systems will be acceptable prvided they are functining prperly and meet the requirements f the lcal health department. If there is market resistance t an area because f envirnmental hazards r any ther cnditins that affect the septic system, well r public water facilities, the appraiser must cmment n the hazards' effect n the subject prperty's marketability and value. The appraiser shuld make the apprpriate cnditins fr clsing based upn FHA requirements. Fr example, if public water facilities are available, the appraiser will cnditin fr the cmmunity r private water facilities t cnvert t public. Off-Site Imprvements: The prperty shuld frnt n a publicly dedicated and maintained street that meets cmmunity standards and is accepted in the market area. If the prperty is n a cmmunity-wned r privately wned and maintained street, there shuld be an adequate, legally enfrceable agreement fr maintenance f the street. A street nt meeting city r state standards frequently requires extensive maintenance, and prperty values may decline if it is nt regularly maintained. If a prperty frnts n a street that is nt typical f thse fund in the cmmunity, the appraiser must cmment n the effect f that lcatin n the subject prperty's marketability and value. The presence f sidewalks, curbs and gutters, street lights, and alleys depends n lcal custm. If they are typical in the cmmunity, they shuld be present n the subject site. The appraiser must cmment n any adverse cnditins and address their effect n the marketability and value f the subject prperty. The appraiser must state the type f any ff-site imprvements (streets, curbs/gutters, sidewalks, street lights, and alleys) that are present and als indicate whether they are publicly r privately maintained. Legal ingress and egress must be available t the prperty, and n exceptins may be nted n the title reprt fr these characteristics. CMS Plicies & Prcedures Page 187 f 208

188 Appraisal Review (cntinued) Site Analysis (cntinued) Prperties Using Slar r Wind Energy: An eligible slar r wind energy system is ne that utilizes the wind r slar energy t reduce energy required frm ther surces. It may be an additin, alteratin r an imprvement t an existing r new structure. Bth active and passive slar systems as well as wind driven systems are acceptable. Hwever, slar heating and dmestic ht water systems are nt permitted withut backup systems that are 100% peratinal. The Lt: The tpgraphy, shape, size, and drainage f the lt are all equally imprtant. Steep slpes that cause ersin, difficulty in maintaining a lawn, r difficult access t the prperty itself r t a garage are generally unfavrable cnditins. Drainage must be away frm the imprvements t avid the cllectin f water in r arund them. In twns and cities the site area shuld be limited t the lt n which the huse sits, unless the appraiser cmments that the additinal land is typical fr the neighbrhd, in which case additinal land may be acceptable. In rural areas, sites may be 10 acres r mre but are cnsidered in relatin t the typical size f lts in the area. If the size f the site is excessive, such as 30 acres in an area where 10 acres is typical, the excess land is nt cnsidered in the appraisal nr included in the mrtgage. Fld Znes: The appraiser must indicate n the appraisal reprt whether r nt the prperty is lcated in a Special Fld Hazard Area that is identified n the Federal Emergency Management Agency's (FEMA) and Fld Insurance Rate Maps (FIRM). The appraiser must als indicate the specific FEMA fld zne, map number and map date. If the prperty is lcated within a SFHA, the appraiser must: Attach a cpy f the fld map panel t the appraisal reprt Enter the FEMA zne designatin n the reprting frm as well as identify the map panel number and map date. Quantify the effect n value, if any. If the prperty is nt shwn n any map, the appraiser must enter "nt mapped." Appraiser shuld still cmment if there is any histry r vulnerability t flding t subject prperty in spite f its lcatin s unmapped status. Appraisers are required t perfrm the due diligence necessary t determine if a prperty is lcated within a Castal Barrier Resurce System (CBRS) zne. The U.S Fish & Wildlife Service mapping database is an additinal surce that identifies the CBRS bundaries. If the prperty is lcated within the CBRS bundaries, appraisers are instructed t immediately stp wrk n the assignment and return the file t the Lender. The fld insurance is required fr the term f the lan in an amunt at least equal t either the utstanding balance f the mrtgage less estimated land value r the maximum amunt f NFIP insurance available with respect t the prperty, whichever is less. CMS Plicies & Prcedures Page 188 f 208

189 Appraisal Review (cntinued) Site Analysis (cntinued) Reject prperties if they are subject t frequently recurring flding r if there is any ptential hazard t life r safety, r if escape t high grund wuld be infeasible during a severe fld. A prperty is nt eligible fr FHA insurance if the huse and related imprvements t the prperty is lcated, r is prpsed t be cnstructed within a SFHA (Zne A r Zne V) and where fld insurance under the Natinal Fld Insurance Prgram (NFIP) is nt available in the cmmunity. A prperty is nt eligible fr FHA-insured financing if the imprvements are lcated, r are prpsed t be lcated within the Castal Barrier Resurce System (CBRS). CBRS areas are envirnmentally prtected areas that have restrictins n federal assistance, including FHA-insured financing fr residential develpment. CBRS areas are lcated alng the cast f the Gulf f Mexic, Atlantic Ocean, and the Great Lakes. Prpsed cnstructin, lcated within a Special Fld Hazard area (100 year frequency), is ineligible regardless f whether r nt the prperty is r will be cvered by fld insurance. Imprvement Analysis The appraiser must prvide a clear, detailed, accurate, and cmprehensive descriptin f the imprvements. The appraiser shuld be as specific as pssible (cmmenting n such things as needed repairs, additinal features, mdernizatin, etc.), and shuld prvide supprting addendum if necessary. The descriptin f the imprvements shuld include a general verall descriptin and specific descriptins f the exterir, fundatin, basement, insulatin, interir surfaces, heating and cling systems, kitchen equipment, attic, amenities, and car strage. If the prperty that is being appraised includes an accessry apartment, the appraiser shuld describe it in the "cmments" sectin f the imprvement analysis prtin f the appraisal reprt frm. Actual and Effective Ages: The relatinship between the actual and effective ages f the prperty is a gd indicatin f its cnditin. A prperty that has been well-maintained will generally have an effective age smewhat lwer than its actual age. Prperties that have an effective age higher than their actual age prbably have nt been well-maintained r may have a particular physical prblem. In such cases, the USDA Certified Underwriter must pay particular attentin t the cnditin f the subject prperty in its review f the appraisal. There is n restrictin n the age f eligible dwellings. Cnsequently, mrtgages n lder dwellings that meet the general requirements are acceptable. The imprvements fr all prperties must be f the quality and cnditin that will be acceptable t typical purchasers in the subject market area. If the prperty is less than tw years ld, the appraiser must shw the mnth and year f cnstructin cmpletin. CMS Plicies & Prcedures Page 189 f 208

