• For a mortgage with an Interest Only feature, the borrower pays interest only during an initial interest only period. The borrower may make voluntary principal payments during the initial interest only period, which will trigger the recalculation of the future monthly payments. After the initial interest only period, the unpaid balance is then fully amortized over the remaining term of the loan. The borrower then makes monthly payments of principal and interest for the remaining years of the loan.
• Interest Only loans are qualified with the principal and interest payment.

• The index is the 1-year London Interbank Offered Rate ("LIBOR") which is the average of interbank offered rates for 1-year U.S. dollar-denominated deposits in the London market, as published in The Wall Street Journal. The index figure used is the most recent index figure available as of the date 45 days before each Interest Change Date.
• The margin will remain the same throughout the life of the loan. Refer to the rate sheet for the current margin.
• On the first Interest Change Date, the interest rate adjusts to a rate equal to the 1-Year LIBOR Index value plus the Gross Mortgage Margin, subject to a First Change Date Cap.
• Annually, after the first Interest Change Date, the Gross Coupon Rate adjusts to a rate equal to the 1-Year LIBOR Index value plus the Gross Mortgage Margin, subject to a Periodic Cap.
• Over the life of the loan, the maximum decrease (floor) is the margin and the maximum increase is the Start Rate plus the Life-of-Loan Cap.
• No conversion option is available.
• For a mortgage with an Interest Only feature, the borrower pays interest only during an initial interest only period. The borrower may make voluntary principal payments during the initial interest only period, which will trigger the recalculation of the future monthly payments. After the initial interest only period, the unpaid balance is then fully amortized over the remaining term of the loan as an adjustable rate mortgage. The borrower then makes monthly payments of principal and interest for the remaining years of the loan.
• Generally, the borrower is qualified with the principal and interest payment at the higher of the Start Rate or the Fully Indexed Rate. However, an ARM with an initial fixed-rate period of 5 years or less that is submitted to Desktop Underwriter (version 8.1 or later) is qualified with the principal and interest payment at the higher of the Start Rate plus 2% or the Fully Indexed Rate.

U.S. Citizens are eligible. Permanent resident and non-permanent resident aliens may be eligible based upon receipt of a satisfactory Alien Status ID Certification completed by a title/escrow representative at closing, without proof of status termination.

• Valid alien registration card INS I-551/I-151.
• Conditional alien registration receipt card (INS Form I-551) with a valid INS Form I-751 filing receipt (petition to remove the conditions of residency).
• Valid foreign passport which contains the reading "Processed for I-551, Temporary evidence of lawful admission for permanent residency. Valid from (date), Employment Authorized."

• A copy (front and back) of a valid Visa I-94 with classifications E-1, E-2, G-4, H-1, H-2, H-3, L-1, TC-1 or TN, allowing residence in the U.S. for at least 90 days from the date of the loan funding.


• Notice of Action for Case Type I485-Application to Adjust to Permanent Resident Status. The form must state that the application has been approved.

For example: If the automated approval and 1003 reflect the borrower's name as John Doe and a credit bureau reflects John E. Doe, an AKA statement with the name John E. Doe must be provided.

• Is purchasing the Mortgaged Premises.


• Will reside in the Mortgaged Premises as a Primary Residence.


• Had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the Mortgaged Premises.

Only the credit report returned with the AU Feedback is required for the loan transaction unless the borrower is attempting to verify additional information such as a debt being paid in full. The credit report must be reconciled with the 1003. the credit report and any additional credit verification documents must be dated within 90 days of the funding date.

Subject Property

A short sale on the subject property is eligible for a purchase transaction. A copy of the short sale agreement from each lien holder on the subject property must be provided, and all requirements of the short sale agreement(s) must be met.

A current or prior short payoff on the subject property is ineligible for a refinance transaction.

The refinance of an existing restructured mortgage on the subject property is ineligible. A restructured mortgage is defined as either the modification or origination of a 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.

Non-Subject Property

A borrower that is currently undergoing a short sale/short payoff on a non-subject property is ineligible.

A borrower that has had a prior short sale/short payoff on a non-subject property in the 24 months prior to the application date or credit report date, whichever is earlier, is ineligible.

If the borrower has had a prior short sale/short payoff on a non-subject property, the short sale/short payoff completion date must be at least 48 months prior to the application date or credit report date, whichever is earlier, to be eligible. A borrower that has had a prior short sale/short payoff on a non-subject property in the 48 to 24 months prior to the application date or credit report date, whichever is earlier, may still be eligible when all of the following requirements are met:

• The mortgage on which the short sale/short payoff occurred has no history of lates or delinquency; and
• The borrower was not obligated to repay any amount associated with the short sale/payoff, including a deficiency judgment.

The AU engine may not, in all instances, be able to identify a short sale/short payoff on the credit report. An indication that may identify a short sale or short payoff includes the word "settled" noted on a mortgage tradeline of the borrower’s credit report.

If the credit report does not show the required monthly payment for a revolving or open-ended credit account, an estimated payment of 5% of the outstanding balance or $10, whichever is greater, may be used for qualification purposes in lieu of documenting the required payment amount.

A 30-day charge account requires that the full balance be paid in full for each 30-day billing cycle. One of the following requirements must be met for any 30-day charge accounts reflected on the borrower’s credit report:

• The current account balance must be paid in full at closing; or
• A copy of the borrower’s current account statement must be provided to verify the minimum monthly payment due if the account has a financing option similar to a revolving or open-ended credit account; or
• The borrower must document sufficient assets to cover the unpaid balance in addition to any funds to close and reserves required for the transaction. In this instance and depending on the AU engine:
  • The liability must be marked as "excluded" when submitted to Loan Prospector or Desktop Underwriter version 8.2 or later.
  • Desktop Underwriter versions prior to 8.2 will automatically exclude open 30-day charge accounts when the payment matches the balance (and therefore the number of months left to pay is 1).

When a current balance on a revolving or open-ended credit account is to be paid at closing, the monthly payment on the current balance must still be qualified in the total debt. A revolving or open-ended credit account may only be excluded from the total debt when documented as paid and closed prior to drawing loan documents. Neither a HUD-1 nor a current account statement showing zero balance are sufficient to verify a revolving or open-ended credit account is closed.

