TABLE OF CONTENTS. QUALIFYING RATIOS... III 4 A. Standard Qualifying Ratios for Conforming Loans... III 4

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1 TABLE OF CONTENTS I. GENERAL INFORMATION... I 1 II. CREDIT SCORE REQUIREMENTS... II 2 A. Underwriting Score... II 2 B. Credit Score Selection... II 2 C. Underwriting Score Selection... II 2 D. Minimum credit score requirement... II 3 III. IV. QUALIFYING RATIOS... III 4 A. Standard Qualifying Ratios for Conforming Loans... III 4 FANNIE MAE DESKTOP UNDERWRITER... IV 5 CONFORMING LOANS... IV 5 1. Loans With "Approve/Eligible" Recommendation... IV 5 2. Loans with a "Refer" To Lender's Underwriter Recommendation... IV 5 3. Loan Delivery Requirements... IV 6 V. FREDDIE MAC LOAN PROSPECTOR... V 7 CONFORMING LOANS... V 7 1. Loans with an "Accept" Risk Class... V 7 2. Loans with a "Caution" Risk Class... V 7 3. Loan Delivery Requirements... V 8 VI. CONVENTIONAL LOANS... VI 9 A. CONFORMING LOANS... VI 9 1. General Information... VI 9 2. Adverse Credit... VI 9 3. Limited or No Traditional Credit History... VI 9 4. Inaccurate Credit History... VI 9 5. Short Sale... VI 9 6. Loan to Value Ratios and Occupancy Requirements... VI Qualifying Ratios... VI 20 prior written permission of AllRegs, no part of this work may be used, reproduced or transmitted in any form or by any means, by or to any party outside of Fidelity Bank. i

2 8. Minimum Down Payment Requirements... VI Credit History... VI Required Reserves... VI Refinance Requirements... VI Prepaids... VI Total Contribution Limits... VI 22 VII. VIII. GOVERNMENT LOANS...VII 24 A. ELIGIBLE TRANSACTIONS... VII Credit Score Requirements... VII VA Products... VII FHA Products... VII 24 B. INELIGIBLE TRANSACTIONS... VII 25 C. FHA STREAMLINE REFINANCE AND VA IRRL TRANSACTIONS... VII 25 D. UNDERWRITING DOCUMENTATION... VII 26 E. COSIGNERS... VII 26 F. MANUFACTURED HOUSING... VII 26 G. MODULAR HOMES... VII 26 H. FANNIE MAE DU UNDERWRITTEN FHA LOANS... VII 26 I. FANNIE MAE DU UNDERWRITTEN VA LOANS... VII 27 J. FREDDIE MAC LP UNDERWRITTEN FHA LOANS... VII 27 K. FREDDIE MAC LP UNDERWRITTEN VA LOANS... VII 27 INTEREST ONLY GUIDELINES...VIII 28 A. CREDIT PROFILE... VIII Conforming... VIII Non-Conforming... VIII Ineligible Borrowers... VIII Qualifying... VIII 28 IX. AGE OF DOCUMENTS...IX 30 X. ELIGIBILITY CRITERIA...X 31 A. BORROWER LIMITATIONS... X Loans to One Borrower in a Contiguous Area... X Eligible Borrowers... X 31 B. EVALUATING INCOME... X 32 prior written permission of AllRegs, no part of this work may be used, reproduced or transmitted in any form or by any means, by or to any party outside of Fidelity Bank. ii

3 1. Stable Monthly Income... X Income Documentation... X 32 C. UNDERWRITING DOCUMENTATION... X Direct Written Verifications... X Additional Documentation... X 33 D. ALTERNATIVE DOCUMENTATION... X Eligibility Criteria:... X Acceptable Documentation... X Fax Copies... X Internet Documentation... X Reverification Authorization... X Verification of Employment... X Credit History... X Income Analysis... X Long Term Debt... X 37 E. DOWN PAYMENT GUIDELINES... X Minimum Down Payment Requirements... X Cash Assets for Down Payment and Closing Costs... X Subordinate... X 44 F. APPRAISAL STANDARDS... X Lender Standards... X Agency Guidelines... X 47 XI. REFINANCE TRANSACTIONS...XI 48 A. ELIGIBILITY REQUIREMENTS... XI Refinance Transactions with Less Than One Year's Seasoning... XI Rate-Term Refinances... XI Cash-Out Refinance Transactions... XI Property Listed For Sale... XI 49 B. NEW CONSTRUCTION... XI Construction-To Permanent... XI Construction-To-Permanent Treated as a Purchase Transaction... XI Construction-To-Permanent Treated as a Rate-Term Refinance... XI Construction-To-Permanent Treated as a Cash-Out Refinance*... XI 51 prior written permission of AllRegs, no part of this work may be used, reproduced or transmitted in any form or by any means, by or to any party outside of Fidelity Bank. iii

4 5. Acquisition Cost Documentation... XI Borrower Acted as Contractor:... XI 52 XII. XIII. SPECIFIC PROPERTY TYPES - ELIGIBLE PRODUCTS...XII 54 A. PROPERTIES SUBJECT TO OCCUPANCY RESTRICTIONS... XII 54 B. PROPERTIES SUBJECT TO AGE RESTRICTIONS... XII Government Housing Programs... XII Age Restrictions - 62 Years of Age or Older... XII Age Restrictions - Any Age Restriction... XII Required Documents for Age Restricted Properties... XII 55 C. CONDOMINIUM PROJECTS... XII Site Condos... XII General Condo Eligibility Requirements... XII Ineligible Projects... XII Completion... XII Multiple Ownership... XII Commercial Use... XII Right of Refusal... XII Adverse Environmental Factors... XII Litigation... XII Delinquent HOA Dues... XII Insurance Requirements... XII Pooled Insurance... XII 59 D. PLANNED UNIT DEVELOPMENTS... XII 60 PROPERTY/APPRAISAL STANDARDS...XIII 60 A. Conventional Purchase Transactions... XIII 60 B. Conventional Refinance Transactions... XIII 61 prior written permission of AllRegs, no part of this work may be used, reproduced or transmitted in any form or by any means, by or to any party outside of Fidelity Bank. iv

