SECTION 1 - LOAN ELIGILITY STANDARDS. Borrower Identity Verification. Borrower Requirements. Inter Vivos Revocable Trust ( Living Trust ):

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1 SECTION 1 - LOAN ELIGILITY STANDARDS Borrower Identity Verification Acceptable forms of identification include: Valid state driver s license, with photo Valid state non-driver s license, with photo Military photo ID Work ID with photo US passport, with photo Permanent Resident Card, with photo Borrower must have a valid social security number. Verification can be made by viewing the social security card, pay-stub, or W-2. Social security number should be consistent on all documentation, including credit report. Resolution of any discrepancies is required to SMFC s satisfaction. Borrower Requirements SMFC does not lend to business entities; it is required that all Borrowers be individuals. Any person who signs the application is to be considered a Borrower and all Borrowers must sign the Note All Borrowers must meet one of the following: U.S. Citizen: It is necessary that Borrower(s) have a valid social security number and be a citizen of the United States. Permanent Residents: In order to verify a borrower has the necessary Permanent Resident card ( green card ), a copy of the Form I-551 is required. Borrower must have a valid social security number. Non-Permanent Residents: If a Borrower is a non-permanent resident, Broker will verify the following: o A valid social security number o Appropriate documentation that supports eligibility to work in the U.S. A copy of current work authorization documentation is needed (such as H Visa, L, E-1, G series and TN Visa). Inter Vivos Revocable Trust ( Living Trust ): An inter vivos revocable trust (a living trust ) is a trust defined as follows: Created by an individual during his or her lifetime Becomes effective during its creator s lifetime Can be changed or canceled by its creator at any time, for any reason, during his or her lifetime Eligibility Requirements At least one individual establishing the trust must be used to qualify for the loan. The loan may not be Texas Equity Loan subject to Article XVI, Section 50(a) (6) and 50 (g) of the Texas Constitution. For Desktop Underwriter, Loan Prospector and Manually Underwritten Loans, SMFC will fund loans titled in a trust as long as the occupancy is:

2 One-to-four-unit primary residence Second home Trust Agreement Requirements A review of the Trust Agreement is required to ensure the agreement meets all of the following requirements: The trust is established by one or more natural persons, solely or jointly. The person establishing the trust is known as the Settlor, Trustor, or Grantor, (referred to below as Settlor ). The trust is effective during the Settlor s lifetime. The Settlor has the right to revoke or alter the trust during his or her lifetime. The Settlor is the primary beneficiary of the Trust. If there is more than one Settlor, there can be more than one primary beneficiary. The Settlor is the trustee or one of the co-trustees. The trustee has the power to mortgage the Mortgaged Premises for the purpose of securing a loan to the party (or parties) who are the borrowers on the Note. The Trustee is not required to obtain written consent from the beneficiaries to mortgage the subject property if written consent has been provided. There is no unusual risk or impairment of lenders rights (such as distributions required to be made in specified amounts other than net income). The trust is valid under federal, state and local law. If the trust agreement requires more than one trustee to borrow money or to purchase, construct or encumber realty, the lender must confirm that the requisite number of trustees have signed the loan documents. Certification of Trust A certification of trust or a summary of trust is acceptable if required by state law. Loan Documentation Requirements: The loan file must contain either: A complete copy of the trust agreement; or In states that require a lender to rely on an abstract, summary or certification of the trust agreement instead of the trust agreement, a copy of the abstract, summary or certification. For signature requirements, see Inter Vivos Trusts Section. Number of Properties Owned/Financed: See Home Affordable Refinance Program (HARP) Section for Number of Properties Owned / Financed requirements on DU Refi Plus and LP Open Access loan transactions. If the subject property is a Primary Residence, there is no maximum numbers of financed properties. If the subject property is a Second Home or Investment Property, the Borrower may own up to four (4) financed properties, including the subject property. For loans serviced by Ocwen Loan Servicing, LLC, the borrower may have a maximum exposure of four (4) loans or $2,000,000, whichever is less.

