Iffg hf3 Seller Guide

S ELLER G UIDE
HF3 Series
Business Development Manager

Adam Madorsky
-1-
Effectiv e Date 10/05/2015
Proprietary and Confidential
-3-
S ELL ER G UI DE
T ABL
1.
E OF
C ONT
ENTS
INTRODUCTION ....................................................................................
Objective ........................................................................................................................................................
General Business Information ......................................................................................................
Contractual Obligations ..................................................................................................................
Master Sale Contract and Program Documents ...............................................................................

Seller ID ..................................................................................................................................................
Loan Number(s) ..............................................................................................................................
Notices .......................................................................................................................................
Guide Updates and Amendments.......................................................................................................
Hours of Operation and Holidays ........................................................................................................
Contact Information ........................................................................................................................
Assumptions ........................................................................................................................................
2.
SELLER ELIGIBILITY..........................................................................
Seller Eligibility Standards ..............................................................................................................
Net Worth.................................................................................................................................
Approvals .............................................................................................................................................
Experience and Reputation .........................................................................................................
Compliance ...................................................................................................................................
MERS ...................................................................................................................................................
Private Mortgage Insurance ........................................................................................................
Delinquency and Repurchases ........................................................................................................
Underwriting and Delivery Standards..........................................................................................
Ownership/Correspondents ..............................................................................................................
Application Documentation ..................................................................................................................
Application .....................................................................................................................................
Financial Information ....................................................................................................................
Request for Taxpayer Identification Number and Certification Form ..........................................
Fidelity Bond and Errors and Omissions Insurance ...................................................................

Corporate Resolution ...................................................................................................................
State Licenses ....................................................................................................................................
Articles of Incorporation, Corporate Bylaws and/or Agreements.................................................
Company Summary, Resumes and Organizational Chart.........................................................
Fictitious Business Names (DBAs)..............................................................................................
Quality Control Policies and Reports...............................................................................................

Vendor Management Plan ...........................................................................................................
Appraisal Management Policies ..................................................................................................
Compliance Policies .....................................................................................................................

Investor Scorecards......................................................................................................................
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Notice of Seller Approval .....................................................................................................................
Continuing Business Obligations...................................................................................................

Reporting Requirements ........................................................................................................................
Ongoing Obligations .........................................................................................................................
Suspension or Termination .................................................................................................................
Termination .......................................................................................................................................
Effect of Termination ........................................................................................................................
3.
REPRESENTATIONS AND WARRANTIES ............................................
Introduction.............................................................................................................................................
Seller Representations and Warranties ............................................................................................
Individual Loan Representations and Warranties ........................................................................
Events of Default and Remedies ........................................................................................................
Events of Default .....................................................................................................................................
Remedies of the Purchaser and its Assignees ..............................................................................
Remedy Standards...........................................................................................................................
4. COMMITMENT .................................................................................................
Commitment and Pricing Overview.........................................................................................................
Commitment Requirements....................................................................................................................
Pricing and Delivery Options ...........................................................................................................

Enforcement......................................................................................................................................
Transferability of Commitments.............................................................................................................
Commitment Loan Schedule .......................................................................................................
5.
UNDERWRITING .....................................................................................
Introduction ............................................................................................................................................
Seller Underwriting Responsibility ........................................................................................................
Underwriting Review ...............................................................................................................................

Underwriting Considerations..................................................................................................................
Ability to Repay (ATR), Qualified Mortgage, and Net Tangible Benefit Requirements .................
fraud detection requirements.................................................................................................................

electronic signature and disclosure requirements ..............................................................................
Borrower Eligibility................................................................................................................................
Immigration and Naturalization Service (INS) Classifications .......................................................
Borrower Types .......................................................................................................................................
Maximum Loans to One Borrower ........................................................................................................

Loan Application Analysis ................................................................................................................
Credit...........................................................................................................................................
Credit Report Requirements ..................................................................................................................

Selecting the Credit Score ...........................................................................................................
Limited, No Credit History or Alternative Credit History.................................................................
Minimum credit requirements/Tradelines .......................................................................................
Adverse Credit ..................................................................................................................................
Bankruptcy ........................................................................................................................................
Consumer Credit Counseling Services (CCCS) ............................................................................
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Foreclosures .....................................................................................................................................
Loss Mitigation History - Modifications, Forbearances, Rearrangements, Extensions, or

Workouts ...........................................................................................................................................
Mortgage/Housing History ...................................................................................................................
Analyzing Delinquent Mortgage/Housing Payments ..........................................................................
Grade Determination ...................................................................................................................................

Qualifying Ratios ...................................................................................................................................
Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) Ratios .............................................
Housing and Debt-to-Income Ratios ...............................................................................................
Payment Shock ...........................................................................................................................
Second Trust Deeds, Junior Liens, and Secondary Financing ........................................................

Sales and Financing Concessions........................................................................................................
Liabilities ....................................................................................................................................
Debt to Income Calculations ............................................................................................................
Installment Debt .............................................................................................................................................

Revolving Debt ..................................................................................................................................
Alimony/Child Support/Separate Maintenance Obligations ...........................................................
Negative Cash Flow from Rental Property/Other Real Estate Owned ........................................
Current Principal Residence Pending Sale ...........................................................................

Business Debts .................................................................................................................................
Un-Reimbursed Business expenses ...............................................................................................
AUTOMOBILE DPRECIATION .............................................................................................................

Debt Payoff........................................................................................................................................
Co-Signed Debt / Contingent Liabilities ..........................................................................................
Retirement / Savings Plan Loans .........................................................................................................
Student Loans..........................................................................................................................................
Income .....................................................................................................................................................
Income verification Requirements ........................................................................................................
Income Types ...................................................................................................................................

Full Documentation ..........................................................................................................................
Reduced Documentation .................................................................................................................
Ineligible Income Documentation types .......................................................................................
Assets ......................................................................................................................................................
Requirements and Guidelines..........................................................................................................

