Conforming and High Balance ARM 1

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1 Conforming and High Balance ARM Program Description: An adjustable rate mortgage program with conforming loan amounts. Fixed for 5 or 7 years then adjust to a 1 year ARM based on the one year LIBOR index. Program Codes: High Balance Program Codes: M107-5/1 5/1 Yr LIBOR ARM J5/1F High Balance 5/1 Yr LIBOR ARM M107-7/1 7/1 Yr LIBOR ARM J7/1F High Balance 7/1 Yr LIBOR ARM M107-10/1 10/1 Yr LIBOR ARM Contents: click heading below to be directed to appropriate section. Age of Documents Appraisals Appraiser Requirements ARM Program Information Assets Assumptions Borrower Eligibility Closing Requirements Construction to Permanent Continuity of Obligation Credit Departure Residence Documentation Down Payment Escrow Holdback Flood Insurance Geographic Restrictions Gifts Hazard Insurance Income/Employment Interest Only Loan Amount Maximum LTV/CLTV/HCLTV High Balance Maximum LTV/CLTV/HCLTV Maximum LTV/CLTV/HCLTV Mortgage Insurance Mortgages to one Borrower Non-Arms Length Transaction Non-Occupant Co-Borrowers Number of Properties Occupancy Prepayment Penalty Property Types (Eligible/Ineligible) Property Flipping Properties Listed for Sale Purchases Ratios/Qualifying Rate Refinances Rate/Term Cashout Rent Loss Insurance Reserves Seller/Interested Party Contributions Source of Funds Subordinate Financing Temporary Buydowns Title Documentation Trusts Underwriting Mega Capital does not make any loans, which are defined, as high-cost under Section 32 or any State or locally governed legislation. Mega Capital reserves the right to amend the requirements set out in this document without providing prior notice. All loans must meet Program Guidelines and Mega Capital Conventional Underwriting guidelines. Conforming and High Balance ARM 1

2 Maximum DU LTV/CLTV/HCLTV Purchase and Rate and Term Refinance Occupancy Units Maximum LTV / CLTV / HCLTV 1 Minimum FICO 1 90% 2 / 90% / 90% 620 Primary Residence 2 75% / 75% / 75% % / 65% / 65% 620 Second Home 1 80% / 80% / 80% 620 Purchase - 75% / 75% / 75% 1 Investment Rate/Term Refi - 65% / 65% / 65% % / 65% / 65% 620 Cashout Refinance 3 Occupancy Units Maximum LTV / CLTV / HCLTV 1 Minimum FICO Primary Residence 1 75% / 75% / 75% % / 65% / 65% 620 Second Home 1 65% / 65% / 65% 620 Investment 1 65% / 65% / 65% % / 60% / 60% HCLTV is HELOC CLTV. If secondary financing is a HELOC, the loan amount plus the draw amount cannot exceed the CLTV and the loan amount plus the total line amount cannot exceed the HCLTV. 2 Additional credit requirements may apply to LTV >80% due to MI restrictions. 3 Cash-out not permitted if property was purchased within the prior 6 months. If property was listed for sale in the past 6 months, LTV for Cash Out Refinance may not exceed 70%. Notes: 2-unit primary residence. Borrowers may not own any other residential property of equal or greater value in the same area in which the units are located. The mailing address and property address must be verified as the same; if this cannot be done, it must be treated as an investment property. High Balance Maximum LTV/CLTV/HCLTV Purchase and Rate and Term Refinance Occupancy Units Maximum LTV / CLTV / HCLTV 1 Minimum FICO Primary Residence 1 75% / 75% / 75% % / 65% / 65% 740 Second Home 1 65% / 65% / 65% 740 Investment 1 65% / 65% / 65% 740 Cashout Refinance 2 Occupancy Units Maximum LTV / CLTV / HCLTV 1 Minimum FICO Primary Residence 1 60% / 60% / 60% HCLTV is HELOC CLTV. If secondary financing is a HELOC, the loan amount plus the draw amount cannot exceed the CLTV and the loan amount plus the total line amount cannot exceed the HCLTV. 2 Cash-out not permitted if property was purchased within the prior 6 months. Notes: Age of Documents Credit documents must be no more than 90 days old on the date the note is signed. For new construction, credit documents must be no more than 120 days old on the date the note is signed. If the credit documents are old than allowed, they must be updated. The inspection and the appraisal update must occur within the four months that precede the date of the note and mortgage. Conforming and High Balance ARM 2