3 NOTE: If there are multiple loans for the same borrower recurring simultaneously, loans need to be underwritten at the same time in order to measure the impact of each transaction upon the other. Occupancy Types It is necessary for the broker to review the Borrower s intention for occupancy of the property. There are three classifications; each explained below. It is the responsibility of the broker to explain adequately any red flags or inconsistencies as it pertains to occupancy. Primary Residence - Refinance: In order to be classified as a Primary Residence on a refinance transaction, the Borrower must currently occupy the property as their primary residence and be in title to the property. The address on the documentation in the file, (including but not limited to loan application, pay-stubs, W- 2 s, tax returns, credit report, etc.) must match the property address. Primary Residence Purchase: For purchases of Primary Residences, the borrower must occupy the property within sixty (60) days of closing and must intend to reside in the property for a minimum of one (1) year. There are several checkpoints that should be evaluated in order to confirm that the Borrower intends to reside in the property being purchased as their Primary Residence. Several of these include, but are not limited to, the following: Borrower s place of employment is a distance convenient to the location of the property; If Borrower is not selling his/her current primary residence, it should be reasonable that he/she will be moving into the subject property rather than remaining in current primary residence. Areas to review should be comparison of the values of the properties, location compared to employment; elapsed time between the purchase of the current primary residence, location of subject property (i.e. is it in vacation area, rental area, moving from a single family to a 2-4 unit, etc.). Motivational letters should be provided in the loan file to explain any inconsistencies or questions regarding occupancy as a primary residence. The standard loan documents signed at closing must contain language that the loan is in default if the Borrower makes any false statements or misrepresentations regarding occupancy of the property. Second Home/Vacation Home: Loans secured by properties indicated as a Second Home or Vacation Home must meet certain criteria: Must be a one unit property Should be located in a resort area, unless occupancy of the property as a second home is adequately explained by the Borrower Property must be suitable for year round use Rental income may not be used for qualification purposes Property cannot be subject to any timesharing, rental agreements or allow a management firm to have control Borrower s 1040 s cannot show any rental income Hazard insurance policy may not contain any loss of rent coverage

4 Investment Property: Property must be suitable for year round use. Refer to Underwriting Section for details on calculating rental income for qualification purposes. Ineligible Ownership Interests/Property Types Life Estates Community Land Trusts Co-operatives Illinois Land Trusts Types of Transactions Non-Arm s Length Transaction Broker is responsible to determine if the transaction is a non-arm s length transaction. If the borrower has a relationship or any type of business affiliation with the property broker, builder or any other party to the transaction, it is considered a non-arm s length transaction. Broker must also verify that the borrower is not an owner of any business entity selling the property or involved in the transaction. Non-arm s length transactions are not acceptable for second homes or investment properties. Non-arm s length transactions on owner occupied transactions cannot be for bail-out purposes. Purchase Broker must provide fully executed, legible copy of the Contract of Sale (Agreement of Sale, Purchase Agreement, etc.). This fully executed, legible copy must include all addenda. The seller of the property indicated on the Contract of Sale should be the same as the owner of record. The chain of title on the title commitment should indicate that the property has been owned for one (1) year. If the property has sold in the past twelve (12) months, a thorough review should be done to make certain that it is a valid transaction. For properties owned less than 90 days, a Field Review will be required if the value increases by more than 20% from the original purchase price and it must be supported by documented improvements which are commented on by the appraiser. The new purchase must be an arms-length transaction. The borrower should not be receiving funds back at closing. If the borrower is receiving a refund of the initial deposit made at the time of signing the Contract, it is necessary that the funds used for the initial deposit are verified as the borrower s funds. All documentation must be consistent throughout the transaction as to borrower s name, Broker s name, property address, loan amount, etc. Any inconsistencies must be explained to the satisfaction of SMFC. Real estate commission can t exceed 8%. Purchasing of a Short Sale property: Borrowers may pay additional fees or payments in connection with acquiring a property that is a preforeclosure or short sale that are typically the responsibility of the broker or another party.

5 Examples of additional fees or payments include: Short sale processing fees (also referred to as short sale negotiation fees, buyer discount fees, short sale buyer fees); 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 Payment to a subordinate lien holder; and Payment of delinquent taxes or delinquent HOA fees The purchase of a short sale property must be an Arms-Length transaction Limited Cash Out Refinance A loan classified as a Limited Cash Out Refinance is described as a loan where the proceeds of the new transaction are being used to pay off the outstanding first lien, customary costs associated with the new transaction, including prepayment penalties, loan costs, fees, prepaids, etc. Any secondary liens being paid off with the funds of the new transaction must have been liens that were used in whole to acquire the subject property. Paying off a co-owner or ex-spouse can be considered a Limited Cash-Out Refinance if there is evidence that the subject property was occupied as a primary residence for the parties. Verification is required. It is also necessary that SMFC be provided with a fully executed agreement detailing the buy-out. The HUD-1 at closing must indicate the payoff of the co-owner or ex-spouse s interest. There cannot be any cash back to the borrower. The loan must satisfy the Continuity of Obligation section as outlined below. The lesser of two percent (2%) of the loan amount or $2,000 is not considered cash out and is acceptable. For limited cash out refinances, a principal curtailment at closing is allowed up to the lesser or 2% of the new loan amount or $2,000 and must be clearly reflected on the HUD-1 form or other equivalent closing statement. Properties listed for sale are not eligible for refinancing. The listing agreement must have been cancelled prior to application date for a Limited Cash-Out refinance. The subsequent refinance of a restructured loan may be delivered to SMFC on a Limited Cash-Out Refinance transaction if: The borrower(s) made a minimum of 24 consecutive months of timely mortgage payments (from the date of restructure) on the restructured loan before closing on the refinance mortgage loan. A restructured loan is a mortgage loan in which the terms of the original transaction have been changed, resulting in absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan that results in: forgiveness of a portion of principal and/or interest on either the first or second mortgage, application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness, conversion of any portion of the original mortgage debt to a soft subordinate mortgage, or conversion of any portion of the original mortgage debt from secured to unsecured. Cash-Out Refinance

