I.                    Federal Housing Administration (FHA) - operates under the control of the Department of Housing and Urban Development (HUD) and has the primary responsibility for administering the government home loan insurance program. This program allows buyers who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA.

II.                 Eligible properties:

1.      A majority of the properties using a FHA loan will be a single family residence (SFR).  FHA requires that the SFR be owner-occupied or principal residence, it cannot be a second home or an investment property.

                                                               i.      FHA defines Principal Residence as a property that will be occupied by the borrower for the majority of the calendar year.  At least one borrower must occupy the property; residence must begin within 60 days after signing.

                                                             ii.      An individual or couple owning a home covered by a mortgage insured by FHA that will be kept may not purchase another principal residence with FHA mortgage insurance except for under the following circumstances:

1.      Relocation – When a borrower must relocate and re-establish residency to another area not within reasonable commuting distance of the current residence.  The original home may be kept as a rental.

2.      Increase in Family Size – if the number of dependents has increased to the point where the present house no longer meets the family’s needs, the borrower may obtain another home with an FHA mortgage.  The original loan must be paid down to 75% LTV and this must be verified by a current appraisal.

3.      Vacating a Jointly-Owned Property – if the borrower is vacating a residence that will  remain occupied by a co-mortgagor, the individual leaving may obtain another FHA mortgage.  Acceptable situations are divorce, or when one mortgagor is moving out and is getting married.

4.      Non-Occupying Co-Borrower – a borrower that will be a non-occupying co-borrower on property being purchased with a FHA mortgage as a principal residence by other family members may have a joint interest in that property as well as his or her principal residence that is covered by a FHA mortgage.

5.      Properties previously purchased as investment properties prior to the FHA rule changes are not subject to these restrictions.  However, in no event may the exceptions be used to assist investors in acquiring rental properties through the supposed purchase of a “principal residence”.  FHA has a ban on private investors.

2.      Secondary Residence – defined as property the borrower occupies in addition to his or her principal residence.  Secondary residence are only permitted when the local FHA office agrees that an “undue hardship” exists, meaning that affordable rental housing that meets the needs of the family is not available.  The only circumstance this is allowed under is when the borrower must obtain secondary residence because of seasonal employment, or employment location, or other circumstances not related to recreational use.

3.      Investment Properties – mortgages on properties purchased as investment properties under FHA regulations may be assumed by investors that credit qualify.  This applies to the following:

                                                               i.      Streamline refinances without appraisals purchased prior to 1989 ban on investors.

                                                             ii.      Purchases of FHA owned properties, with permission from local FHA office.

                                                            iii.      Section 203 (k) rehabilitation loans

4.      Non-Profit Organizations and State and Local Government Agencies – may purchase properties subject to certain conditions:

                                                               i.      Non-Profit must intend to sell or lease the property to low or moderate income individuals (generally defined as income not exceeding 115% of the median) may obtain insured financing on investment property.  The non-profit must be:

1.      Exempt from taxation under Section 501 (a) of the Internal Revenue Code of 1986.

2.      Two years’ experience as a provider of housing to low and moderate income persons

3.      Have a voluntary board with no part of the net earnings of the organization benefiting any member, founder, contributor, or individual.

                                                             ii.      State and Local Government Agencies do not require approval from local FHA office.

5.      Multiple unit properties may be purchased by an FHA mortgage not to exceed 4 units.

III.               Maximum mortgage amount -

1.      2008 loan limits for Maricopa County are:

                                                               i.      1 family dwelling - $346,250

2.      The maximum mortgage amount does not include the 1.5% Upfront Mortgage Insurance Premium that can be wrapped into the loan.

3.      Loan limits will vary according to high cost areas by state and may vary from county or metropolitan area.

4.      Maximum Loan-to-Value Percentages

                                                               i.      Low Closing Cost States (Arizona)

1.      98.75% - For property with value or sales price at or less than $50,000

2.      97.65% - For property with value or sale price greater than $50,000 up to $125,000

3.      97.15% - For property with value or sale price in excess of $125,000

                                                             ii.      High Closing Cost States

1.      98.75% - For property with value or sale price equal to or less than $50,000

2.      97.75% - For property with value or sale price in excess of $50,000

5.      When the maximum loan-to-value ratio has been determined, it is to be applied to the lesser of either:

                                                               i.      The appraised value

                                                             ii.      The sales price of the property

IV.              Seller Contributions

1.      Sellers, or other interested third parties such as real estate agents, builders, developers, etc. may contribute up to 6% of the property sale price toward the buyer’s closing costs.