3 Appraisals Appraisal requirements as stated on DU findings are acceptable, except as noted below: Full appraisal required for: Purchase of REO 1, Short Sale or Foreclosure property Refinance where most recent transaction was for purchase of REO 1, Short Sale or Foreclosure property Appraisal must be ordered thru RELS for all REO properties. An update, review or 2 nd appraisal may be required if the appraisal is over 120 days old at time of closing. At least 2 of the 3 comparables must be dated within 90 days of the appraisal date. When there is only 1 comp or no comps within the required 90 days, the following will apply: If the LTV is = or < 65% and under, and only 1 comp available within 90 days of appraisal, either a Vector AVM or a Corelogic is ran to support the value If the LTV is > 65%, and there is only 1 comp, we ask the appraiser to attempt providing us an additional comp within 90 days of appraisal. If the appraiser cannot provide, a Desk Review is ordered If there is -0- comps within the past 90 days of appraisal, we ask the appraiser for 2 comps within 90 days, if none can be provided, a desk review is ordered. All reviews are at the expense of the broker High Balance A field review is required if the value is >$1,000,000 and the LTV/CLTV/HCLTV is >75%. Properties with a Property Condition rating of C5 or C6 are not eligible. Properties with a Property Quality rating of Q6 are not eligible. DU Property Inspection Waiver (PIW) PIW not allowed. Must have a full appraisal Note: Appraisals may not be transferred from another lender Declining Markets Standard appraisal requirements apply or as required by Desktop Underwriter (DU). Appraisals marked as "declining" should be given additional scrutiny to ensure the value is supported by the most recent sales and market data and that all the comments from the appraiser are taken into consideration. Appraiser Requirements Must be state licensed. Must not be on FHLMC Exclusionary or any other Investors Exclusionary list. Conforming and High Balance ARM 3

4 ARM Program Information Assets Index: The average of the interbank offered rates for 1-year U. S. denominated deposits in the London Market, as published in the Wall Street Journal. The index figure is the most recent index figure from the Wall Street Journal that is available on the day that is 45 days before the interest rate change date. Margin: 2.25% Initial Adjustment: The first adjustment may change the previous interest rate by no more than 5% up or down. The first interest rate change date is 59, 83 or 119 months from the first payment due date. Subsequent Adjustment: Each subsequent adjustment may change the interest rate by no more than 2% up or down. Subsequent interest rate change date is once every 12 months after the first interest change date. Life Cap: The lifetime cap is 5% over the initial note rate. There is no downward cap, except for the margin. Conversion Option: Not permitted. Conversion Fee: N/A Note Rate Limitations: 5/1 ARM Note rates may not be lower than 3% below the fully indexed rate. 7/1 & 10/1 ARM Note rates may not be lower than 3% below the fully indexed rate. The borrowers must have enough liquid assets to cover the down payment, reserve requirements, closing costs and any prepaid items. A minimum of one month s bank statement required regardless of a VOD in file. Large deposits: Any single deposit that exceeds 25% of the total monthly qualifying income must be papertrailed and sourced. If joint borrowers have separate accounts then review single deposits that exceed 25% of the individual borrower s gross monthly income. If the source of a large deposit can be identified on the bank statement (i.e. IRS Tax Refund) no further documentation is required Business Funds - Business funds only allowed for down payment, Borrower must be a minimum 70% owner in the business with an access letter provided from all other partners and a letter from the CPA stating withdrawal off funds from the account will not have an adverse affect on the business. Business funds may not be used as reserves Assumptions Borrower Eligibility Permitted after first interest rate adjustment period. Creditworthy borrowers only. Borrower Type U.S. Citizens Permanent Resident Aliens Requirements Allowed with a valid Social Security Number Allowed under the same terms as US citizens. Permanent resident aliens must provide proof of their residency (i.e. green card). The Permanent Resident Alien certification must be completed and included in the loan file. Conforming and High Balance ARM 4

5 Non-Permanent Resident Aliens Foreign National First Time Homebuyer Borrowers are eligible for financing under the same terms as a US citizen. Must currently reside in the U.S. and have a social security number Borrower must be employed in the U.S. The source of the income must be verified and must be expected to continue for at least 3 years and Have a 2-year work history of working in the US. Standard documentation authenticity, accuracy, and completeness apply Tax Identification Number (TIN) is not acceptable One of the following valid Visas are required: - H-1B, Temporary Worker. - L-1, Intra-Company Transferee. - E-1, Treaty Trader. - E-2, Treaty Investor. - G series (G-1, G-2, G-3, G-4). - TN or TC NAFTA VISA Used by Canadian or Mexican citizens. Not allowed Allowed with no restrictions Maximum number of borrowers is limited to 4. Closing Requirements Impounds for Taxes and Insurance are required on LTV s above 89.99% Conforming and High Balance ARM 5