6 The funds received by the borrower from the loan transaction can be used for any legitimate purpose. The purpose of the cash out should be clearly stated on the loan application, and if necessary, further described in a separate document. If the purpose of the cash out indicates potential additional debt or a change in financial condition, further clarification should be obtained. For example, if the borrower states that the cash out is being used as a down payment for the purchase of another property, further details are required to understand additional debts that may be incurred. If the cash out would cause any change in financial standing (i.e. funds are being used to start a new business may result in borrower leaving their current employment), it is necessary that the situation be explained and verified thoroughly to ascertain if there may be an impact to the borrower s ability to repay the loan. Properties listed for sale are not eligible for refinancing. The listing agreement must have been cancelled six (6) months prior to the application date for a Cash-Out refinance. Condominiums in Florida are not permitted for cash out refinancing. The borrower must have owned the property for at least six (6) months prior to application date in order to be eligible for a Cash-Out refinance transaction, except as noted below in the Delayed Financing Section. If the proceeds of the cash out refinance are paying off a restructured loan the new loan will be ineligible for sale to SMFC. Delayed Financing: If the subject property was purchased in the last 6 months measured from the date of purchase to the application date of the new refinance, the loan will be eligible for a Cash Out Refinance transaction provided the following requirements are met: The executed HUD-1Settlement Statement from the purchase transaction must reflect no financing secured by the subject property was used to purchase the subject property. The purchase transaction was an Arms-Length transaction. The source of funds used to purchase the subject property must be fully documented. If funds were borrowed (either unsecured or secured by an asset other than the subject property) to purchase the subject property, those funds must be paid with the cash out proceeds and reflected on the HUD 1 Settlement Sheet for the refinance transaction. If the Cash out proceeds do not pay off the borrowed funds, the payments on the balance remaining must be included in the debt to income ratio calculation. The amount of the cash out refinance loan can be no more than the actual documented amount of the borrower s initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV/CLTV/HCLTV ration for the transaction.) The preliminary title report for the refinance must reflect the borrower(s) as the owner of the subject property and must reflect that there are no liens on the property. All other cash-out refinance eligibility requirement as noted above are met and cash out pricing is applied. Continuity of Obligation: For Refinance Transactions, there must be a continuity of obligation if there is currently an outstanding lien that will be satisfied through the refinance transaction.

7 Continuity of obligation is met when any one of the following exists: At least one (1) borrower is obligated on the new loan who was also a borrower obligated on the existing loan being refinanced; The borrower has been on title and residing in the property for at least twelve (12) months or can demonstrate a relationship (relative, domestic partner, etc.) with the current obligor; The loan being refinanced and the title to the property are in the name of a natural person or a limited liability company (LLC), as long as the borrower was a member of the LLC prior to transfer. Transfer of ownership from a corporation to an individual does not meet the continuity of obligation requirements. The borrower has recently inherited, or was legally awarded, the property (divorce, separation or dissolution of a domestic partnership). Loans with an acceptable continuity of obligation may be considered either a Cash Out or Limited Cash- Out as described in this Section. If the borrower is currently on title but is unable to demonstrate an acceptable continuity of obligation, or if there is no outstanding lien against the property, the loan is still acceptable as a Cash-Out Refinance, as detailed below: If the purchase date is within six (6) to twelve (12) months prior to application date and there is no lien, the LTV must be based on the lesser of the original sales price or the current appraised value If the purchase date is more than twelve (12) months and there is no lien, the LTV may be based on the current appraised value If there is a lien and the borrower has been on title for at least six (6) months, the LTV is limited to 50% based on the appraised value. Installment Land Contracts Transactions that are to pay off an Installment Land Contract are considered a Limited Cash-Out Refinance if the Contract is in effect more than twelve (12) months. The Loan to Value ( LTV ) is based upon the appraised value. Transactions where the Contract has been in effect for twelve (12) months or less are to be considered a Purchase transaction. The LTV is based on the lower of the appraised value or total acquisition cost (purchase price per contract, plus any cost the purchaser incurs for rehabilitation, renovation or energy conservation improvements.) The lender must fully document the expenses for total acquisition when there was rehabilitation, renovation or energy conservation improvements. In both instances above, it is necessary to verify the pay history by obtaining cancelled checks or bank statements, as per guidelines for credit verification. Lease Purchase Transactions A Lease Purchase Transaction is to be considered a Purchase Transaction, with no cash out to the borrower. Credit to the borrower for rent payments is acceptable. Equity Swapping Transactions