2.      The 6% contribution limitation from the seller includes closing costs normally paid by the borrower.

3.      Items typically paid by the seller, under local or state law or custom, such as real estate commissions, charges for pest inspections, etc. are not considered contributions.

4.      Items such as decorating allowances, repair allowances, moving costs, etc. are considered inducements to purchase and result in a dollar-for-dollar reduction to the sales price.  Personal property items such as cars, boats, riding lawn mowers, furniture, etc. given by the seller to consummate the sale result in a reduction to the mortgage.

5.      Some items may be considered part of the transaction with no adjustment to the sales price.  These typically include:

                                                               i.      Ranges

                                                             ii.      Refrigerators

                                                            iii.      Dishwashers

                                                           iv.      Washers and Dryers

                                                             v.      Carpeting

                                                           vi.      Window Treatments (the local FHA office determines what is customary)

6.      Transactions That Affect the Maximum Mortgage Calculations:

                                                               i.      Identity-of-interest transactions are limited to a maximum  LTV ratio of 85%.  Identity-of-interest is defined as transactions between family members, business partners, or other  business affiliates.  However, maximum financing above 85% is available under the following circumstances:

1.      A family member purchasing another family member’s principal residence.

2.      An employee of a builder purchasing one of the builder’s new homes or models as a principal residence.

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

4.      Sales by corporations that transfer employees out of an area, purchase the transferred employee’s home and then resell to another employee.

                                                             ii.      Non-occupying co-borrowers – when there are two or more borrowers, but one or more will not occupy the property as a principal residence, the maximum mortgage is limited to 75% LTV.

1.       Maximum financing is available for borrowers related by blood (parent-child, siblings, aunts-uncles/nieces-nephews, etc.)

2.      Maximum financing is also available for unrelated individuals that can document evidence of a family-type, longstanding and substantial relationship not arising out of the loan transaction.

                                                            iii.      3- and 4-unit properties, regardless of occupancy status, must be self-sufficient.  This means that the maximum mortgage is limited so that the ratio of the monthly mortgage payment divided by the monthly net rental income does not exceed 100%.

1.      Monthly payment is defined as principal, interest, taxes, and insurance, including mortgage insurance (PITI), as well as any homeowners’ association dues, computed at the note rate (no consideration for buydowns may be given).

2.      Net rental income is the appraiser’s estimate of fair market rent from all units, including the unit chosen by the borrower for occupancy, less the FHA office’s allowance for vacancies and maintenance (or 25% if the local FHA office has not established a separate allowance).

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

                                                           iv.      Building on own land – if the borrower is acting as a general contractor or is having a house built on land already owned or being acquired separately, maximum financing is available if the borrower receives no cash from the settlement.  Equity in the land may be used as the borrower’s entire cash investment.  However, if the borrower receives cash at closing exceeding $250, the loan is limited to 85% of the sum of the appraised value.  Replenishment of the borrower’s own cash expended during construction is not considered as “cash back” provided the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds used for construction.

                                                             v.      Paying off land contracts (lease purchase) is the same as building on land, the borrower may not receive cash at closing.

V.                 Secondary Financing

1.      Federal, State, and local government agencies may provide secondary financing for the borrower’s entire cash investment requirement.  Loans secured by secondary mortgages are subject to the following conditions:

                                                               i.      No cash back to the borrower

                                                             ii.      The secondary mortgage payment must be included in the qualifying ratio.

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

2.      Non-profit agencies must be approved by the local FHA office and meet the general non-profit requirements previously discussed.

3.       Other organizations and private individuals may provide secondary financing under the following conditions:

                                                               i.      The combined amounts of the first and second mortgages do not exceed the applicable loan-to-value ration and the maximum mortgage limit for the area.

                                                             ii.      The repayment terms of the second mortgage must not provide for a balloon payment before 10 years, unless the property is sold or refinanced, and must permit prepayment by the borrower, without penalty, after giving the lender 30 days advance notice.

                                                            iii.      Combined payment cannot exceed borrower’s reasonable ability to pay.  Any periodic payments due on the second mortgage are due monthly and are substantially the same amount.