Asset Documentation .......................................................................................................................
Minimum Down Payment .................................................................................................................

Earnest Money Deposits ........................................................................................................................
Age of Asset Documentation ...........................................................................................................
Reserve Requirements.....................................................................................................................
Ineligible Assets and Sources of Funds...............................................................................................
Acceptable Assets and Sources of Funds...................................................................................

Transaction Types ......................................................................................................................
Purchase .....................................................................................................................................
Rate/Term Refinance .............................................................................................................................

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Cash-Out Refinance.........................................................................................................................
Continuity of obligation .....................................................................................................................

Delayed Financing ......................................................................................................................
Construction-to-Permanent Refinance............................................................................................
Land Contract Refinance .......................................................................................................................

Lease Option-To-Purchase..............................................................................................................
Inherited Properties ..........................................................................................................................
Ineligible Transaction Types ..................................................................................................................
6.
LO AN PROGRAMS .................................................................................
Asset Utilization.....................................................................................................................................
Program Eligibility .............................................................................................................................
Income Verification ...........................................................................................................................

Asset Qualifier Program .............................................................................................................................

Bank Statement Program (24-Month and 12-Month Verification Options) ..................................
Income Documentation Requirements.................................................................................................
Bank Statement Requirements .............................................................................................................
Home Equity Loan Programs (A+ and A Grades only).................................................................
Simultaneous Second Lien Program Restrictions..............................................................................
Stand-Alone Second Lien Program Restrictions .................................................................................
Non-Warrantable Condominiums ............................................................................................................
7.
COLLATERAL .........................................................................................
Eligible Property Types ...................................................................................................................

Single-Family Residence .................................................................................................................
Row Home ...................................................................................................................................
Townhouse........................................................................................................................................
Multi-Family .......................................................................................................................................
Modular Homes (Panelized, Pre-Cut Homes) ................................................................................

Planned Unit Development (PUDs) ................................................................................................
Condominiums .........................................................................................................................................
Rural Properties.....................................................................................................................................
Ineligible Property Types ...........................................................................................................
Occupancy..............................................................................................................................................
Owner Occupied Primary Residence..............................................................................................
Second Home or Vacation Homes .......................................................................................................

Non-Owner Occupied Investment Properties......................................................................................
Property Underwriting.................................................................................................................................
Seller Considerations .......................................................................................................................
Appraiser Qualifications ...................................................................................................................
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Appraisal Requirements ..................................................................................................................
Appraisal Evaluation...................................................................................................................
8.
SERVICING ...........................................................................................
Servicing ..................................................................................................................................................
Designation of the Servicer........................................................................................................
Junior Lienholder Notification ....................................................................................................

Compliance with Statutes and Regulations ..................................................................................
Borrower Notification Requirements ..............................................................................................
IRS Reporting .............................................................................................................................

Life of Loan Flood Certification Requirements .............................................................................
Tax Service Contracts Requirements ............................................................................................
Current Payment History .................................................................................................................

Property Insurance Requirements .................................................................................................
Escrow Accounts ........................................................................................................................
Temporary Buydowns ................................................................................................................
9.
DELIVERY AND FUNDING ................................................................
Delivery and Funding......................................................................................................................

File Requirements ............................................................................................................................
Funding ........................................................................................................................................
Post Funding .........................................................................................................................
10.
11.
DEFINITIONS .....................................................................................
FORMS ...........................................................................................
HF3Funding SellerApplication ......................................................................................
Certificate of Corporate Resolution (Form 102) .....................................................................
Annual Seller Re-Certification Form (Form 200) ...................................................................
Seller Commitment Form (Form 205) ....................................................................................
New Wire Account Set-Up Form (Form 250)............................................................................
Project Review Questionnaire (Form 450)................................................................................

Delivery File Checklist (Form 500) ........................................................................................
Borrower Affirmation Asset qualifier Loan Program.................................................................
Borrower Affirmation asset utilization and Bank Statement Loan Programs ......................
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S E LLE R G UIDE
C HAP TE R 1.
I N TRO DUC TION
1. INTRODUCTION
Objective ........................................................................................................................................................
General Business Information ..........................................................................................................
Contractual Obligations ..................................................................................................................
Master Sale Contract and Program Documents ...............................................................................
Seller ID ...........................................................................................................................................
Loan Number(s) ..............................................................................................................................
Notices .............................................................................................................................................
Guide Updates and Amendments.......................................................................................................
Hours of Operation and Holidays ........................................................................................................
Contact Information ........................................................................................................................
Assumptions ........................................................................................................................................
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S E LLE R G UIDE
C HAP TE R 2.
S E LLE R E LIGIBI LI TY
CONTRACTUAL OBLIGATIONS
This Guide and any Program Supplement(s) describe the Seller eligibility requirements, product guidelines,
underw riting criteria, Commitment procedures, documentation and delivery requirements, funding, and
interim Servicing procedures associated w ith the acquisition of loans by HF3 Funding. This Guide and any
Program Supplement(s) also describe, among other things, the Representations and Warranties that are
required by HF3 Funding.
LOAN NUMBER(S)
HF3 Funding assigns a loan number to each loan. This loan number must be used for all correspondence
and transmittals pertaining to each individual loan sent to HF3 Funding or its designees.
2. SELLER ELIGIBILITY
Seller Eligibility Standards ..................................................................................................................
Net Worth.....................................................................................................................................
Approvals ..........................................................................................................................................
Experience and Reputation .............................................................................................................
Compliance .......................................................................................................................................
MERS ................................................................................................................................................
Private Mortgage Insurance.............................................................................................................
Delinquency and Repurchases .............................................................................................................
Underwriting and Delivery Standards .............................................................................................
Ownership/Correspondents .............................................................................................................
Application Documentation.......................................................................................................................
Application ...................................................................................................................................
Financial Information ........................................................................................................................
Request for Taxpayer Identification Number and Certification Form ...............................................
Fidelity Bond and Errors and Omissions Insurance ......................................................................
Corporate Resolution .......................................................................................................................
State Licenses .........................................................................................................................................