• A 12 month history of the account being paid on time. This can be verified with the credit report or a statement from the lender. And,
• Canceled checks for the previous 12 months, verifying the liability is being paid by someone else.

A contingent liability may also be excluded and the documentation of the most recent 12 months’ payment history is not required, if the obligation to make the payments on a debt of the Borrower includes the following:

• A court order, such as a divorce decree, assigning the contingent liability to another party as well as documentation verifying the transfer of ownership to another party. Or,
• Evidence of release of liability for the Borrower and/or assumption of the liability by another party from the lender when the contingent liability is a mortgage, as well as documentation verifying the transfer of title to another party.

The housing expenses for the borrower’s primary residence must be qualified regardless of the property being owned and obligated solely by the non-borrowing spouse.

• The Borrower’s executed non-contingent sales contract for the previous residence, a lender’s commitment to the buyer of the previous residence (if the executed sales contract includes a financing contingency) and evidence of reserves of six months’ payments covering any liens on the previous residence;


or


• An executed buyout agreement that is part of an employer relocation plan where the employer/relocation company takes responsibility for the outstanding mortgage(s).

• The borrower's most recent tax return, evidencing the borrower did not claim mortgage interest for the property.


OR


• The borrower's current hazard insurance policy for the property in question, evidencing no mortgagee.

Stable monthly income is the borrower's verified gross monthly income from all acceptable and verifiable sources that can reasonably be expected to continue for at least the next three years. For each income source used to qualify the borrower, both the source and the amount of the income must be determined to be stable. A borrower who has had different types of employment in the past may be considered to have stable income if the income amount has remained at a consistent level. When evaluating a borrower who has changed jobs frequently, any affect on the borrower's ability to pay the borrower's obligations due to the changes must be considered. In most instances, a two-year history of receiving income is required in order for the income to be considered stable and used for qualifying.

The determination that the income can reasonably be expected to continue must be based on the documentation requirements, and should focus on the borrower's occupation, tenure, past employment history and probability of consistent receipt. Income may not be considered for qualifying with knowledge or documentation that indicates that the income will terminate within the next three years.

Significant increases or decreases in income level

When the borrower has experienced a significant decrease in income, the borrower's income cannot be averaged using a previous higher level unless there is documentation of a one-time occurrence (e.g., injury) that prevented the borrower from working or earning full income for a period of time and proof that the borrower is back to the income amount that they previously earned. The analysis will be focused on the most recent earnings to determine the income that is most likely to be received at the level for the next three years and used for qualifying.

When the borrower has experienced a significant increase in income, sufficient documentation must be provided to determine that the increase is stable and likely to continue at the level used for qualifying (e.g. that the income is not a one time incentive payment).

Full Income Documentation
Provident Funding will adhere to the requirements of the AU Feedback for documenting income, unless it permits documentation that does not verify the amount of income earned by the borrower. In the instance that the requirements of the AU Feedback differ from the requirements set forth below, the more restrictive requirements apply.

When a current or most recent income statement is required, it must be dated within 90 days of the funding date and no earlier than 30 days prior to the initial application interview date.

• Paystubs must reflect at least 30 days of YTD earnings. When paystubs do not reflect YTD earnings, additional consecutive paystubs are required to document earnings for the most recent 30 days and a written Verification of Employment (VOE) must be obtained by the loan originator directly from the employer.
• Paystubs and W-2 forms must be computer generated and cannot be handwritten or appear to be altered in any way.
• Internet pay stubs are acceptable provided they are complete and contain all of the required information for the qualifying Borrower: Borrower name, employer, pay period, earnings, deductions, etc.
• Written Verifications of Employment (VOE) must be supported by paystubs and W-2s.
  
• Individual federal income tax returns are required for an employed Borrower who receives commission income or is employed by the property seller, real estate broker, or a closely held family business.

• A Borrower has an ownership interest of 25% or more in a business. The business may be a sole proprietorship, partnership or corporation.
• A Borrower paid on a per-job basis or contract basis, and therefore filing 1040 Schedule C, even if the Borrower holds no ownership interest in the company paying the income (typically 1099 income).
• A Borrower employed in a closely held family business.

• Letter from the business’ CPA, regulatory agency or professional association
• Business listing or yellow page ad for the business
• Business license
• Internet website printout (acceptable sources include Borrower’s business website, government, union or professional association website)

• A subject 2-4 unit Primary Residence (only those units not occupied by the Borrower).
• A subject Investment Property.
• Non-subject Investment Properties.

Whenever rental income is to be used from either subject or non-subject property, the Borrower must demonstrate at least a two-year history of managing 1-4 unit Investment Properties.

• If the borrower has a history of receiving rental income from the property, then any rental income used to qualify must be substantiated using a cash flow analysis of the borrower’s prior two (2) years federal tax returns and considering the full housing expense (PITI).
• If the borrower does not have a history of receiving rental income from the property, then any rental income used to qualify must be substantiated with copies of the current lease agreements and cancelled checks. Gross rental income must be reduced by 25% to compensate for vacancies, maintenance and operating expenses.

In addition, the following are subject to certain considerations:

Subject 2-4 Unit Primary Residence or Subject Investment Property

• The Form 998/216 Operating Income Statement is required even if rental income from the subject property is not considered in qualifying the borrower.
• Six (6) months of rent loss insurance coverage when rental income from the subject property is used in qualifying the borrower.
• For subject investment property transactions, if the Borrower owns more than one financed Investment Property, the Borrower must meet the following requirements:
  • The Borrower cannot have individual and/or joint ownership of more than 4, 1- to 4-unit properties that are financed including the subject property.
  • subject Investment Property Mortgage is on a fixed-rate, level-payment mortgage or 7/1 ARM.

• If a property was owned during the previous tax year but rental income was not reported due to previously being occupied as the Borrower's primary residence, the requirements under section 3.4. Conversion of a Primary Residence shall apply.

• Payments are received pursuant to a written agreement, court decree or law.


• The length of time the payments have been received.


• The regularity of receipt.


• The availability of procedures to compel payment.


• The age of each child for which child support payments are made (if applicable).


• Eligibility criteria governing the continued receipt of the income, such as age of dependents or accumulation of assets.

• The borrower's employer must provide a letter confirming the borrower's position, the stability of continued employment, and the exact date the borrower will return to work.


• The borrower must provide a written explanation letter confirming the intent to return to work and on which date.