VI.               Mortgage Credit Analysis – to determine the borrower’s ability and willingness to repay the mortgage debt, and thus, limit the probability of default or collection difficulties.  Four major elements are typically evaluated in assessing a borrower’s ability and willingness to repay the mortgage debt:

1.      Stability and adequacy of income

2.      Funds to close

3.      Credit history

4.      Qualifying ratios and compensating factors

VII.            Borrower Eligibility – mortgages will be made to individuals, state and local government agencies, qualifying non-profit organizations, and to investors under certain restrictions.

1.      Co-borrower takes title to the property and obligates themselves on the mortgage note.

2.      Co-signer is permitted, but does not take title and has no ownership interest in the property.  However, the co-signer is liable for repayment of the mortgage obligation.  The co-signer’s income, assets, liabilities, and credit history are included in the determination of creditworthiness.

                                                               i.      Unless a family member, a co-borrower or co-signer may not have an interest in the transaction.

VIII.         Credit History

1.      Analyzing the borrowers credit – past credit performance serves as the most useful guide in determining the attitude toward credit obligations.  This should govern the borrower’s future actions.  A borrower who has made payments on previous or current obligations in a timely manner represents reduced risk.  Conversely, if the credit history, despite adequate income to support obligations, reflects continuous slow payments, judgements, and delinquent accounts, strong offsetting factors will be necessary to approve the loan.

2.      When analyzing the borrower’s credit record, it is the overall pattern of credit behavior that must be examined rather than isolated occurrences of unsatisfactory or slow payments. A period of financial difficulty in the past does not necessarily make the risk unacceptable if a good payment record has been maintained since. When delinquent accounts are revealed, the lender must determine whether the late payments were due to a disregard for, or an inability to manage, financial obligations, or to factors beyond the control of the borrower including delayed mail or disputes with creditors.

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

4.      We also recognize that some prospective borrowers may not have as yet established a credit history. For those borrowers, and those who do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means of direct access from the credit provider or may elect to use a non-traditional mortgage credit report developed by a credit reporting agency as described in paragraph 2-4 below. Neither the lack of credit history nor the borrower’s decision not to use credit may be used as a basis for rejection.

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

6.      When reviewing the borrower’s credit and credit report, the lender must pay particular attention to the following:

                                                               i.       Previous rental or mortgage payment history - The payment history of the borrower’s housing obligations is of significant importance in evaluating credit. The lender must determine the borrower’s payment history of the housing obligations through either the credit report, directly from the landlord or mortgage servicer, or through cancelled checks covering the most recent 12-month period.

                                                             ii.      Recent and/or undisclosed debts - The lender must ascertain the purpose of any recent debts as the indebtedness may have been incurred to obtain part of the required cash investment on the property being purchased. Similarly, a satisfactory explanation must be provided by the borrower to account for the omission of any significant debt shown on the credit report but not listed on the loan application. The borrower must explain all inquiries shown on the credit report.

                                                            iii.      Collections and judgments - We do not arbitrarily require that collection accounts be paid off as a condition for loan approval, but we do require that court-ordered judgments be paid off before the loan is eligible for insurance endorsement. (An exception may be made if the borrower has been making regular and timely payments on the judgment and the creditor is willing to subordinate that judgment to the insured mortgage.) Both collections and judgments indicate the borrower’s regard for credit obligations and must be considered in the analysis of creditworthiness.

                                                           iv.      Previous mortgage foreclosure - A borrower whose previous residence or real property was foreclosed on or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an insured mortgage. However, if the foreclosure of the borrower’s principal residence was the result of extenuating circumstances beyond the borrower’s control and the borrower has since established good credit, an exception may be granted. Extenuating circumstances do not include the inability to sell a house when transferring from one area to another.

                                                             v.      Bankruptcy - A bankruptcy (Chapter 7 liquidation) will not disqualify the borrower if at least two years have passed since the bankruptcy was discharged and the borrower has re-established good credit (or has chosen not to incur new credit obligations), and has demonstrated an ability to manage financial affairs. An elapsed period of less than two years (but not less than twelve months) may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited an ability to manage financial affairs and the borrower’s current situation is such that the events leading to the bankruptcy are not likely to recur.

1.      A borrower paying off debts under Chapter 13 of the Bankruptcy Act may also qualify if one year of the pay-out period has elapsed and performance has been satisfactory, and the borrower also receives court approval to enter into the mortgage transaction.