5 FIDELITY BANK UNDERWRITING GUIDE I. GENERAL INFORMATION RESERVED FOR LENDER INFORMATION Chapter I 1

6 II. CREDIT SCORE REQUIREMENTS All conventional loans require a credit score to be established for each Borrower. The three major Credit Repositories ("Agencies") offer a product that scores each consumer's credit history using the Fair Isaac model. Trademark names include the Experian "Fair Isaac Credit Score" (FICO), Trans Union "Emperica Score" and Equifax "Beacon Score". All are acceptable and are referred to as the "Credit Score. The minimum credit score for all Fidelity Bank Products is 640. A. UNDERWRITING SCORE The term "Underwriting Score" Score refers to the overall credit score applicable to a specific mortgage loan transaction as determined using the Agencies' "middle/lower, then lowest" credit score selection methodology, which is equivalent to Fannie Mae's "Representative Credit Score" and Freddie Mac's "Indicator Score". B. CREDIT SCORE SELECTION The following criteria should be used to determine each individual borrower's credit score using the "middle/lower" method: If there are three valid credit scores for a borrower, the middle score of the three scores is to be used. a. If there are three valid credit scores for a borrower but two of the scores are the same, the duplicate score is used. b. If there are two valid scores for a borrower, the lower of the two scores is to be used. c. If there is one valid score for a borrower, that score is used. C. UNDERWRITING SCORE SELECTION After selecting the appropriate credit score for each borrower, the Underwriting S core must then be determined: a. If there is more than one borrower, the lowest selected credit score among all borrowers is the Underwriting Score. b. When there is only one borrower, the selected credit score for that borrower is also the Underwriting Score. c. If the loan was underwritten through Fannie Mae's Desktop Underwriter or Freddie Mac's Loan Prospector, the system generated score must be reflected on the loan submission form (FNMA/FHLMC 1008). Additionally, the original credit report must be included in the file showing the score. Chapter II 2

7 D. MINIMUM CREDIT SCORE REQUIREMENT Regardless of AUS decision minimum Underwriting Score requirements for all loans delivered to Fidelity Bank is 640 Chapter II 3

8 III. QUALIFYING RATIOS In addition to the information in this section, refer to requirements for specific product guidelines. A. Standard Qualifying Ratios for Conforming Loans Typically applies to all Conforming Loans. Refer to product/program specific guidelines for complete parameters. Table III-1 Underwriting Method Total Debt to Income Ratio Occupant Borrower s Ratio w/ Non-occupant Co-borrower Manually underwritten Not Applicable Not Applicable LP Accept/DU Approve Follow AUS Findings Follow AUS Findings Chapter III 4

9 IV. FANNIE MAE DESKTOP UNDERWRITER CONFORMING LOANS 1. Loans With "Approve/Eligible" Recommendation a. The subject mortgage Loan must pass all the eligibility and underwriting tests performed by Desktop Underwriter and any verification messages or approval conditions specified on the Desktop Underwriter Findings Report must be satisfactorily resolved before closing. b. Terms and conditions of the closed loan and underwriting information in the loan file must match the data on which the Desktop Underwriter recommendation/verification messages are based. c. All Delegated Loans submitted under this program may be subject to 100% validation audit (at a minimum to include data integrity) and post-funding audit by the Fidelity Bank. Any inconsistencies in the data will require loan to be reunderwritten by DU (per Fannie Mae's Guide to Underwriting with Desktop Underwriter) and may result in non-fund, suspense, or repurchase notification by Fidelity Bank. d. All Non-Delegated Loans submitted must have a validation audit (data integrity) and property/appraisal review by Fidelity Bank. Any inconsistencies in the data will typically result in the loan having to be re-underwritten by Desktop Underwriter (per Fannie Mae's Guide to Underwriting with Desktop Underwriter) and may result in a non-fund, suspense, or repurchase notification by Fidelity Bank. 2. Loans with a "Refer" To Lender's Underwriter Recommendation a. Fidelity Bank does not purchase loans scoring a "Refer" or "Refer with Caution" recommendation from DU. b. Fidelity Bank does not accept manually underwritten loans under delegated underwriting authority, including contract underwritten loans. c. Manually underwritten loans are defined as loans that receive one of the following responses due to insufficient or invalid credit only: i. Fannie Mae DU Response: (a) Refer/Eligible - only when significantly inaccurate credit or insufficient/invalid credit. (b) Refer/Ineligible - only when significantly inaccurate credit or insufficient/invalid credit. (c) Refer/w/Caution - only when significantly inaccurate credit or insufficient/invalid credit. Chapter IV 5

10 3. Loan Delivery Requirements a. Any Loan to be delivered to Fidelity Bank for purchase as a Fannie Mae Desktop Underwriter Loan must include all applicable Desktop Underwriter reports as listed below: i. Underwriting Findings (includes Underwriting Findings, Findings, Verification Messages / Approval Conditions, and Observations). ii. Credit Report Summary iii. Underwriting Analysis Report iv. Credit and appraisal documentation as required by Desktop Underwriter to include all credit reports and all generated credit scores. b. The above items should be included in the file. Please include any Fidelity Bank specific loan submission summary form as required, which should include the loan score. c. Follow submission requirements as dictated by Fidelity Bank. Chapter IV 6