• The dates of return cited by the employer and the borrower must match.


• The borrower's work history prior to going out on family leave must be documented.

• Borrower must be a U.S. Citizen or Permanent Resident Alien.


• Subject property must be a primary residence or second home.


• Must possess a 2-year U.S. credit history and a 2-year U.S. residence history.


• Must file U.S. income tax returns. In most cases, income is not taxable and is reported on a separate schedule and is not reflected on the first page of the returns. Two-year employment history must be fully documented.


• Year-to-date income must be verified and converted to U.S. Dollars.


• Loan is Full Documentation.

If the transcript of the return cannot be obtained due to the recent filing of the return by the borrower, the underwriter must determine who prepared the return.

• Self-Prepared: The return cannot be used and the return from the previous year must be obtained and used for the income calculation.


• Professionally Prepared: The underwriter must obtain a letter from the paid preparer evidencing that the return provided for the mortgage transaction match that which was filed with the IRS. With that letter, the transcript is not required and the borrower’s signed and dated tax return can be used to document the borrower's income.

• Gift that must be repaid in full or in part.


• Sweat equity.


• Funds donated in any form such as cash, bonds or personal items of value donated by the seller, builder, real estate agent or any other party directly associated with the subject transaction.


• Non-marketable and restricted securities.


• Custodial accounts for children or others.


• Proceeds of a personal or unsecured loan.


• Cash advance on a revolving charge account or unsecured line of credit.


• Cash for which the source cannot be verified (cash on hand).

• Funds on deposit in the Borrower’s checking, savings, money market or certificate of deposit account or other depository account.


• A gift that is from a Related Person of the Borrower, that does not have to be repaid.


• Proceeds of a loan fully secured by the Borrower’s owned assets. (Bridge/Swing Loan).


• Proceeds from the sale of the Borrower’s assets: real estate, stocks, bonds, mutual funds, or any part of a retirement account or other non-depository account. Proof of liquidation of the Borrower's assets is required.


• A cash deposit toward the purchase, the source of which is verifiable.


• Funds disbursed from a trust if properly documented.

Cash Deposit held by Escrow

All earnest money deposits must be verified with a cancelled check or a receipt from the holder of the deposit. AU does not consider a cash deposit held by escrow (earnest money) as liquid. In order to give the borrower credit for earnest money, regardless of the percentage amount of the sales price, AU must be submitted in one of the following ways:

• If the earnest money check has not cleared the borrower's bank account, the amount can be included in a depository account such as a checking or savings account; or


• If the earnest money check has cleared the borrower's bank account, the amount can be entered as "Earnest Money" on the 1003 Details of Transaction line l. Other Credits, where it is assumed to be verified with a copy of the cancelled check or escrow receipt AND bank statement showing the source of funds at the time the earnest money check was written or cleared. A large increase in the account must be explained and verified regardless of age.

Depository Accounts

PF will use 100% of funds held in a depository account such as checking, savings, money market funds and certificates of deposit. However, if the most recent monthly statement for a certificate of deposit has less than 30 days of activity due to a recent account opening or renewal, then the initial principal contribution amount must be used instead of the current balance to account for early withdrawal penalties.

Brokerage Accounts

When used for funds to close or down payment, proof of liquidation is required for funds held in a brokerage account with stocks, mutual funds, and other securities that are traded on an exchange or marketplace generally available to the public (i.e. NYSE and NASDAQ) provided that the value of the funds or securities with readily verified prices through financial publications. When used for reserves, 60% of the vested balance (net of any margin accounts) must be used. Stocks issued by a privately held company are not eligible assets.

Savings Bonds

Savings Bonds may be counted at 100% of redemption value if mature or at their original purchase price if not yet mature unless the current redemption value can be documented. When used for reserves, 60% of the value of the bonds must be used.

Retirement Funds

The value entered for the retirement account should be 60% (liquid amount) of the vested balance. However, funds that have not been vested or that cannot be withdrawn under circumstances other than the account owner’s retirement, death, or employment termination (e.g. pension fund) may not be used. Although AU does not consider retirement funds as liquid, retirement accounts from Traditional IRA, ROTH IRA, SEP IRA, 401(k), KEOGH, and 403(b) may still be used for funds needed to close with the most recent statement and proof of actual receipt of funds by the Borrower in one of the following ways:

• Documentation verifying the specific terms of the loan against retirement account and net proceeds, or


• Payout statement with the net early withdrawal amount after penalties and taxes are withheld.

Sales Proceeds

Proceeds from the sale of real property must be verified by one of the following:

• A HUD-1 form or other equivalent closing statement.


• Executed buy-out agreement accompanying a settlement statement that is part of an employer relocation plan where the Employer/relocation Company takes responsibility for the outstanding mortgage(s).


• Transactions involving a 1031 tax deferred exchange require a HUD-1 on the sale of the investment property being “exchanged,” exchange agreement and verification of funds transferred to escrow/title from the exchange holder. A 1031 exchange is permitted only on investment property purchase transactions in which all proceeds from the sale of the relinquished property are applied toward the purchase of a replacement property of equal or greater value.

Gift Funds

For Primary Residence Purchase transactions only, the use of gift funds is acceptable provided the borrower contributes, from their own funds, a minimum of 5% of the value of the property towards the down payment. However on Standard Conforming loans with an LTV of 80% or less, the entire down payment may be gifted. Gift funds must come from an immediate family member and be documented as follows:

• Gift letter must include the donor’s name, address, telephone number, relationship to Borrower, amount, date of funds transfer, and state that the gift is for the purchase of the subject property and that no repayment is required.


• Immediate family is defined as parents, siblings, children, spouse, grandparents, aunts and uncles.


• Verification of the transfer and receipt of gift funds.

Notes:

• Do not include the amount of gift funds in another asset account.
• Gift funds are not permitted on second homes and non-owner occupied loans. Gift funds are also not permitted on refinance transactions.

Bridge Loan

This type of financing is acceptable if the bridge loan is not cross-collateralized with the new property. Refer to Section 2.4.5. for qualifying the bridge loan liability.

Life Insurance

The net proceeds from a loan against the cash value or from the surrender of a life insurance policy may be used as a source of funds needed to close and reserves. AU does not consider life insurance as liquid. In order to give the borrower credit for net loan proceeds or surrender, these assets must be submitted to AU as an “Other Liquid Asset” and proof of actual receipt by the borrower with one of the following:

• Documentation verifying the specific terms of the loan against the life insurance policy and net proceeds, or


• Payout statement with the net surrender amount.

