Rural Development Guidelines

Rural Development Guidelines | Table of Contents

Table of Contents MICHIGAN MUTUAL UNDERWRITING _________________________________________________________ 5 Program Description _____________________________________________________________________________ 5

Product Specifications _____________________________________________________________________ 6 Ownership in Multiple Properties __________________________________________________________________ 6 Loan Purpose ___________________________________________________________________________________ 6 Guarantee Fee __________________________________________________________________________________ 6 Occupancy _____________________________________________________________________________________ 7 Eligible Borrowers _______________________________________________________________________________ 7 Ineligible Borrowers _____________________________________________________________________________ 7 Legal Name ____________________________________________________________________________________ 7 Overview _____________________________________________________________________________________________ 7 Nicknames ____________________________________________________________________________________________ 7 Married Names ________________________________________________________________________________________ 8 Multiple Name Variations ________________________________________________________________________________ 8

Minimum/Maximum LTV _________________________________________________________________________ 8 Purchase _____________________________________________________________________________________________ 8 Refinance _____________________________________________________________________________________________ 8

Loan Amount ___________________________________________________________________________________ 8 Age of Documents _______________________________________________________________________________ 9 Secondary Financing _____________________________________________________________________________ 9 Interested Parties’ Contributions ___________________________________________________________________ 9 Eligible Properties _______________________________________________________________________________ 9 Ineligible Properties _____________________________________________________________________________ 9 Repair Escrow Holdbacks ________________________________________________________________________ 10 Assumption ___________________________________________________________________________________ 10 Escrow Waivers for Property Taxes/Hazard Insurance _________________________________________________ 10 Flood Insurance ________________________________________________________________________________ 10 Minimum Credit Score __________________________________________________________________________ 10 Registration of Funds ___________________________________________________________________________ 10 Underwriting Method ___________________________________________________________________________ 10 Term_________________________________________________________________________________________ 10 Trusts ________________________________________________________________________________________ 11 Eligible Borrowers _____________________________________________________________________________________ 11 Eligible Properties _____________________________________________________________________________________ 11 Required Documentation _______________________________________________________________________________ 11 Exception for Trust Certificate Authorized States _____________________________________________________________ 11 Other Title and Closing Requirements _____________________________________________________________________ 12 Ineligible ____________________________________________________________________________________________ 12

Purchase Transactions ____________________________________________________________________ 13 Property Designation ___________________________________________________________________________ 13 Maximum Loan Amount _________________________________________________________________________ 13 Property Condition _____________________________________________________________________________ 13 Short Sales ____________________________________________________________________________________ 13 Personal Property ______________________________________________________________________________ 13

Refinance Transactions ___________________________________________________________________ 14 Maximum Loan Amount _________________________________________________________________________ 14 Borrower Eligibility _____________________________________________________________________________ 14

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Rural Development Guidelines | Table of Contents Streamline Refinances __________________________________________________________________________ 14 “Cash Out” at Closing ___________________________________________________________________________ 14 Subordinate Financing __________________________________________________________________________ 14 Adding / Deleting Borrowers _____________________________________________________________________ 14 Appraisal Requirements _________________________________________________________________________ 15 Interest Rate __________________________________________________________________________________ 15 Mortgage Payoffs ______________________________________________________________________________ 15 Texas Refinances _______________________________________________________________________________ 15

Credit__________________________________________________________________________________ 16 Obligations Requiring Inclusion in DTI ______________________________________________________________ 16 Student Loans _________________________________________________________________________________ 16 Conventional/Fixed Payment ____________________________________________________________________________ 16 Graduated Payments___________________________________________________________________________________ 16 Deferred Payments ____________________________________________________________________________________ 16

Residence History ______________________________________________________________________________ 16 Social Security Number __________________________________________________________________________ 16 Credit Report __________________________________________________________________________________ 17 Adverse Credit History __________________________________________________________________________ 17 Verification of Rent _____________________________________________________________________________ 17 Debts Cosigned by Borrower _____________________________________________________________________ 17 CAIVRS _______________________________________________________________________________________ 17 Derogatory Credit ______________________________________________________________________________ 17 Federal Debt _________________________________________________________________________________________ 17 Tax Liens ____________________________________________________________________________________________ 17 Judgments ___________________________________________________________________________________________ 17 Student Loans ________________________________________________________________________________________ 17 Bankruptcy __________________________________________________________________________________________ 18 Foreclosure __________________________________________________________________________________________ 18 Short Sales / Pre-Foreclosure Sales ________________________________________________________________________ 18

Non-Purchasing Spouse in Community Property States ________________________________________________ 18

Employment/Income _____________________________________________________________________ 19 Determining Eligible Income______________________________________________________________________ 19 Non-Taxable Income ____________________________________________________________________________ 19 Non-Working Borrowers _________________________________________________________________________ 19 Reductions to Annual Income ____________________________________________________________________ 20 Child Support / Alimony / Separate Maintenance ____________________________________________________ 20 Upward Mobility _______________________________________________________________________________ 20 Employment Gaps ______________________________________________________________________________ 20 4506T Processing _______________________________________________________________________________ 21 Recently Filed Tax Returns ______________________________________________________________________________ 21

Hourly or Salaried Employees_____________________________________________________________________ 21 Situations Requiring Last Two Years Tax Returns _____________________________________________________ 21 Overtime and Bonus Income _____________________________________________________________________ 21 Part Time or Second Job Income __________________________________________________________________ 22 Self-Employed Borrowers ________________________________________________________________________ 22 Retirement Income _____________________________________________________________________________ 22 Maternity Leave _______________________________________________________________________________ 23 Social Security (Long-Term) Disability Income ________________________________________________________ 23 Social Security Income Received for a Child _________________________________________________________ 24 Social Security Disability Received for an Adult Child (18 or Older) or Parent _______________________________ 24 Unemployment / Public Assistance ________________________________________________________________ 24 Dividend / Interest Income _______________________________________________________________________ 24

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Rural Development Guidelines | Table of Contents Assets _________________________________________________________________________________ 25 Earnest Money Deposit__________________________________________________________________________ 25 Reserves after Closing ___________________________________________________________________________ 25 Reimbursement of Prepaid Costs __________________________________________________________________ 25 Asset Verification ______________________________________________________________________________ 25 Acceptable Funds to Close _______________________________________________________________________ 25 Verification of Funds ____________________________________________________________________________ 26 Verification of Deposit (FNMA Form 1006) __________________________________________________________________ 26 Most Recent Two Month’s Bank Statements ________________________________________________________________ 26 Cash on Hand_________________________________________________________________________________________ 26 Gift Funds ___________________________________________________________________________________________ 27 Grant Funds __________________________________________________________________________________________ 28 Disposition of Personal Assets____________________________________________________________________________ 28 Subordinate Financing __________________________________________________________________________________ 28 Updated Documents ___________________________________________________________________________________ 28

Homeownership Counseling _______________________________________________________________ 29 Collateral ______________________________________________________________________________ 30 Appraisal Requirements _________________________________________________________________________ 30 Uniform Appraisal Dataset (UAD) _________________________________________________________________________ 30

Property Characteristics _________________________________________________________________________ 31 Income Producing Properties ____________________________________________________________________________ 31 Access ______________________________________________________________________________________________ 31 Flood Zones __________________________________________________________________________________________ 31 Swimming Pools ______________________________________________________________________________________ 31