8 SMFC will not fund transactions that involve Equity Swapping. Loan to Value ( LTV ) The maximum LTV for each program is specified in the program matrices contained on these guidelines. Purchase Transaction: The LTV is calculated by dividing the loan amount by the lower of the purchase price or the appraised value. Limited Cash Out Refinance: The LTV is calculated by dividing the loan amount by the appraised value. Cash-Out Refinance: The LTV is calculated by dividing the loan amount by the appraised value. Combined Loan to Value ( CLTV ) and High Combined Loan to Value ( HCLTV ) Calculate the CLTV by adding together the loan amount on the new loan, plus the current principal balance of subordinated liens (using the current balance on both closed-end and open-end subordinate financing) and dividing by the lower of the appraised value or sales price (if applicable). HCLTV limits must be calculated using the full amount of the line of credit available based on recording or title information unless updated by a formal modification; letters or other alternative forms of documentation regarding changes to line amounts are not acceptable. For example, if the value for a property is determined to be $100,000, the new first mortgage is $50,000, the current outstanding balance of a line of credit being subordinated is $20,000 and the full amount of the line of credit being subordinated based on the recoding and title information or formal modification agreement is $30,000, the LTV/CLT/HCLTV would be 50.00%/70.00%/80.00%. ($50,000/$100,000 = 50.00%) ($50,000 + $20,000 / $100,000 = 70.00%) ($50,000 + $30,000 / $100,000 = 80.00%) Refer to program matrices for limits on CLTV and HCLTV. Secondary Financing If there is secondary financing on the subject property, it is necessary that the loan file contain all documentation to verify the terms and conditions of the financing. The loan must also meet all LTV, CLTV and HCLTV requirements. The following are requirements: The monthly payments on the subordinate financing must be included in the housing ratio; It is necessary that the payments on the subordinate financing be due monthly, quarterly or semiannually and must cover at the interest due, at a minimum; The interest rate on the subordinate financing must at a market rate (no more than 2% below the posted net yield in effect for second mortgages at the time of closing) unless provided by the property broker, in which case the interest rate may be below market rate; Mortgage cannot have a maturity or call balloon payment of less than five (5) years, unless it is fully amortizing; The following subordinate financing is not acceptable: Subordinate mortgages that have a prepayment penalty; Subordinate mortgages that are subject to an interest rate buydown plan

9 Subordinate mortgages that allow negative amortization Subordinate mortgages that have wraparound terms Subordinate mortgages through a Community Second Mortgage/Down Payment Assistance Program; Subordinate financing of judgments or tax liens If the subordinate financing has a variable or graduated payment feature, is acceptable if: The payments on the subordinate financing are structured to fully amortize with its loan term The payments on the subordinate financing remain constant for each annual period The interest rate on the first mortgage has a fixed interest rate. If the first mortgage is an ARM program, it must have an initial fixed rate period of at least five (5) years Subordinate financing is provided by the borrower s employer as part of an Employer Assisted Housing Program. If the subordinate financing is a Home Equity Line of Credit (HELOC), the monthly housing expense must include a payment on the HELOC calculated as follows: The payment from the credit report; or If the payment is not on the credit report, calculate the payment on the outstanding balance as shown under the terms of the HELOC Note. For financing obtained from a borrower s employer, it may be a subordinate loan on the property or an unsecured loan. It is not necessary that the subordinate require regular payments. The loan file must contain a copy of the terms from the employer that provides the details of the financing. Such financing can be structured as follows: Fully amortizing monthly payments Deferred payments for a specific time period, changing to fully amortizing monthly payments Deferred payments over the life of the loan Forgiveness of the debt over time If variable rate, the monthly payment must remain constant for one year with the change of the payment at end of each year not exceeding one percent (1%) Financing terms may provide for the employer to require full repayment of the debt should an employee terminate employment before maturity date of the subordinate financing Contributions from Interested Parties There are two categories for contributions from parties other than the borrower. These two categories are: Financing contributions Sales Concession All contributions from interested parties are required to be disclosed on the HUD-1. A contributor can be a direct participant in the transaction, such as the builder, developer, broker or real estate agent. It may also be someone who has an established relationship not directly involved in the transaction, although this contribution is considered a gift and should follow guidelines for gifts in the underwriting section of this guideline.