190 Appraisal Review (cntinued) Imprvement Analysis (cntinued) Cnfrmity t the Neighbrhd: The imprvements shuld generally cnfrm t the neighbrhd in terms f age, type, design, and materials used fr their cnstructin. If there is market resistance t a prperty because its imprvements are nt cmpatible with the neighbrhd r with the requirements f the cmpetitive market, (because f inadequate plumbing, heating, r electrical services; design; quality; size; cnditin; r any ther reasn directly related t market demand), the lan shuld be underwritten mre carefully. If apprpriate, the lan may als require mre cnservative mrtgage terms. The USDA Certified Underwriter shuld be aware that many lder neighbrhds have favrable hetergeneity in architectural styles, land use and age f husing. Fr example, lder neighbrhds are especially likely t have been develped thrugh custm building; this variety may be a psitive marketing factr. In the appraisal and underwriting prcess, special cnsideratin must be given t prperties that represent special r unique husing fr the subject neighbrhd. Nntraditinal types f husing, such as earth huses, gedesic dmes, lg huses, etc. are acceptable, prvided the appraiser has adequate infrmatin t develp a reliable estimate f market value. There is n requirement that ne r mre f the cmparable sales must be f the exact same design and appeal as the prperty that is being appraised (althugh appraisal accuracy is enhanced by using cmparable sales that are the mst similar t the subject prperty). On a case-by-case basis, bth the appraiser and the USDA Certified Underwriter must independently determine whether there is sufficient infrmatin available t develp a reliable estimate f market value. This will depend n the extent f the difference between the special r unique prperty and the mre traditinal types f huses in the market and the number f such prperties that have already sld in the area. If recent cmparable sales f the same design and appeal as the subject prperty are nt available, the appraiser may be able t determine sund adjustments fr the differences between the cmparables that are available and the subject prperty and t demnstrate the marketability f the prperty. He may need t use lder cmparable sales r cmparable sales in cmpeting neighbrhds and any ther reliable market date t verify the existence f similar prperties in the market area t dcument the prperty as acceptable. Hwever, if the appraiser is nt able t find any evidence f market acceptance and the characteristics f the prperty are s significantly different that he r she cannt establish a reliable estimate f market value, the prperty will nt be acceptable as security fr any mrtgage. CMS Plicies & Prcedures Page 190 f 208

191 Appraisal Review (cntinued) Imprvement Analysis (cntinued) There is n minimum size r living area requirements fr prperties. Hwever, dwelling units f any type shuld cntain sufficient living area t be acceptable t typical purchasers r tenants in the subject market area. There shuld be cmparables f similar size t the subject prperty t supprt the general acceptability f a particular prperty type. Unpermitted Additins Unpermitted additins, mdificatins and rm cnversins are nt eligible. Insulatin and Energy Efficiency The Appraisal Reprt Frm prvides an area fr the appraiser t state the "R" value fr insulatin if he r she is aware f it and t cmment n the adequacy f the insulatin. The appraiser shuld list the additinal energy-efficient features in the "cmments" area. The appraiser als shuld cmpare the energy-efficient features f the subject prperty t thse f the cmparable prperties in the "sales cmparisn analysis" grid t assure that the verall cntributin f these items is reflected in his r her estimate f the market value f the subject prperty. An energy efficient prperty is ne that uses cst effective design, materials, equipment, and site rientatin t cnserve nnrenewable fuels. Special energy saving items shuld be recgnized in the appraisal prcess. The nature f these items and their cntributin t value will vary thrughut the cuntry because f climatic cnditins and differences in utility csts. CMS Plicies & Prcedures Page 191 f 208

192 Appraisal Review (cntinued) Imprvement Analysis (cntinued) Rm List and Grss Living Area: The mst cmmn cmparisn fr single family prperties (including units in PUD r cndminium prjects) is abve grade grss living area. The appraiser must be cnsistent when he r she calculates and reprts the finished abve-grade rm cunt and the square feet f abve grade grss living area that is abve-grade in square feet. Fr units in cndminium prjects, the appraiser shuld use interir perimeter unit dimensins t calculate the grss living area. In all ther instances, the appraiser shuld use the exterir building dimensins per flr t calculate a prperty's abvegrade grss living area. Only finished abve-grade areas shuld be used--garages and basements (including thse that are partially abve-grade) shuld nt be included. A level is cnsidered t be belw-grade if any prtin f it is belw-grade--regardless f the quality f its "finish" r the windw area f any rm. Therefre, a walk-ut basement with finished rms wuld nt be included in the abve-grade rm cunt. Rms that are nt included in the abve-grade rm cunt may add substantially t the value f a prperty--particularly when the quality f the "finish" is high. Fr that reasn, the appraiser shuld reprt the basement r ther partially belw-grade areas separately and make apprpriate adjustments fr them n the "basement and finished areas belw-grade" line in the "sales cmparisn analysis" adjustment grid. T assure cnsistency in the sales cmparisn analysis, the appraiser generally shuld cmpare abve-grade areas t abve-grade areas and belw-grade areas t belw-grade areas. Hwever, if the appraiser needs t deviate frm this apprach because f the style f the subject prperty r f any f the cmparables, he r she must explain the reasn fr the deviatin and clearly describe the cmparisns that are being made. Infestatin, Dampness and Settlement: CMS requires crrectin if the appraiser indicates that there is evidence f dampness, wd bring insect infestatin r damage, r settlement, (that is atypical fr the age and lcatin f the subject and presents a weather r safety hazard. CMS Plicies & Prcedures Page 192 f 208