Articles of Incorporation, Corporate Bylaws and/or Agreements ......................................................
Company Summary, Resumes and Organizational Chart.............................................................
Fictitious Business Names (DBAs) .......................................................................................................
Quality Control Policies and Reports....................................................................................................
Vendor Management Plan ...............................................................................................................
Appraisal Management Policies ......................................................................................................
Compliance Policies .........................................................................................................................
Investor Scorecards..........................................................................................................................
Notice of Seller Approval .....................................................................................................................
Continuing Business Obligations ..................................................................................................
Reporting Requirements.........................................................................................................................
Ongoing Obligations .........................................................................................................................
Suspension or Termination .................................................................................................................
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C HAP TE R 2. S E LLE R E LIGIBI LI TY
Termination .......................................................................................................................................
Effect of Termination ........................................................................................................................
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S E LLE R G UIDE
C HAP TE R 5.
U NDE RW RI TI NG
5. UNDERWRITING
Introduction ............................................................................................................................................
Seller Underwriting Responsibility ........................................................................................................
Underwriting Review ..............................................................................................................................
Underwriting Considerations .................................................................................................................

Ability to Repay (ATR), Qualified Mortgage, and Net Tangible Benefit Requirements.................
fraud detection requirements ................................................................................................................
electronic signature and disclosure requirements .............................................................................
Borrower Eligibility ...............................................................................................................................
Immigration and Naturalization Service (INS) Classifications .......................................................
Borrower Types .......................................................................................................................................
Maximum Loans to One Borrower .......................................................................................................

Loan Application Analysis ................................................................................................................
Credit ..........................................................................................................................................
Credit Report Requirements .................................................................................................................
Selecting the Credit Score ...............................................................................................................

Limited, No Credit History or Alternative Credit History.................................................................
Minimum credit requirements/Tradelines ............................................................................................

Adverse Credit ..................................................................................................................................
Bankruptcy ........................................................................................................................................
Consumer Credit Counseling Services (CCCS) ............................................................................
Foreclosures .....................................................................................................................................
Loss Mitigation History - Modifications, Forbearances, Rearrangements, Extensions, or Workouts
....................................................................................................... .....................
Mortgage/Housing History .........................................................................................................................
Analyzing Delinquent Mortgage/Housing Payments .........................................................................

Grade Determination ..................................................................................................................................
Qualifying Ratios...................................................................................................................................
Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) Ratios..............................................
Housing and Debt-to-Income Ratios...............................................................................................
Payment Shock ...........................................................................................................................
Second Trust Deeds, Junior Liens, and Secondary Financing ........................................................
Sales and Financing Concessions .......................................................................................................

Liabilities ....................................................................................................................................
Debt to Income Calculations .................................................................................................................

Installment Debt ......................................................................................................................................
Revolving Debt..................................................................................................................................
Alimony/Child Support/Separate Maintenance Obligations...........................................................
Negative Cash Flow from Rental Property/Other Real Estate Owned..........................................
Current Principal Residence Pending Sale ..........................................................................

Business Debts .......................................................................................................................................
Un-Reimbursed Business expenses....................................................................................................
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C HAP TE R 5.
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AUTOMOBILE DPRECIATION ............................................................................................................
Debt Payoff .......................................................................................................................................

Co-Signed Debt / Contingent Liabilities ..........................................................................................
Retirement / Savings Plan Loans.........................................................................................................
Student Loans.........................................................................................................................................
Income .....................................................................................................................................................
Income verification Requirements ........................................................................................................
Income Types ...................................................................................................................................
Full Documentation ..........................................................................................................................

Reduced Documentation .................................................................................................................
Ineligible Income Documentation types ......................................................................................
Assets......................................................................................................................................................
Requirements and Guidelines .........................................................................................................

Minimum Down Payment .................................................................................................................
Earnest Money Deposits ..............................................................................................................................
Age of Asset Documentation ...........................................................................................................
Reserve Requirements ....................................................................................................................
Ineligible Assets and Sources of Funds ..............................................................................................
Acceptable Assets and Sources of Funds ..................................................................................
Transaction Types .......................................................................................................................................
Purchase .....................................................................................................................................
Rate/Term Refinance .............................................................................................................................
Cash-Out Refinance ..............................................................................................................................

Continuity of obligation .....................................................................................................................
Delayed Financing ......................................................................................................................
Construction-to-Permanent Refinance ...........................................................................................
Land Contract Refinance........................................................................................................................
Lease Option-To-Purchase .............................................................................................................
Inherited Properties ..........................................................................................................................