10 (a) Sales Concessions A sales concession is a contribution from an interested party in the form of non-realty items or financing concessions that exceed the limitations. The value of these sales concessions must be deducted from the sales price when calculating the LTV and CLTV for underwriting purposes. Examples of sales concessions are as follows: Furniture Automobiles Financial obligations being paid by the broker Assignment of rental payments Contributions in excess of the established limits Decorator and upgrade allowances, if placed in an escrow account HOA dues that cover period after the closing date Moving costs Giveaway items Short sale processing fees (also referred to as short sale negotiation fees, buyer discount fees, short sale buyer fees) that are reimbursed (to the buyer) by an interested party to the transaction Repair allowances or decorator allowances (b) Financing Concessions Financing concessions for primary residences and second homes are limited to the following percentages: 9 percent of value for mortgages with LTV/TLTV ratios less than or equal to 75 percent 6 percent of value for mortgages with LTV/TLTV ratios greater than 75 percent up to and including 90 percent 3 percent of value for mortgages with LTV/TLTV ratios greater than 90 percent The maximum financing concession for investment properties is 2 percent regardless of the LTV ratio Contributions in excess of the above limitations are considered sales concessions and therefore must be deducted from the sales price when calculating the LTV and CLTV for underwriting purposes. Fees or costs paid by the broker are acceptable if common to the area and do not exceed the actual costs. Examples of common financing contributions are: Buydown plans Discount points Commitment fees Origination fees Other closing costs (transfer taxes, stamps, attorney fees, surveys, title insurance, etc.) Impounds A monthly escrow for the payment of private mortgage insurance, real estate taxes, hazard insurance,ho-6 insurance (for condominiums) and flood insurance premiums is required. Waivers can be

11 obtained in some circumstances. Please refer to Chapter 5 Registration, Section F for details and requirements in order for an escrow waiver to be considered. In all cases, it is necessary for an escrow account to be maintained in the following circumstances: For the payment of private mortgage insurance. If the borrower is required to escrow for flood insurance, all required insurance coverage as well as property taxes must be escrowed. If there is an escrow account established, full or partial, the HO-6 policy for condominiums must be escrowed, unless the association policy includes unit-level walls-in coverage. If the transaction is a Cash-Out Refinance and delinquent taxes 60 days or more past due (Must be paying two delinquent tax installments in California) are included in the loan amount, an escrow account for taxes and all insurance must be established. SECTION 2 PROPERTY Ineligible Properties The following property types are not eligible: Commercial properties Cooperatives Multi-family dwellings over 4 units Mobile homes Condo-tels Farms or working ranches Non-warrantable Condominiums Timeshares Unimproved land Properties with resale restrictions, other than age restricted communities Common Interest Apartments Properties that do not meet local health and safety standards Properties currently listed for sale on all refinance transactions Properties in Hawaii Lava flow Hazard Zones one (1) and Two (2) Investment Condominiums in Florida Community Land Trust Mixed Use Property If a property s use is primarily residential, it is acceptable for sale to SMFC if it is used for a small commercial purpose. In order to be acceptable, it must meet the following criteria: Property must be single family unit Borrower must occupy the property as their primary residence Borrower must be the business owner and operator At least two thirds of the property must be used for residence Mixed use must be legal use under local zoning Business may not be industrial or manufacturing use

12 Market value of the property must be based on the residential use of the property, not the business use Manufactured Home (a) Overview A manufactured home is described as a dwelling built on a permanent chassis and attached to a permanent foundation. The manufactured home and the land on which it is situated must be titled as real property. Other factory-built housing (not built on a permanent chassis) such as modular, prefabricated, panelized, or sectional housing is not considered manufactured housing and is eligible. (b) Property Requirements Property cannot be located in Condo Project Property must be a primary residence or second home See Product Matrix for LTV/CLTV limitations Property cannot be a single-width manufactured home Property cannot be on leasehold estates Property must be a single family unit, classified as real property Towing hitch, wheels and axles must be removed and dwelling must assume the same characteristics of site-build housing Borrower must own the land on which the manufactured home is situated in fee simple Property must have sufficient square footage and room dimensions to be accepted to typical purchasers in the subject market area (Home must be at least 12 feet wide and have a minimum of 600 square feet of gross living area) Manufactured Home must be built in compliance with the Federal Manufactured Home Construction and Safety Standards that were established June 15, 1976, as amended and in force at the time the home is manufactured and requirements that appear in HUD regulations at 24 C.F.R. Part Evidence of meeting these standards is evidenced by the presence of both a HUD Data Plate and HUD Certification Label (tag). Permanent foundation must be attached in accordance with manufacturer s requirements for anchoring, support, stability and maintenance. Foundation system must be appropriate for the soil conditions for the site and meet local and state codes. Home must be permanently connected to a septic tank or sewage system, and to other utilities in accordance with local and state requirements Property must be situated on a publicly dedicated and maintained street Property is not acceptable if there are incomplete items that affect the ability to obtain an occupancy permit or have defects or needed repairs that affect livability. (c) Other Requirements Loans secured by manufactured homes must be underwriting through DU or LP. The property must be properly identified as a manufactured home Condominium