Outbuilding / Property Use ______________________________________________________________________ 32 Step 1: Site and Building Requirements ____________________________________________________________________ 32 Step 2: Identify Any Loan Limitations of the Proposed Property _________________________________________________ 33

Eligible Properties ______________________________________________________________________________ 34 Condominium Eligibility_________________________________________________________________________________ 34 Planned Unit Developments (PUDs) _______________________________________________________________________ 34

Private Roads _________________________________________________________________________________ 34 Existing / New Construction ______________________________________________________________________ 35 Existing _____________________________________________________________________________________________ 35 New ________________________________________________________________________________________________ 35

Repairs to Subject ______________________________________________________________________________ 35 Water Purification Systems ______________________________________________________________________ 35 Inspections ___________________________________________________________________________________ 36 Individual Wells _______________________________________________________________________________________ 36 Septic Systems ________________________________________________________________________________________ 36 Termite Inspections ____________________________________________________________________________________ 36

FEMA Declared Disaster Area Policy _______________________________________________________________ 36

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Rural Development Guidelines | Program Description

MICHIGAN MUTUAL UNDERWRITING Program Description The Rural Housing Service (RHS) program provides very low-, low- and moderate-income rural residents with better access to affordable housing finance options with little or no down payment or out-of-pocket costs. Borrowers may obtain a loan to purchase a new or existing home that is located in a designated rural area. A rural community generally has a population of 10,000 or less; however, a community with a population of 20,000 or less can be considered “rural” if it is located outside a metropolitan statistical area (MSA). To be eligible for RHS assistance, borrowers must lack sufficient resources to obtain Conventional financing without RHS guarantee assistance (for example, borrower is unable to secure the necessary down payment, which is generally 20%). MMI will only approve loans that receive “Accept/Eligible” recommendations through Rural Development’s GUS (Guaranteed Underwriting System). Upon MMI approval (and possibly clearing of conditions), the file will be submitted to RD for Conditional Approval. All borrowers must have a mid-credit score of 640 with GUS approval at this time. An “Accept/Eligible” through the GUS system does not guarantee an approval from Michigan Mutual. Back to Top (Remainder of page intentionally left blank)

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Rural Development Guidelines | Product Specifications

Product Specifications Borrowers that are able to secure traditional conventional credit financing are not eligible for a USDAguaranteed loan. Traditional conventional credit is defined as follows:  the applicant is able to make a 20 percent down payment; and  the applicant is able to pay all closing costs out of pocket; and  the applicant’s total debt ratio is 36 percent or less; and  the applicant’s debt ratio for principal, interest, taxes and insurance (PITI) is 28 percent or less; and  The applicant had a good credit history consisting of at least two credit bureau tradelines open and paid as agreed for at least a 24-month period, to include that: o The applicant was not currently 30 days or more past due on any tradeline; and o The applicant had not been 60 days or more past due on any tradeline over the past 24-month period; and o The applicant did not have a foreclosure or bankruptcy in their credit history over the past 36month period; and  the conventional mortgage loan term is for a 30-year fixed rate loan term without condition to obtain Private Mortgage Insurance (PMI)

Ownership in Multiple Properties Not permitted. The borrower must not own any other adequate housing at the time of closing. All manufactured housing not on a permanent foundation (such as in a mobile home park or not on land owned by the applicant) is deemed inadequate by RHS.

Loan Purpose  

Purchase Rate and term refinance (cash-out refinances not permitted)

NOTE: Loans that have been restructured due to a financial hardship, are in forbearance, or contain a short payoff are ineligible for a rate and term refinance.

Guarantee Fee Effective with Conditional Commitments issued on and after October 1, 2012 the up-front guarantee fee on refinance transactions is increasing from 1.5% to 2% (purchases remain at 2%). The annual fee is also increasing from 0.30% to 0.40% for both refinance transactions and purchase transactions. NOTE: Please be aware of the current turn times for each local RD office as well as MMI’s underwriting turn times and submission procedure for obtaining conditional commitments (loans do not get submitted to RD until the end of the underwriting process to ensure a full package with final terms) to ensure the correct Guarantee fee is being charged. The new Guarantee Fees and Annual Fee Calculators are now available on the USDA LINC Training and Resource Library, at https://usdalinc.sc.egov.usda.gov/USDALincTrainingResourceLib.do. The calculators are located in the Loan Origination section under Documentation and Resources. Back to Top 2/28/2013

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Rural Development Guidelines | Product Specifications

Occupancy Owner-occupied, primary residences only

Eligible Borrowers U.S. Citizens, Permanent Resident Alien (with evidence of lawful permanent residency)

Ineligible Borrowers     

Non-occupant co-borrowers Non-permanent Resident Alien On HUD debarred list (see below Excluded Parties List System) Claim on HUD’s CAIVRS (Credit Alert Interactive Voice Response System) Corporations, L.L.C.’s, etc.

Legal Name Overview Each borrower must use their legal name when applying for a mortgage. Review the following list of documents to ensure the borrower’s legal name is consistent:  Loan application (1003)  Credit Report  4506-T  DU/LP findings  Title Commitment/Policy  Purchase agreement  FHA Case Number Assignment MMI requires the pertinent loan documentation (FHA Case Number Assignment, loan application, credit report and closing documentation) to be prepared in the borrower’s legal name. In most cases the name reflected on the driver’s license will be utilized to determine the borrower’s legal name. However, in those instances where there is a variance between the driver’s license and the Social Security card (or other documentation within the loan file), utilize the following examples for further guidance:

Nicknames If the driver’s license reflects Mike Smith and the Social Security Card (or other documentation within the loan file) reflects Michael Smith then the pertinent loan documentation must reflect the name Michael Smith. Back to Top

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Rural Development Guidelines | Product Specifications

Married Names If a borrower has recently married or is married during loan processing, the new married name, if applicable, will be utilized for all pertinent loan documentation. MMI will require a copy of the marriage license if the new name is not reflected on both the driver’s license and the social security card. If Borrower Validation fails in FHA Connection due to this reason, MMI will order a third party Social Security Number verification.

Multiple Name Variations If a borrower has multiple names / hyphenated variations, the name that appears on the social security card will be utilized for all pertinent loan documentation. NOTE: In all of the above cases, an AKA/FKA affidavit will be required at closing

Minimum/Maximum LTV Purchase  

Minimum: No minimum LTV Maximum: 100% (not including guarantee fee). LTV of 100% may be exceeded by the amount of the guarantee fee if it is being financed.

Refinance  

Minimum: No minimum LTV required on no cash out (rate/term) refinance transactions (cash out transactions are not permitted). Maximum: 100% (not including guarantee fee). LTV of 100% may be exceeded by the amount of the guarantee fee if it is being financed.

Loan Amount  

Minimum: $40,000 Maximum: $417,000 Back to Top

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Rural Development Guidelines | Product Specifications

Age of Documents Credit document expiration dates are listed below unless the nature of the document is such that its validity for underwriting purposes is not affected by being older than the number of prescribed days (e.g. divorce decrees, tax returns).  Credit Report: 90 days – an in-file “soft pull” credit report will be pulled within 10 days of closing, if the credit report is more than 60 days old.  Paystub: 60 days  Written VOE: 90 days  VOD/Bank Statement: 60 days (funds to close or reserves)  VOR: 90 days  VOM: 30 days  Appraisal: 120 days  Title Commitment: 90 days  Closing Protection Letters: 30 days

Secondary Financing Soft/Silent Seconds are eligible only if provided by Government Agency as a soft/silent second. repayment must be considered in housing ratio.