Ineligible Transaction Types .................................................................................................................
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S E LLE R G UIDE
C HAP TE R 5.
U NDE RW RI TI NG
INTRODUCTION
HF3 Fundings guidelines strive to provide clear underw riting standards to help Sellers understand the types of loans
eligible for purchase. These guidelines outline the level of risk acceptable to HF3 Funding and describe general and
specific requirements for each program, including criteria pertaining to the Borrow ers employment, income, assets and
liabilities, credit, and qualifying ratios.
Although these guidelines cover most circumstances, they may not comprise all possible loan scenarios. Where a specific
circumstance is not addressed, HF3 Funding w ill apply prudent underw riting principles at its sole disc retion to determine
loan eligibility. These guidelines represent the minimum necessary for a loan to be purchased by HF3 Funding. The
crucial requirements are that the terms of the loan must relate to the Borrow ers ability to repay and that the value and
marketability of the property is acceptable.
These guidelines must be interpreted and applied by the Seller in a manner that complies w ith all applicable law s and
regulations, including consumer protection law s and regulations.
These underw riting standards are intended to outline the underw riting criteria for loans that are eligible for purchase
by HF3 Funding. HF3 Funding is under no obligation to purchase any loan that satisfies these underw riting
standards. Compliance by the Seller w ith these underw riting standards shall not be deemed to create a Commitment
by HF3 Funding to purchase, or cause any third-party to purchase any loan, such decision to purchase being at the sole
discretion of HF3 Funding.
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C HAP TE R 5.
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UNDERWRITING CONSIDERATIONS
HF3 Funding evaluates many aspects of the loan but relies principally on the credit scoring system that has proven
to consistently and accurately predict loan performance. Examining the characteristics of the loan, HF3 Funding
w ill focus on the Borrow ers current credit, ability to repay, and the property being used for collateral.
When underw riting a loan, all elements of the loan w ill be examined to determine the level of risk, including the
Borrow ers capacity and w illingness to repay, the Borrow ers credit, compensating factors, the appraisal, and the
overall investment quality of the loan.
The follow ing are examples of underw riting considerations and compensating factors:
Borrow ers demonstrated ability to pay housing expenses greater than or equal to the proposed
monthly housing expenses
Verified reserves of Principal, Interest, Taxes, Insurance and HOA dues in excess of Program
Requirements.
Borrow er receives documented compensation or income (i.e., public benefits) that is not
reflected in effective income, but directly affects their ability to pay the mortgage.
A Borrow ers demonstrated ability to:
Accumulate savings;
Devote a greater portion of his or her income to housing expenses;
Maintain a good credit history, including current and previous mortgage/housing payments
(applicable to A-, B and C grades only); and
Provide a large (typically 10% more than required) dow n payment on the Mortgaged
Property.
A Borrow ers:
Potential for increased earnings based on education, job training, and time employed, or
practice in a specific profession;
Verified net w orth, liquid, and other verified assets substantial enough to evidence an
ability to repay the loan regardless of income;
Conservative attitude tow ard using credit;
Evidence of significant monthly residual income (above program requirements).
Cash-out proceeds do not qualify as a compensating factor.

A loan may present a distinct circumstance or additional compensating factors not listed above. All underw riting
considerations must be w ell documented and w ill be review ed on a case-by-case basis.
ABILITY TO REPAY (ATR), QUALIFIED MORTGAGE, AND NET TANGIBLE

BENEFIT REQUIREMENTS
The Consumer Financial Protection Bureau adopted a rule that implements the Ability to Repay (ATR) and
Qualified Mortgage (QM) provisions of the Dodd-Frank Act. HF3 Funding w ill only purchase loans in w hich the
Borrow ers ability to repay has been established as laid out in the Truth In Lending Act. Investment properties used
for business purposes (Borrow er does not intend to occupy property more than 14 days per year), are exempt from
ATR, but must still meet applicable points and fees threshold.
Sellers are responsible for providing evidence of compliance w ith ATR/QM rules.
The Originator must verify the income and assets used to determine the Borrow ers ability to repay the loan. Refer to
the Income and Assets sections of this Guide for additional information.
Benefit to the Borrower

In keeping w ith the Commitment to responsible lending, all Loans purchased by HF3 Funding must have a
measurable benefit to the Borrow er. When determining the benefit on a transaction, one of the follow ing items must
exist to support the benefit to the Borrow er:
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1.
C HAP TE R 5.
U NDE RW RI TI NG
Purchasing a home
2. Low er principal and interest housing payment

3. Low er total monthly payments
4.
Low er interest rate
5. Conversion from an adjustable rate to a fixed rate

6.
Pay-off of a balloon payment
7.
Conversion from negative amortization to fully amortization
8.
Reduction of loan term
9.
Reduction of total interest payments
10. Consolidation of debt

11. Resolution of loss mitigation actions
12. Pay-off of a tax lien
13. Proceeds (cash-out) to Borrow er in excess of the costs and fees to refinance
14. Pay-off of a Construction Loan

15. Pay-off of property taxes
16. Title transfer/Court order
17. Eliminating mortgage insurance
18. Cash-out for medical needs
19. Cash-out for education needs

20. Pay-off of a privately held mortgage
21. Other as defined by the Borrow er
On a Loan w here the only benefit is monthly savings, closing costs and f ees must be taken into account and
recouped w ithin state-specified timeframes as applicable. Originators must adhere to any state-specific or federal
benefit to Borrow er compliance requirements. Benefit to Borrow er must be calculated based on the qualifying housing
payment.
Non-QM Loans
HF3 Funding w ill purchase non-QM loans that meet ATR requirements. In addition, HF3 Funding w ill only purchase
loans that conform to their program guidelines, even if the Borrow er has a reasonable ability to repay the loan
according to its terms.
Points and Fees

Clear itemization of fees and application of all credits that indicate paid by/to w ill be required on all loans. HF3
Funding w ill accept a broad number of documents as evidence of compliance. Acceptable for ms of evidence include,
but are not limited to:
Initial GFE
Initial TIL
Subsequent GFEs w ith accompanying Change of Circumstance forms
Subsequent TILs
Final HUD-1
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C HAP TE R 5.
U NDE RW RI TI NG
FRAUD DETECTION REQUIREMENTS

The Seller must obtain the follow ing for each Loan submitted to HF3 Funding for review and purchase.
GSA, LDP and Exclusionary List

The Seller must verify that no company or individual w ho are material parties to the transaction is listed on HUDs
Limited Denial Participation list, the federal General Services Administration (GSA) Excluded Party list, and Freddie
Macs Exclusionary List. All lists must be checked for all parties to the transaction.
If any of the names appear on either list, the Loan is not eligible for purchase. This applies to all Loans and is not
limited to FHA and VA loans.
Fraud Detection Reports

HF3 Funding w ill use fraud detection tools (i.e. FraudGUARD) to screen every loan submitted for purchase. The
Seller must provide evidence in the Loan file that they have ordered third party fraud detection reports and resolved
any red flags, discrepancies, and conflicting information.
ELECTRONIC SIGNATURE AND DISCLOSURE REQUIREMENTS