Trust Funds

Funds received from a Trust to which the borrower is the beneficiary but not the original Trustor must include a typed copy of the trust agreement or a signed statement on letterhead from the trustee that details the information required below:

• Identify the trustee including name, address, telephone number and an individual contract where the trustee is an independent party that typically handles trust accounts (trust company, financial institution, CPA, lawyer).


• Identify the Borrower as the beneficiary.


• Show that the Borrower has access to all or a certain specific amount of the funds.


• Show that the trust has the assets to disburse funds to the Borrower.

Other Non-Liquid Assets

Proceeds from the sale of an asset other than real property or exchange-traded securities not held in a brokerage account require:

• A bill of sale and proof of receipt computer generated or typed that identifies the Borrower as the seller of the property and property sold. The bill of sale must also show the disposition of all liens if applicable, and the proceeds paid to the borrower. The buyer and seller or their authorized agents must sign it.
  
• Or all of the following:
  
  • Documentation of the existence and Borrower ownership of the assets (e.g. car title, stock certificate, U.S. savings bond).
  
  
  • Documentation of the value of the asset by a third party (e.g. blue book or appraisal).
  
  
  • Documentation that a buyer exists at the specified price (e.g. letter of intent or contract).

Assets from the Borrower’s business may be used to qualify with a CPA letter confirming the Borrower has access to the funds for withdrawal and that withdrawal of the funds will not have a detrimental effect on the business when business assets are used for the transaction. The CPA cannot be an interested party to the transaction and cannot be related to the Borrower. Use of a Borrower’s business assets requires a minimum of six months’ reserves.

Payments on a loan secured by a borrower's cash assets (e.g. retirement account, life insurance policy) do not have to be considered as long-term debt when qualifying the borrower. However, any loan balances must be subtracted from the account balances so that the borrowed funds are not counted as financial reserves.

Standard Conforming

Primary residence/second home > 90% LTV = 3% of value.

Primary residence/second home > 75-90% LTV = 6% of value.

Primary residence/second home < 75% LTV = 9% of value.

Non-owner occupied properties = 2% of value.

Super Conforming

Primary residence/second home = 3% of value.

Non-owner occupied properties = 2% of value.

Additional examples of contributions granted by any interested party to the transaction that are considered to be sales concessions (regardless of the of the limits above) are:

• Vacations.
• Furniture or decorator allowances.
• Personal property items being left in the property.
• Automobiles.
• Moving costs or other "giveaways.".

• 2 months reserves for a subject second home plus an additional 2 months reserves on every other financed second home and 1-4 unit investment property.
• 6 months reserves for a subject investment property plus an additional 2 months reserves on every other financed second home and 1-4 unit investment property.
• 6 months reserves for a subject 2-4 unit primary residence.
• 2 months reserves when the LTV is greater than 80%.
• 24 months reserves for Interest Only loans.

• 2 months reserves for a subject 1-unit primary residence.
• 6 months reserves for a subject 2-4 unit primary residence.
• 6 months reserves for subject second home and investment properties plus an additional 2 months reserves on every other financed second home and 1-4 unit investment property.
• 6 months reserves for each property owned including the subject property when the LTV is greater than 80%.

• When excluding the borrower’s housing payments on a previous primary residence with an executed non-contingent sales contract and a lender’s commitment to the buyer (if there executed sales contract includes a financing contingency), an additional 6 months reserves covering the PITI of the previous residence are required. Refer to Section 2.4.5. for qualifying the bridge loan liability.
• When qualifying with assets from the borrower’s business, an additional 6 months reserves are required.
• Conversion of a borrower’s previous primary residence to a second home requires 6 months reserves for both the previous and current residence. The reserve requirement may be reduced to 2 months for both properties if there is documented equity of at least 30% in the existing property, based on a full appraisal dated no more than 60 days from the funding date minus any outstanding liens. Note: Satisfying this reserve requirement also satisfies the Super Conforming 2 month reserve requirement for primary residences.
• Conversion of a borrower’s previous primary residence to an investment property requires 6 months reserves for both the previous and current residence. A property that is pending sale but will not close prior to the date of purchasing a new primary residence will be treated as an investment property for qualification purposes. Note: Satisfying this reserve requirement also satisfies the Super Conforming 2 month reserve requirement for subject 1-unit primary residences and 6 month reserve requiremnet for subject 2-4 unit primary residences.

• Have resided together for at least one year, and
• Will continue residing together in the new residence, and
• Are "pooling" their funds to buy a home

• Source of pooled funds
• Fact that the pooled funds are not borrowed
• Relationship between the contributing Related Person and the Borrower

• Has resided with the Borrower for the past year
• Intends to continue residing with the Borrower in the new residence for the foreseeable future

The following exemplify unacceptable primary residence transactions:

• The borrower has purchased a home in the past six months, and is now attempting to obtain financing for another owner occupant loan, while retaining their recently purchased property as an investment.
• The borrower currently owns a home that is valued at $200,000 and states they plan to move into the new property that is located in the same city that is valued at $150,000. Unless provided with an acceptable letter of explanation, the loan is treated as an investment property.
• The borrower currently lives in a SFR and wants to claim occupancy in a planned duplex purchase.
• The borrower is purchasing a property as owner occupied, but the seller intends to rent it back from the Borrower’s for a timeframe that exceeds the maximum of 60 days.
• A refinance transaction with a non-occupant co-borrower who previously was the sole owner of the subject property, and an occupant borrower is being added but does not currently hold title (even if the occupying individual has been paying the existing mortgage).

• Be written by a title insurer legally able to do business in the jurisdiction where the mortgaged premises are located. The policy must be fully enforceable and protective of the mortgagee’s rights.


• Protect the mortgagee up to at least the current principal balance of the mortgage.


• Must be written on the 2006 American Land Title Association (ALTA) policy long or short form. Provident will continue to accept the 1992 ALTA policy form until January 1st, 2008 or if the state commissioner approval is required and still pending. The title policy must include an ALTA Form 8.1, Environmental Protection Lien Endorsement, included. Part (b) of ALTA Form 8.1 may make an exception only for specific state statutes that provide for possible subsequent “super liens” that could take priority over the mortgage.