11 V. FREDDIE MAC LOAN PROSPECTOR CONFORMING LOANS 1. Loans with an "Accept" Risk Class a. The subject Loan must pass all eligibility and underwriting tests performed by Loan Prospector. Any verification messages or approval conditions specified on the Loan Prospector Feedback Certificate must be satisfactorily resolved before delivery to Fidelity Bank. b. Terms and conditions of the closed loan, and underwriting information in the loan file must match the data on which the Loan Prospector "Accept" risk class is based. c. All Delegated Loans submitted under this program may be subject to 100% validation audit (at a minimum to include data integrity) and post-funding audit by Fidelity Bank. Any inconsistency in the data will require the loan to be reunderwritten by Loan Prospector and may result in non-fund, suspense, or repurchase notification by Fidelity Bank d. All Non-Delegated Loans submitted must have a validation audit (data integrity) and property/appraisal review by Fidelity Bank. Any inconsistencies in the data will typically result in the loan having to be re-underwritten by Loan Prospector and may result in a non-fund, suspense, or repurchase notification by Fidelity Bank. 2. Loans with a "Caution" Risk Class a. Fidelity Bank does not purchase loans scoring a Caution risk class from Loan Prospector. b. Fidelity Bank will not purchase any loan scoring a Caution risk class from LP with the Purchase Eligibility message of 500 Freddie Mac Eligible. LP A-minus offering. c. Fidelity Bank does not accept manually underwritten loans under a delegated underwriting authority, including contract underwritten loans. Manually underw ritten loans are defined as loans that receive one of the following responses due to insufficient or invalid credit only: i. Freddie Mac LP Response: (a) Invalid - only when significantly inaccurate credit or insufficient/invalid credit. (b) Ineligible - only when significantly inaccurate credit or insufficient/invalid credit. (c) Incomplete - only when significantly inaccurate credit or insufficient/invalid credit. (d) Caution - only when significantly inaccurate credit or insufficient/invalid credit. Chapter V 7

12 3. Loan Delivery Requirements a. Loans deliver as a Freddie Mac Loan Prospector underwritten loan must include: i. LP Feedback Certificate ii. Credit and appraisal documentation as required by LP to include all credit reports and all Credit Scores generated. b. The above items should be included in the file. Please include any Fidelity Bank specific loan submission summary form as required to, which should include the LP AUS Key Number. c. Follow submission requirements as dictated by Fidelity Bank. Chapter V 8

13 VI. CONVENTIONAL LOANS A. CONFORMING LOANS 1. General Information Conventional conforming loans should be underwritten to the standards and guidelines for Fannie Mae or Freddie Mac unless otherwise indicated. 2. Adverse Credit When significant adverse credit is identified in a borrower's credit history, documentation must be provided evidencing whether the derogatory information was due to extenuating circumstances or financial mismanagement, and that an acceptable credit history has been re-established. Refer to FNMA B3-5.1-B3-5.4 or FHLMC for specific credit underwriting guidelines. 3. Limited or No Traditional Credit History Loans manually underwritten due to receipt of unacceptable results from AUS due to insufficient credit history are not saleable to Fidelity Bank. 4. Inaccurate Credit History Loans manually underwritten due to receipt of unacceptable results from AUS due to inaccurate credit history are not saleable to Fidelity Bank. The borrower will have to correct inaccuracies in their credit file and a new corrected report must be obtained. An explanation from the borrower along with the original credit report must be provided in the loan file. Use of a "Credit Repair" company is not acceptable. 5. Short Sale A short sale is the sale of a property for less than the total amount necessary to satisfy the mortgage obligation. A short sale occurs when the borrower cannot sell the property for the full amount of their indebtedness and the lender accepts a payoff of less than the total amount owed on the mortgage, if accepting less would reduce the loss the lender would have incurred if the property had been foreclosed upon. a. Extenuating Circumstances: If a short sale occurs as the result of extenuating circumstances, such as loss of job or illness, at least two years must have elapsed from the date of closing and payoff to the lender on the short sale to the date of closing of the new transaction. Chapter VI 9

14 b. Financial Negligence: If the short sale is due to financial negligence or mismanagement, at least four years must have elapsed from the date of closing and payoff to the len der on the short sale to the date of closing of the new transaction. 6. Loan to Value Ratios and Occupancy Requirements Refer to Fannie Mae guidelines for loans with a Desktop Underwriter certificate and to Freddie Mac guidelines for loans with a Loan Prospector certificate for maximum LTV and CLTV. Table VI-1 PRIMARY RESIDENCE TERMS OF 30 YEARS OR LESS "PURCHASE MONEY" AND NO CASH-OUT REFINANCE TRANSACTIONS Property Type LTV w/out LTV with TLTV* CLTV** 1-2 Unit Dwelling 95% 90% 95% 95% 3-4 Unit Dwelling 80% 75% 80% 80% Cooperative NA NA NA NA Chapter VI 10

15 Table VI-2 PRIMARY RESIDENCE TERMS OF 30 YEARS OR LESS CASH-OUT REFINANCE TRANSACTIONS Property Type LTV w/out LTV with TLTV* CLTV** 1-2 Unit Dwelling 85% 85% 85% 85% 3-4 Unit Dwelling 75% 70% 75% 75% Cooperative NA NA NA NA Table VI-3 PRIMARY RESIDENCE TERMS OF 40 YEARS OR LESS - BUT MORE THAN 30 YEARS 40-YEAR 5/1 LIBOR ARM: LOAN TERM = 40 YEARS "PURCHASE MONEY" AND "NO CASH-OUT REFINANCE TRANSACTIONS Property Type Underwriting Option LTV w/out LTV with TLTV* CLTV** 1-2 Unit Dwelling DU Approve 95% 90% 95% 95% Chapter VI 11

16 Table VI-4 PRIMARY RESIDENCE TERMS OF 40 YEARS OR LESS - BUT MORE THAN 30 YEARS 40-YEAR 5/1 LIBOR ARM: LOAN TERM = 40 YEARS "CASH-OUT REFINANCE TRANSACTIONS Property Type Underwriting Option LTV w/out LTV with TLTV* CLTV** 1-2 Unit Dwelling DU Approve 85% 85% 85% 85% Table VI-5 PRIMARY RESIDENCE INTEREST ONLY OPTIONS TERMS OF 30 YEARS OR LESS PURCHASE MONEY AND NO CASH-OUT REFINANCE TRANSACTIONS Property Type Minimum Loan Score LTV w/out LTV with TLTV* CLTV** 1 Unit Dwelling N/A 85% N/A N/A N/A Cooperative N/A NA N/A N/A N/A Chapter VI 12