Documents Eligible for Electronic Signatures (e Signatures)
HF3 Funding w ill purchase loans on w hich certain documents are signed using an Electronic Signature.
Initial application documents associated w ith the 1003, (i.e. initial disclosures, sales contract) may be signed
electronically. The Seller is responsible for determining that the documents have been properly signed by all parties
(as w ith non-electronic documents). Any transaction involving the use of a Pow er of Attorney w ill not be permitted to
use an eSignature.
The Seller w ill not be permitted to submit any final documents w ith eSignatures other than an appraisal.
The documents received under the E Signature process must adhere to Uniform Electronic Transactions Act
(UETA), or the Electronic Signatures in Global and National Commerce Act (ESIGN), as applicable w ith the
eMortgage delivery process referenced in section 18D of the Seller Guide.
All disclosures must be in compliance w ith state, federal and local mortgage lending law s and regulations. HF3
Funding w ill accept loans for purchase, in w hich the Borrow ers received initial federal and state disclosures
electronically according to the requirements outlined by the Electronic Signatures in Global and National Commerce
(E-SIGN) Act of 2000.
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C HAP TE R 5.
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BORROWER ELIGIBILITY
The guidelines below describe a persons eligibility to be a Borrow er in HF3 Fundings Loan Programs. HF3
Funding w ill purchase loans made to individual, natural persons only. Loan applications from corporations, general
partnerships, limited partnerships, and Doing Business As (DBAs) or religious/non-profit organizations are ineligible.
IMMIGRATION AND NATURALIZATION SERVICE (INS) CLASSIFICATIONS

The U.S. Department of Immigration and Naturalization Service (INS) has defined specific residency classifications. HF3
Funding offers programs to individual persons w ho are citizens and/or legal permanent residents of the United States.
For eligibility and restriction details, refer to the HF3 Funding Loan Program M atrices.
The follow ing are some of the classifications defined by the INS:
INS
Classification
INS Definition
Program Guideline
U.S. Citizen
A citizen of the United States is a native-born,

foreign-born, or naturalized person w ho ow es
allegiance to the United States and w ho is entitled
to its protection.
United States citizens are eligible Borrow ers

for all of HF3 Fundings Loan Programs.
Permanent
Resident Alien
A permanent resident alien is a person w ho is not a

U.S. citizen but is legally able to maintain
permanent residency in the United States.
A permanent resident alien may be an eligible

Borrow er, if the Borrow er is a holder of an alien
registration card (green card). The Seller is
responsible to verify that the Borrow er has a
valid registration card.
Non-Permanent
Resident Alien
A non-permanent resident alien is a person w ho is

not a U.S. citizen but resides in the United States
under the terms of a Visa.
A non-permanent resident alien may be eligible if

they maintain a current G-1 to G-5, H-1, L-1, or
E-1 Visa and they can provide a copy of the Visa
w ith underw riting documentation.
Foreign
Nationals
A foreign national is a person w ho is not a U.S.

citizen and w ho lives and w orks outside of the
United States.
Not eligible
Persons w ith
Diplomatic
Immunity
A person w ith diplomatic immunity is allow ed to live

in the United States to carry out their official
diplomatic duties. They are not U.S citizens, and
are exempt from law suit or prosecution under the
host countrys law s.
Not eligible
Evidence of Residency
Acceptable evidence of permanent residency for Borrow ers w ho are not U.S. citizens must be provided. The
Borrow er must provide the INS evidence as follow s:
Alien Registration Receipt Card I-151 (referred to as a green card).
Alien Registration Receipt Card I-551 (Resident Alien Card) that does not have an expiration
date on the back (also know n as a green card).
Alien Registration Receipt Card I-551 (Conditional Resident Alien Card) that has an expiration
date on the back, and is accompanied by a copy of the filed INS Form I-751 (petition to remove
conditions).
Non-expired foreign passport that contains a non-expired stamp (valid for a minimum of three
years) reading Processed for I-551 Temporary Evidence of Law ful Admission for Permanent
Residence. Valid until [mm-dd-yy]. Employment Authorized.
The U.S. Citizenship and Immigration Services Web site is:

https://egov.immigration.gov/cris/caseStatus SearchDisplay.do
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Other forms of evidence of residency that are not listed may be acceptable, and w ill be review ed on a case-by-case
basis.
BORROWER TYPES
The follow ing are the types of Borrow ers allow ed by HF3 Funding programs. HF3 Funding limits the number of
Borrow ers per Loan to four. For eligibility and restriction details, refer to the HF3 Funding Loan Program M atrices.
Primary Borrower
The Primary Borrow er is the individual w ho earns the most income. Non-Occupant Co-Borrow ers cannot be the
Primary Borrow er on the Mortgaged Property.
Co-Borrower
A Co-Borrow er is an individual other than the Primary Borrow er w hose credit history, income, or assets are used for
qualifying the loan. The Co-Borrow er is the Borrow ers spouse, domestic partner, or any individual jointly responsible
for repayment of the loan w ith the Borrow er. All Co-Borrow ers must be on title.
First-Time Homebuyers (FTHB)