• For all Condominium Unit mortgages, an ALTA 4 endorsement or equivalent must be attached.


• For all PUD Unit mortgages, an ALTA 5 endorsement or equivalent must be attached.

• Subsurface public utility easements for local residential distribution, such as lines for gas and water, and cable for electric, telephone or television utilities, provided that the location of the easements is ascertainable and fixed. The exercise of the rights thereunder must not interfere with the use and enjoyment of any present improvements on the mortgaged premises or proposed improvements on which the appraisal or mortgage is based. If the easement is unlocated, condition for the appropriate endorsement for your state.


• Exceptions for encroachments on easements for public utilities by a garage, tool shed or similar structure that is not attached to, or a portion of, the dwelling structure are acceptable. The exceptions are acceptable provided that the encroachments do not interfere with the use and enjoyment of the easements or the exercise of rights of repair and maintenance in connection therewith.


• Exceptions for mutual easement agreements of record that establish a joint driveway or a party wall are acceptable if such improvements are constructed partly on the mortgaged premises and partly on adjoining property, wholly on the mortgaged premises or wholly on the adjoining property. The easement agreement must allow all present and future owners and their heirs, successors and assigns forever, unlimited use and enjoyment of the driveway or party wall without any restriction other than restriction by reason of the mutual easement owners’ rights in common and duties for joint maintenance.


• Exceptions for fence misplacements on either side of the property line of the mortgaged premises are acceptable provided that neither the misplacement, nor a future correction thereof, will interfere with the use and enjoyment of any improvements on the mortgaged premises or with the use and enjoyment of any improvements. The definition of fence in this section shall not include retaining walls or other permanent structures.


• Exceptions for encroachments on the mortgaged premises by improvements on adjoining property are acceptable provided that the encroachment does not touch any improvements on the mortgaged premises. Also, the encroachment must not interfere with the use and enjoyment of any improvements on the mortgaged premises or with the use and enjoyment of the mortgaged premises not occupied by improvements.


• Exceptions for encroachments on adjoining property by eaves or other projections attached to improvements on the mortgaged premises, or by structures such as tool sheds or by a driveway appurtenant to the mortgaged premises are acceptable. This is provided that there is an endorsement to the title insurance policy whereby the policy affirmatively insures against loss suffered by reason of the entry of a decree or court order requiring the removal of the encroachment.


• Exceptions for outstanding oil, gas, water or mineral rights are acceptable if commonly granted by private institutional mortgage investors in the area where the mortgaged premises are located. The endorsement must also state that the exercise of such rights will not result in damage to the mortgaged premises or impairment of the use or marketability of the mortgaged premises for residential purposes and there is no right of surface or subsurface entry within 200 feet of the residential structure. Otherwise, it must comprehensively endorse the title insurance policy to affirmatively insure the lender against damage or loss due to the exercise of such rights.

• If any outstanding defaulted taxes, liens, and/or judgments are requested to be paid at closing, then they must be reflected on the HUD-1 and the escrow/closing agent must provide a payoff statement showing current balance, fees, interest and penalties to fully satisfy the debt(s). If the transaction is a short sale purchase where the sales proceeds are insufficient to satisfy the owner's outstanding lien(s), a short sale agreement is required from the lender(s).


• A lis pendens filed by a lender must be released from title to ensure that the property will not be foreclosed upon. However, the lender may be unwilling to release the lis pendens until their lien is satisfied. In this case, a letter is required from the entity that filed the lis pendens acknowledging the transaction and stating that the lis pendens will be released upon satisfaction of their lien.

• The POA must be a "Specific" or "Special" Power of Attorney that grants authority to the Attorney-in-Fact to enter into a real estate transaction on behalf of the borrower and mortgage the subject property. The POA does not need to specify the lender name, but it cannot be a "Durable" or "General" POA, except in states that require a statutory form or that prohibit the refusal of a Durable or General POA, as long as the POA is not illegal or unenforceable.
• The POA must be signed and dated by the borrower prior to the signing of the loan documents.


• The POA must indicate clearly that the mortgagor is appointing an Attorney-in-Fact and specifically identify the person appointed.


• The POA must be notarized.


• The POA must be recorded prior to, or concurrent with, the security instrument.


• All loan documents must be executed by the Attorney-in-Fact and signed as such.

The POA must be acceptable and insurable by the title company issuing the title policy.

• Provident Funding must approve the POA prior to the signing of loan documents. In the instance that the executed POA was not approved by Provident Funding prior to loan documents being generated, a redraw will be required to include the Attorney-in-Fact's name under the borrower signature lines.

The Rate and Term refinance of a mortgage originated at the time the borrower purchased the subject property requires a minimum of 120 days seasoning measured from Note date to Note date.

The refinance of a previous Provident Funding cash-out refinance will be considered cash-out, unless the original mortgage is seasoned 6 months. To establish 6 months seasoning, both of the following requirements must be met:

• The funding date of the current refinance transaction must not be within 6 months of the date of the previous mortgage.
• Borrower has made six regular monthly mortgage payments on the existing loan.

• Alaska
• District of Columbia
• New York
• West Virginia

• Cash out refinances in Texas.
• Loans with a debt-to-income ratio greater than 60% in Massachusetts and Minnesota.
• Refinances where the proceeds are used to pay off an existing mortgage with a prepayment penalty secured by a subject property located in New Jersey.
• Primary residence refinances on an ARM or interest only loan in Rhode Island.
• Interest only loans in Illinois and Maine.
• ARMs with an initial fixed period of 3 years or less in Illinois.
• Loans secured by condominiums in Florida.