17 Table VI-6 PRIMARY RESIDENCE INTEREST ONLY OPTIONS TERMS OF 30 YEARS OR LESS "CASH-OUT REFINANCE TRANSACTIONS Property Type Minimum Loan Score LTV w/out LTV with TLTV* CLTV** 1 Unit Dwelling % N/A N/A N/A Cooperative NA NA N/A N/A N/A Table VI-7 SECOND HOME TERM OF 30 YEARS OR LESS "PURCHASE MONEY" TRANSACTIONS ONLY Property Type LTV w/out LTV with TLTV* CLTV ** 1 Unit Dwelling 90% 90% 90% 90% Cooperative NA NA NA NA Chapter VI 13

18 Table VI-8 SECOND HOME TERMS OF 30 YEARS OR LESS "NO CASH-OUT" REFINANCE TRANSACTIONS Property Type LTV w/out LTV with TLTV* CLTV ** 1 Unit Dwelling 90% 90% 90% 90% Cooperative NA NA NA NA Table VI-9 SECOND HOME TERMS OF 30 YEARS OR LESS "CASH-OUT" REFINANCE TRANSACTIONS Property Type LTV w/out LTV with TLTV* CLTV ** 1 Unit Dwelling 75% 75% 75% 75% Cooperative NA NA NA NA Chapter VI 14

19 Table VI-10 SECOND HOME TERMS OF 40 YEARS OR LESS - BUT MORE THAN 30 YEARS 40-YEAR 5/1 LIBOR ARM: LOAN TERM = 40 YEARS "PURCHASE MONEY" AND NO CASH-OUT REFINANCE TRANSACTIONS Property Type Underwriting Option LTV w/out LTV with TLTV* CLTV** 1 Unit Dwelling DU Approve 90% 90% 90% 90% Table VI-11 SECOND HOME INTEREST-ONLY OPTIONS TERMS OF 30 YEARS OR LESS "PURCHASE MONEY" TRANSACTIONS ONLY Property Type LTV w/out LTV with TLTV* CLTV ** 1 Unit Dwelling 85% N/A N/A N/A Cooperative NA N/A N/A N/A Chapter VI 15

20 Table VI-12 SECOND HOME INTEREST-ONLY OPTIONS TERMS OF 30 YEARS OR LESS NO CASH-OUT REFINANCE TRANSACTIONS Property Type LTV w/out LTV with TLTV* CLTV ** 1 Unit Dwelling 85% N/A N/A N/A Table VI-13 SECOND HOME INTEREST-ONLY OPTIONS TERMS OF 30 YEARS OR LESS "CASH-OUT" REFINANCE TRANSACTIONS Property Type Underwriting Score LTV w/out LTV with TLTV* CLTV ** 1 Unit Dwelling % N/A N/A N/A Chapter VI 16

21 Table VI-14 INVESTMENT PROPERTIES TERMS OF 30 YEARS OR LESS "PURCHASE MONEY" TRANSACTIONS ONLY Property Type LTV w/out LTV with TLTV* CLTV ** 1-2 Unit Dwelling 3-4 Unit Dwelling 90% 85% 85% 85% 75% 70% 75% 75% Table VI-15 INVESTMENT PROPERTIES TERMS OF 30 YEARS OR LESS "NO CASH-OUT" REFINANCE TRANSACTIONS Property Type LTV w/out LTV with TLTV* CLTV ** 1-2 Unit Dwelling 3-4 Unit Dwelling 75% 75% 75% 75% 75% 70% 75% 75% Chapter VI 17

22 Table VI-16 INVESTMENT PROPERTIES TERMS OF 30 YEARS OR LESS CASH-OUT" REFINANCE TRANSACTIONS Property Type LTV w/out LTV with TLTV* CLTV ** 1-2 Unit Dwelling 3-4 Unit Dwelling 75% 75% 75% 75% 70% 65% 70% 70% Table VI-17 INVESTMENT PROPERTIES TERMS OF 40 YEARS OR LESS - BUT MORE THAN 30 YEARS 40-YEAR 5/1 LIBOR ARM: LOAN TERM = 40 YEARS "PURCHASE MONEY" TRANSACTIONS ONLY Property Type Underwriting Option LTV w/out LTV with TLTV* CLTV** 1-2 Unit Dwelling DU Approve 90% 85% 85% 85% Chapter VI 18

23 Table VI-18 INVESTMENT PROPERTIES TERMS OF 40 YEARS OR LESS - BUT MORE THAN 30 YEARS 40-YEAR 5/1 LIBOR ARM: LOAN TERM = 40 YEARS "NO CASH-OUT" REFINANCE TRANSACTIONS Property Type Underwriting Option LTV w/out LTV with TLTV* CLTV** 1-2 Unit Dwelling DU Approve 75% 75% 75% 75% Table VI-19 INVESTMENT PROPERTIES TERMS OF 40 YEARS OR LESS - BUT MORE THAN 30 YEARS 40-YEAR 5/1 LIBOR ARM: LOAN TERM = 40 YEARS "CASH-OUT" REFINANCE TRANSACTIONS Property Type Underwriting Option LTV w/out LTV with TLTV* CLTV** 1-2 Unit Dwelling DU Approve 75% 75% 75% 75% *The TLTV ratio is derived by adding the amount of a HELOC to be disbursed at closing to the first mortgage amount, plus any other subordinate financing, and dividing the sum by the value of the mortgaged premises. **The CLTV ratio is derived by adding the amount of any subordinate financing, including the full credit limit extended for a HELOC (not just the anticipated disbursed amount) to the first mortgage amount and dividing that sum by the value of the mortgaged premises. Chapter VI 19

24 7. Qualifying Ratios Table VI-20 FIXED-RATE MORTGAGES Underwriting Method Total Debt to Income Ratio Occupant Borrower s Ratio w/ Non-occupant Co-borrower Manually Not Applicable Not Applicable LP Accept/DU Approve Follow AUS Findings Follow AUS Findings Table VI-21 ADJUSTABLE RATE MORTGAGES* Product Conforming 3/1 & 5/1 ARMs Conforming - 7/1 & 10/1 ARMs Qualifying Rate for Calculating Ratios DU users follow Fannie Mae published guidelines LP users follow Freddie Mac published guidelines Note rate *ARM products with Interest-Only features must be qualified at the fully indexed rate as well as the fully amortizing payment. 8. Minimum Down Payment Requirements a. For a primary residence or second home with an LTV in excess of 80%, gift funds are allowed only after a minimum down payment of at least 5% has been made from the borrower's own funds. b. Gift funds are not allowed on investment property transactions. 9. Credit History a. Acceptable Credit: Refer to specific product and agency guidelines for acceptable credit scores. b. Adverse Credit: When significant adverse credit is identified in a borrower's credit history, documentation must be provided evidencing whether the derogatory information Chapter VI 20