6 Construction to Permanent Construction to permanent financing involves the granting of a long-term mortgage to a borrower for the purpose of replacing interim financing that the borrower obtained in order to fund the construction of the home. Owner occupied single family and second homes only. Investments not allowed. Condos and Attached PUD s not allowed Not allowed with Interest Only. A final Certificate of Completion is required or the current appraisal indicates subject property is 100% complete Photographs of the completed property must be provided A Certificate of Occupancy or equivalent from the local authority must be provided Construction to Permanent transactions may be treated as: A purchase where the applicant receives no cash out or; As a refinance where the applicant may or may not receive cash out. The dates of verification of employment, income, source of funds and credit history must not be more than 120 days prior to the Note date of the permanent mortgage The date of the appraisal report must not be more than 120 days prior to the Note date Purchase Transactions: When a purchase transaction is used in connection with a lot that the borrower acquired 12 or more months before applying for the construction financing or if the borrower acquired the lot through an inheritance or gift (regardless of the date of acquisition), the LTV ratio is determined by dividing the loan amount by the lesser of: The current appraised value for the property (both the lot and improvements), OR The sum of the documented costs of the construction and the current appraised value of the lot. If the borrower acquired the lot within the 12 months preceding the date of the application for the construction financing, the LTV ratio is determined by dividing the loan amount of the construction to permanent mortgage by the lesser of: The current appraised value for the property (both the lot and improvements), OR The total acquisition costs (which are the sum of the documented costs of the construction and the sales price of the lot). Note: The sales price of the lot must be documented by a copy of either the purchase contract or the related HUD-1 Settlement Statement. The borrower must use his/her own savings or other liquid assets to make a minimum required down payment of 5%. The remainder of the down payment may come from other sources. The purchase price must be clearly supported with the documented cost to construct including the lot. All LTV, loan amount and down payment requirements for purchase transactions must be met. Refinance Transactions: When underwriting as a refinance transaction, the construction financing must be in the borrower s name. The borrower must have held legal title to the lot before he/she applied for the construction financing. If the borrower acquired the lot 12 months or more prior to the application for the construction loan, the LTV/CLTV/HCLTV is based off of the current appraised value. If the borrower acquired the lot less than 12 months prior to the application for the construction loan, the LTV/CLTV/HCLTV is based off the lesser of the current appraised value or the total acquisition cost (cost of improvements plus the lot) The loan is subject to all LTV and loan amount restrictions for refinance transactions (either rate/term or cash out). All improvements must be completed prior to funding. For the borrower to be eligible for a cash-out refinance transaction, the borrower must have held legal title to the lot for at least six months prior to the closing of the permanent mortgage. Conforming and High Balance ARM 6

7 Credit The minimum representative credit score is 620, except where specifically modified in the Maximum LTV/CLTV/HCLTV tables, regardless of the DU findings. All Borrower(s) must have sufficient credit experience regardless of DU findings (generally defined as a minimum of three open trade lines for 12 months or more). Non-Traditional credit is not allowed. A single representative credit score is required to be selected for each borrower. A representative score is determined for the borrower and the loan, as follows: Borrower Representative Score: If a total of 3 scores are obtained for a borrower, the designated score for that borrower shall be the middle score. If a total of 2 scores are obtained, the lower score will be the designated score for that borrower. Loan Representative Score: If there are co-borrowers on the loan, the credit score applicable to the loan itself will be the lowest of the respective borrowers scores. If only one score is available from all three repositories, the one score will be designated as the loan score. Late payments are considered accounted for in the credit score. However, the following items are subject to individual evaluation, no matter how high the credit score: Bankruptcy, foreclosure, deed-in-lieu, short sale. Judgments, collections, charge-offs, tax liens. Bankruptcy, Pre-foreclosure, Short Sale, Deed-in-Lieu and Foreclosures are not allowed on High Balance loans. The following table summarizes the waiting period requirements for all significant derogatory credit events: Derogatory Event Bankruptcy Chapter 7 or 11 Bankruptcy Chapter 13 Multiple Bankruptcy Filings Foreclosure Waiting Period Requirements 4 years Minimum 680 FICO required 2 years from discharge date 4 years from dismissal date 5 years if more than one filing within the past 7 years 7 years Deed-in-Lieu of Foreclosure and Preforeclosure, Short Sale Minimum 680 FICO required 4 years 80% maximum LTV ratios 1 7 years LTV ratios permitted by program Minimum 680 FICO required 1 The maximum LTV ratios permitted are the lesser of the LTV ratios in this table or the maximum LTV ratios permitted by the program. We do not allow extenuating circumstances. The credit report and other credit documentation must evidence that the borrower(s) has reestablished an acceptable credit history. Borrowers who have completed a short sale, short refinance or restructured loan and are purchasing or refinancing a property which is not the subject of the short refinance / restructured loan must have no more than 1 x 30 days late on any mortgage in the past 12 months. Conforming and High Balance ARM 7

8 Departure Residence Pending Sale, Listing or Conversion of Primary Residence If the Borrower's current Primary Residence in on the market and the sale will not close before the closing of the new Primary Residence, the following requirements must be met: Qualifying with Current and Proposed Housing Payment A pending sale requires a valid, signed Purchase Agreement A minimum of six months PITI reserves for the current primary residence and new transaction is required A minimum of two months PITI reserves is allowed if 30% equity in the retained principal residence as evidenced by a full appraisal dated no more than 60 days prior to the Note Date Qualifying with Proposed Housing Payment Only The Borrower's fully executed non-contingent sales contract for the previous residence Lender's commitment to the buyer of the previous residence (if the executed sales contract includes a financing contingency) A minimum of six months PITI reserves for the current primary residence and new transaction is required A minimum of two months PITI reserves is allowed if 30% equity in the retained principal residence as evidenced by a full appraisal dated no more than 60 days prior to the Note Date. Must be an Arm's Length transactions Borrower Converting Primary Residence to a Second Home 0 x 30 in last 12 months Both the current and proposed mortgage payments must be used to qualify the Borrower for the new transaction Six months PITI reserves required for both the retained and subject properties or Reduced reserves of no less than two months for both the retained and subject properties may be considered if there is documented equity of at least 30% in the retained property as evidenced by a full appraisal dated no more than 60 days prior to the Note Date. Borrower Converting Primary Residence to Investment Property 0 x 30 in last 12 months If there is documented equity of at least 30% in the retained property as evidenced by a full appraisal dated no more than 60 days prior to the Note Date, up to 75% of the rental income may be used to offset the mortgage payment to qualify when the following requirements are met: Rental income is documented with a fully executed lease agreement when the borrower s tax returns reflect a two-year history of managing investment properties, as evidenced by the most current two years filed and signed Federal IRS 1040 tax returns; and Proof is provided that a security deposit was received from the tenant and deposited into the borrower s account A family member, individual with an Established Relationship with those involved in the transaction, or an interested party may not sign the lease agreement as the renter At Underwriting discretion, a fair market rent letter may also be required If the 30% equity in the property cannot be documented, or the borrower does not have a two-year history of managing investment properties, rental income may not be used to offset the mortgage payment Both the retained and the proposed mortgage payments must be used to qualify the Borrower for the new transaction Six months PITI reserves required for both the retained and subject properties. Conforming and High Balance ARM 8