All Mortgages Except 10, 15 and 20 Year Fixed Mortgages

• Minimum Credit History: 12 months except where additional credit history requirements are indicated below.
• Minimum Tradelines: (must meet one of the following requirements)
  • More than 24 months housing payment history with 0x30 late PLUS two additional installment and/or revolving tradelines with at least 12 months of credit history.
  • 12-24 months housing payment history with 0x30 late PLUS three additional installment and/or revolving tradelines with at least 24 months credit history.
  • 0-12 months housing payment history with 0x30 late PLUS four additional installment and/or revolving tradelines with at least 24 months credit history.
  • More than 12 months housing payment history with prior derogatory history PLUS four additional installment and/or revolving tradelines with at least 24 months credit history.
• Housing Payment History (Mortgage and/or Rent): No 30-day late payments in the most recent 12 months. A Verification of Rent (VOR) is required for any borrower without property ownership for the most recent 12 months.
• Installment Debt History: No more than one 30-day late payment in the most recent 12 months.
• Revolving Debt History: No more than two 30-day late payments in the most recent 12 months.
• Derogatory Credit: No collections, charge-offs or past-due accounts in the most recent 12 months, even if they have been paid current.
• Bankruptcy: Minimum 48 months since discharge/dismissal date.
• Foreclosure, Short Sale, Short Refinance, Deed-in-Lieu: Minimum 60 months since date of activity.
• Construction-to-Perm: Ineligible
• Rate & Term Refinance: Payoff of a purchase money second/HELOC is permitted only for the original lien that is reflected on the purchase HUD-1. Payoff of a second/HELOC that was obtained through the rate/term refinance of the original purchase money is ineligible.
• A minimum 2-year history of managing rental properties is required if any rental income is used to qualify.
• Capital gains income may not be used to qualify.
• Validation of the borrower's two-years individual federal tax returns is required regardless of the documentation level required per the AU Feedback.

• Minimum Credit History: 24 months except where additional credit history requirements are indicated below.
• Minimum Tradelines: (must meet one of the following requirements)
  • More than 24 months housing payment history with 0x30 late PLUS two additional installment and/or revolving tradelines with at least 12 months of credit history.
  • 12-24 months housing payment history with 0x30 late PLUS three additional installment and/or revolving tradelines with at least 24 months credit history.
  • 0-12 months housing payment history with 0x30 late PLUS four additional installment and/or revolving tradelines with at least 24 months credit history.
  • More than 12 months housing payment history with prior derogatory history PLUS four additional installment and/or revolving tradelines with at least 24 months credit history.
• Housing Payment History (Mortgage and/or Rent): No 30-day late payments in the most recent 24 months. A Verification of Rent (VOR) is required for any borrower without property ownership for the most recent 24 months.
• Installment Debt History: No more than one 30-day late payment in the most recent 24 months.
• Revolving Debt History: No more than two 30-day late payments in the most recent 24 months.
• Derogatory Credit: No collections, charge-offs or past-due accounts in the most recent 24 months, even if they have been paid current.
• Bankruptcy: Ineligible regardless of seasoning.
• Foreclosure, Short Sale, Short Refinance, Deed-in-Lieu: Ineligible regardless of seasoning.
• Construction-to-Perm: Ineligible
• Rate & Term Refinance: Payoff of a purchase money second/HELOC is permitted only for the original lien that is reflected on the purchase HUD-1. Payoff of a second/HELOC that was obtained through the rate/term refinance of the original purchase money is ineligible.
• A minimum 2-year history of managing rental properties is required if any rental income is used to qualify.
• Capital gains income may not be used to qualify.
• Validation of the borrower's two-years individual federal tax returns is required regardless of the documentation level required per the AU Feedback.

Conversion of a Primary Residence to an Investment Property
Both the current and proposed mortgage payments must be used to qualify the borrower for the new transaction, and 6 months PITI for both properties is required to be held in reserves. The borrower is permitted to use rental income to offset the housing payment for the previous residence if the borrower has a two-year history of managing investment properties and there is documented equity of at least 30% in the existing property, based on a full appraisal dated no more than 60 days from the funding date minus any outstanding liens. The rental income must be documented with a copy of the fully executed lease agreement and receipt of a security deposit from the tenant and deposit into the Borrower’s account. Rental income may not be used if 30% equity cannot be documented or if the LTV on the proposed mortgage is greater than 80%. A property that is pending sale but will not close prior to the date of purchasing a new primary residence will be treated as an investment property for qualification purposes.

The subject loan amount is limited to the amounts used to:

• Pay off the first mortgage, regardless of its age, except:
  • Rate and term refinance transactions with LTV greater than 80% are ineligible to payoff a mortgage obtained in the past 6 months to consolidate a first mortgage and secondary financing. A copy of the HUD-1 from a refinance transaction in the past 6 months must be provided to demonstrate the refinance mortgage was not used to consolidate a first mortgage and secondary financing.
• Pay off any junior liens secured by the Mortgaged Premises that were used in their entirety to acquire the subject property (the length of time seasoned does not matter in this situation).
• Pay related Closing Costs, Financing Costs and Impound Account items.
• Disburse cash out to the Borrower not to exceed 2% of the new refinance mortgage or $2,000, whichever is less.

The Borrower is not required to satisfy outstanding junior liens, provided that:

• The junior liens remain subordinate to the lien of the new refinance mortgage.
• The junior liens meet the secondary financing requirements for the loan program.
• A copy of the subordination agreement is maintained in the mortgage file.

• Paying off the first mortgage regardless of age.


• Paying off any junior liens secured by the subject property, including a HELOC, regardless of age.


• Paying related Closing Costs, Financing Costs and Impound Account items.
  
• Disbursing cash-out to the Borrower.

• Family sales or transfers, including estate sales.


• Corporate sales or transfers.


• Mortgagors employed in the real estate or construction trades who are involved in the construction, financing or sale of the subject property.


• Transactions involving principals or vendors (including the appraiser, settlement agent, title company, etc) who is involved in the lending process of the subject property.

• Absence of equity or down payment.


• The purchase price may not represent actual consideration given.


• Financial bailouts or attempts to hide poor credit.


• Occupancy concerns.


• Financing of unsold builder inventory, especially in soft real estate markets.

• The family member or relative is the borrowers’ spouse, child, parent, or any other individual related to the borrowers by blood, adoption, or legal guardianship.


• Full documentation of the Borrower’s income, employment and assets.


• Borrower must provide copies of cancelled check(s) to verify all earnest money paid to the seller.


• 5% of the sales price must be verified as being saved by the Borrowers but these funds do not have to be used towards the down payments.


• Verification that the Borrower is not now, nor has previously been, on title to the property.


• A payment history for the existing mortgage (verification of seller’s mortgage) on the subject property must be obtained and show no delinquencies within the past 12 months.


• Borrower must provide a written explanation stating the relationship to the seller and the reason for purchase.