25 was due to extenuating circumstances or financial mismanagement, and that an acceptable credit history has been re-established. Refer to Fannie Mae s Selling Guide or Freddie Mac s Seller/Servicer Guide for detailed information on credit history standards and requirements. c. Limited or No Traditional Credit References: Loans with limited or no traditional credit references require manual underwriting. Fidelity Bank does not purchase manually underwritten loans under delegated underwriting authority or contract underwritten loans. 10. Required Reserves a. For 2-4 unit primary home transactions, cash reserves equal to six months PITI for the subject property are required when rental income from the units is used for qualifying. b. For all 1-4 unit investment property transactions, cash reserves equal to six months PITI for the subject property are required. The reserve requirement may not be waived. 11. Refinance Requirements See Section X eligibility criteria on page X Prepaids a. Prepaid settlement costs that are normally paid by the borrower, are classified as: i. Per diem interest charges from the date of disbursement through the end of the then current month. i. Real estate taxes covering any period after the date of settlement. ii. Hazard insurance premiums and reserves toward future premiums. iii. Escrow accruals required for the renewal of the MI premium b. The amount the property seller may pay toward prepaid items must be included in total contribution limits. c. The amount that the borrower's employer pays towards the prepaids is not included in total contribution limitations. d. The property seller (or the borrower's employer) may pay the following prepaids: i. Interest charges from date of disbursement through the end of the current month. ii. Real estate taxes covering any period after the date of settlement. iii. Hazard insurance premiums and reserves toward future premiums. iv. The escrow accruals required for the renewal of the MI premium s. Chapter VI 21

26 e. The amount the lender or seller may pay toward prepaid items must be included in the total contribution limits. 13. Total Contribution Limits a. The maximum allowable contributions from interested parties based on the lesser of the purchase price or appraised value are: Property Type LTV/ CLTV Contribution Primary Residence Second Home Investment Property > 90% > 75 90% 75% > 90% > 75 90% 75% All LTV/TLTV/CLTVs 3% 6% 9% 3% 6% 9% 2% Note: Seller contributions for HOA dues must be paid directly to the Association b. HUD-1 review: i. To ensure that all fees, disbursements and charges reflected on the settlement statement were fully disclosed in the purchase agreement and available to the appraiser for consideration in determination of the property s market value, review of both the borrower s and seller s side of the HUD-1 is required. ii. Disbursements on the seller side of the HUD-1 to the borrower or an entity controlled by the borrower, or to a company owned by the seller, require additional consideration. iii. Real estate commissions must include all commissions on page two of the HUD-1 (700 series section), as well as any non-lien related disbursements such as: (a) Marketing expenses; Administration fees; (b) Finder s fees; (c) Referral fees (d) Consulting fees; or (e) Assignment of sale fees. Chapter VI 22

27 iv. Any combination of the above disbursements exceeding 8% of the sales price must be treated as a sales concession and deducted dollar-for-dollar from the sales price for purposes of calculating the LTV/TLTV/CLTV. Chapter VI 23

28 VII. GOVERNMENT LOANS A. ELIGIBLE TRANSACTIONS All FHA and VA loans must conform to applicable FHA or VA one-to-four family housing requirements. All Loans must be insurable by FHA or eligible for guaranty by VA. The following Loan types are eligible for purchase by Fidelity Bank: 1. Credit Score Requirements Regardless of AUS decision minimum Underwriting Score requirements for all FHA and VA loans is VA Products Loans guaranteed by VA under Sections 3710 and 3720 of title 38, U.S. Code and the VA Loan Guaranty Standards. a. Fixed Rate Loans b. 3/1 and 5/1 ARMs with 1/1/5 Caps 3. FHA Products Loans insured by the FHA under any combination of the following: Table VII-1 Section of the Act 203(b) 203(b) 203(b) 203(b) 234(c) 234(c) 234(c) Brief Description Fixed Rate Loan ARM Loan Temporary Buydown - Fixed Rate Loan $50,000 Loan and Under (3% Down) Fixed Rate Condominium ARM Condominium Condo $50,000 loan and under (3% down) Chapter VII 24

29 B. INELIGIBLE TRANSACTIONS The following transactions are ineligible: a. Cash out refinance loans in the State of Texas. b. FHA and VA loans with any Section 50(a)(6) financing. c. VA Indian leasehold properties. d. FHA 203k Renovation loans or streamline 203k. e. FHA Section 8 loans. f. FHA Military Impact Area Loans. g. FHA loans to non-profit organization borrowers. h. HOPE for Homeowner s Program. i. HUD 184 Program - Indian Reservations. j. FHA and VA loans on manufactured homes. k. FHA cash out loans with CLTV >85%. l. FHA loans subject to FHA Test Case requirements. m. VA Rate-Term and Cash out refinances with LTVs or CLTVs greater than 90%. n. Loans financing manufactured housing. C. FHA STREAMLINE REFINANCE AND VA IRRL TRANSACTIONS FHA Streamline Refinances and VA Interest Rate Reduction Loan (IRRRL) loans must be current and have no 30-day* or greater mortgage late payments in the most recent 12- month period. The following documentation is required to be in the loan file: a. All loan submissions require a 3 bureau merged credit report reflecting credit scores. b. Evidence the existing loan is current. c. All loan submissions require a 3 bureau merged credit report. d. If a current mortgage payment history is not reported, a separate mortgage payment history for the most recent 12 months must be provided. e. If the loan is seasoned 12 months or more, evidence that the existing loan has not had any 30-day or greater mortgage late payments in the past 12 months*. f. If the loan is seasoned less than 12 months, provide documentation evidencing that: i. The existing loan has no 30-day or greater mortgage late payments since the inception of the loan; and ii. No 30-day or greater mortgage late payments for any other first mortgage loans associated with the property and borrower(s) in the most recent 12 months. Chapter VII 25