9 Documentation Assets: Assets: require bank statements per DU findings, regardless of a VOD in file. Income/employment verification requires a minimum of Paystubs & W-2 covering most recent year or tax returns covering the most recent two-year period per DU findings. The underwriter may condition for additional documentation as needed over and above DU/DO findings to determine eligibility. Down Payment Primary Residence: Minimum of 5% cash down payment from borrower's own funds unless the LTV/CLTV is <80% Second Home: Minimum of 5% cash down payment from borrower's own funds unless the LTV/CLTV is <80% Investment Properties: Borrower's own funds required for down payment regardless of LTV Seller/interested party contributions cannot be applied to the borrower's minimum down payment requirement Seller Funded Down payment Assistance Programs (Nehemiah, etc.) NOT ALLOWED Escrow Holdback Not allowed. Flood Insurance A flood hazard determination is required for all loans. Flood insurance is required if the property is located in a special flood hazard area or flood zone. Properties located in a community that does not have FEMA flood maps are not federally mandated to require flood insurance; therefore, evidence of flood insurance is not required. Properties mapped in a flood zone, but located in a NFIP Non-Participating community are ineligible. Flood insurance is required on properties located within the following special flood hazard area zones: A, AE, AH, AO, A1-30, A-99, V, VE, V1-30 The maximum amount of flood insurance required is the lowest of: 100% of the replacement cost of the dwelling, calculated as appraised value minus land value OR the unpaid principal balance of the mortgage OR the maximum insurance available under the National Flood insurance program. (Currently $250,000 per dwelling.) The maximum deductible for a flood insurance policy is the National Flood Insurance Program (NFIP) maximum limit. Current NFIP maximum limits are $5,000 for 1-4 unit properties, and $25,000 for condominium association master policies. Geographic Restrictions Loans allowed in CA only. Properties on Catalina island or any other island off the California Coast are not allowed. Conforming and High Balance ARM 9

10 Gifts Type Owner Occupied Second Home Investment Percentage of Borrower s Funds Not Allowed Minimum 5% (10% High Balance) down payment must be from the borrower's own funds. Note: If the LTV/CLTV is less than or equal to 80%, the entire down payment may be a gift. Minimum 5% (10% High Balance) down payment must be from the borrower's own funds. Note: If the LTV/CLTV is less than or equal to 80%, the entire down payment may be a gift. Gifts are allowed on primary residences and second homes, per DU. The gift may be provided by a relative, domestic partner, or fiancé/fiancée only. Second homes allow gifts made by a relative only. A relative is defined as a borrower s spouse, child or other dependant, or any individual related by blood, marriage, adoption or legal guardianship. An executed gift letter is required. a copy of the donor s check and the borrower s deposit slip, a copy of the donor s withdrawal slip and the borrower s deposit slip, a copy of the donor s check to the closing agent, or a settlement statement showing receipt of the donor s check. When the funds are not transferred prior to settlement, the lender must document that the donor gave the closing agent the gift funds in the form of a certified check, a cashier s check, or other official check. Gift letters must be dated prior to note date Gift of Equity Not allowed Hazard Insurance Hazard insurance is required for each property. The amount of hazard insurance coverage must be the lesser of 100% of the insurable value of the improvements as established by the property insurer OR the unpaid principal balance as long as it equals at least 80% of the insurable value of the improvements. For properties located in California, lenders may not require hazard insurance in an amount exceeding the replacement value of the improvements on the property. The maximum deductible is 5% of the face amount of the policy. HO-6 Policy (Condo/Attached PUDs) 100% replacement coverage of the exterior and interior of condominiums/attached PUD units is required. If the master or blanket policy for the condominiums/attached PUD development does not provide full coverage of the interior or is a bare walls policy, then an individual HO 6 ( walls in ) policy must be obtained to reach the full 100% coverage. The HO 6 policy must be sufficient to repair the interior of the unit, including any additions and improvements to its original condition in the event of a loss. The HO 6 policy is required to cover 100% of the insurable replacement cost of the unit s interior improvements, including kitchen cabinets, lighting, flooring and plumbing fixtures. Conforming and High Balance ARM 10