• The underwriter must be satisfied the transaction makes sense and that the Borrower will occupy the property as a primary residence.


• Verified amounts of gifts of equity in the subject property are acceptable sources of down payment. The donor must provide a gift letter. When the LTV/CLTV is greater than 80%, the Borrowers must contribute a minimum of 5% of the sales price towards the down payment from their own funds. Transactions with an LTV/CLTV at 80% or below can be an all gift transaction, however 5% of the sale price must be verified as being saved by the Borrowers.

• Full documentation of the Borrower’s income, employment and assets.


• Verification of the Borrower as a beneficiary of the property.


• The Borrower may not receive cash back at closing.


• If the Borrower uses a portion of the proceeds to buy out other beneficiary’s interest, his/her interest must be verified in a copy of the will and a buyout agreement must be fully executed. Payoffs to the beneficiaries must be a closing condition and shown on the Hud-1 Closing Statement.


• The transaction is considered as a rate/term refinance for LTV purposes.


• Primary residence only.


• Obtain verification of mortgage on an existing financing to verify the outstanding balance; the payment history should be disregarded on existing mortgage as not a credit consideration.

• The borrowing individual must also occupy and have secured a 1-unit property for some portion of the year.


• The property must be in a location remote in distance from the Borrower’s Primary Residence and cannot be located in the same metropolitan area.


• The property must be located in an area in which the primary use is vacation/resort homes or the Borrower must provide a signed letter of explanation regarding the use of the property as a second home. The underwriter must be satisfied the transaction makes sense and that the Borrower will occupy the property as a second home.


• The property must be suitable for year-round occupancy.


• The property must be available for the Borrower’s exclusive use and enjoyment (i.e. no rental income, no timesharing ownership arrangement, rental pools or agreements that require the Borrower either to rent the property or give a management firm control over the occupancy of the property are permitted).


• The Borrower may not be affiliated in any way with the builder, developer or the property seller.


• The housing expense-to-income (top/front-end) ratio must be computed using the Borrower’s Primary Residence expenses and the monthly housing expense on the second home must be considered in calculating the debt-to-income (bottom/back-end) ratio.
• The Borrower must document a minimum of two months PITI for the second home in reserves plus an additional two months reserves for each additional financed second home and investment property. For Super Conforming loans, the Borrower must document a minimum of six months PITI for the second home in reserves plus an additional two months reserves for each additional financed second home and investment property.

• The loan may not contain temporary subsidy buy-downs.


• The Borrower may not be affiliated in any way with the builder, developer or property seller.


• The housing expense-to-income ratio must be computed using the Borrower’s Primary Residence expenses.


• The Borrower must demonstrate at least a two-year history of managing 1-4 unit Investment Properties before the Net Cash Flow of the subject can be used in qualifying the Borrower.


• The full PITI of the investment property must be used in calculating the Borrower's debt-to-income ratio if the two year history of managing investment properties is not verified.


• The Borrower must document a minimum of six months PITI for the investment property in reserves plus an additional two months reserves for each additional financed second home and investment property.


• The Borrower must have rent loss insurance coverage on the subject investment property to provide insurer’s liability worth six month’s gross monthly rent only when rental income is used.

• The loan program is limited to a fixed-rate, level-payment mortgage or 7/1 ARM.


• The Borrower cannot have individual and/or joint ownership of more than four (4), 1- to 4-unit properties that are financed including the subject property.

• The loan must close within 180 days of documented completion.


• Cash to borrower to recoup any out-of-pocket expenses is not permitted.


• LTV/CLTV is based on the lesser of the current appraised value or the purchase price (the current appraised value of the lot plus documented actual cost to construct the improvements).

• If the borrower employs a general contractor: signed construction contract, complete breakdown of construction costs and specifications, and copies of cancelled checks and corresponding paid receipts for supplies, labor or funds paid to subcontractors by the borrowers.


• If the borrower paid labor and materials, copies of cancelled checks and corresponding descriptive paid receipts are required.


• Sweat and trade equity is not an acceptable construction cost.

• Borrower held title to property to the start of construction.


• LTV/CLTV is based on current appraised value.


• For rate/term transactions: All loan proceeds must pay existing land loan and existing construction balances. Cash out to borrowers is not permitted.


• For cash-out transactions: The borrower may receive cash to recoup out-of-pocket expenses but loan is subject to cash-out LTV/CLTV guidelines.

• All of the loan proceeds must be used to pay the outstanding balance under the contract and no loan proceeds may be disbursed to the Borrower.


• The LTV must be computed based on the lower of the appraised value, or the total acquisition cost. The acquisition cost will be determined by the purchase price indicated in the original land contract or contract for deed, plus any documented cost the Borrower has expended for rehabilitation, renovation, refurbishment or energy conservation improvements.

• The LTV ratio must be computed based on the appraised value.


• Rate and term or cash-out loans are based on the standard requirements.

• For closed-end seconds, the maturity date or amortization basis of the junior lien must not be less than five years after the Note Date of the first lien, unless the junior lien is fully amortizing.


• For closed-end seconds with a variable interest rate, the monthly payment must remain constant for 12 -month periods (i.e. adjustments occur annually).


• No prepayment penalty. For the purpose of subordinate financing eligiblity, this does not apply to Home Equity Lines of Credit with terms that allow the lender to recoup third party closing costs paid by the lender on the Borrower's behalf, documented with a copy of the HUD-1, if the Borrower terminates or closes the account within the first three years.


• No negative amortization.


• The terms of the secondary financing must provide for regular monthly payments of principal and interest, or interest only. Secondary financing without regular monthly payments are not acceptable.


• No silent seconds (municipal, city, etc).


• Secondary financing may not be from an interested party to the transaction, including mortgage broker, realtor, seller or builder.

• PF must condition that any survey exception be deleted from the final Title Policy as “title” conditions on the Loan Approval Log. If the Title Company is not willing to delete the survey exception, then a survey must be required.


• PF must condition for Survey coverage or a Survey/Location Endorsement as the “title” condition on the Loan Approval Log.


• PF must verify with the Title Company that any applicable survey exception has been deleted and PF’s final policy will reflect either the required survey coverage or an endorsement.


• The instructions to escrow/title must explicitly state these requirements.