Borrow ers are considered First-Time Homebuyers (FTHB) w hen there is no evidence of ow ning residential property
in the previous three years. First-Time Homebuyers generally must fulfill specific requirements in addition to the
conditions stipulated for experienced homebuyers. A Borrow er(s) w ho has experience ow ning a home, but has not
ow ned one in the past three years, w ill be considered a FTHB.
In the instance w here one Borrow er is a FTHB and the other Borrow er(s) is not, HF3 Funding w ill treat the
transaction as a non-FTHB transaction for grading and program eligibility.
For LTV/CLTV restrictions, reserve requirements and other guidelines specific to FTHBs, refer to the HF3 Funding
Loan Program Matrices.
Non-Borrowing Occupant
A Non-Borrow ing Occupant is the Borrow ers legal spouse, domestic partner, or any person residing in the
Mortgaged Property w hose credit, income, and/or assets are not considered in the loan qualifying pr ocess. NonBorrow ing Occupants that appear on title w ill have to execute the documents required by law to create a valid lien
on the property.
When a married Borrow er purchases a property w ithout involving a spouse, HF3 Funding requires the spouse to
sign the security instrument, and any other applicable documentation under governing state law to confirm
relinquishment of their rights to the property.
Non-Occupant Co-Borrower
A Non-Occupant Co-Borrow er (co-signer) is an individual w ho w ill not be living in the Mortgaged Property, but w
hose income and/or assets have been used to qualify for the loan. The co-signer must sign the Note. Although the
Non-Occupant Co-Borrow er does not reside in the Mortgaged Property, he or she is jointly responsible (w ith the
Primary Borrow er) for repaying the loan. If the Loan Program allow s for a Non-Occupant Co-Borrow er, the loan is
subject to the follow ing conditions:
Mortgage Loan:
Ow ner occupied or second vacation home
Full Documentation only
The Primary (occupant) Borrow ers credit profile w ill be used for grade determination, and
the Primary Borrow er must have a DTI of no more than 60%
A minimum of 5% of the dow n payment must come from the Primary (occupant) Borrow ers
ow n funds. A dow n payment of 100% gift funds is allow ed at LTVs less than 80% or the
program maximum, w hichever requires the greater dow n payment. Secondary financing is
not allow ed on Non-Occupant Co-Borrow er transactions. Closing costs may also be in the
form of a gift.
Non-Occupant Co-Borrow er:

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Individual cannot be the Primary Borrow er, and must be a close family member such as a
parent, child, grandparent, or sibling. Credit must meet the minimum credit standards for
the grade assigned to the loan
Must provide income and asset documentation to be used for loan qualification
Must be vested on the Mortgaged Property for a minimum of six months for a Rate/Term
Refinance and tw elve months for a Cash-Out Refinance transaction
Up to tw o Non-Occupant Co-Borrow ers allow ed
Title Held in a Trust or LLC on Behalf of the Borrower

The Borrow er must be an individual w ith the exception of inter-vivos revocable trusts and limited-liability companies
(LLCs) under certain circumstances. Inter vivos revocable trusts are created by individuals, w hile they are still living,
as an estate planning tool.
Title must generally be in the Borrow ers name as an individual, trust, or LLC at time of application for refinance
transactions and at the time of closing for all transactions.
Title in the name of an LLC at time of application is acceptable provided the Borrow er is a member of the LLC and the
Loan w ill be in the Borrow ers name as an individual or acceptable trust at closing.
Non-individual legal entities such as corporations, general partnerships, limited partnerships, real estate syndications
or investment trust are not eligible.
The inter vivos revocable trust, also called a family trust, living trust, or revocable living trust, can be used as an
alternative form of property ow nership. An inter vivos revocable trust (living trust) is a trust defined as follow s:
Eligibility Requirements
Created by an individual during his/her lifetime
Becomes effective during its creators lifetime
Can be changed or canceled by its creator at any time, for any reason, during his or her lifetime
At least one individual establishing the trust must be on the Loan.
Trust Agreement Requirements

The Seller must obtain copies of the entire trust document and include them in the loan file submitted for purchase.
The copies must be certified by an attorney or the grantor/trustor/settlor. The title company must also be supplied w ith
copies of the trust.
A review of the trust agreement is required to ensure the agreements meets all of the follow ing requirements:
The trust is established by one or more natural persons, solely or jointly. The person
establishing the trust is know n as the Settlor, Trustor, or Grantor, referred to below as
Settlor.
The trust is effective during the Settlors lifetime
The Settlor is the primary beneficiary of the Trust. If there is more than one Settlor there can be
more than one primary beneficiary.
The Settlor is the trustee or one of the co-trustees
The trustee has the pow er to mortgage the Subject Property for the purpose of securing a loan
to the party (or parties) w ho are the borrow ers on the Note.
The trustee is not required to obtain w ritten consent from the beneficiaries to mortgage the
subject property if w ritten consent has been provided.
There is no unusual risk or impairment of lenders rights, such as distributions required to be

made in specified amounts other than net income
The trust is valid under federal, state, and local law
If the trust agreement requires more than one trustee to borrow money or purchase, construct,
or encumber realty, the Seller must confirm that the requisite number of trustees have signed
the loan documents.
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Certification of Trust
A certification of trust or a summary of trust is acceptable if required by state law . In states that require a Seller to rely
on an abstract, summary or certification of the trust agreement instead of the trust agreement, a copy of the abstract,
summary or certification is acceptable.
California (CA) Only Exception

California (CA) law provides for the use of a Certification of Trust that states the various facts about the trust in lieu of
obtaining copies of the trust. Sellers can rely upon this certification so long as it is signed by all of the trustees
(Pow ers of Attorney are not allow ed). Sellers must review the certification to verify the above requirements are met.
Title
The title insurance policy must ensure full title protection, and must indicate that title to the subject property is vested
in the name of the trustees. The policy may not list any exceptions w ith regard to the trust or the trustees.
Additional documentation:
Inter Vivos Revocable Trust Rider to the Deed of Trust/Mortgage
Inter Vivos Trust as Borrow er Acknow ledgment
Verbiage on this Acknow ledgement may be incorporated into the Inter Vivos Revocable Trust
Rider to the Deed of Trust/Mortgage. If the verbiage is included in the Rider, then the
Acknow ledgement is not required
MAXIMUM LOANS TO ONE BORROWER

In order to reduce the level of risk and ensure lien security, HF3 Funding limits the potential Borrow ers open loans,
total number of properties ow ned, and number of mortgaged properties ow ned in one area.
The occupancy of the property being financed w ill determine the limitations on how many other financed 1 -4 family
properties the Borrow er may ow n and/or be obligated on. These limitations apply to each Borrow er, individually and
all Borrow ers collectively that ow n and/or are obligated on a note secured by a mortgage. The Borrow er(s) obligation
on a mortgage is important w hen evaluating capacity. Therefore, even if the Borrow er is not an ow ner of record, but is
obligated on a note of a financed property, it must be included in the maximum number of financed properties .
The follow ing are excluded from these limitations:
Properties ow ned free and clear
Joint or total ow nership in property this is held in the name of a corporation, even if the
Borrow er is the ow ner of the corporation. How ever, if the Borrow er is individually obligated on
the note, it must be included
Ow nership in a multi-family property (5+ units)
Ow nership in commercial property
Ow nership in timeshares
Ow nership in unimproved land
For all loans, the Borrow er's primary residence, the subject property and any properties ow ned separately by a CoBorrow er must be included in the total number of properties ow ned.
Maximum Dollar Amount Sold to HF3