193 Appraisal Review (cntinued) Imprvement Analysis (cntinued) Prperty Cnditin and Appraiser Cmments: Based n the factual data f the imprvement analysis, the appraiser must express an pinin abut the cnditin f the imprvements. The appraiser must reprt the cnditin f the imprvements in factual, specific terms. Any cnditin that may affect the value r marketability f the subject prperty must be reprted t assure that the appraiser adequately describes the prperty. The appraiser must reprt a detrimental cnditin f the imprvements even if that cnditin is als typical fr cmpeting prperties. Fr instance, the appraiser shuld nte if a prperty is characterized by deferred maintenance r a lack f updating even if the same cnditin applies t cmpeting prperties in the neighbrhd. Any required repairs and any physical, functinal, r external inadequacies must be addressed by the appraiser in the "Cmments" sectin f the reprt. Adverse envirnmental cnditins (including, but nt limited t, hazardus wastes, txic substances, etc.) that are present in the imprvements, n the site, r in the immediate vicinity f the subject prperty must als be addressed. Rf Damage Visible evidence f rf leaks and/r interir water damage (e.g., ceiling stains) even if the appraisal des nt list them must be addressed. If any f these cnditins exist, a rf certificatin by a qualified rfing cntractr r general cntractr must be btained. The rf must have a remaining useful and physical life f at least tw years. Deferred Maintenance Appraisals n prperties with deferred maintenance must include a realistic cst t cure. Excessive deferred maintenance (usually abve 5% f the prperty value) and any items that affect basic habitability and safety will require an Appraisal Update and/r Cmpletin Reprt (Fannie Mae 1004D/Freddie Mac frm 442). Refer t Appliances: The Valuatin Prtcl (page D-26 f Appendix D, Handbk ) fr additinal guidance. Unacceptable Prperty Cnditins Imminent Threat - Prperties defined as imminent threat are thse that pse an imminent health r safety threat Inadequate Fundatin Inadequate fundatins are thse that d nt meet current cde requirements. Additinally, a cantilevered prperty is nt acceptable. A cantilevered prperty is a prjecting structure supprted at ne end and carries a lad at anther end r alng its length Inadequate Heating Prperties defined as having inadequate heating are thse withut permanently affixed legal heating systems (e.g., the prperty uses space heaters r fireplaces t heat the premises) Inadequate Maintenance r Services: These are prperties, which lack city r cunty maintenance services Inadequate Utilities: These are prperties withut water r public electricity cnnectins t the site. This term als includes imprperly vented water heaters Barded-up prperties CMS Plicies & Prcedures Page 193 f 208

194 Appraisal Review (cntinued) Imprvement Analysis (cntinued) Physical Deficiencies r Adverse Cnditins: Debris, Graffiti, Trash Prperties shwing an excessive amunt f debris, graffiti, r trash may require clean up. If clean-up is necessary, an Appraisal Update and/r Cmpletin Reprt (Fannie Mae frm 1004D/Freddie Mac frm 442) with pht is required Infestatin, Dampness, Settlement If the appraiser indicates that there is evidence f dampness, wd bring insects, r settlement, he r she must cmment n its effect n the subject prperty's marketability and value. The USDA Certified Underwriter must request either satisfactry evidence that the cnditin was crrected r submit a prfessinally prepared reprt (e.g., an exterminatr's certificate r an engineer's reprt). The reprt must indicate that based n an inspectin f the prperty, the cnditin des nt pse any threat f structural damage t the imprvements. If crrective actin is nt a cnditin f the appraisal, the appraiser must cmment n the effects f adverse cnditins n value and marketability. Sales Cmparisn Apprach The value indicated by this apprach must be supprted by an analysis f recently clsed sales f at least three cmparable sales lcated in the subject prperty's neighbrhd r market. One f the three settled cmparables sales used must be a cnventinal sale if available. If the subject prperty is lcated in an area where there is all gvernment financing, this must be nted in "Cmments". Having all cnventinal cmparables with n gvernment cmparable sales is acceptable. Generally, the appraiser shuld use cmparable sales that have been settled r clsed within the last six mnths. Hwever, the appraiser may use lder cmparable sales as additinal supprting data if he r she believes that it is apprpriate. The appraiser must cmment n the reasns fr using cmparable sales that are mre than six mnths ld. If the subject prperty is lcated in a declining market, the cmparable sales must be dated within 90 days f the date f the appraisal. The appraiser's analysis f a prperty must take int cnsideratin all factrs that have an impact n value, recgnizing that a well- infrmed r well-advised purchaser will pay n mre fr a prperty than the price he r she wuld pay fr a similar prperty f equal desirability and utility if it were purchased withut undue delay. T accmplish this, the appraiser must analyze the clsed r settled sales, the cntract sales, and the current listings f prperties that are the mst cmparable t the subject prperty. This is particularly imprtant in sft r declining markets because the cmpeting current listings and cntracts prbably reflect the upper-end f value fr the subject prperty as f the effective date f the appraisal, and we expect appraisers t accurately reprt and reflect market cnditins as f that date. CMS Plicies & Prcedures Page 194 f 208