Any

Interested Parties’ Contributions Seller contributions are allowed to a maximum of 6%

Eligible Properties     

Single Family Condominiums (Site Condominiums do not require FHA approval) PUDs Existing Construction (properties older than 1 year) New Construction (less than 1 year old, with Certificate of Occupancy)

Ineligible Properties     

Manufactured Homes Properties in Urban Areas Working Farm (income-producing tract) Properties with in-law quarters/suites Properties that are under construction

NOTE: Site Value must generally not exceed 30% of the total value of the property. Back to Top

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Rural Development Guidelines | Product Specifications

Repair Escrow Holdbacks Not permitted

Assumption The assumption feature is subject to credit and property criteria for RHS 1980-D Loan program. MMI does not currently underwrite and/or close Assumption loans.

Escrow Waivers for Property Taxes/Hazard Insurance Not permitted

Flood Insurance MMI requires flood insurance for all properties that are located within a flood zone. If flood insurance is not available in certain flood hazard areas because the community does not participate in the National Flood Insurance Program (NFIP), MMI will not finance properties located in those areas.

Minimum Credit Score 640

Registration of Funds The loan must be registered with MMI as an RD loan. Registration of funds with RD will be completed by MMI’s Secondary Marketing Department.

Underwriting Method MMI will only underwrite loans containing an AUS recommendation of Accept/Eligible from the Guaranteed Underwriting System (GUS)

Term 30 year fixed Back to Top

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Rural Development Guidelines | Product Specifications

Trusts Living (“inter vivos”) trusts must comply with local state regulations and the following requirements. To be eligible for financing, the borrower must be:  The settlor, or the person who created the trust, and  The beneficiary, or the person who is designated to benefit from the trust, and  The trustee or the person who will administer the trust for the benefit of the beneficiary, the borrower

Eligible Borrowers   

One or more borrowers with one living trust, or Two or more borrowers with separate living trusts, or Multiple borrowers with one or more holding title as an individual and one or more holding title as a living trust

Eligible Properties  

1-4 unit primary residences 1 unit second homes

Required Documentation 



Attorney’s Opinion Letter from the borrower’s attorney, verifying all of the following: o The trust was validly created and is duly existing under applicable law, o The trust is revocable, o The borrower is the settlor of the trust and the beneficiary of the trust o The trust assets may be used as collateral for a loan, o The trustee is:  Duly qualified under applicable law to serve as trustee,  Is the borrower,  Is the settlor,  Is fully authorized under the trust documents and applicable law to pledge or otherwise encumber the trust assets Complete copy of the trust documents certified by the borrower to be accurate, OR a copy of the abstract or summary for jurisdictions that require a lender to review and rely on an abstract or summary of trust documents instead of the trust agreements

Exception for Trust Certificate Authorized States In lieu of the Attorney’s Opinion letter and copies of trust documents, the title company Trust Certification is acceptable for the following states: Alabama Kansas New Mexico Tennessee Arizona Maine North Carolina Texas Arkansas Michigan Ohio Vermont California Minnesota Oregon Virginia District of Columbia Missouri Pennsylvania Washington Idaho New Hampshire South Carolina Wyoming The same terms and conditions apply as shown above for the Attorney’s Opinion. Back to Top

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Rural Development Guidelines | Product Specifications

Other Title and Closing Requirements    

The title to the property is vested in the trustee on behalf of the trust (or such other customary practices), Title binder may not contain any exceptions to coverage based on the mortgaged property being held by the living trust, The Note must be executed individually by the settlor and by the trustee on behalf of the trust. The Revocable Trust Rider must be used with the mortgage or Deed of Trust The date of the trust must be reflected on the Note as part of the description below the Trustee’s signature (i.e. Jane Doe, Trustee of the Jane Doe Trust dated April 1, 2000)

Ineligible  

Blind Trusts Life Estates Back to Top

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Rural Development Guidelines | Purchase Transactions

Purchase Transactions Property Designation In order for a property to be eligible for a Rural Development Guaranteed Loan, the property must be located in a rural-designated area as defined by Rural Development Instruction. You may view eligible areas on USDA’s Rural Development website: http://eligibility.sc.egov.usda.gov

Maximum Loan Amount The appraisal determines the maximum loan amount. The borrower may finance up to 100% of the appraised value for purchase transactions. If the Guarantee Fee is included in the loan amount, max LTV may be exceeded by the amount of the guarantee fee. Closing costs (those normal and customary only) may be financed when there is equity above the contract price as supported by the appraisal. Discount points, however, are only eligible for financing for low income households as defined by Rural Development.

Property Condition Any condition noted on the appraisal that is related to the safety or livability of the subject property must be addressed and rectified prior to loan closing. Expenses related to property inspections and property repairs may not be financed into the new GRH refinance loan, or escrowed for prior to closing. NOTE: See your local Rural Housing website for any state-specific requirements and complete details regarding the Purchase Agreement/Sales Contract Form that may be required.

Short Sales MMI will accept purchase transactions where the seller is selling the home under a “short sale” agreement with their current lender. MMI must be provided the fully executed short sale approval letter and the requirements set forth by the current lender must be met prior to closing.

Personal Property Any personal property (excluding appliances) transferred with a property sale must be deemed to have zero transfer value, as indicated by the sales contract and appraisal. If any value is associated with the personal property, the sales price and appraised value must be reduced by the personal property value for purposes of calculating the LTV/CLTV/HCLTV. Back to Top

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Rural Development Guidelines | Refinance Transactions

Refinance Transactions Maximum Loan Amount The applicant may borrow up to 100% of the appraised value for refinance transactions. If the Guarantee Fee is included in the loan amount, the maximum LTV may be exceeded by the amount of the guarantee fee. Closing costs (those normal and customary only) may be financed when there is equity above the contract price as supported by the appraisal. Discount points, however, are only eligible for financing for low-income households as defined by Rural Development. The maximum loan amount cannot exceed the balance of the loan being refinanced, plus the Guarantee Fee, and reasonable and customary closing costs, including funds necessary to establish a new escrow account. Unpaid fees, such as late fees due the current servicer, are not eligible to be included in the new loan amount.

Borrower Eligibility The loan must be secured by the same borrower as the original loan/Note. The original loan must be a Guaranteed Rural Housing (GRH) or USDA Section 502 Direct only. The Program may not be used to refinance FHA, VA, or other government or conventional mortgages. Refinance loans are permitted for properties in areas that have been determined to be non-rural since the existing loan was made.

Streamline Refinances Streamline refinances are not eligible.

“Cash Out” at Closing Applicants may receive reimbursement from loan proceeds at settlement for their personal funds advanced for eligible loan purposes that are part of the refinance transaction, such as an appraisal fee or credit report fee. At closing, a nominal amount of “cash out” to the applicants (beyond reimbursement of these prepaid items) may occasionally result due to final escrow and interest calculations. This amount, if any, must be applied to a principal reduction of the new loan.