30 Note: Fidelity Bank requires an appraisal on VA Interest Rate Reduction Loans. D. UNDERWRITING DOCUMENTATION a. The application package must contain acceptable documentation to support the underwriting decision. b. When standard documentation does not provide sufficient information to support the decision, additional explanatory statements must be provided. c. Verification forms must pass directly between lender and creditor without being handled by any third party. d. Documentation must not contain any alterations, erasures, and correction fluid or correction tape. Copies must be stamped, "Certified, True and Exact Copies of the Original." e. Certificates of Eligibility for VA loans must be updated when issued more than 12 months prior to the date of application. However, it is the underwriter's discretion to require a more recent update if there is information in the file that coul d lead them to believe there is another outstanding VA loan. E. COSIGNERS Individuals applying for a loan that will not take title are considered guarantors or co - signers and are ineligible. All borrowers must be in title. F. MANUFACTURED HOUSING Mortgage Loans secured by manufactured housing are not eligible for purchase by Fidelity Bank. G. MODULAR HOMES FHA and VA loans financing modular homes are eligible for purchase by Fidelity Bank. As with all loans, the modular home must be of investment quality and meet the appropriate Agency guidelines. H. FANNIE MAE DU UNDERWRITTEN FHA LOANS a. FHA loans may be underwritten through FHA TOTAL Mortgage Scorecard and/or Fannie Mae's Desktop Underwriter per the terms of Mortgagee Letter , dated January 6, b. DU for FHA loans must include the findings report(s) in the file. Chapter VII 26

31 c. All conditions and requirements identified through DU must be included in the file. d. Files must be packaged in accordance with FHA published requirements including but not limited to, those in Mortgagee Letter I. FANNIE MAE DU UNDERWRITTEN VA LOANS a. VA guaranteed loans may be underwritten through Fannie Mae s Desktop Underwriter per the terms of the VA Lenders Handbook and Fannie Mae s Desktop User Guide. b. DU for VA loans must include the findings report(s) in the file as well as meet all conditions and requirements identified by DU. J. FREDDIE MAC LP UNDERWRITTEN FHA LOANS At this time Fidelity Bank does not accept FHA loans underwritten through Freddie Mac s Loan Prospector K. FREDDIE MAC LP UNDERWRITTEN VA LOANS At this time Fidelity Bank does not accept VA loans underwritten through Freddie Mac s Loan Prospector Chapter VII 27

32 VIII. INTEREST ONLY GUIDELINES A. CREDIT PROFILE 1. Conforming a. DU Approve/Eligible ; or b. LP Accept c. Certain transactions may also have Underwriting Score requirements. Refer to Section VI.A.6 Loan to Value Ratios and Occupancy Requirements on page VI 10. d. Loans receiving a DU Approve or an LP Accept or with an Ineligible message related to 2-4 unit property, investment property, TLTV/CLTV exceeding 95% or combination of temporary buydown with Interest-Only are allowed. 2. Non-Conforming The greater of: a. 720 Underwriting Score, or b. Minimum Underwriting Score required for the loan specific product types. 3. Ineligible Borrowers Borrowers with significant inaccurate credit are not eligible for the Interest-Only feature on Non-Conforming Loans. However, if there is a co-borrower whose credit score is valid, that score may be used to meet a minimum Underwriting Score requirement. Refer to specific agency guidelines. 4. Qualifying a. Conforming: Qualify as required by Fannie Mae and Freddie Mac. b. Non-Conforming Fixed Rate Products: Qualify with the note rate and fully amortizing payment. c. Non-Conforming ARM Products: Qualify with the fully indexed rate and fully amortizing payment. Chapter VIII 28

33 Chapter VIII 29

34 IX. AGE OF DOCUMENTS Information used to make the credit decision must be current. The maximum age of documents at closing is: Table IIX-1. Item Conforming Existing Property Conforming New Construction Non-Conforming Existing Property Non-Conforming New Construction Credit Documents 90 days old 120 months old NA NA Appraisal 90 days old* 120 days old* NA* NA* *At closing, if the appraisal is older than 90 days for Conforming but is less than one year old, obtain an update from the appraiser indicating that the property value has not declined since the original appraisal date. If the effective date of the appraisal exceeds one year or the value has declined, a new appraisal will be required. For a property located in a Market Classification of 3 or 4 a Collateral Consultation Review (CCR) or the FNMA Field Review Form 2000 or FHLMC Form 1032 will be required in addition to the appraisal update. The required CCR Review must be obtained by the Seller from a source acceptable to Fidelity Bank. Chapter IX 30

35 X. ELIGIBILITY CRITERIA A. BORROWER LIMITATIONS 1. Loans to One Borrower in a Contiguous Area a. Fidelity Bank limits the number of financed rental properties a borrower may own in one contiguous area, generally defined as within a two-block radius, to no more than two properties. b. Fidelity further restricts the number of financed properties any one borrower may have. Refer to Fannie Mae and Freddie Mac Guidelines for specific limitations. 2. Eligible Borrowers a. Loans with title or interest held in various forms/legal entities such as Life Estates, Non-Revocable Trusts, Guardianships, LLC's, Corporations or Partnerships are not eligible. b. Co-signers: Individuals applying for a loan that will not take title are considered guarantors or co-signers. Guarantors or co-signers are ineligible. All borrowers must be in title. c. A non-u.s. citizen, who is lawfully residing in the U.S. as a permanent or a nonpermanent resident alien, is eligible for a mortgage on the same terms as a U.S. citizen. d. All non-u.s. citizen borrowers must have current acceptable documentation from the Bureau of Citizenship and Immigration Services (BCIS) (formerly the Immigration and Naturalization Service (INS)) within the Department of Homeland Security, evidencing the person's legal residency status in the United States. e. Permanent Resident Alien (Immigrant): Individuals granted the privilege of residing permanently in the U.S. Also includes refugees and others seeking political asylum. Documentation is commonly referred to as a Green Card'. f. Nonpermanent Resident Alien (Non-immigrant): Individuals seeking temporary entry to the U.S. for a specific purpose, business or pleasure. This group may include intra-company transferees, temporary workers/trainees, visitors for business or pleasure, students, etc. Various types of visa classification documentation will apply. Refer to the BCIS/INS for specifics. g. Diplomatic Status: Applicants possessing diplomatic status are ineligible. h. Valid SSN Required: All borrowers must have valid and verifiable Social Security Numbers. Other forms of taxpayer identification are not allowed. Chapter X 31