13 A condominium is a project where the unit owner does not own the land or improvements. The unit owner has title to a unit within a building, an undivided interest in the common elements of the project, and use of certain common elements. In order for SMFC to fund a loan that is secured by an individual unit in a condominium project, the project must meet standard secondary market guidelines (such as Fannie Mae). (a) CPM Fannie Mae offers a web-based tool known as Condo Project Manager (CPM) Expedited Review that will provide lender-specific project acceptance for attached, detached, new, established, and 2-4 unit projects. CPM is available on efanniemae.com. The loan file must have a valid, unexpired CPM Lender Certification, as of the date of the Note, in the underwriting package prior to loan funding. In addition, Broker must not be aware of any changes in circumstances since the project information was submitted to CPM that would result in the project not meeting the eligibility criteria. CPM contains certain unique project eligibility and review requirements. Some of those requirements are: New and established condo projects consisting of manufactured homes are not eligible for CPM. CPM may be used to determine project acceptance for new and established projects. Presale and investor concentration in some cases are more flexible than the Lender Full Review eligibility requirements. Brokers must review the homeowners association budget (not required for 2-4 unit projects); the actual budget for established projects or the projected budget for new projects. Budget review must conclude: The budget is adequate (i.e. it includes allocations for line items pertinent to the type of condo) The budget provides for the funding of replacement reserves for capital expenditures and deferred maintenance (at least 10% of the budget); and The budget provides adequate funding for insurance deductible amounts. For new projects, the Broker must represent and warrant that the project meets all legal requirements as outlined. The project must be covered by the kinds of insurance (hazard, flood, liability and fidelity) as required for a condo project, as outlined in Insurance Section, Chapter 9G No more than 15% of the total units in an attached condo project can be thirty (30) days or more past due on the payment of their condo/association fee payments. No single entity (same individual, investor group, partnership or corporation) other than the developer during the initial marketing period, may own more than 10% of the total units in the project. In the case of a project that has fewer than ten (10) units, no single entity may own more than one (1) unit. The nonresidential space does not exceed twenty percent (20%) of the project s total square footage. (b) PERS Fannie Mae s Project Eligibility Review Service (PERS) is available for submission and review of new and newly converted condominium projects. This review is required on the following: New and newly converted attached condominium projects located in Florida

14 New non-gut rehabilitation condo projects New condo projects that contain one or more units with less than 400 square feet See the Fannie Mae website for complete details for submission. Broker is responsible for obtaining PERS approval from Fannie Mae. The broker must provide evidence that the project has a valid, unexpired Fannie Mae Final Approval as of the date of the note. (c) Types of condominiums: Established Project: At least 90% of the total units in the project have been conveyed to the unit purchasers; The project is 100% complete, including all units and common elements; The project is not subject to additional phasing or annexation; and Control of the homeowner s association has been turned over to the unit owners New Project: Less than 90% of the total units in the project have been conveyed to the unit purchasers; The project is not fully completed, such as proposed construction, new construction or the proposed or incomplete conversion of an existing building to a condo; The project is newly converted; or The project is subject to additional phasing or annexation. 2-4 Unit Project: Additional eligibility requirements apply for 2-4 unit properties: No one individual, investor group, partnership or corporation may own more than one unit within the project All units, common elements and facilities within the project, including those that are owned by any master association, must be 100% complete; All but one unit in the project must have been conveyed to owner-occupant principal residence or second home purchasers; and The units in the project must be owned in fee simple or leasehold, and the unit owners must be the sole owners of, and have rights to the use of, the project s facilities, common elements, and limited common elements. Manufactured Home Project: All condo projects consisting of manufactured homes must be submitted to Fannie Mae for review and acceptance, with the exception of multi-width manufactured homes that are part of a PUD project (d) Limited Review for Attached Condo Units The Limited Review is intended to be used on a spot loan basis, meaning that a Broker may originate loans for sale to SMFC that arise through the ordinary course of business. Broker may originate more

15 than one loan in a particular project under Limited Review provided the project is an established project and meets all requirements for a Limited Review. Broker may not, however, target the project with specific marketing efforts or be named by the developer or the project s homeowner s association as a preferred lender. Projects eligible for Limited Review include: Project does not consist of manufactured homes; Project meets established project ; Project is covered by insurance as described in Insurance Section The following are NOT eligible for Limited Review: Attached Units in new condo projects, even if scored through DU Investment Properties Condominiums in Florida Ineligible Project Type Projects that are managed and operated as a hotel or motel, even though the units are individually owned. Hotel or motel conversions (or conversions of other similar transient properties) Projects with names that include the word hotel or motel. Projects that include registration services and offer rentals of units on a daily basis. Projects that restrict the owner s ability to occupy the unit. Projects with mandatory rental pooling agreements that require unit owners to either rent their units or give a management firm control over the occupancy of the units. Projects with non-incidental business operations owned or operated by the homeowners association such as, but not limited to, a restaurant, a spa, a health club, etc. Investment securities (i.e. projects that have documents on file with the Securities and Exchange Commission, or projects where unit ownership is characterized or promoted as an investment opportunity). Common interest apartments or community apartment projects are projects or buildings that are owned by several owners as tenants-in-common or by a homeowners association in which individuals have an undivided interest in a residential apartment building and land, and have the right of exclusive occupancy of a specific apartment in the building. Timeshare or segmented ownership projects. Houseboat projects. New projects where the broker is offering sale/financing structures in excess of eligibility policies for individual mortgage loans. These excessive structures include, but are not limited to, builder/developer contributions, sales concessions, HOA or principal and interest payment abatements, and/or contributions not disclosed on the HUD-1. Projects where more than 20% of the total space is used for nonresidential purposes. Projects where a single entity (the same individual, investor group, partnership, or corporation) owns more than 10% of the total units in the project. Multi-dwelling unit condos or co-ops; projects that permit an owner to hold title (or stock ownership and the accompanying occupancy rights) to more than one dwelling unit, with ownership of all of his or her owned units (or shares) evidenced by a single deed and financed by a single mortgage (or share loan)