11 Income / Employment Income/employment verification requires a minimum of Paystubs & W-2 covering most recent year or tax returns covering the most recent two-year period per DU findings. The underwriter may require additional income documentation if income does not appear reasonable or income cannot be calculated with the minimum required. Acceptable Sources of Income: Wage Earner Income. Commission, overtime, bonus income which has a minimum 2 year history and documented it is likely to continue for the next 3 years. Self-Employed: Sole Proprietorship, Partnership, Corporations and S Corporations. Self-employed borrowers must follow documentation requirements per DU findings. Self-employed borrowers with declining income over 20% will require a year to date profit and loss prepared and signed by the borrower. Non-Employed Income: Alimony/maintenance/Child Support/Separate maintenance, Foster Care, Unemployment/Welfare/ADC, Disability/Worker s Compensation, Retirement/Pension, Social Security, Annuity, IRA, Military/VA Benefits, Trust, Interest & Dividend, Inheritance/Guaranteed Income, Note Receivables, Mortgage Differential/COLA and Rental. Income from sources other than the ones addressed may be considered provided the borrower has received the income for a least 2 years and documentation supports that it will continue for at least 3 years. Handwritten income documents are not permitted. Must be computer generated Unacceptable Sources of Income: Income based on future earnings Draw Income Capital withdrawals VA Education Benefits Income from Mortgage Credit Certificates Illegal Income/Income not listed on Tax Returns Any income that cannot be documented and verified Rental Income Rental income and bedroom count must be captured on all 1-4 unit investment properties and all owner occupied 2-4 unit properties regardless of the DU, appraisal type and regardless of whether the borrower uses rental income to qualify. If rental income is used to qualify on the subject property, the monthly income (or loss) must be determined with an Operating Income Statement (Form 216/998), AND one of the following: Single-Family Comparable Rent Schedule (Form 1007). Small Residential Income Property Appraisal Report (Form 1025). Employment Gap: Income from borrowers who re-enter the workforce and currently have less than a two-year employment and income history may be used to qualify, if The borrower has been at the current employer for a minimum of six months, and There is evidence of a previous employment history. Borrowers who are newly employed and have an employment and income history that covers less than the 2 most recent years may be eligible for a mortgage loan as long as the borrower was either attending school, or training program related to the new position, immediately prior to their current employment. Document a 2 year history. Conforming and High Balance ARM 11

12 Income / Employment cont. Written VOE: A written VOE is required when utilizing other income for qualifying over and above base pay (commission, bonus, or overtime). A written Verification of Employment (VOE) may be used to verify employment along with a paystub dated within 30 days of the loan application. Verbal Verification of Employment (VVOE) is required as follows: A verbal VOE must be obtained within 10 calendar days prior to the Note Date for borrowers with wage earner income. A verbal VOE must be obtained within 30 calendar days prior to the Note Date for selfemployed borrowers. 3 rd Party Verification for the Self Employed Borrower: Verify the existence of the borrower s business from a third party that may include a CPA, regulatory agency, or appropriate licensing bureau; and Verify a phone listing and address for the borrower s business through resources such as the telephone book, directory assistance, internet, or contact the appropriate licensing bureau. A verbal VOE from a CPA is not an acceptable third party verification for self-employed borrowers. Internet sites such as 411.com, Chamber of Commerce sites and Manta.com where they allow the business owner to add their own information are not acceptable. Single source verifications, such as from superpages.com, yellowpages.com and searchbug.com is not allowed IRS Form 4506-T a signed and processed IRS Form 4506-T is required on all loans to obtain the borrower(s) s tax return transcripts for the two years prior to the loan application, regardless of income or documentation type and regardless of DU findings. All borrowers must sign the IRS Form 4506-T at application and closing; only the form signed at application must be processed. All forms and transcripts must be included in the loan file. This form is required on all conventional loans, all wage earners, self-employed, commission and all other non-employment income types. Tax transcripts may not take the place of required tax returns. Note: Max Number of Owned Businesses is limited to a total of 3 Interest Only Not Allowed. Conforming and High Balance ARM 12

13 Loan Amount Minimum Loan Amount - $50,000 Loan amount must be rounded down to the nearest $50. Maximum Loan Amount Conforming Limits High Balance Limits 1-unit - $417,000 1-unit - $ 625,500 2-units - $533,850 2-units - $ 800,775 3-units - $645,300 3-units - $ 967,950 4-units - $801,950 4-units - $1,000,000 High Balance Use the following link to determine geographic eligibility and maximum loan amount. However, in no instance may the loan amount ever exceed $1,000, MI Coverage Mortgage insurance is required on all LTV s >80%. MI Coverage LTV Ranges 10-, 15- and 20-Yr. Term Yr. Term % 25% 30% % 12% 25% % 6% 12% NOTES: Financed MI is not allowed. Reduced/Custom/Lower cost MI coverage will not be allowed regardless of findings. Lender-Purchased MI is not allowed. For all loans requiring mortgage insurance, borrowers must be supplied with a Mortgage Insurance Disclosure form. The disclosure must describe the reason the mortgage insurance is required, the guidelines for cancellation, and contact references for canceling the insurance. Approved MI companies: UGI Mortgages to One Borrower The policy on mortgage ownership limits is designed to protect the company from excessive risk exposure with the same borrower. Mega Capital will finance up to 4 (1 primary, 1 second home and 2 investment) properties for a borrower not to exceed an aggregate amount of $2,000,000. Max Number of Properties owned is limited to 5 (regardless if owned free and clear Conforming and High Balance ARM 13