36 i. Living Trust (Inter Vivos Revocable Trust): A living trust is an eligible mortgage borrower if it meets the following requirements as well as State requirements and Fannie Mae or Freddie Mac guidelines. Refer to FNMA Ch. B2-2 or FHLMC Ch for details. i. To determine whether or not the Trust meets all the criteria required by State and Fidelity Bank standards, one of the following will be required: (a) An attorney's opinion stating the Trust meets all secondary marketing requirements as set forth by Freddie Mac or Fannie Mae, as applicable, and any applicable State requirements; or (b) Certification from a title company evidencing compliance with all marketing requirements as set forth by FHLMC/FNMA and any applicable State requirements. ii. A copy of the Trust document must be included in the loan file. B. EVALUATING INCOME 1. Stable Monthly Income Establishing stable monthly income is based on the type of income received, the length of time received and whether or not the income is likely to continue. In addition, for salaried applicants, considerations in determining stable income are length of time employed in current position and length of time employed in a current profession. 2. Income Documentation Depending on the type of employment, various documentation requirements may b e applied based on full documentation or alternative documentation methods, and considerations as to whether the borrower is salaried, commissioned or self employed, etc. Refer to FNMA Ch. B3-3 or FHLMC Ch for establishing stable income and required documentation. C. UNDERWRITING DOCUMENTATION The application package must contain acceptable documentation to support the underwriting decision. When standard documentation does not provide sufficient information to support the decision, additional explanatory statements or documentation must be provided. Chapter X 32

37 1. Direct Written Verifications a. Written verifications for employment, deposit accounts and/or mortgage/rental history (VOE/VOD/VOM) must pass directly between the lender and employer, financial institution, mortgagor/landlord, as applicable, without being handled by any third party. b. Documentation must not contain any alterations, erasures, and correction fluid or correction tape. c. Copies must be stamped, "Certified, True and Exact Copies of the Original." 2. Additional Documentation a. Tax returns, if required, must be true copies of filed returns must be signed by the applicant. b. Do not accept copies that are signed by a tax preparer. Tax preparers only sign the filed original. c. Do not accept W-2 forms that are marked "Employer Copy". Employers do not distribute their copies. d. Do not accept handwritten W-2 forms or paystubs. Tax returns must be obtained if computer generated documents are not available. e. Letters of explanation regarding financial circumstances must spec ifically address the financial or credit concern presented and must contain a complete explanation in the applicant's own words, and be signed and dated by the applicant. f. Executed 4506T and most recent 2 years transcripts are required on all files. D. ALTERNATIVE DOCUMENTATION 1. Eligibility Criteria: Alternative documentation is allowed for all FNMA and FHLMC eligible loans. 2. Acceptable Documentation Alternative documentation provided in lieu of "Verification of Employment" and "Verification of Asset" forms must be legible originals or certified true and exact copies*. The documentation cannot contain any alterations, erasures or white -outs. *Each copy must be stamped and signed by the loan processor or branch manager, certifying that they are true copies of the originals. The individual certifying the original must include a signature, which contains at least his/her first initial and full surname. Chapter X 33

38 3. Fax Copies Fax copies in lieu of original documents or certified copies are acceptable subject to the following: a. Verification transmitted directly from the loan processor to an employer, depository institution, mortgagee or landlord. The employer, depository institution, mortgagee or landlord must transmit the verification directly back to the loan processor. b. Photocopies or faxes received by the loan originator or loan processor directly from the borrower are acceptable. c. Copies or faxes from a builder, real estate agent, property seller or other third party are unacceptable. 4. Internet Documentation For both conforming and non-conforming conventional loans, Internet documents/downloads of credit reports as well as income, employment and asset verification are acceptable. This allowance for Internet docs does not change the required content or level of documentation needed. The information must be easy to read, understandable, and have no evidence of alterations, erasures or white -outs, and must make sense based on the borrower profile and transaction terms. The following source validation criteria apply to all documents obtained via the Internet: a. Identify the borrower as the employee or owner of the applicable account. b. Identify the credit reporting agency, employer, or depository/investment firm's name and source of information. c. Headers, footers, and the banner portion of the printout of the downloaded web page(s) must reflect the appropriate firm. d. Display the Internet uniform resource locator (URL) address and the date and time printed. e. If faxing an Internet download, make sure fax header does not cover URL information. 5. Reverification Authorization A Borrower's consent must be evidenced by their signature on the appropriate form in order to allow subsequent reverification as required by Fidelity Bank. 6. Verification of Employment Employment and income for a salaried employee may be verified by obtaining all of the following documentation in lieu of a "Verification of Employment" (VOE): a. The borrower's W-2 forms for the past two years. b. The W-2 forms must be complete and legible. Chapter X 34