The aggregate dollar amount of all loans made to one Borrow er sold or serviced by HF3 Funding may not exceed
$4M.
Maximum Loans to One Borrower Sold to HF3

There is no limit to the number of loans that can be submitted for the same Borrow er to be sold to HF3 Funding.
Rather, the maximum number of loans to one Borrow er is limited by the aggregate dollar amount of the total loans
sold or serviced by HF3 Funding. The aggregate dollar amount of all loans sold or serviced by HF3 Funding may
not exceed $4M.
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Maximum Properties One Borrower May Own

A Borrow er may finance or ow n multiple properties. HF3 Funding offers tw o options for Borrow ers that ow n multiple
properties. They include:
1)
If the Loan being sold to HF3 Funding is secured by the Borrow ers principal residence, there are no
limitations to the number of properties that the Borrow er can ow n or are currently financing.
2)
If the Loan being sold to HF3 Funding is secured by the Borrow ers second home or an investment
property:
a.
The Borrow er may have up to ten financed properties (including their principal residence) OR
b.
The Borrow er may ow n or have financed an unlimited number of properties if the Loan being
sold to HF3 Funding has a maximum LTV/CLTV that does not exceed the lesser of the program
maximum or 70%.
More stringent lending practices should be implemented in cases w here the Borrow ers loan documents exhibit
escalation of late payments and multiple refinances. New investors that have made multiple real estate acquisitions
(more than 50% of the properties purchased) in the past 12 months may require additional review , documentation, or
be ineligible for purchase.
In all cases the Borrow er must have sufficient assets to close and meet reserve requirements. For more information,
refer to the HF3 Funding Loan Program M atrices.
Maximum Loans in One Market Area Sold to HF3

The number of loans to one Borrow er in any single market area is limited to tw o. The term single market area refers
to the physical location of the propertymeaning tw o or more homes ow ned by the same Borrow er w ithin a several
block radius, defined neighborhood, or lending area.
LOAN APPLICATION ANALYSIS

The Loan File assists in determining the Borrow ers eligibility for the loan. During the completion and review of the
application, the Seller should analyze the application in the follow ing manner:
Verify and substantiate the quantity, quality, and durability of the Borrow ers income.
Verify and analyze the Borrow ers assets to determine if adequate funds are available to meet
the equity and reserve requirements of the transaction.
Verify and substantiate the Borrow ers liabilities and credit history in relation to the Borrow ers
assets and income.
Evaluate the Borrow ers net w orth in relation to his or her ability to manage financial affairs and
accumulate assets/w ealth.
Verify that the declarations are consistent w ith program eligibility.
The Loan File must contain a complete, fully executed Loan application (1003). Both the initial and final 1003s must
be provided. The follow ing applies:
Must be signed and dated by the Borrow er
All HMDA data must be completed.
Seller is determined by auditing the interview ers section
Seller Contact information is included
Potential Buy and Bail Loan Scenarios

Loans that exhibit the follow ing characteristics, sometimes referred to Buy and Bail Characteristics, may be
deemed ineligible for sale to HF3:
The borrow er defaults on the original mortgage shortly after purchasing a second property
The borrow er w ill be a first time landlord (renting out the original property)
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The borrow er has minimal or no equity in the original property
Inability to validate lease terms w ith the purported tenant
Purported tenant has a pre-existing relationship w ith the homeow ner
CREDIT
Credit is defined as the Borrow ers history of credit payments and financial obligations. An assessment of the
Borrow ers capacity and w illingness to pay financial obligations is a major factor used in determining a Borrow ers
creditw orthiness. A Borrow er(s) w ho has consistently met financial obligations in the past may indicate reasonable
justification that he or she is likely to continue to do so in the future. A Borrow ers credit history provides a strong
measure of their intent to repay.
Credit history is measured on credit depth, number of obligations, delinquency patterns, and demonstrated intent to
repay. In a subjective evaluation of credit, many factors are considered w hen evaluating a Borrow ers credit history.
The factors include:
Credit repayment history
Line utilization
Proportion of balances versus limits on revolving accounts
Patterns of debt pyramiding
Recent inquiries and new ly opened accounts
Recent changes in the number of open accounts or overall amount of credit outstanding
The number of open accounts and length of credit history
Public record information
For more information, refer to the HF3 Funding Loan Program Matrices.
Equal Credit Opportunity Act

The Federal Equal Credit Opportunity Act prohibits lenders from discriminating against credit Borrow ers on the basis
of race, color, religion, national or ethnic origin, sex, marital or familial status, age (provided the Borr ow er has the
capacity to enter into a binding contract), disability, because all or part of the Borrow ers income is derived from a
public assistance program or because the Borrow er has, in good faith, exercised any rights under the Consumer
Credit Protection Act. State law s may also prohibit discrimination on certain additional basis such as sexual
orientation.
Number of Open Accounts

It is generally not one credit usage factor, but the combination of factors that establish w hether or not the overall
pattern of credit use is acceptable.
In general, the greater the number of credit accounts, the higher the credit risks. How ever, it is important to analyze
the number of accounts w ithin specific types of credit (i.e., retail, installment, revolving and mortgage). The higher risk
group includes Borrow ers w ith a large number of bank revolving accounts, and/or accounts w ith outstanding
balances. On the other hand, if there is no bank revolving accounts, this could indicate an inability of the Borrow er to
obtain credit.
The lack of acceptable credit cannot be compensated for by either capacity or collateral strengths . When determining
investment quality, the likelihood of timely repayment, as demonstrated by responsible credit, must alw ays be
present. Once credit is established, how ever, collateral and capacity can be used to strengthen the loans overall
investment quality.
Recent Inquiry Risk Factors and Undisclosed Liabilities