Subordinate Financing Subordinate financing such as home equity seconds and down payment assistance “silent” seconds cannot be included in the new loan amount. Any existing secondary financing must be subordinate to the new first lien.

Adding / Deleting Borrowers As part of the refinance transaction, additional borrowers may be added to the new GRH loan or existing borrowers may be deleted from the current loan. All applicants that will be a party to the Promissory Note for the new loan must meet all eligibility requirements. Back to Top

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Rural Development Guidelines | Refinance Transactions

Appraisal Requirements A complete Uniform Residential Appraisal Report (URAR) is required. Any conditions noted on the appraisal that is related to the safety or livability of the subject property must be addressed and rectified prior to loan closing. Expenses related to property inspections and property repairs may not be financed into the new GRH refinance loan, or escrowed for prior to closing.

Interest Rate For GRH refinance transactions, the interest rate of the new loan must be at least 1% less than the interest rate of the existing loan.

Mortgage Payoffs All refinance transactions will require current payoff statements for all liens on title to reflect the loan is current at time of closing (should not reflect more than 59 days of interest). However, paying off an existing FHA loan, where it is permitted for the servicer to collect a full 30 days of interest if payment in full is received after the required monthly payment due date, may result in a full two months’ worth of interest on the payoff. As long as the mortgage is current, this would be considered acceptable. MMI does not refinance loans that have been modified (due to hardship), have forbearance agreements in place, or with restructured/short payoffs.

Texas Refinances When refinancing a loan in Texas, it first has to be determined whether or not the property is eligible for max financing based on the borrower’s current liens. A Texas cash out refinance is typically referred to as a 50(a)(6). There are 2 different ways a property can be subject to Texas Article XVI, Section 50(a)(6):  If the borrower will receive any amount of cash out from the refinance, even if it is of an incidental amount, or  If the borrower has ever done a cash out refinance on the subject property before, or has taken a nonpurchase money second, even if the current transaction is only a rate/term refinance. Once a Texas Equity Loan, always a Texas Equity Loan. MMI does not allow Texas 50(a)(6) transactions. MMI will only approve purchases, and rate/term refinance loans in Texas where the borrower has never taken equity from the property. Back to Top (Remainder of page intentionally left blank)

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Rural Development Guidelines | Credit

Credit Obligations Requiring Inclusion in DTI The total debt ratio must include revolving debt, regardless of when the debt will be retired. Installment loans will only be considered if the debt will be retired in more than six months. However, if the monthly payment on the debt is substantial (borrower’s income, assets, amount of overall credit and current spending habits will be taken into consideration when determining if payment is “substantial”), the payment will also be included in long term debt. If a debt payment is scheduled to begin within twelve months of the mortgage loan closing, MMI must include the anticipated monthly obligation in the underwriting analysis. Similarly, balloon notes that come due within one year of loan closing must be considered in the underwriting analysis. 12 months same as cash debts also must be included in the anticipated monthly obligation in the underwriting analysis, regardless of repayment status.

Student Loans Conventional/Fixed Payment Student loans that are currently in repayment must have documentation to verify the current payment due (ex: letter from a loan servicer, online account verifications, or other official written documentation. Verifications are valid for 120 days, or 180 days for new construction. A fixed loan payment will not adjust over the repayment term. The payment listed on the documentation may be used for debt ratios.

Graduated Payments Graduated repayment plans typically start with low payments and then adjust every 12 months or more. Regardless of when payment adjustments occur, lenders must utilize the highest payment documented on the repayment plan agreement in debt ratios.

Deferred Payments Deferred student loans that are not in repayment status may use an estimated payment of 1% of the loan balance reflected on the credit report, or a verified fixed payment provided by the loan servicer to document the payment that will be due once deferment ends. All student loans, regardless of deferment status, must be included in the anticipated monthly obligation in the underwriting analysis.

Residence History A 24-month history of residence is required on all files.

Social Security Number Borrowers must have a valid Social Security Number (tax identification numbers are not permitted).

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Rural Development Guidelines | Credit

Credit Report 3 bureau in-file merged report or RMCR must be provided. Borrowers are required to have at least 3 open and active trade lines with at least 12 month current history. Verification of Rent can act as 1 trade with 2 others.

Adverse Credit History Borrowers are not required to document adverse credit history, except those involving delinquent Federal debt or previous Agency loans. Additionally, existing collection accounts (not federal debt related) may remain outstanding.

Verification of Rent Rental verifications are not required; however, may be requested subject to overall loan file and underwriter review.

Debts Cosigned by Borrower If the borrower has co-signed on a loan for another party, an acceptable 12 month history and 12 months cancelled checks validating that the borrower is not making the payment must be provided in order to exclude the payment from the total debt. In addition, the credit report must reflect the account as a co-signed/joint account, or a copy of the installment note must be provided documenting same.

CAIVRS All borrowers must be screened using HUD’s CAIVRS (Credit Alert Interactive Voice Response System) to determine if an applicant is delinquent on any federal loan.

Derogatory Credit Federal Debt Delinquent federal debt must be satisfied prior to loan closing, and borrower must show mitigating cause (extenuating circumstances).

Tax Liens Outstanding tax liens must be satisfied prior to loan closing, and borrower must show mitigating cause (extenuating circumstances).

Judgments All judgments must be satisfied prior to loan closing, and borrower must show mitigating cause (extenuating circumstances. Source of funds used to pay must be explained and paper-trailed.

Student Loans Delinquent student loans must be satisfied prior to loan closing, or if reflecting past due, must be brought current. Back to Top 2/28/2013

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Rural Development Guidelines | Credit

Bankruptcy Bankruptcy must be discharged for a minimum of 1 year, and loan must receive an Accept/Eligible recommendation.

Foreclosure Foreclosure must have occurred over 1 year ago (as evidenced by Sheriff’s Deed) and must receive an Accept/Eligible recommendation.

Short Sales / Pre-Foreclosure Sales Short sales / pre-foreclosure sales will be considered as foreclosures, and must meet the applicable 1 year waiting period on a GUS Accept. If the GUS findings do not recognize the short sale from the credit report, the 3 year seasoning requirement for a manually underwritten loan must be applied. *If a deficiency balance is reflected owing on any federal debt, such as the result of foreclosure, the debt must be paid off before the borrower is eligible for an RD loan. NOTE: Federal Debt cannot be discharged in a Chapter 7 Bankruptcy.