39 7. Credit History a. Adverse Credit: When significant adverse credit is identified in a borrower's credit history, documentation must be provided evidencing whether the derogatory information was due to extenuating circumstances or financial mismanagement, and that an acceptable credit history has been re-established. b. Refer to Fannie Mae s Selling Guide or Freddie Mac s Seller/Servicer Guide for detailed information on credit history standards and requirements. 8. Income Analysis Conventional Loans should be underwritten to the underwriting guidelines published by Fannie Mae or Freddie Mac unless indicated otherwise in this section. a. Verbal Verification of Employment: i. A verbal verification of employment is required for all borrowers, within 10 days prior to closing. This policy applies to all income types with the exception of passive income. b. Employment by Relatives or Transaction Participants: If the borrower is employed by a relative, a closely held family business, the property seller, real estate agent, or any party to the real estate transaction, the following documentation must be obtained: i. Borrower's signed and completed personal federal income tax returns for the most recent one-year period, and ii. Verification of Employment form (VOE) or iii. Pay stub(s) with W-2 form(s). c. Current income reported on the VOE or pay stub may be used if it is consistent with W-2 earnings reported on the tax returns. If the tax returns do not include W-2 earnings or income is substantially lower than the current VOE or pay stub, further investigation is needed to determine whether income is stable. d. Child Support, Alimony or Maintenance Income: In order to be used as income, child support, alimony or maintenance payments must reasonable be expected to continue for at least a three year period. The following documentation is required: i. Copy of the final divorce decree, legal separation agreement or court order; and ii. Copies of court records, bank statements or canceled checks evidencing a minimum of three months receipt of payments. e. Foreign Income: i. Foreign Income is acceptable only if income can be verified on U.S. personal tax returns. Chapter X 35

40 ii. Foreign income should be paid in U.S. currency; however, income paid in foreign currency may be considered on a case-by-case basis if it's converted into U.S. currency. f. Notes Receivable, Installment Sales and Land Contracts: i. Secured: Evidence of receipt for the last 12 months of income from notes receivable or installment sales or land contracts is required in addition to a copy of the note verifying payment amount and remaining term of at least three years. ii. Unsecured: Evidence of receipt for the last 12 months of income from unsecured notes receivable is required in addition to a copy of the note verifying payment amount and remaining term of at least three years. g. Rental of Previous Residence Listed For Sale but Not Yet Sold or Converting to a Second Home: i. If the current primary residence is pending sale but will not be closed prior to the closing date of the new residence or will convert to a Second Home and at least 30 percent equity in the current primary residence can be documented: ii. Both the current and the new mortgage principal, interest, taxes and insurance (PITI) payments must be used to qualify the borrower for the new residence; and iii. Reserve requirements are the greater of: Two months PITI for both properties; or Standard reserve requirements; or Reserve requirements as indicated by AUS (i.e., Desktop Underwriter DU reserve requirements may be greater than published policy). h. If the current primary residence is pending sale but will not be closed prior to the closing date of the new residence or will convert to a Second Home and at least 30 percent equity in the current primary residence cannot be documented: i. Both the current and the new mortgage principal, interest, taxes and insurance (PITI) payments must be used to qualify the borrower for the new residence, and ii. Reserve requirements are the greater of: (a) Six months PITI for both properties, or Standard reserve requirements, or Reserve requirements as indicated by AUS (i.e., Desktop Underwriter DU reserve requirements may be greater than published policy). i. Existing Property Converting to Investment Property: Chapter X 36

41 If the current primary residence will become an investment property and at least 30 percent equity in the current primary residence can be documented, then 75% of the rental income may be used to offset the mortgage payment in qualifying for the departure residence when the following requirements are met: i. Rental income is documented with a fully executed lease agreement; and ii. Proof is provided that a security deposit was received from the tenant and deposited into the borrower s account; and iii. Reserve Requirements are the greater of: (a) Two months PITI for both properties; or 9. Long Term Debt Standard reserve requirements; or Reserve requirements as indicated by AUS (i.e., Desktop Underwriter DU reserve requirements may be greater than published policy). a. Pay Down of Debt: Installment or mortgage accounts may not be paid down to ten months or less to allow the borrower to qualify. This type of debt must be paid in full. Payoff of revolving accounts in order to qualify the borrower is generally not allowed, depending on the previous use of the revolving accounts and average balances. If the borrower can evidence that the revolving account or accounts do not typically have high balances and are paid in full each month or frequently, then pay off of revolving accounts for qualifying may be acceptable to the underwriter. b. Revolving Accounts: The monthly payment on every revolving and open-end account with a balance, regardless of the apparent number of payments remaining, must be included in the borrower s long-term debt and ratio calculation. If the credit report does not reflect a payment on a currently reporting liability, and the actual payment cannot be determined, a minimum payment may be calculated using the greater of $10.00 or 5% of the outstanding balance. c. Loans Secured by Retirement Accounts: Payments on loans secured by the borrower's 401(k) or SIP (Savings Investment Plan) are not included in long term debt because they are voluntary payments; however, the underwriter should consider these payments in terms of their possible impact on cash flow and debt ratios. The borrower should indicate plans for debt repayment if the inclusion of a 401(k) or SIP loan payment in the monthly debts would result in a very high total debt-to-income ratio or negative cash flow. d. Open-End Lines of Credit (HELOCS): Chapter X 37

42 If not shown on the credit report, payments on a home equity line of credit with an outstanding balance may be calculated at 1% of the outstanding balance or the current payment reflected on the Borrower s billing statement. e. Deferred Payment Accounts: Some debts may have deferred payments or be in a period of forbearance. These debts must be included in the qualifying ratios if there are more than 10 months of payments remaining. When payments on an installment debt are not given on the credit report or are listed as deferred, documentation supporting the required payment must be provided. Examples of acceptable documentation include but are not limited to: i. Direct verification from the creditor. ii. Copy of the installment loan agreement. f. Deferred Student Loans: For a deferred student loan, if the actual payment cannot be determined, a payment should be calculated by using 2% of the original student loan balance. g. Contingent Liabilities: Contingent liabilities are debts that the borrower is not currently required to pay but may be required to pay in the future (e.g. co-signed loans, court ordered payments, previous residence sold through assumption of mortgage with no release of liability). i. Co-Signed Loans: The monthly payment on a co-signed loan may be excluded from long term debt only with evidence of timely payments being made by someone other than the borrowers. Copies of canceled checks for the last six months or a statement from the creditor are acceptable documentation. ii. Assumption with No Release of Liability: The debt on a previous residence may be excluded from long term debt with evidence that the borrower no longer owns the property. The following documents are required: (a) Copy of documents transferring ownership of the property; The assumption agreement executed by the transferee; and Evidence that the mortgage is current. iii. Court Order: If the obligation to make payments on a debt has been assigned to another person by court order, such as a divorce decree, the payment may be excluded from long term debt. The following documents are required: Chapter X 38