7.      Credit Eligibility Requirements - In addition to the credit analysis described above, a borrower must be rejected for any of the following reasons:

                                                               i.      Delinquent or Federal debts - If the borrower is presently delinquent on any Federal debt or has a lien, including taxes, places against his or her property for a debt owed to the United States, the borrower is not eligible until the delinquent account is brought current, paid or otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing.

                                                             ii.      Credit Alert Interactive Voice Response System (CAIVRS) - Lenders must screen all borrowers using CAIVRS. If CAIVRS indicates the borrower is presently delinquent or has had a claim paid within the previous three years on a loan made or insured by HUD on his or her behalf, the borrower is not eligible. Exceptions to this may be granted under the following situations:

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

                                                           iv.      Bankruptcy - When the property was included in a bankruptcy that was caused by circumstances beyond the borrower’s control (such as the death of the principal wage earner or serious long-term uninsured illness, etc.), the borrower may be eligible.

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

1.      Stability of Income - We do not impose an arbitrary minimum length of time a borrower must have held a position to be eligible. However, the lender must verify the borrower’s employment for the most recent two full years. If a borrower indicates he or she was in school or in the military during any of this time, the borrower must provide evidence supporting this such as college transcripts or discharge papers. The borrower must also explain any gaps in employment of a month or more. Allowances for seasonal employment, such as is typical in the building trades, etc., may be made. To analyze the probability of continued employment, lenders must examine the past employment record, qualifications for the position, previous training and education, and the employer’s confirmation of continued employment. A borrower who changes jobs frequently within the same line of work, but continues to advance in income or benefits should be considered favorably. In this analysis, income stability takes precedence over job stability.

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

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

2.      The borrower can document a two-year work history prior to the absence from the work force. This can be accomplished by providing traditional employment verifications, copies of W-2’s, etc.

                                                             ii.      An example of an acceptable employment situation includes a nurse that took several years off to raise children and is now returning to the nursing profession. Scenarios not meeting the criteria above should be considered as compensating factors only.

2.      Salaries, Wages, and Other Forms of Effective Income: The income of each borrower to be obligated for the mortgage debt must be analyzed to determine whether it can reasonably be expected to continue through at least the first three years of the mortgage loan. If the borrower intends to retire during this period, the effective income will be the amount of retirement benefits, social security payments, etc. No inquiry may be made regarding possible future maternity leave.

                                                               i.      In most cases, borrower income will be limited to salaries or wages. Income from most other sources, provided it is properly verified by the lender, can be included as effective income. Procedures for treating other acceptable income sources besides salaries and wages are described below:

1.      Overtime and bonus income - Both may be used to qualify if the borrower has received such income for approximately the past two years and there are reasonable prospects of its continuance. The lender must develop an average or overtime income for the past two years and the employment verification must not state categorically that such income is not likely to continue. Periods of less than two years may be acceptable provided the underwriter adequately justifies and documents his or her reason for using the income for qualifying purposes.

2.      Qualifying - If bonus income varies significantly from year-to-year, a period of more than two years must be used in calculating the average income.

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

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

b.      Please note that our definition of part-time income refers to jobs taken in addition to the normal, regular employment to supplement the borrower’s income, i.e., a second job, and should not be construed as meaning jobs of less than 40 hours per week. If a borrower’s regular employment is simply less than a typical40 hour work week, the stability of that income should be evaluated as any other regular, on-going primary employment. This would include, as an example, a registered nurse who has been working 24 hours per week for the last year. This is the borrower’s primary job, even though less than 40 hours, and should be included as effective income.

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

a.       Commission earned less than one year is not considered effective income. Exceptions may be made in those situations where the borrower’s compensation was changed from a salary to commission within a similar position with the same employer. A borrower may also qualify when that portion of earnings not attributable to commissions would still be sufficient to qualify the borrower for the mortgage.

5.      Retirement and Social Security income - Such income requires verification from the source (former employer, Social Security Administration) or through federal tax returns. If  any benefits expire within the first full three years, the income source may only be considered as a compensating factor.

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

7.      Notes Receivable - A copy of the note must be presented to establish the amount and length of payment. The borrower must also provide evidence these payments have been received consistently for the last twelve months which may include deposit slips, cancelled checks, or tax returns.