195 Appraisal Review (cntinued) Sales Cmparisn Apprach (cntinued) The cmparable market data must be verified, analyzed, and adjusted fr differences between the cmparable prperties and the subject prperty. Because the appraiser's estimate f market value is n better than the reliability f the cmparable data that is used, the appraiser must exercise due diligence t ensure the reliability f the cmparable sales data that he r she uses. The appraiser must reprt the data and/r verificatin surce(s) fr each cmparable sale n the appraisal frm. An appraiser may use a single surce fr the data and verificatins r multiple surces if they are needed t adequately verify the cmparable sales. The quality f the data available varies frm surce t surce and frm ne lcality t anther. On the ther hand, if the appraiser's basic data surce des nt cnfirm r verify the sales data, the appraiser will need t use additinal surces. When cmparable sales data is prvided by a party that has a financial interest in either the sale r financing f the subject prperty, the appraiser must re-verify the data with a party wh des nt have a financial interest in the subject transactin. The USDA Certified Underwriter shuld thrughly review the "sales cmparisn analysis" adjustment grid. The sales cmparisn analysis prvides many places in which an errr can be made in the use f dllar adjustments. A spt check must always be made f the psitive and negative adjustment calculatins. Errrs in arithmetic may have a significant effect n the value cnclusin and, therefre, must be crrected by the appraiser. The fllwing key items are cnsidered in the review and analysis f the sales cmparisn apprach: Prximity t Cmparable Sales t the Subject: The descriptin f the cmparable's prximity t the subject prperty must be specific (e.g., tw blcks suth). Whenever pssible, the appraiser shuld use cmparable sales in the same neighbrhd and/r as the subject prperty because the sales prices f cmparable prperties in the neighbrhd shuld reflect the same psitive and negative lcatin characteristics. Generally, cmparable sales shuld nt be mre than ne mile frm the subject. Sales Price: The sales price f each cmparable sale shuld be within the general range f the estimate f market value fr the subject prperty. A $100,000 cmparable sale fr a $75,000 subject prperty may raise questins abut the validity f the cmparable. Cmparable Sales Inside and Outside New and Established Prjects: Fr prperties that are in established subdivisins r fr units in established cndminium r PUD prjects (thse that have resale activity), the appraiser shuld use cmparable sales frm within the subject prperty's subdivisin r prject if there are any available. Resale activity frm within the subdivisin r prject shuld be the best indicatr f value fr prperties in the subdivisin r prject. If the appraiser uses sales f cmparable prperties that are lcated utside f the subject neighbrhd, an explanatin must be included with the analysis. Fr prperties in new subdivisins r fr units in new (r recently cnverted) cndminium r PUD prjects, the appraiser must cmpare the subject prperty t ther prperties in its general market area as well as t prperties within the subject subdivisin r prject. This cmparisn shuld help demnstrate market acceptance f new develpments and the prperties within them. Generally, the appraiser shuld select ne cmparable sale frm the subject subdivisin r prject and tw cmparable sales frm utside the subject subdivisin r prject. CMS Plicies & Prcedures Page 195 f 208

196 Appraisal Review (cntinued) Sales Cmparisn Apprach (cntinued) In selecting the cmparables, the appraiser shuld keep in mind that sales r re-sales frm within the subject subdivisin r prject are preferable t sales frm utside the subdivisin r prject as lng as the develper r builder f the subject prperty is nt invlved in the transactins Value Adjustments: Cmparable sales must be adjusted t the subject prperty; except fr sales and financing cncessins, which are adjusted t the market at the time f sale. The subject prperty is the standard against which the cmparable sales are evaluated and adjusted. The appraiser must describe prperty characteristics using specific, factual, and detailed language. The appraiser must use numerals whenever pssible (e.g., fr lt size, age f imprvements, etc.). Clear descriptins (such as gd, average, fair r pr) must be used t prvide cnsistency between the prperty and the cmparable sale. If an item in the cmparable prperty is superir t that in the subject prperty, a negative (-) adjustment is required t make that item equal t that in the subject prperty. Cnversely, if an item in the cmparable prperty is inferir t that in the subject prperty, a psitive (+) adjustment is required t make that item equal t that in the subject prperty. If the appraiser's adjustments d nt fall within the net and grss percentage adjustment guidelines, but the appraiser believes that the cmparable sales used in the analysis are the best available, as well as the best indicatrs f value f the subject prperty, the appraiser must prvide an apprpriate explanatin. Number f Adjustments The need fr numerus adjustments indicates the cmparable sale is nt similar t the subject prperty. This decreases the validity f the cmparable sale. In sme circumstances, the use f cmparable sales with higher-thannrmal adjustments may be warranted. The appraiser must satisfactrily justify their usage. Sales r Financing Cncessins/Cntributins Appraisers are required t identify and reprt sales cncessins and prperly address and / r adjust the cmparable sale transactins t accunt fr sales cncessins. Sales cncessin influence the price paid fr real estate and may be paid in many frms. The appraiser must be prvided with all financing data and sales cncessins, even if the cncessin is in a frm nt nrmally included in the sales agreement, such as a gift r dwn payment assistance. The dllar amunt f sales r financing cncessins paid by the seller must be reprted fr the cmparables if the infrmatin is reasnably available. Generally, sales r financing data fr cmparable sales, such as the mrtgage amunt, lan type, interest rate, term, and any fees r cncessins the seller paid--is available. The appraiser shuld btain this infrmatin frm an individual wh was a party t the cmparable transactin (the brker, buyer, r seller) r frm a data surce that the appraiser cnsiders t be reliable. There may be sme situatins in which sales r financing infrmatin is nt available because f legal restrictins r ther disclsure-related prblems. In such cases, the sale shuld nt be used as market data. CMS Plicies & Prcedures Page 196 f 208