16 Condo or co-op projects that represent a legal, but non-conforming, use of the land, if zoning regulations prohibit rebuilding the improvements to current density in the event of their partial or full destruction. A tax-sheltered syndicate s leasing to a co-op or leasing co-ops; projects that involve the leasing of the land and the improvements to the co-op corporation, even if the co-op corporation owns part of the building. Co-op projects that are subject to leasehold estates. Limited equity co-ops; projects in which the co-op corporation places a limit on the amount of return that can be received when stock or shares are sold Co-op projects with units that are subject to resale restrictions or located on land owned by community land trusts. Co-op projects in which the developer or sponsor has an ownership interest or other rights in the project real estate or facilities other than the interest or rights it has in relation to unsold units. Any project (condo, co-op or PUD) for which the homeowners association or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability or functional use of the project. Projects for which the Broker determines that the pending litigation involves minor matters are not considered ineligible projects, provided the lender concludes that the pending litigation has no impact on the safety, structural soundness, habitability or function of the project. The following are defined to be minor matters: o Non-monetary litigation involving neighbor disputes or rights of quiet enjoyment; o Litigation for which the claimed amount is known, the insurance carrier has agreed to provide the defense and the amount is covered by the association s or co-op corporation s insurance; or o The homeowners association or co-op corporation is named as the plaintiff in a foreclosure action, or as a plaintiff in an action for past due homeowners association dues. For established condo projects, with attached condo units, there are LTV limitations for Limited Review eligibility as follows: Occupancy Type DU Approve Other DU Scores Manual Underwrite Primary Residence 80% 80% 80% Second Home 75% 75% 75% Investment Property Not Permitted Not Permitted Not Permitted (e) Limited Review for Detached Condo Units When a lender performs a Limited Review for a detached unit in a condo project, the Broker must meet the following criteria: Mortgage is secured by a single detached unit in a condo project. Mortgage is not secured by a manufactured home. The project is not an ineligible project (as described in Section 9D (d) above. The condo unit is occupied as the owner s principal residence or second home, whether the loan is manually underwritten or submitted through DU. The condo unit is an investment property and the loan was submitted to DU. The appraiser commented on, and reflected in the appraisal report, any effect that buyer resistance to the condo form of ownership has on the market value of the individual unit.

17 If the condo project is new, the appraiser used as a comparable sale at least one detached condo unit, which may be located either in a competing project or in the subject property, if the condo unit is offered by a builder other than the one that built the subject unit. The mortgage title insurance policy meets title insurance requirements for units in condo projects, as outlined in Chapter 12AA Property is covered by the type of hazard and flood insurance coverage required for single-family detached dwelling, if the condo unit consists of the entire structure as well as the site and air space or the project s master hazard and flood insurance policies, if the condo unit consists only of the air space for the unit and the improvements and site are considered to be common areas or limited common areas. (f) Full Review for All Condo Projects: The project must meet the following requirements: The project must not be an ineligible project, as previously described in Section 9D(d) above. The project must not be a manufactured housing project. The project must not be a new project as previously described in Section 9D(c) above and contain any units with less than 400 square feet. The project must meet all insurance requirements in Chapter 9 Section G(d). No more than 20% of the total square footage of the project can be used for commercial purposes. The units in the project must be owned in fee simple. No more than 15% of the total units in a project may be 30 days or more past due on their homeowners association (HOA) dues. For example, a 100 unit project may not have more than 15 units that are 30 days or more delinquent. There must not be any environmental problems identified through the performance of the project underwriting. All rehabilitation work involved in a condo conversion must have been completed in a professional manner. (g) Additional requirements for condo projects consisting of 2-4 units: No single entity (same individual, investor group, partnership or corporation) may own more than one unit within the project; All units, common elements and facilities within the project, including those that are owned by any master association, must be 100% complete; All but one unit in the project must have been conveyed to owner-occupant principal residence or second home purchasers and The unit owners must be the sole owners of, and have rights to the use of, the project s facilities, common elements and limited common elements. (h) Additional requirements for new condo projects and newly converted attached projects: A certificate of occupancy or other substantially similar document has been issued by the applicable governmental agency for the project or subject phase All units in the building in which the unit securing the mortgage is located are complete, subject to the installation of buyer selected items, such as appliances. Broker is expected to obtain appropriate documentation to support that all buyer selection items for the unit being financed are properly installed prior to closing.