Non-Purchasing Spouse in Community Property States Except for obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the applicant’s qualifying ratios when the applicant resides in a community property state or the property guaranteed is located in a community property state. The non-purchasing spouse’s credit history is not considered a reason to deny a loan application. However, the non-purchasing spouse’s obligations must be considered in the debt-to-income ratio unless excluded by state law. A credit report that complies with Rural Development requirements must be obtained for the non-purchasing spouse in order to accurately determine the debts that must be counted in the total debt ratio. Mortgages in the name of the non-purchasing spouse (the person named on the Note is not our borrower) must be verified as paid as agreed. Any delinquency on the mortgage history in the most recent 12 months must be evaluated when determining the credit worthiness of the borrower. Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

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Rural Development Guidelines | Employment/Income

Employment/Income In order to be eligible for a Rural Development guaranteed loan, the Borrowers’ adjusted household income cannot exceed the maximum allowable income limit set forth in Rural Development Instruction. Borrowers must meet the income eligibility utilizing the Income Eligibility Worksheet from USDA Rural Development website (print and retain with income docs). Click on the link below: http://eligibility.sc.egov.usda.gov/eligibility/incomeEligibilityAction.do?pageAction=state&NavKy=income@11 For a list of Single Family Housing Income Limits by county, click on the link below: http://www.rurdev.usda.gov/rhs/sfh/sfh%40guaranteed%40loan%40income%40limits.htm

Determining Eligible Income All household income will be considered to determine borrower(s) eligibility for GRH program. All eligible income may not be acceptable as qualifying income. Generally, qualifying income will be calculated by considering the applicant’s two-year history. If the applicant has had a recent substantial increase in earnings, concurrence of acceptance from both the underwriting and the state or local county Rural Development Office is required. Income documentation is required for all income-earning members of the household, even if the household member is not a borrower on the mortgage transaction and/or if the income is not used for qualification. NOTE: Line of work changes require a minimum 6 month job time in order to use income.

Non-Taxable Income Income which has been verified as non-taxable can be grossed-up 125%.

Non-Working Borrowers A non-working borrower or co-borrower must provide an affidavit that they are not currently working or seeking work. Back to Top

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Rural Development Guidelines | Employment/Income

Reductions to Annual Income Annual income may be reduced by $480 for each member of the family residing in the household, other than the applicant, spouse or co-applicant who is:  Under 18 years of age  A full time student aged 18 or older, or  Disabled or handicapped (18 years of age of older). *A “Certification of Disability or Handicap” form must be completed. This can be found on our website, at www.michiganmutual.com. A one-time deduction of $400 may be taken for any elderly family member (a person of 62 or older). Additional adjustments in the amount of the annual expenses may be deducted for child care expenses for children up to the age of 12 if both parents are employed full time. A child care letter from the provider stating the cost of the care is required. A deduction is permitted for reasonable attendant care and auxiliary apparatus expenses for each handicapped or disabled member of any household to the extent necessary to enable any member of such household (including handicapped/disabled member) to be employed. This deduction is limited to the amount by which the aggregate of such expenses exceeds 3% of the gross annual household income.

Child Support / Alimony / Separate Maintenance Child support, alimony, and separate maintenance will be considered as part of the household income if received regularly. The length of time this income has been received is not considered when determining household income for eligibility purposes. A minimum of 3 years continuance must be able to be verified. The borrower must also provide evidence that the funds have been received for the last 12 months. Acceptable evidence includes deposit slips, canceled checks, court records, or tax returns. If the income is non-taxable (ex: child support), it can be grossed up to 125% for qualifying purposes.

Upward Mobility For salaried borrowers, frequent job changes within the same line of work that improve borrower’s situation (upward mobility) are acceptable as long as there are no gaps greater than 30 days.

Employment Gaps Borrowers with gaps in employment in excess of 30 days must provide satisfactory written explanation and documentation. Back to Top

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Rural Development Guidelines | Employment/Income

4506T Processing MMI will require IRS transcripts for the most recent two tax periods, including W-2s and 1040s. MMI will accept IRS transcripts processed by the broker (see vendor links on our website). If transcripts are not provided, MMI will process the transcripts and the fee will be charged to the borrower on the HUD-1 at closing. It is the responsibility of the broker to properly disclose this fee for income verification to each borrower appropriately on the Good Faith Estimate. Any tax returns/W2s used for qualifying must be verified.

Recently Filed Tax Returns 4506T results will be requested for the last two years’ federal tax returns. If the results reflect “No Record of Return Found” due to recent filing (with a verified extension, if applicable), the following options are available:  Copy of the most recent year’s return, stamped as received and signed by the borrower’s local IRS office.  If tax returns were filed by a licensed CPA, it is acceptable to obtain a letter, along with copies of the tax returns directly from the CPA, confirming returns have been filed with the IRS.

Hourly or Salaried Employees All sources of income must be verified using FNMA Form 1005 "Verification of Employment" as well as the most recent pay check stub. Rural Development, as outlined in Rural Development Instruction, will typically review the past 24 months to determine income eligibility. MMI requires verified primary sources of income for a 24-month period to confirm loan approval. Alternate documentation is permitted in place of FNMA Form 1005. Alternate documentation must include: two years W2’s, 30 days paystubs with year-to-date information, and a Processor’s Certification of Employment. If computer generated W2’s and paystubs cannot be provided, a standard Verification of Employment form must be thoroughly completed and obtained.

Situations Requiring Last Two Years Tax Returns      

Self-Employed borrowers Commissioned borrowers Borrowers employed by a relative or closely-held family business. Borrowers who are not commissioned, but need to validate their expenses (such as truck drivers or borrowers paid “piece work”, etc.) Borrowers using dividend and interest income to qualify. Borrowers receiving commission or bonus income ≥ 25% of their base pay

Overtime and Bonus Income Overtime and bonus income can be used to qualify the applicant if the employer verifies that the applicant has received it during the last 24 months and indicates that the overtime or bonus income will in all probability continue. The lender must develop an average of the last 24 months overtime and bonus income to determine the amount of income that can be considered in evaluating the borrower's qualifications. Back to Top

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Rural Development Guidelines | Employment/Income

Part Time or Second Job Income Part-time or second job income with duration of at least 24 months may be used. The income stream must have been consistent, and likely to continue. If the income has not been stable and/or is not likely to continue, it may not be used to qualify.

Self-Employed Borrowers Two (2) most recent years’ 1040s are required. They must be signed and certified by the applicant. Additionally, a Year-To-Date Profit & Loss Statement with Balance Sheet, prepared and signed, must be submitted. If the applicant has 25 percent or greater ownership interest in any business entity, the applicant must also provide the most recent two (2) years' business tax returns with all forms and schedules (1120 for a Corporation, 1120S and K1 for an S-Corporation, or 1065 and K1 for a Partnership), along with a current Profit and Loss Statement with a Balance Sheet. It is underwriter discretion if the Profit and Loss Statement will be required to be prepared and signed by an accountant.

Retirement Income Retirement income, such as pensions, annuities, 401K distribution, etc, may be verified by letters from the organizations providing the income, copies of the retirement award letters (with photocopies of canceled checks attached), tax returns, or IRS W2 forms. This evidence must confirm a continuation of this income for a minimum of three (3) years.

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Rural Development Guidelines | Employment/Income

Maternity Leave If the borrower will return to work as of the first mortgage payment date, the borrower's regular employment income may be used for qualifying. If the borrower will not return to work as of the first mortgage payment date, the lender must use the lesser of the borrower's regular employment income or maternity leave income (if any). If it is determined a borrower will be on maternity leave at the time of closing and that borrower's income is needed to qualify for the loan, the lender must confirm the effective income used for qualifying is supported and employment will continue as described below:  The borrower must have a stable employment and income history that meets standard eligibility requirements; and  The borrower must provide written confirmation of his or her intent to return to work and the agreed upon date of return as evidenced by documentation provided by the employer. Information from the borrower's employer indicating that the borrower does not have the right to return to work after the leave period would conclude the borrower’s income may not be used as effective income for qualifying. A verbal verification of employment is required to be obtained within 10 business days of closing. If the employer confirms the borrower is on maternity leave, and the return to work date is consistent with the documentation provided, this is sufficient to consider the borrower as employed. Income must be verified accordingly with:  the amount and duration of the borrower's “maternity leave income,” which may require multiple documents or sources depending on the type and duration of the leave period; and  the amount of the “regular employment income” the borrower received prior to the maternity leave; regular employment income includes, but is not limited to, the income the borrower receives from employment on a regular basis that is eligible for qualifying purposes (for example, base pay, commissions, and bonus) Note: Income verification may be provided by the borrower, by the borrower's employer, or by a third-party employment verification vendor.