197 Appraisal Review (cntinued) Sales Cmparisn Apprach (cntinued) Examples f sales r financing cncessins include interest rate buy dwns r ther belw-market rate financing; lan discunt pints; lan riginatin fees; clsing csts assistance fr csts custmarily paid by the brrwer; payment f cndminium r PUD assciatin fees; builder incentives, dwn payment assistance, mnetary gifts r persnal prperty, refunds f (r credit fr) the brrwer's expenses; absrptin f mnthly payments; assignment f rent payments; and the inclusin f nn-realty items in the transactin given by the seller r any ther party t the transactin. Adjustments must be cnsidered fr different types f sales r financing cncessins. Psitive adjustments fr sales r financing cncessins are nt acceptable. Fr example, if lcal traditin r law results in virtually all f the prperty sellers in the market area paying a 1% lan riginatin fee fr the purchaser, and a prperty seller in that market did nt pay any lan fees r cncessins fr the purchaser, the sale wuld be cnsidered as a cash equivalent sale in that market. The appraiser shuld recgnize cmparable sales that sld fr all cash r with cash equivalent financing and use them as cmparables if they are the best indicatrs f value fr the subject prperty. Such sales can als be useful t the appraiser in determining thse csts that are nrmally paid by sellers as the result f traditin r law in the market area. The amunt f the negative adjustment t be made t each cmparable with sales r financing cncessins is equal t any increase in the purchase price f the cmparable the appraiser determines t be attributable t the cncessins. The need t make negative adjustments and the amunt f the adjustments t the cmparables fr sales and financing cncessins are nt based n hw typical the cncessins might be fr a segment f the market area. Hwever, large sales cncessins can be relatively typical in a particular segment f the market and still result in sale prices that reflect mre than the value f the real estate. Adjustments based n mechanical, dllar-fr-dllar deductins that are equal t the cst f the cncessins t the seller (as a strict cash equivalency apprach wuld dictate) are nt apprpriate. The effect f the sales cncessins n sales prices can vary with the amunt f the cncessins and differences in varius markets. The adjustments must reflect the difference between what the cmparables actually sld fr with the sales cncessins and what they wuld have sld fr withut the cncessins s that the dllar amunt f the adjustments will apprximate the market's reactin t the cncessins. Date f Sale/Time Adjustments The appraiser shuld prvide the date f the sales cntract and the settlement r clsing date fr each cmparable sale. Unless the appraiser believes that the exact date is necessary t understand the adjustments, nly the mnth and year f the sale need t be reprted. If the appraiser des nt reprt bth the cntract date and the settlement r clsing date, he r she must identify the reprted sale date as either the cntract date r the settlement r clsing date. If the appraiser reprts the cntract date nly, he r she must state whether the cntract resulted in a settlement r a clsing. CMS Plicies & Prcedures Page 197 f 208

198 Appraisal Review (cntinued) Sales Cmparisn Apprach (cntinued) The appraiser must minimize adjustments made due t the difference in time f the cmparable sale frm the subject prperty sale. The adjustments must reflect the difference in market cnditins between the date f sale f the cmparable and effective date f appraisal fr the subject prperty. If used, the cmparable sales must be supprted by dcuments that reflect the differences were warranted. Fr example, psitive adjustments fr the time f sale must have a crrelated rating in the Neighbrhd sectin shwing increasing prperty values. Additinally, the appraiser must explain the appreciatin that has taken place, hw lng is has been experienced, and whether it can be expected t cntinue. The appraiser must als describe the cnditins causing it. Abve-Grade Rm Cunt & Grss Living Area Only finished abve-grade areas shuld be included in calculatin f grss living area. The appraiser shuld reprt the basement and ther partially belw-grade areas separately and adjust them accrdingly. The rm cunt shuld be similar fr the subject prperty and all cmparables. Fr example, a fur bedrm cmparable sale generally is nt acceptable t supprt the value f a tw bedrm subject prperty. The appraiser must address large differences between subject prperty and cmparable sales, since they raise dubts abut the validity f the cmparables as gd indicatrs f value. Adjustments fr differences in square ftage must be realistic fr the marketplace. Bracketing The appraiser must chse cmparables that bracket the square ftage (GLA) f the subject. Ideally, ne f the cmparables shuld be a little larger (200 square feet t 300 square feet); anther a little smaller; and a third shuld be apprximately the same size (generally 100 square feet f the subject). The appraiser shuld nt select cmparables by sales price. Ttal Adjustments (Net & Grss) There are established guidelines fr the net and grss percentage adjustments that are relied upn t determine whether a prperty shuld be used as a cmparable sale. Generally, the dllar amunt f the net adjustments fr each cmparable sale shuld nt exceed 15% f the cmparable's sales price. When the adjustments exceed 15%, the appraiser must cmment n the reasns fr nt using a mre similar cmparable. Further, the dllar amunt f the grss adjustments fr each cmparable sale shuld nt exceed 25% f the cmparable's sales price. The amunt f the grss adjustment is determined by adding all individual adjustments withut regard t the psitive r negative adjustments. When the adjustments exceed 25%, the appraiser must cmment n the reasns fr nt using a mre similar cmparable. Line adjustments shuld nt exceed 10%. Individual adjustments that are excessively high shuld be explained by the appraiser and reviewed carefully by the USDA Certified Underwriter. CMS Plicies & Prcedures Page 198 f 208

199 Appraisal Review (cntinued) Cst Apprach The estimated reprductin cst f imprvements must nt be cmpleted fr existing cnstructin; hwever, the estimated value f the site must still be entered. If the subject prperty is prpsed cnstructin r existing cnstructin under ne year f age, the Marshall and Swift Frm 1007 is t be cmpleted and attached and the bx is t be cmpleted using the figures frm Marshall and Swift calculatins. Under "Cmments n Cst Apprach, the appraiser must indicate, fr existing, prpsed, r under cnstructin, that the prperty cnfrms t applicable minimum HUD standards. If it des nt cnfrm, the appraiser must reject the prperty and explain. If the required repairs r crrectins permit the prperty t "cnfrm t HUD standards," the appraiser shuld state that the prperty cnfrms t minimum / maximum HUD standards. In additin, a sketch f all imprvements (huse, garage, utbuildings) must be prepared n a separate page and attached t the Unifrm Residential Appraisal Reprt (Fannie Mae frm 1004). The appraiser shuld nte in the "Cmments n Cst Apprach" bx, See attached summary prperty sketch. The sketch shuld shw the grss living area abve grade fr the huse and the area f the garage if attached. The sketch shuld include all exterir dimensins f the huse as well as patis, prches, garages, breezeways and ther ffsets. The appraiser shuld enter "cvered" r "uncvered" t indicate a rf r n rf, such as ver a pati. Remaining Ecnmic Life: The estimated remaining ecnmic life must be shwn in the "Cmments n Cst Apprach" space. The remaining ecnmic life f a prperty is the estimated perid ver which the imprvements will cntinue t cntribute t the value f the prperty, r the estimated perid in which the imprvements increase the value f the prperty abve that fr the vacant site prvided the imprvements receive nrmal maintenance. Value Influences: There are fur basic frces that influence real prperty values: Scial standards Ecnmic factrs Gvernment cntrls Envirnmental cnditins Because these frces may result in a change in the imprvement's' cntributin t value, estimating the remaining ecnmic life f a prperty can be difficult. Therefre, the appraiser shuld emphasize the verall quality and design f the imprvements and the attitudes f typical purchasers in the subject market area. The appraiser may state the remaining ecnmic life as a single figure r as a range, if mre apprpriate. CMS Plicies & Prcedures Page 199 f 208