Established Attached Condominium Eligibility Warranty
Attached Condominiums with 5 units or more must meet the following requirements based on the appraisal and Condominium Questionnaire completed by the HOA or management company:

• All of the project’s units, common elements and amenities have been completed and are not subject to additional phasing.


• At least 90% of the total units in the project have been conveyed to the unit purchasers other than the developer.


• Control of the homeowners association has been turned over to the unit owners.


• The LTV/CLTV does not exceed 80% for Primary Residences and 75% for Second Homes.


• The Condominium Project can not exceed 7 stories.


• No single entity owns more than 10% of the total units. If the project has fewer than 10 units, a single entity may not own more than 1 unit.
• The project does not have common areas or recreational facilities leased to or by the HOA.


• There is no pending litigation involving the HOA or developer.


• HOA must waive its “right of first refusal” to the sale, lease or transfer of a unit in case of foreclosure or deed in lieu.


• Commercial use within the project cannot exceed 20% of the total square footage for the project and compatible with residential use.


• No more than 15% of total units are delinquent on their HOA dues by more than 30 days.


• The project is not an ineligible project (see section 3.13.2 Unacceptable Properties)

Small Condominium Eligibility Warranty
Projects with less than 5 units are not warranted as described above. To be eligible for financing, they must meet the following requirements:

• All units, common areas and facilities, including those that are part of the master association are complete.


• A single entity may not own more than 1 unit.


• Appraiser has stated that projects of this size are common to the area and has used a comparable property in the appraisal to help determine value.


• No more than one unit in the project can be held for investment.

• The individual unit owners own or have a leasehold interest in a parcel of land improved with a dwelling. This ownership is not in common with other unit owners.


• A homeowners association that owns or has a leasehold interest in and is obligated to maintain property and improvements within the development (i.e. greenbelts, recreation facilities and parking areas) and administers the development for the common use and benefit of the unit owners.


• The unit owners have an automatic, non-severable interest in the homeowners association and pay mandatory assessments.

• The appraiser makes a comment that there appears to be a problem such as “ground is soggy” or “there is a noxious odor” or requires an inspection as “subject to.”


• The sales contract requires an inspection due to possible problems with either system similar to the termite requirements.

• The holdback is for a purchase transaction.


• There must be no adverse affect to marketability due to the incomplete items.


• Incomplete items must be minor in nature and not affect the Borrower’s safety or ability to live in the home.


• The builder/seller/borrower, as the case may be, is required to submit the bid(s) that they have obtained for the designated work. PF requires that 150% of the highest bid be collected and held in the hold back account, until the 442 from the Appraiser is received, verifying that the work has been completed. At that time, PF will authorize the Escrow account holder the funds will then be released by the escrow account holder.


• 30 days is the maximum amount of time allowed for an escrow holdback.


• The Borrower will be charged an escrow holdback fee of $500. If the branch is aware of the holdback up front, the cost can be represented on the TIL. If the branch is made aware of the holdback after the docs are drawn, then the fee must be paid outside of Escrow, or the docs must be redrawn.


• A final inspection (442) must be provided within 30 days of loan closing and must reflect the completion of all items. Extensions will not be provided.

• Empty swimming pools: PF will condition for verification that the swimming pool has been filled with dirt or water prior to closing. A fence around the pool is not sufficient.


• Security bars without quick releases: Any room that has security bars on the windows must have a door that exists to the outside of the property, or the bars must have quick release mechanisms.


• Balcony doors on the second floor that open to 'thin air': Appraiser must address that they have been secured in a manner that meets the county code in which the property is located.

• Good Faith Estimate (GFE) prepared within three (3) rescission days of the application interview date.


• Equal Credit Opportunity Act (ECOA) Notice.


• Borrower Certification and Credit Authorization signed by all borrowers.


• Fair Lending Notice.


• Broker Fee Agreement signed and dated by the application interviewer and all borrowers.


• Any other notices that the loan originator is required to provide in the state in which the property is located. The loan originator is expected to be familiar with and in compliance with all disclosure regulations imposed by regulators in any state for which a loan is submitted.

The type of appraisal report required depends on the property type and occupancy. The AU Feedback Certificate will contain a Minimum Assessment Feedback (MAF) indicating the level of inspection required for a particular transaction. The appraisal report obtained must meet or exceed in detail the MAF. Resubmissions to the AU engine with any changes to the loan transaction may alter the MAF. Thus, it is essential that the MAF be rechecked after each submission to the AU engine.

The following transactions require a full appraisal, even if the MAF indicates a lesser form:

• Purchases of REO properties or purchases of properties whose most recent transaction was a foreclosure sale.
• Loans with LTV greater than 80%.
• Super Conforming loans.
• Jumbo Loans.

Property Inspection Alternative
On certain transactions, Loan Prospector will determine that the loan is eligible for the Property Inspection Alternative (PIA). With this determination, the Borrower is permitted to obtain a Form 2070 (Exterior Only) Inspection or for a small fee, not obtain any appraisal documentation.

Super Conforming loans
The minimum acceptable appraisal for a loan with a Super Conforming loan amount is a Form 70 appraisal. This form is required regardless of any MAF allowing a less comprehensive appraisal report.

An additional Field Review is required for loans with both 75% LTV/CLTV and greater and $1 million property value or greater.

An appraisal (over 90 days old) is valid for 12 months from its effective date if an Appraisal Update dated within 90 days of funding indicates that the value of the property has not decreased since the effective date of the original appraisal. A minimum of two new comparables with pictures are required to support the Appraisal Update. The appraiser is also to provide a current photo of the property and state that there has been no change since the original report was completed. The Appraisal Update must be completed by the same appraiser that completed the original appraisal report.

If the appraisal is dated more than 90 days and the property is considered to be in a declining market, a new appraisal is required.

• Marked by the appraiser as a declining market; and/or
• Marked by the appraiser as an oversupply of homes for sale; and/or
• Marked by the appraiser as having a marketing time over 6 months; and/or
• Indicated in the AU Feedback Certificate.

Desktop Underwriter

The subject property has been identified as being located in either an area of declining home prices or in an area where it may be difficult to assess home values.

• The conversion of a garage into living space
• The conversion of non-living area to living area, regardless of whether or not the appraiser assigns the area value
• Any conversion, remodeling, or addition that required the alteration of, addition, or removal of electrical or plumbing work in a living area
• Any alteration, removal, or addition to the property that would require permits in accordance with local code