14 Non-Arms Length Transaction A non-arms length transaction is one in which there is a relationship or business affiliation between the seller and the buyer of the property (e.g., family sale, property in an estate, employee and employer, renter and landlord, flip transactions, or direct sale without a third party). Although non-arms length transactions are not prohibited, these loans do require close examination to ensure the equity position is not compromised. Non-ARM's length transactions are permitted for the purchase of new and existing properties under the following conditions: Loans must be processed using full documentation for assets and income, regardless of the DU findings. Transaction must be for a primary residence. Second Homes and Investment properties are not allowed. If the property is a newly constructed property, and the borrower has a relationship or business affiliation (any ownership interest, or employment) with the builder, developer, or seller of the property, the loan must be secured by a primary residence. In these situations, second homes are not permitted. A full appraisal must be obtained regardless of the DU findings. The appraiser must be informed of the non-arms length transaction and address whether or not the market value has been affected by the relationship of the parties. Loans requiring MI may have additional restrictions. Broker/Employee/Borrower or Escrow Relationship We will consider case-by-case a Broker/Employee or Escrow relationship on refinance loans only. These loans are considered Non-ARM s Length and will require full documentation regardless of DU findings. AVM or desk review required to support value For a purchase transaction, the escrow must be a separate independently owned company outside of the broker relationship/affiliation. Borrower must have 5% of own funds regardless of down payment Non-Occupant Co- Borrowers Number of Properties Ineligible Transactions (including but not limited to): Borrower is purchasing a property from a builder who is also taking the borrower s existing residence as trade for equity or may be purchasing the borrower s existing residence. Any type of transaction where the builder, property seller, and/or any party currently on title is a company owned by the borrower. If the borrower on the loan is or is related to and/or affiliated with the builder, property seller, or on title as a registered agent, sales agent, partner or employee. Flip Transactions. Title is in the name of an LLC owned partially or wholly by the borrower, and borrower is interested in transferring title from the LLC to self, then refinancing. Review these types of transactions in light of current seasoning requirements based on our product guidelines. Non-occupant co-borrowers are allowed on LTV s less than or equal to 90% subject to the following requirements: Primary Residence only. The owner-occupant must have 5% of the purchase price in their own funds. (Waived if LTV/CLTV <=80%) The non-occupant s income and liabilities will not be considered in qualifying. Verification of employment or income is not required for the non-occupant co-borrower. Not allowed on High Balance loans Not allowed on Interest-Only loans. Occupancy Type Total Financed Properties Primary Residence No limit Second Home & Investment Property 4 Conforming and High Balance ARM 14

15 5/1 ARMs are not permitted when the borrower owns more than 1 financed Investment Property. Max number of properties a borrower can own is limited to 5 regardless of whether they are owned free and clear Occupancy Prepayment Penalty Owner Occupied, Second Homes & Investment No prepayment penalty. Conforming and High Balance ARM 15

16 Property Types Eligible Attached SFRs Detached SFRs Attached PUDs (FNMA Warrantable) Detached PUDs Attached Condos 1 Detached Condos 1 High Rise Condos Units 2 Rural Properties 1. Condo Restrictions: a. All loans must always comply with the most current Fannie Mae guidelines regardless of DU b. Must be existing FNMA approved condo c. Condo projects fewer than 8 units not allowed. or; d. DU Limited Project Review i. Restrictions for Attached Condos: (with DU Limited Project Review) 1. max 80% LTV on primary residence 2. max 75% LTV on second homes 3. Investment properties not allowed units are not allowed for second homes. Rural Properties Rural properties must also meet the following requirements: Owner occupied primary residence or second home. The area must generally be a minimum of 25% developed. Comparable sales must be located no more than 20 miles from the subject property, be in the same county and school district. Be accessible by roads that meet local standards. Have adequate sewage, water, and utilities available and in service. Land value generally may not exceed 30%. Properties with outbuildings, such as a barn or stable, must be considered in the underwriting process to determine whether or not the property is residential in nature. A property with a small barn or stable may be acceptable if the value of the outbuilding(s) is minimal and the appraiser demonstrates that it is typical for residential properties in the market area. However, if the property has a large outbuilding, such as a large barn or multiple outbuildings, it may indicate that the property is agricultural or non-residential in nature and would therefore be ineligible. Rural properties greater than 10 acres are not allowed. Ineligible Non-warrantable Condos Condo projects with 8 units or less Manufactured Homes Condotels Working farms, ranches, orchards and/or commercial operations Properties on Mega Capital ineligible projects list Properties with Deed Restrictions (unless the restriction is for Age Restrictions only) Investment Condos Properties sold at auction Properties with Tandem Room Unpermitted conversions are limited to 1 bath, enclosed patio, and a garage conversion to storage or any living area that does not pose a health or safety hazards. Significant additions are not permitted and must have a permit. All additions and conversions are subject to case by case Leaseholds Conforming and High Balance ARM 16