Social Security (Long-Term) Disability Income A borrower receiving Social Security income as a result of a long-term disability does not have a defined expiration date and must be expected to continue. The required documentation to verify the amount of the monthly benefit is:  a copy of the Social Security Disability Income (SSDI) award letter; or  current bank statement reflecting direct deposit of benefit and previous year’s 1099; or  current bank statement reflecting direct deposit of benefit and previous year’s tax return reflecting receipt of benefit

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Rural Development Guidelines | Employment/Income

Social Security Income Received for a Child SSI received for a child requires documentation the income will continue for at least the first full three years of the loan (from loan closing date) or the income may only be considered as a compensating factor. Documentation required:  The child’s Award Letter; and  Birth certificate reflecting the child is ≤14 years old (if the child is 15 or older there is not a 3 year continuance of income)

Social Security Disability Received for an Adult Child (18 or Older) or Parent SSI received for an adult child or parent requires documentation the income will continue for at least the first full three years of the loan (from loan closing date) or the income may only be considered as a compensating factor. Documentation required:  The most current Award Letter reflecting the borrower as payee/guardian for the adult child/parent; and  Birth Certificate or other legal document indicating the dependent is 18 or older; and  Last 2 years 1099’s showing borrower as payee to support history of receipt; and  Legal Guardianship documents reflecting the borrower as legal guardian for the adult child/parent are required.

Unemployment / Public Assistance Unemployment and Public Assistance benefits will be considered as income if they are properly documented by letters or exhibits by the paying agency. The amount, frequency and duration of payments must be stated in the verifying documents. If an individual receives unemployment benefits as a regular part of his/her income, MMI requires copies of tax returns for the past two (2) years to establish a history of receipt. This income must be documented as on-going for a minimum of three (3) years.

Dividend / Interest Income Dividend and interest may be used as income provided the assets that are generating the dividend/interest income will not be used for the down payment or closing costs on the proposed loan. The applicant must provide tax returns for the previous two (2) years along with verification of current assets via bank statements, verification of deposits, etc. This income will be averaged over two (2) years or calculated at current market interest rates, whichever is less. Back to Top

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Rural Development Guidelines | Assets

Assets Borrower’s liquid assets, as well as equity in current home, must not be adequate to obtain traditional Conventional financing. The borrower may, however, qualify for an FHA or VA loan. In other words, applicants may have liquid assets and be eligible to participate in the GRH Program. Those assets, however, should not be sufficient to meet the down payment and closing cost requirements associated with a traditional Conventional uninsured mortgage product (LTV ≤ 80%). This means applicants do have a choice of USDA-Guaranteed Rural Housing, FHA, VA, or a Conventional mortgage product with Private Mortgage Insurance.

Earnest Money Deposit The Earnest Money Deposit must be verified (deposit amount and source of funds) regardless of the amount. If the Earnest Money Deposit is not verifiable, the borrower(s) should not be given any credit for it in the transaction or on the HUD-1 Settlement Statement.

Reserves after Closing Not required.

Reimbursement of Prepaid Costs Evidence of payment of credit report and appraisal fees is required if trying to get back at close.

Asset Verification Verification of assets must evidence sufficient funds to close as stated in the Details of Purchase section of the application. Assets may be verified by either a Verification of Deposit (VOD) or 2 months bank statements.

Acceptable Funds to Close 100% of the borrower’s cash to close may come from a gift. Back to Top (Remainder of page intentionally left blank)

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Rural Development Guidelines | Assets

Verification of Funds Verification of Deposit (FNMA Form 1006) Current balance must cover funds to close requirements. In addition the average balance must be consistent with current balance. Any significant increase ($1000 or more) must be accompanied by written explanation and evidence of source of funds for large deposits.

Most Recent Two Month’s Bank Statements Bank Statements may be provided as alternative documentation to the VOD. The borrower’s bank statement(s) for the most recent two (2) months to verify funds that the borrower has in a depository institution may be provided. The borrower's bank statements must identify clearly the depository institution, the account holder(s), the account number, the time period covered by the statement, all deposit and withdrawal transactions, and the ending account balance. If the date of the borrower's most recent bank statement is more than 45 days earlier than the date of the borrower's application, the borrower must supply a supplemental statement - the borrower may provide any bank generated forms (such as deposit or withdrawal slips) that show a machine printed account number, balance, and date. When using most recent bank statements, large deposits must be explained and documented. MMI considers large deposits as any non-payroll deposit that is more than 10% of gross income or $1000, whichever is less. (Monies for closing to be supported by bank statement dated within 60 days of closing).

Cash on Hand Cash on hand is typically not an acceptable source of funds for closing. However, it may be acceptable if the following can be documented:  Analysis of discretionary income through a household budget supports the ability to accumulate the funds.  Cash is a way of life for the borrower and can be documented with receipts where cash is used consistently to make household payments, such as rent/mortgage, utilities, etc. In certain circumstances, borrowers who have saved cash at home and are able to adequately demonstrate the ability to do so are permitted to have this money included as an acceptable source of funds to close the mortgage. The money must be verified, whether deposited in a financial institution or held by the escrow/title company and the borrower must provide evidence of the ability to accumulate such savings (as shown above in numbers 1 & 2). The borrower must explain in writing how such funds were accumulated and the amount of time taken to do so. MMI must be able to determine the reasonableness of the accumulation of the funds based on the borrower's income stream, the time period the funds were saved, spending habits, documented expenses and history of using financial institutions. If these conditions cannot be met the cash on hand is not an acceptable source of funds for closing. Back to Top

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Rural Development Guidelines | Assets

Gift Funds The borrower occupying the home being financed as their principal residence may use funds received as a gift to pay for the down payment, closing costs and/or pre-paid expenses. The gift donor must be able to document an acceptable relationship to the borrower in order for gift funds to be eligible. An acceptable donor relationship is defined as:  An individual who is related to the borrower by blood, marriage, adoption, or legal guardianship (i.e. spouses, parents/children, siblings, step-children, aunts/uncles, nieces/nephews) OR  a fiancé, fiancée, or domestic partner that currently either resides in the same residence or has joint assets with the borrower, in order to demonstrate a long-standing family-type relationship. The donor may not be, nor have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction. Gift Documentation Documentation requirements verifying the borrower’s relationship to the donor may include, but is not limited to a copy of the donor and/or borrower’s:  birth certificate  marriage license  any other third party verification deemed necessary by the underwriter to certify the donor’s relationship to the borrower  Documents that demonstrate a history of borrower and donor shared residency/assets include but are not limited to a copy of a driver’s license, utility bills, or a bank statement. Gift funds must also be documented with a signed Gift Letter which must include:  the dollar amount of the gift  the date the funds will be given (or have been given)  a statement confirming that no repayment is expected  the donor’s name, address, telephone number and relationship to the borrower Receipt of Gift Funds The transfer of the gift funds must be documented from the donor to the borrower with one of the following:  A copy of the cancelled gift check and borrower’s bank statement showing the deposit of funds into the borrower’s bank account OR  If the gift was given using a certified check, then a copy of the certified check as well as proof the funds came from the donor (i.e. copy of the donor’s bank statement showing the withdrawal, copy of the donor’s account statement from a line of credit, etc) and borrower’s bank statement showing the deposit of funds into the borrower’s bank account. NOTE: MMI must be able to determine that the gift funds were not provided by an unacceptable source, and were the donor’s own funds. Cash gifts are not allowed. Back to Top