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

9.      Government Assistance Programs - Income received under a welfare program, unemployment income, workman’s compensation, payments for foster children, etc., is acceptable subject to documentation from the paying agency provided the income is expected to last at least three years, such income may be considered as a compensating factor. (Unemployment income requires a two-year documentation of its receipt and reasonable assurance of its continuance. This may be appropriate for individuals employed on a seasonal basis, such as farm workers, resort area employees, etc.)

10.  Rental Income - Rent received from property owned by the borrower may be acceptable, subject to proper documentation. A separate schedule of real estate is not required provided all properties are shown on the URLA.

a.       Rent received from the additional units in a multiple-unit property in which the borrower resides in one of the units may be used for qualifying purposes. The rent (after subtracting the local FHA office’s estimate for vacancies and maintenance) may be added to the borrower’s gross income in calculating the qualifying ratios.

b.      Income from roommates, etc., in a single-family property to be occupied as the borrower’s primary residence, is not acceptable. Rental income from “boarders” is acceptable when provided by a relative. The rental income may be considered as effective income if shown on the borrower’s tax returns. Otherwise, the income may only be considered as a compensating factor and must be adequately documented by the lender.)

c.       The following is required to verify rental income:

                                                                                                                                       i.      Schedule E of IRS Form 1040 -  Depreciation may be added back to the net income or loss shown on Schedule E. Positive rental income is considered as gross income for qualifying purposes; negative rental income must be treated as a recurring liability.

                                                                                                                                     ii.      Current leases - If a property was acquired since the last income tax filing and is not shown on Schedule E, a current, signed lease or other rental agreement must be provided. The gross rental amount must be reduced for vacancies and maintenance by 25 percent.

11.  Projected Income - Projected or hypothetical income is not acceptable for qualifying purposes. Exceptions are permitted for income verified by the employer and scheduled to begin within 60 days of loan closing.

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

12.  Employment by Family-Owned Business - Borrowers employed by business owned family members are required to provide additional income documentation. These borrowers must provide the normal verification of employment and pay stub’s and evidence that he or she is not an owner of the business. This may include copies of the corporate tax return showing ownership percentages.

13.  Self-Employed Borrowers - A borrower with a 25 percent or greater ownership interest in a business is considered self-employed for mortgage loan underwriting purposes.

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

                                                                                                                                       i.      Between one and two years - An individual self-employed between one and two years must have at least two years previous successful employment (or a combination of one year of employment and formal education or training) in that or a related occupation to be eligible.

                                                                                                                                     ii.      Less than one year - The income from borrowers self-employed less than one year may not be considered as effective income.

b.      Documentation Requirements - The following are required:

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

                                                                                                                                     ii.      Signed copies of federal business income tax returns for the last two years, with all applicable schedules, if the business is a corporation, an “S” corporation, or a partnership;

                                                                                                                                    iii.      A year to date profit-and –loss (P&L) statement and balance sheet;

                                                                                                                                   iv.      A business credit report on corporations and “S” corporations.

X.                 Borrower’s Cash Investment in the Property

1.      Funds to Close - The cash investment in the property must equal the difference between the amount of the insured mortgage, excluding any upfront MIP, and the total cost to acquire the property, including prepaid expenses, etc. (see paragraph 1-9). All funds for the borrower’s investment in the property must be verified. Acceptable sources of these funds include:

                                                               i.      Earnest money deposit - If the amount of the earnest money deposit exceeds 2 percent of the sales price or appears excessive based on the borrower’s history of accumulating savings, the lender must verify the deposit amount and the source of funds. Satisfactory documentation includes a copy of the borrower’s cancelled check. We will also accept a certification from the deposit holder acknowledging receipt of funds and separate evidence of the source of funds. Evidence of source of funds includes a verification of deposit or bank statement showing that the average balance at the time the deposit was made was sufficient to have included the earnest money deposit.

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

                                                            iii.      Gift Funds - An outright gift of the cash investment is acceptable if the donor is a relative of the borrower, the borrower’s employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low-and –moderate-income families or first-time home-buyers, or a close friend with a clearly defined interest in the borrower. A gift from any other source is considered an inducement to purchase and requires a reduction to the sales price. No repayment of the gift may be expected or implied. (As a rule, our concern is not with how the donor obtains the gift funds provided they are not derived in any manner from a party to the sales transaction. Donors may borrow gift funds from any other acceptable source.)

1.      The lender