200 Appraisal Review (cntinued) Incme Apprach The incme Apprach t value is based n the assumptin that market value is related t the market rent r incme that a prperty can be expected t earn. Appraisals relying n the Incme Apprach as a sle indicatr f market value are nt acceptable. Its use is generally apprpriate in neighbrhds f single-family prperties when there is a substantial rental market, and is required fr all three-t fur- unit prperties. When used, the appraiser must shw the grss rent frm each f the cmparables at the bttm f the frm under "Final Recnciliatin". The value indicated by the Incme Apprach, if cnsidered applicable by the appraiser, must be derived by the grss rent multiplier technique using ecnmic market rent. Estimated market rent is based n an analysis f cmparable rentals in the neighbrhd. After apprpriate adjustments are made t the cmparables, their adjusted (r indicated) values are recnciled t develp an estimated mnthly market rent fr the subject prperty. The grss rent multiplier is determined by dividing the sales prices f cmparable prperties that were rented at the time f sale by their mnthly market rent, which is then recnciled t create a single grss rent multiplier (r a range f multipliers) fr the subject prperty. If the Incme Apprach is nt used, the appraiser shuld draw a line thrugh the wrds "Indicated Value by Incme Apprach (if applicable)" and enter the estimated market rent. The rest f the line items shuld be marked "N/A". Recnciliatin The recnciliatin prcess that leads t the estimate f market value is an n-ging prcess thrughut the appraiser's analysis. The final recnciliatin is nt an averaging technique, rather it is a prcess used by the appraiser t explain the reasnableness f each apprach and its applicability t the final estimate f value. The appraiser must indicate whether the appraisal is made "as is", "subject t repairs, alteratins, r cnditins listed", r "cmpletin per plan and specificatins". The "as is" value shuld be used nly if there are n repairs r inspectins required r if the prperty is being rejected. CMS Plicies & Prcedures Page 200 f 208

201 NATURAL DISASTERS Overview When natural disasters ccur (e.g. hurricanes, trpical strms, trnades r ther severe strms) steps must be taken t ensure that the security n each lan is prtected. Once a disaster is declared, FEMA annunces which cunties are cnsidered disaster areas under Designated Cunties at CMS will update their Disaster Site and it is the respnsibility f the client t check the site fr updates. The fllwing guidelines apply when a prperty is lcated in a Federally Declared Majr Disaster Area as defined by FEMA: Prperties Lcated in Federally Declared Majr Disaster Areas If the prperty inspectin was cmpleted prir t the incident date f the natural disaster, a re-inspectin r inspectin will be required. These requirements apply t all Lans regardless f appraisal requirements. Regardless f whether r nt the transactin requires an appraisal, an inspectin will be required up t and including 90 days frm the date the natural disaster ccurred. There may be situatins where a lnger timeframe may be instituted. The inspectin r re-inspectin must be a cnditin f the lan clsing. Inspectin Requirements An appraiser, engineer, architect, qualified hme inspectr r an emplyee f the Client may perfrm the special prperty inspectin. Attach phtgraphs f the subject prperty t the Special Disaster Inspectin Certificatin. The individual wh perfrms the inspectin shuld review the riginal appraisal reprt and be able t certify that his r her persnal inspectin f the building revealed n indicatins f significant disaster related damages. The inspectr's Special Disaster Inspectin Certificatin must address the physical cnditin f the site and imprvements; it des nt need t address value trends. If the cnditin f the subject prperty is acceptable, the value cnclusin made prir t the disaster. CMS Plicies & Prcedures Page 201 f 208

202 Natural Disasters (cntinued) Inspectin Requirements (cntinued) Special Disaster Inspectin Certificatin Alternatives The fllwing frms may als be used fr this certificatin alng with a phtgraph f the subject prperty: Appraisal Update and/r Cmpletin Reprt (Fannie Mae frm 1004D/Freddie Mac frm 442) Unifrm Residential Appraisal Reprts (Fannie Mae frm 1004/Freddie Mac frm 70) Drive-by Appraisal (Fannie Mae/Freddie Mac frm 2055). In any situatin where the appraiser ntes defects in the exterir inspectin, a full Fannie Mae frm 1004/Freddie Mac frm 70 appraisal reprt with an interir and exterir inspectin is required Individual Cndminium r PUD Unit Appraisal Reprt (Fannie Mae frm 1073/Freddie Mac frm 465) Special Disaster Inspectin Certificatin may take the frm f a letter n the qualified individual's letterhead bearing an riginal signature. The letter is required t cntain the language indicated in the Special Disaster Inspectin Certificatin Instructins Standard frm used by the prperty inspectr prviding it clearly identifies the name, address, and qualificatins f the inspectr, cntains the infrmatin required in the Special Disaster Inspectin Certificatin, and bears an riginal signature Prperties with Significant Damage: If a prperty was significantly damaged and an appraiser perfrmed the prperty damage inspectin, the prperty must be re-inspected by a qualified hme inspectr, r an engineer t assess the nature and degree f the damage. A significantly damaged prperty must be repaired befre the lan is clsed if the damage affects the structural integrity r livability f the prperty, as determined by the inspectr. Prperties with Minr Damage: Repairs will nt be required fr a prperty with minr damage nt affecting the structural integrity r livability f the prperty. Appraisers must certify that value as is and that prperty still meets USDA Minimum Standards. CMS investrs will nt finance delinquent lans. CMS Plicies & Prcedures Page 202 f 208

203 Natural Disasters (cntinued) Escrw Accunts When prpsed exterir develpment wrk cannt be cmpleted due t weather related issues and the wrk remaining des nt affect the livability f the hme, an escrw accunt fr exterir weather delayed repairs may be established by the apprved lender per Lan nte guarantees will be issued pst-clsing fr lans with eligible escrw accunts established per sectin (2)(ii). Escrw accunts fr interir repairs are nt permitted. CMS Plicies & Prcedures Page 203 f 208