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Rural Development Guidelines | Assets

Grant Funds Grants are an acceptable source of funds to close. A borrower may use funds obtained as a grant to satisfy part of the cash requirement for closing. The grant may be awarded from a charitable organization, government municipality, or nonprofit organization. Grants from a charitable organization, a government municipality or non-profit organization are permitted, provided they are unrelated to the transaction. The grant must be evidenced by either a copy of the letter awarding the gift or grant to the borrower or a copy of the legal agreement that specifies the terms and conditions of the grant. This supporting document must include language indicating that no repayment of the grant is expected, and an indication of how the funds will be transferred (to the borrower, the lender, or the closing agent). Evidence of the receipts of the grant funds must be included in the loan file for guaranty. Neither gifts nor grants can contribute to cash reserves or be considered a compensating factor.

Disposition of Personal Assets Proceeds from the sale of personal property may be used towards closing costs. Required documentation for funds obtained includes, but is not limited to, a bill of sale, bank statement verifying deposit of funds, and, when applicable, a transfer of title.

Subordinate Financing Subordinate Financing is acceptable as long as provided by a Government Agency as a soft/silent second. Any repayment must be considered in housing ratio.

Updated Documents When updating expired funds verification documents, alternate documentation can be used. For example, when updating an expired Verification of Deposit, bank statements or printouts may be used. Although one month current bank statement and bank printout may be used to update funds, these cannot be used to initially verify funds.

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Rural Development Guidelines | Homeownership Counseling

Homeownership Counseling Applicants utilizing the Guaranteed Rural Housing Program represent a wide spectrum of credit profiles. Most applicants have never owned a home and many applicants have never rented. Nonetheless, despite these varied profiles, they all may be excellent candidates to achieve successful homeownership through this affordable housing program. As we work to support this objective, as well as to comply with the current Rural Development Instruction Counseling, the underwriter may request evidence of your borrower’s successful completion of homeownership counseling. This is not a requirement on every Rural Development loan file. It will be used selectively on files which have no previous housing expense and/or to demonstrate an ability to handle the proposed housing payment on a timely basis. If this condition is part of our underwriting decision on your Rural Development loan file, the condition may be cleared by utilizing Fannie Mae's "Guide to Homeownership", or a comparable program offered by local nonprofit organizations, or by standard mortgage insurance classes given in the mortgage industry. This condition may be cleared by providing a signed certificate of completion and the household budget worksheet information. Please note, while Homeownership Counseling is not required on all files by MMI, many Rural Development State Offices require all first-time home buyers to complete home buyer education. Rural Development State Offices that require Homeownership Counseling:  Georgia  South Carolina *The Homeownership Counseling requirement may not be limited to the states mentioned above. If you are originating a Guaranteed Rural Housing product in a state not referenced above, please confirm your state's requirements regarding Homeownership Counseling with the local Rural Development office, as additional states are considering this requirement as a mandatory item for all first-time home buyers. If Homeownership Counseling is required by the local RD office, this will be a requirement for MMI approval as well. See Rural Housing website for state specific requirements and complete details at www.rurdev.usda.gov

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Rural Development Guidelines | Collateral

Collateral MMI requires all USDA appraisals to comply with FHA Appraisal Independence Requirements (AIR).

Appraisal Requirements An appraisal must be obtained through the broker’s assigned AMC (to be ordered in the Broker’s name or MMI’s name as the Lender/Client – either is acceptable), completed by an FHA Roster appraiser who can certify that “HUD’s Minimum Property Standards have been met.” NOTE: MMI is unable to accept transferred appraisals on USDA loans.

Uniform Appraisal Dataset (UAD) Effective for residential property appraisals with an effective date (date of inspection) of January 1, 2012 or after, appraisal reports must be completed in compliance with the Uniform Appraisal Dataset (UAD). This rule applies to all Rural Development mortgage loans. The UAD defines all fields required for an appraisal submission for specific appraisal forms and standardizes definitions and responses for a key subset of fields. UAD was formulated to improve the quality and consistency of appraisal data. The UAD does not change the look of the existing appraisal forms, but some fields on the forms are being extended to include additional information. The appraisal forms that must be UAD-Compliant effective January 1st are:  Uniform Residential Appraisal Report (FNMA Form 1004)  Individual Condominium Unit Appraisal Report (FNMA Form 1073)  Exterior-Only Inspection Individual Condominium Unit Appraisal Report (FNMA Form 1075)  Exterior-Only Inspection Residential Appraisal Report (FNMA Form 2055) NOTE: MMI is unable to accept properties with a Condition Rating of C5 or C6, nor a Quality Rating of Q6.

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Rural Development Guidelines | Collateral

Property Characteristics Income Producing Properties Subject property must be a non-farm, non-income producing tract. Properties that include buildings which largely or in part have been designed for a business or an income producing purpose are not eligible. Examples of income producing buildings include, but are not limited to, warehouses, bed and breakfast facilities, boarding homes, buildings with mechanical equipment remaining from a prior business, horse riding arenas, and nonresidential buildings such as office buildings, commercial buildings, or mixed-use properties with store-fronts that contain residential space. Income-producing land signifies properties bought or developed specifically to earn revenue for the owner. Some examples of income producing land include the purchase of a residence with a lot or parcel of land which customarily produces or is capable of producing the commercial sale of one or more agricultural commodities, including timberland, or sites with one or more income-producing wind turbines or cell towers. Whether the property actually produces a profit is immaterial.

Access The property must be contiguous to and have access to a paved or all-weather surface street, road or driveway.

Flood Zones For properties that are located in a 100 year flood zone (Zone A) National Flood Insurance must be available and flood insurance is required. In addition to the flood insurance, an elevation certification is required to verify the improvements are located above the flood plain. Confirm the top of the bottom floor is no less than 1 foot above the Base Flood Elevation. NOTE: If the subject property is located within a designated flood zone AND has a well and septic, the property is deemed ineligible for financing.