17 Property Flipping Property flip transactions refer to the process of purchasing an existing property, then immediately reselling it for a profit. Property flip transactions most often, but not always, involve distressed properties acquired at a discounted price, then resold at an increased sales price to an uninformed buyer. The following for a property flip is required: A Minimum of 30 days of seller seasoning from date of recorded deed to purchase contract date required Must be a Arms Length transaction 2 Full appraisals required, 2 nd one through Optimus or Property Science and the 2 nd from Rels Properties Listed for Sale If the subject property is currently listed for sale the loan is not eligible for a rate/term refinance or a cash-out refinance with the Lender. Properties that were listed for sale and taken off the market within the past 180 days are eligible for a refinance as follows: Loans are eligible for either a rate/term or cash-out refinance. Cash-out refinances are limited to 70% maximum LTV. Properties that were listed for sale must have been taken off the market on or before the application date. Every effort should be made to verify the property is no longer listed for sale and the underwriter should give additional scrutiny to these transactions to ensure that refinancing the loan provides a benefit to borrower. Purchases Purchase of Pre-foreclosure or Short Sale Properties Allowable Fees and Payments Borrowers may pay additional fees or payments in connection with acquiring a property that is a pre-foreclosure or short sale that are typically the responsibility of the seller or another party. Examples of additional fees or payments include, but are not limited to, the following: short sale processing fees (also referred to as short sale negotiation fees, buyer discount fees, short sale buyer fees); Customary to the transaction. NOTE: This fee does not represent a common and customary charge and therefore must be treated as a sales concession if any portion is reimbursed by an interested party to the transaction. The following are examples of unacceptable fee s or payments: Paying off sellers collections Tax Liens Judgments Non customary fee s or payments payment to a subordinate lien holder; and payment of delinquent property taxes or delinquent HOA fees The following requirements apply: The borrower must be provided with written details of the additional fees or payments and the additional necessary funds to complete the transaction must be documented. The servicer that is agreeing to the pre-foreclosure or short sale must be provided with written details of the fees or payments and has the option of renegotiating the payoff amount to release its lien. All parties (buyer, seller, and servicer) must provide their written agreement of the final details of the transaction which must include the additional fees or payments. Conforming and High Balance ARM 17

18 Ratios/Qualifying Rate Maximum qualifying ratios are determined by DU. All loans requiring MI are subject to MI restrictions. Installment accounts may not be paid down to 10 months or less to allow the borrower to qualify. Installment or mortgage accounts must be paid in full to remove the payment from ratio calculations. When installment debts with less than 10 months remaining are excluded from the debt-toincome calculation, the following conditions must be considered: When the standard DTI is exceeded, consideration should be given to debts that were not considered in the calculation of the ratios. An installment payment with evidence of 12 months canceled checks or bank statements showing paid from a 3 rd party may be excluded IF the account is a Joint Liability with that party. 5/1 LIBOR qualify at the greater of Note Rate + 2% or Fully Indexed Rate 7/1 & 10/1 LIBOR quality at the Note Rate Conforming and High Balance ARM 18

19 Refinances A current or prior short payoff on the subject property is ineligible for a refinance transaction. The refinance of an existing restructured mortgage on the subject property is ineligible. If the most recent transaction was a cash-out refinance or if it combined a first and nonpurchase money subordinate lien into a new first lien, any refinance of that loan within 6 months will be considered a cash-out transaction (calculate 6 months from note date to note date). Cash out refinances that have not been seasoned 6 months are ineligible. To be eligible for a cash out refinance, the borrower must have owned the property for more than six months. If not, the transaction is ineligible. If the property was purchased within the last 12 months and the appraisal shows a substantial increase in value from the original purchase price, the file should contain documentation supporting the increase. If documentation cannot be obtained then the LTV will be based on the original sales price. Each refinance loan must offer a documented, demonstrable, tangible net economic benefit to the borrower. The Borrower Benefit Worksheet must be included in each loan file. Continuity of Obligation: For a refinance transaction (either limited cash-out or cash-out), there must be a continuity of obligation if there is currently an outstanding lien that will be satisfied through the refinance transaction. Continuity of obligation is met when any one of the following exist: On any refinance transaction where there is an outstanding lien that will be satisfied, at least one of the borrowers obligated on the new loan must also be obligated on the existing loan being refinanced and all borrowers on the new loan must occupy the property. The borrower has been on title and has been residing in the property for at least 12 months and has paid the mortgage for the last 12 months or can demonstrate a relationship (relative, domestic partner, etc) with the current obligor. The title on the existing loan has been held in the name of a natural person or an LLC and the borrower was a member of the LLC prior to the transfer. NOTE: Transfer of ownership from a Corporation to an individual does not meet the acceptable continuity definition The borrower has recently inherited or was legally awarded the property (divorce or separation). If continuity of obligation does not exist, the following transactions will be considered CASH OUT refinances: Outstanding liens with no continuity of obligation: If the borrower has been on title for at least 6 months but continuity of obligation does not exist, the maximum LTV/CLTV will be limited to 50 percent based on the current appraised value. Conforming and High Balance ARM 19