204 Versin /12/16 USDA CONDOMINIUM PROJECT MATRIX Prject Classificatin Site/Detached Cnd Unapprved Cndminium Prject Prject Eligibility Presale Insurance Dcumentatin Requirements N review required. Prject must cnsist f single-family detached dwellings. N shared garages r shared buildings. N requirements. Hazard cverage fr a single family detached dwelling paid by the brrwer. HRAP r DELRAP Previusly Apprved Cndminium Prject by CMS r Anther Lender Appraisal Reprt (Fannie Mae Frm 1073) Apprval Methd Prject Eligibility Presale Insurance Dcumentatin Requirements Lender Certificatin fr Individual Unit Financing Prject must be HRAP r DELRAP apprved. Prject cnsists f at least 2 units. All units and cmmn elements are 100% cmplete in subject legal phase. N single entity (same individual, investr grup, partnership r crpratin) may wn >10% f ttal units in prject (existing prjects). Prjects with <10 unit, n single entity may wn mre than ne unit and prject must be 100% cmplete. <=15% f the ttal units within the prject can be mre than 30 days delinquent n HOA fees, dues r assessment payments. <=25% f the ttal space may be used fr nn-residential purpses. Right f First Refusal language r cvenants in the cndminium legal dcuments are NOT permitted unless the first mrtgagees r its assignees rights will nt be adversely impacted t: Freclse r take title t a cndminium unit pursuant t the remedies in the mrtgage. Existing Prject: 50% f units are sld and cnveyed. New Cnstructin Less Than One Year Old: 30% f the units are sld and cnveyed. Nn-gut Cnversin: 51% f the units are sld and cnveyed. 50% f prject ccupied as primary residence. $1,000,000 liability cverage minimum per ccurrence. Insure n 100% f its replacement cst. Fidelity Insurance is required fr the HOA and Management Cmpany, if applicable, fr all prjects ver 20 units with cverage n less than three mnths aggregate assessments n all units and reserve funds. Walls-in (HO-6) cverage, if required. Plicy must be in hmewner s name r in the name f the HOA (2-4 Unit Prject). Fld Insurance, if applicable. Lender Certificatin fr Individual Unit Financing signed by DE USDA Certified Underwriter FHA HOA Questinnaire Appraisal Reprt Site Cnds: Fannie Mae Frm 1073 Insurance Dcumentatin Pending Special Assessment Analysis, if applicable FHA Cnnectin Apprval Printut Dcumentatin supprting Lender Certificatin that prject is in cntinued cmpliance with cndminium guidelines Fr prjects less than ne year ld, HUD will require the fllwing: Builder s Certificatin f Plans, Specificatins and Site, Frm HUD Warranty f Cmpletin f Cnstructin, Frm HUD Building Permit issued by lcal jurisdictin Final Certificate f Occupancy issued by lcal jurisdictin Subterranean Termite Prtectin Builder s Guarantee (NPCA -99- CMS Plicies & Prcedures Page 204 f 208

205 Versin /12/16 Prject Classificatin Unapprved Cndminium Prject Prject Eligibility Presale Insurance Dcumentatin Requirements Accept a deed r assignment in lieu f freclsure in the event f default by a mrtgagr, r Sell r lease a unit acquired by the mrtgagee r its assignee. FHA Cncentratin: Prjects >3 units: <= 50% may have FHA financing. Prject <=3 units: One unit may have FHA financing. May submit fr HOC apprval if there is >50% and <100% FHA cncentratin and the prject is 100% cmplete fr at least ne year (final r temprary CO), 100% sld and cnveyed and has 10% reserves. Prject des nt cnsist f any manufactured hmes. A stick-built prject cannt cntain any manufactured hmes. N pending litigatin. See the additinal Underwriting Guidelines fr infrmatin n the fllwing tpics: Affrdable Husing Special Assessments Recreatinal Leases Restrictins fr Leasing Transfer cntrl f HOA Verify an eligible prject; See Ineligible Cndminium Prjects sectin fr mre infrmatin. Subterranean Termite Sil Treatment Builders Guarantee (NPCA-99-b) HUD apprved 10-year Warranty, if required CMS Plicies & Prcedures Page 205 f 208

206 Versin /12/16 Ineligible Prjects Any prject r building that is wned by several wners as tenants-in-cmmn, r by a Hmewners Assciatin in which individuals have an undivided interest in a residential apartment building and land, and have the right f exclusive ccupancy f a specific apartment in the building Assisted Living Cmmn Interest Apartment AKA cmmunity apartment prject r wn yur wn. A prject in which individuals have an undivided interest in a residential apartment building and land, and have the right f exclusive ccupancy f a specific unit in the building. The prject r building is ften wned by several wners as tenants in cmmn r by a Hmewners Assciatin Cndminium Htel prjects are managed and perated as a htel r mtel, even thugh the units are wned individually. FHA cnsiders prjects with any f the fllwing characteristics t be nn-residential htel-type prjects and secnd hme residential prjects in resrt lcatins and therefre, ineligible. Cndminium prjects that represent a legal, but nn-cnfrming use f the land; if zning regulatins prhibit rebuilding the imprvements t current density in the event f their full r partial destructin Husebat prjects Investment securities that have dcuments n file with the Securities and Exchange Cmmissin r prjects where unit wnership is characterized r prmted as an investment pprtunity Mandatry Rental Pls Multi-family prjects that permit an wner t hld title t mre than ne unit, with wnership f all his r her units evidenced by a single-deed and mrtgage. Prjects that allw lckut units are cnsidered multi-family New prjects where the seller is ffering sale/financing cntributins / cncessins in excess f established limitatins fr individual lans N mre than 15% f the ttal units within the prject can be mre than ne mnth delinquent n HOA fees, dues r assessment payments Prjects lcated in Castal Barriers as defined by the Castal Barriers Act Prjects nt deemed t be primarily residential Prjects that restrict the unit wner s ability t ccupy the unit Prjects where a single entity wns mre than 10% f the ttal units in the prject Prjects with nn-incidental business peratins wned r perated by the Hmewners Assciatin such as, but nt limited t, a restaurant, spa, health club, etc. Prject where nnresidential space is greater than 25% Prjects where the develper has retained wnership f the cmmn areas r amenities after transfer f cntrl has been turned ver t the HOA Time share r segmented wnership prjects End f Guidelines CMS Plicies & Prcedures Page 206 f 208