Swimming Pools In-ground swimming pools are permitted providing the contributory value for the in-ground pool (disclosed on the appraisal report) is deducted from the total appraised value prior to calculating LTV. The Rural Development Area Office staff will prepare a pool waiver request and forward it to the Rural Development State Office for approval. Back to Top

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Rural Development Guidelines | Collateral

Outbuilding / Property Use The presence of an outbuilding (or multiple outbuildings) in addition to the residential structure does not automatically disqualify a property for eligibility of the SFHGLP. Many rural properties have buildings that can be described as a “necessary related facility”. The presence of such related facilities on the site to be purchased is not prohibited. The property must be predominately residential in design, use and character. The following are steps to consider when determining if a property is qualified:

Step 1: Site and Building Requirements First, you must qualify the property. Farm-related property cannot be acquired under this program. Vacant land or properties used primarily for agricultural, farming, farm operation, or commercial enterprise are ineligible. The Agency considers a farm service building to be any of the structures used in farming operations such as livestock barns and shelters, machinery and farm-supply storage buildings, buildings and facilities for crop storage (including fodder), and special-purpose structures such as grain silos. Properties accompanied by a farm service structure require further analysis to determine eligibility. Functional Farm Service Structures: A farm service structure is considered to be functional when it can be used for its intended design purpose without significant repair. Rural non-farm acreage tracts often contain farm service structure outbuildings such as barns and machine sheds that may have some functionality; however, the tract of land is not income producing and is typical for residential properties in the area. State Directors or their designees may approve the purchase of a site with a functional farm service building if the site is not income producing. Properties primarily utilized for agricultural, farm operation, or commercial enterprises continue to be ineligible. The value of a functional farm service structure must be deducted from the appraised value before computing the maximum loan amount. Non-Functional Farm Service Structures: If the farm service structure cannot be used to meet its intended design purpose without significant repair, the presence of the structure does not disqualify the property from consideration. For example, a dilapidated barn in need of significant repair that may have once been used to house livestock and feed is not considered a functional farm service structure. These types of structures offer little to no value as evidenced by the appraisal, and oftentimes, these non-functional farm service structures can be used for a storage shed which is an eligible loan purpose. Land Limitations: Generally, the value of the site must not exceed 30% of the total value of the property. If the site does exceed 30% of the total value, it must meet the two criteria below:  The value of the site must be typical for the area, as evidenced by the appraisal, and  The parcel cannot be subdivided into two or more sites. Back to Top

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Rural Development Guidelines | Collateral

Step 2: Identify Any Loan Limitations of the Proposed Property The presence of a building (or multiple buildings) other than the residential structure on the proposed property to be purchased does not automatically disqualify a property for eligibility under the SFHGLP. If the building(s) appear not to be farm service buildings, are not currently utilized for income producing purposes, and meet the general acceptability standards for existing property as referenced in the Department of Housing and Urban Development (HUD) Handbooks 4150.20 and 4905.1, then lenders and Agency may proceed with the application. Building types/structures that are eligible loan purposes under section 1980.310 include, but are not limited to, workshops typical of residential use, garages, and storage sheds (attached or detached).

Typically, home based operations that do not require specific features such as child care, product sales, or craft production are not restricted when considering if the property is an income-producing property, as long as the property remains primarily residential in character, use and design.

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Rural Development Guidelines | Collateral

Eligible Properties A single family, primary residence is the only eligible property type. Multi-family residences are not eligible. In-law suites are not eligible.

Condominium Eligibility Non-warrantable condominiums are not eligible. Additional condominium requirements include:  Amenities to be 100% complete.  Homeowners must be in control of the Homeowners Association.  Standard insurance requirements apply  Project must be FHA approved Condominiums are acceptable for financing, provided the project meets FHA minimum project standards. The subject property must be located in a project on FHA’s Approved Condominium Project List. An FHA Certification for Individual Unit Financing, signed and dated by the lender, evidencing compliance with FHA minimum project standards, is required. The Lender Certification for Individual Unit Financing can be found on MMI’s website. FHA approval is not required for Site Condominiums. In addition to $1 million Liability Insurance / Fidelity Bond Coverage, FPMC requires the borrower to purchase an HO-6 Insurance Policy (“Walls-In” insurance). The unit owner is required to obtain a “walls-in” coverage policy (HO-6 or its equivalent) if the master or blanket policy does not include interior unit coverage. The “walls-in” coverage must be sufficient, as determined by the insurer, to repair the interior of the condominium unit, including any additions, improvements and betterments to repair the unit to its original condition prior to the claim event. See the Rural Housing Website for state-specific requirements and complete details regarding condos.

Planned Unit Developments (PUDs) Project must be acceptable to FHA, VA, FNMA or FHLMC. See the Rural Housing Website for state-specific requirements and complete details regarding PUDs: www.rurdev.usda.gov

Private Roads A recorded Private Road Maintenance Agreement or recorded Easement Agreement is required. Back to Top

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Rural Development Guidelines | Collateral

Existing / New Construction Existing Existing construction is defined as properties older than one year. Evidence of Certificate of Occupancy may at times be required. Property may be currently or previously occupied, and must meet the current requirements of HUD Handbooks 4150.2 and 4905.1, typically verified through an RHS Adequacy Certification or by the appraiser certifying in the comments section of the appraisal that the property meets HUD Handbooks 4150.2 and 4905.1. Additionally, a Thermal Certification is required.

New New Construction is defined as 100% complete, less than 1 year old, with an issued Certificate of Completion. Builder Warranties  If the builder is providing a one-year warranty, the following is required: Framing Inspection, Footing Inspection, Thermal Certification, and Certified Plans & Specs  If the Builder is providing a 10-year warranty, only the Thermal Certification is required

Repairs to Subject Repairs, if any, must be completed prior to final loan approval (repair escrows are not permitted). Any conditions noted on the appraisal that are related to the safety or livability of the subject property must be addressed and rectified prior to loan closing. Expenses related to property inspections and property repairs may not be financed into the new GRH refinance loan, or escrowed for prior to closing.

Water Purification Systems Properties with Water Purification Systems are not eligible for financing.  An individual water purification system is a system that is needed to make the water safe and meet code when the individual water supply is unsafe for human consumption unless the system is operating properly. This is not a system that is installed to improve the taste or softness of the water.  Properties with individual water purification systems can be identified by reviewing the appraisal. Back to Top

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Rural Development Guidelines | Collateral

Inspections Individual Wells  

Must be checked to ascertain the distance from the septic system, ease of maintenance and repair of the well, as well as adequacy of the water pressure. Water supply must meet the local health or state drinking water standards based on the results of the following: o Bacteriological analysis of the water supply. o Chemical analysis of the water supply source where there is a history of ground water contamination in the area. o The well construction must meet the requirements of the health authority. o Water samples to be collected by a third party source.

Septic Systems Confirm with Rural Development your state's requirements regarding Lot Sewage Disposal Systems (septic inspection). The inspector must be state-licensed for sewage disposal systems, or a member of a qualified inspection service. The inspection must address the following:  That the system is operating satisfactorily.  That the system is adequate to dispose of all domestic wastes in a manner that does not endanger the public health. Cesspools are ineligible unless the Sewage Enforcement Officer can address the following:  That the cesspools are common to the area (appraiser also must provide comparable sales of properties with cesspools).  That the system is functioning properly.  That there are no records/citations indicating that the system has malfunctioned in the past.  The site must be sufficient to install a replacement system. A Soil Evaluation and Percolation Test for required alternate site is required.

Termite Inspections If required by the lender, appraiser, inspector, or state law, a pest inspection must be obtained to confirm the property is free of active termite infestation

FEMA Declared Disaster Area Policy If the subject property has had an appraisal completed prior to a declared disaster, prior to the end date of a declared disaster, or after a declared disaster with no comments addressing the post-disaster condition of the property from the appraiser, a 1004D with photos will be required to recertify the value/condition of the subject property.

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