20 Refinances cont. No outstanding liens, with no continuity of obligation: If the property was purchased within 6-12 months prior to the application date for the new financing: The LTV/CLTV will be based on the lesser of the original sales price/acquisition cost as documented by HUD 1 settlement statement. If the property was purchased more than 12 months prior to the loan application for new financing, the current appraised value can be used. Buyouts of an ex-spouse or joint owner may be treated as a rate/term refinance if the following conditions are met: The property has been owned and occupied for the previous 12 months by the borrower and joint owner, except in the case of an inheritance. The borrower s income, assets and debts are fully verified. The file contains documentation of the divorce property settlement or estate disposition. The loan proceeds must be disbursed directly to the ex-spouse or joint owner (or his/her authorized agent) and not to the borrower. The disbursement to the ex-spouse or joint owner must be reflected on the HUD I. Refinance - Rate & Term A rate and term refinance is a new mortgage loan that pays off in full the sum of the liens noted in the following. It is acceptable to include closing costs, discount points, prepayment penalties, and any prepaid items, such as hazard insurance, as part of the transaction. Loan amount may include property taxes which are currently due. Property taxes paid in advance or delinquent are considered a cashout refinance. The inclusion of other costs such as late fees and past-due amounts or delinquent HOA dues in the loan amount is not allowed on a rate and term refinance. Unpaid principal balance of an existing first lien And/Or Junior liens (closed-end seconds, HELOCs, and home improvement seconds) that were used for the original purchase of the home. If paying off a purchase 2 nd HELOC, there cannot be any draws in the past 12 months. Other than payment of the first and second liens and closing costs, incidental cash back may not exceed the lesser of 2% of the principal amount of the new mortgage or $2000. Conforming and High Balance ARM 20

21 Refinance - Cashout A cash out refinance involves a new mortgage loan in which the cash back exceeds the lesser of 2% of the new mortgage principal balance or $2,000 and is used to pay off the unpaid principal balance of the existing first mortgage and the amount required to satisfy any outstanding subordinate mortgage liens, no matter how old. Any additional cash back received may be used by the borrowers for any purpose. A statement from the borrowers disclosing the purpose for the cash out is required. It is acceptable to include closing costs, discount points, prepayment penalties, and any prepaid items, such as hazard insurance and property taxes (current and previous year), as part of the transaction. Properties purchased within the past 6 months are not eligible for a cashout refinance. Note date to note date will be used to calculate the 6 months. A minimum 6 months title seasoning required for all cash out transaction. Cannot add someone to loan to qualify if not currently on title. Rent Loss Insurance If the subject property is a 1-4 unit investment property or a 2-4 unit property and rental income is used to qualify the borrower, rent loss insurance is required. This insurance covers the borrower for rental income losses incurred when the property is rendered unrentable due to a direct physical loss, such as a fire. Coverage must be equal to a minimum of six months of gross monthly rent, and must be maintained as long as the mortgage is outstanding. Reserves Determined by DU. If subject property is a second home or investment property, in addition to the above reserve requirements the borrower must also have 2 months' PITIA reserves on every other financed second home and investment property. If the subject property is a 2-4 unit Primary Residence 6 months' PITIA reserves are required, regardless of the loan purpose. Any assets to be used as reserves on a NOO or second home, cannot have any restrictions Seller/Interested Party Contributions Occupancy LTV Maximum Seller Contributions Owner Occupied or Second Home >90% <=90% and >75% <=75% Investment All LTV s 2% All High Balance loans All LTV s 3% The total dollar amount of the Financing Concessions may not exceed the actual total dollar amount of the allowable closing costs. 3% 6% 9% Conforming and High Balance ARM 21

22 Source of Funds Unacceptable source of funds include: Personal or unsecured loan/line of credit Gifts that require full or partial repayment Cash advance from a revolving credit card Cash on hand Business Funds Subordinate Financing Allowed to the maximum CLTV/HCLTV limits as shown in the Maximum LTV/CLTV/HCLTV heading. HCLTV is subordinate financing that includes an undrawn home equity line of credit. The ratio of the sum of the existing mortgage financing and the potential lien from the undrawn home equity line to the value of the property equals the HCLTV. The drawn portion of the home equity line of credit may not exceed the maximum CLTV. Not allowed on High Balance loans with LTV s >80% Community Seconds are not allowed. Negative amortization is not allowed; scheduled payments must be sufficient to cover at least the interest due. Equity share or shared appreciation is not allowed. Subordinate financing from the borrower's employer may not include a provision requiring repayment upon termination. Subordinate financing from the property seller (seller carry-back, including any property seller or other private party carried financing) Not Allowed For closed-end seconds, the maturity date or amortization basis of the junior lien must not be less than five years after the Note date of the first lien Mortgage, unless the junior lien is fully amortizing For closed-end seconds, the loan cannot have a balloon or call option within five years of the date of the Note. For closed-end seconds with a variable interest rate, the monthly payment must remain constant for 12 month periods. No prepayments penalty.(does not included HELOCs that allow the lender to recoup third party closing costs paid by the lender on the Borrowers behalf if the Borrower terminates or closes the account within the first three years. If Secondary Financing is a home equity line of credit, the following restrictions apply. For qualification purposes, the monthly housing payment is calculated as follows: Monthly interest only payment is based on the current balance and is included in the Borrower s monthly housing obligations. The payment from the credit report or the interest only payment from the new subordinate lien, if a draw is being made at closing, will be used. Temporary Buydowns Not Allowed. Conforming and High Balance ARM 22