207 USDA New Cnstructin Required Exhibits and Inspectins Checklist

208 NEW CONSTRUCTION REQUIRED EXHIBITS & INSPECTIONS Nte: This frm applies t single family dwellings, including cndminium units, prpsed cnstructin, under cnstructin, and existing prperties less than ne year ld. This frm des nt apply t manufactured hmes. PROPERTY INFORMATION Prperty Address Lan Number FHA Case # CONSTRUCTION EXHIBITS Exhibits Required fr Prpsed Cnstructin, Under Cnstructin & Existing less than 1 year Cnditin Initials T d 1 Cmplete URAR must include all standard exhibits. Fr prperties less than 90% cmplete at time f appraisal, appraiser must review builder s plans & specificatins r ther dcuments sufficient t identify the extent and character f the subject prperty. Appraisal is cmpleted subject t cmpletin per plans and specs... Appraiser t include fllwing statement in remarks sectin Prperty under cnstructin; cmplete accrding t submitted cnstructin exhibits. Fr prperties mre than 90% cmplete at time f appraisal, review f builder s plans & specificatins is required and appraisal is cmpleted subject t repairs... r as-is. 2 Builder Certificatin f Plans, Specificatins, & Site - Frm HUD HUD Nt required fr less than 90 percent lan-t-value cases. 3 Subterranean Termite Treatment Builder s Certificatin and Guarantee - HUD-NPCA-99-A (always required). New Cnstructin Subterranean Termite Sil Treatment Recrd - HUD-NPCA-99-B signed by licensed pest cntrl cmpany (Required, if n HUD-NPCA-99-A, the bx fr SOIL is checked). If the state has mre stringent recrd keeping requirements than the NPCA-99-B, use the state frm and attach t HUD-NPCA-99-A. 4 One Year Builder Warranty f Cmpletin f Cnstructin - Frm HUD Executed between Builder and Purchaser at clsing. HUD Nt required fr less than 90 percent lan-t-value cases. 5 Lcal Authrity Apprval fr Individual Water Supply System and/r Sewage Dispsal System when applicable. Dcumentatin shwing lcatin f well, septic tank and drain-field. Prvide evidence frm lcal Health Authrity that bth systems are peratinally acceptable. This includes btaining a well water quality test. Fllwing Exhibits required in cases where prperty is inspected by lcal gvernmental authrity Cnditin Initials T d 6 Building Permit issued by lcal gvernment prir t start f cnstructin. 7 Certificate f Occupancy (r its equivalent) issued by the lcal gvernment as evidence f all required inspectins. 8 Final Inspectin Optins t verify 100% Cmpletin (n-site & ff-site imprvements) If the prperty is 100% cmplete and n cnditins/repairs are required by the appraiser, the URAR may serve as the final inspectin prvided it cntains the standard exhibits including clear phtgraph f each diagnally ppsite frnt and rear crner f the huse and the fllwing statement in the remarks sectin f reprt This is a newly cmpleted dwelling and appears t be in cnfrmance with the submitted cnstructin exhibits and a statement f the acceptability f grading and drainage fr the prperty. OR Final Inspectin by the Appraiser r FHA Fee Inspectr - Required by GMACB in rder fr DE USDA Certified Underwriter t certify that the prperty is 100% cmplete. Final Inspectin is required fr Prpsed Cnstructin, Under Cnstructin less than 90% cmplete at time f initial appraisal inspectin r Under Cnstructin mre than 90% cmplete at time f initial inspectin. Final Inspectin reprted n Frm HUD and t include phts shwing cmpletin f cnstructin. Fllwing Exhibits required in cases prperty is NOT inspected by lcal gvernmental authrity Cnditin Initials T d 9 HUD-Apprved 10-Year Warranty - Executed at clsing. (Prvide warrantr apprval applicatin prir t clsing.) List f HUD-apprved warranties at: 10 Final Inspectin Optins t verify 100% cmpletin (n-site & ff-site imprvements) If the prperty is 100% cmplete and n cnditins/repairs are required by the appraiser, r if the prperty is an existing prperty less than ne year ld, the URAR may serve as the final inspectin prvided it cntains the standard exhibits including clear phtgraph f each diagnally ppsite frnt and rear crner f the huse and the fllwing statement in the remarks sectin f reprt This is a newly cmpleted dwelling and appears t be in cnfrmance with the submitted cnstructin exhibits and a statement f the acceptability f grading and drainage fr the prperty. OR Final Inspectin by the Appraiser (must be qualified) r FHA Fee Inspectr - Required t certify that the prperty is 100% cmplete, fr bth n-site and ff-site imprvements. Final Inspectin reprted n Frm HUD and t include clear phtgraph f each diagnally ppsite frnt and rear crner f the huse and the fllwing statement in the remarks sectin f reprt and statement in remarks sectin: This is a newly cmpleted dwelling that was nt cmpleted under HUD r VA inspectins. The dwelling appears t be in cnfrmance with the submitted cnstructin exhibits and a statement f the acceptability f grading and drainage fr subject prperty. DE USDA Certified Underwriter t sign the fllwing frms in regards t New Cnstructin Prperties HUD Addendum t URLA (Frm HUD 2900-A, page 3) DE Lender certifies that the prperty is 100% cmplete (bth n-site & ff-site imprvements) and the prperty meets HUD s minimum prperty standards (MPS) HUD b Cnditinal Cmmitment Direct Endrsement Statement f Appraised Value DE USDA Certified Underwriter Name DE USDA Certified Underwriter Signature CHUMS # Date