18 At least 70% of the total units in the project or subject legal phase must have been conveyed or be under a bona fide contract for the purchase to owner-occupant principal residence or second home purchasers. A project consisting of one building cannot have more than one legal phase. Broker is required to represent and warrant that the project meets the legal requirements Homeowners association projected budget must be reviewed to determine: o that it is adequate (i.e. it includes allocations for line items pertinent to the type of condo); o it provides for the funding of replacement reserves for capital expenditures and deferred maintenance at least 10% of the budget, and o it provides adequate funding for insurance deductibles No more than 15% of the total units in an attached condo project can be 30 days or more past due on the payment of their condo/association fee payments. No single entity (the same individual, investor group, partnership or corporation other than the developer during the initial marketing period) may own more than 10% of the total units in the project. The unit owners must be the sole owners of, and have rights to the use of, the project s facilities, common elements, and limited common elements. The project must be located on one contiguous parcel of land. The project may be divided by a public street. The structures within the project must be within a reasonable distance from each other. Common areas and facilities, such as recreational facilities and parking, must be consistent with the nature of the project and competitive in the marketplace. If a new project is part of a larger development, and the unit owners are required to pay monthly assessments of more than $50 to a separate master association for that development, a review of the overall development plan for the master association is required to evaluate the acceptability of the project. When reviewing the overall development plan to determine the project s potential viability, evaluate the: o Consistency of future and existing improvements; o Time limitations for expansion; and o Reciprocal easements between legal phases. It is necessary to determine that acceptable completion assurance arrangements have been provided for new projects (or newly converted attached condo projects) that are only substantially completed. These include cash deposits, letters of credit, assignments of certificates of deposit, or assignments of other assets that can be easily converted to cash. Similar arrangements must be provided to support assurances against construction and structural defects. These assurances should: o Protect each unit against defects that become apparent within one year from the date of its settlement, and o Cover all common facilities for one year from the time when units that represent 60% of the votes in the homeowners association have been transferred. The sales program developed for marketing units in a project must recognize and provide procedures for complying with all laws pertaining to: The advertising and sale of real estate, The form and content of sales agreements, and The method for handling deposits connected with a sale. When the homeowners association retains the right to provide a substitute buyer or to have the first option to purchase a unit, that right cannot be exercised in any way that could be interpreted as unlawful discrimination or impair the marketability of the units in the project.

19 Facilities related to the project must be owned by the unit owners or the homeowners association. The developer may not retain any ownership interest in any of the facilities related to the project. The amenities and facilities, including parking and recreational facilities, may not be subject to a lease between the unit owners or the homeowners association and another party. The developer or sponsor should provide for and promote the unit owners early participation in management of the project. It is preferred that the project be managed by an independent professional management firm. The contract with the management firm should be for a reasonable term, and should include equitable provisions for its termination. Individual units in new condo projects must be available for immediate occupancy at the time of loan closing. (i) Additional requirements for established condo projects: All units, common elements and facilities within the project must be 100% complete. The project cannot be subject to additional phasing or annexation. At least 51% of the total units in the project must be conveyed to purchasers as principal residences or second homes. A review must be conducted of the homeowners association actual budget to determine the budget: o Is adequate (i.e. it includes allocations for line items pertinent to the type of condo), o Provides for the funding of replacement reserves for capital expenditures and deferred maintenance equal to at least 10% of the budget, o Provides adequate funding for insurance deductible amounts. No more than 15% of the total units in an attached condo project can be 30 days or more past due on the payment of their condo/association fee payments. All facilities related to the project must be owned by the unit owners or the homeowners association. The developer may not retain any ownership interest in any of the facilities related to the project. The amenities and facilities, including parking and recreational facilities, cannot be subject to a lease between the unit owners or the homeowners association and another party. Separate metering of individual units is recommended but not generally required. For projects in which the units are not separately metered, it is necessary to: o Determine that having multiple units on a single meter is common and customary in the local market where the project is located, and o Confirm that the project budget includes adequate funding for utility payments. Unit owners in the project must have the sole ownership interest in, and rights to the use of the project s facilities, common elements, and limited common elements. At least 90% of the total units in the project must have been conveyed to the unit purchasers. Control of the homeowners association must have been turned over to the unit purchasers. No single entity (the same individual, investor group, partnership, or corporation) may own more than 10% of the total units in the project. If the project has fewer than ten (10) units, no single entity may own more than one unit. The insurance (hazard, flood, HO-6, liability and fidelity) must meet the requirements in Insurance Section. The project must be demonstrably well managed. If the project is professionally managed: o The management contract should be for a reasonable term, and