Recent inquiries indicate that the consumer has actively been seeking credit. A Borrow er w ith minimal credit
experience and a number of recent inquiries should be more closely scrutinized than a Borrow er w ith the same
number of inquiries and a very long and stable credit history.
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Multiple inquiries w ithin the most recent 12 months generally increase risk and, w hen combined w ith high balancesto-limits on revolving accounts may indicate that the Borrow er is in danger of becoming overextended. In addition,
several recent inquiries combined w ith a credit history of short duration may make even mild derogatory credit
information significant.
The follow ing factors should be considered:
Borrow ers payment experience
Type of credit being sought
Total amount of credit outstanding
Credit utilization reflected on the report
If the credit report indicated that a creditor has made multiple inquiries w ithin the previous 90-day period, the
underw riter must determine w hether additional credit w as granted as a result of the Borrow ers request. A review and
evaluation of the inquiries section of the Borrow ers credit report is required to determine if the Borrow er has received
additional credit that is not reflected in the credit report or disclosed in the Loan File. A detailed explanation letter that
specifically addresses both the purpose and outcome of each inquiry is required from the Borrow er(s). An overall
generic credit explanation letter is not acceptable.
As a result of the credit inquiries, the loan may be subject to additional requirements. If additional credit w as obtained,
a verification of that debt must be provided and the Borrow er must be qualified w ith the monthly payment. The
verification can be achieved through a direct verification w ith the creditor or use of a credit supplement.
Sellers are expected to proactively identify any and all undisclosed liabilities that may affect the loan approval in
relation to underw riting guidelines, eligibility parameters, or pricing. It is the Sellers responsibility to develop and
implement its ow n business processes to support compliance w ith Fannie Maes requirements for undisclosed
liabilities. Although Sellers may already have such processes in place, some best practices that may be incorporated
include:
Refreshing a credit report prior to closing to uncover additional debt or credit inquiries
Adopting new services from credit vendors that provide Borrow er credit report monitoring
services betw een the time of loan application and closing
Investigating credit inquiries listed on the credit report to determine w hether the Borrow er did in
fact, open additional debt resulting in repayment obligations. In some cases, it is possible to
obtain a direct verification w ith the creditor associated w ith the inquiry
It is also highly recommended that a Mortgage Electronic Registration System (MERS) report be run, prior to closing,
to determine if the Borrow er has undisclosed liens and/or if another mortgage is being originated. If new debt has
been obtained, the Loan File must be re-evaluated to ensure compliance w ith debt-to-income and Borrow er eligibility
requirements.
Recently Opened Accounts

Like inquiries, several recently opened accounts may be a w arning that the Borrow er(s) may be getting
overextended. In addition, a credit history w ith all accounts recently opened may signal that the Borrow er(s) do not
have sufficient experience managing financial obligations. The follow ing factors should be considered:
Borrow ers payment experience
Utilization of revolving credit lines
Total amount of credit outstanding
Recent inquiries
Whether the Borrow er has sufficient experience in managing investment property
Outstanding Debt/Line Utilization

Tw o very important indicators of repayment ability are the number of accounts w ith sizable outstanding balances and
high credit line utilization. The number of trade lines w ith balances reported in the last three years should be
considered and review ed in relationship to the number and activity in the last 12 months.
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Analyze the current balance for each open account to the high credit limit to determine w hether there is a pattern of
accounts w ith balances at or near their limits. Generally, if a Borrow er has credit balances that represent at or near
70% of their open and active credit limit, this may require additional review and/or compensating factors. The more
accounts w ith high balances-to-limits and the higher the percentage used, the higher the risk.
High balances-to-limits may also indicate the Borrow er is making minimum payments on revolving accounts rather
than reducing the debt and may be at or near payment capacity. Any derogatory information in a credit history w ithin
the most recent tw o years combined w ith several revolving accounts at or near their limits should be considered
derogatory information w hen evaluating the credit profile of the Borrow er. Generally, the higher the Borrow ers
overall utilization of revolving credit, the higher the amount of risk. Compensating factors or additional documentation
may be required to offset this risk.
Reason/Score Codes
Along w ith the credit scores, credit repositories return up to four reason codes w ith each credit score provided. These
codes are sometimes referred to as score factor codes. These reason codes provide an explanation as to w hy the
Borrow er(s) did not receive a higher score. This is taken into consideration w hen evaluating borrow ers credit.
HAWK Alerts
All three national credit repositories have developed automated messages to help messages to help identify possible
fraudulent activity on a credit report. These alerts are commonly know n as HAWK Alerts. All HAWK Alert messages
show n on a credit report, especially those in the Fraud Verification Information section must be addressed and
resolved.
Military Active Duty Alert

Military personnel are particularly susceptible to identity theft because many of their records, orders, and identification
documents display their social security number. An active duty alert is a type of fraud alert established under the Fair
and Accurate Credit Transactions Act (FACTA) that provides credit identity theft protection for U.S. military service
personnel.
The Mortgagee must contact the Borrow er directly to verify identity w henever an active duty alert appears on the
Borrow ers credit report.
Customer Identification and OFAC Alert Screening

The mortgagee must comply w ith Section 326 of the USA Patriot Act and OFAC, including:
Provide each Borrow er w ith a customer identification notice
Obtain at least four items verifying the Borrow ers identity through documentary or nondocumentary methods
OFAC alert screening
Determine if the Borrow er is questionable or suspicious
Monitor questionable instance w hich may require internal and external reporting of suspected
individuals
Ensure Sellers employees are trained and informed of suspicious activities related to antimoney laundering or terrorist activities
Weighing Risk Factors

When evaluating Borrow er(s) w ith adverse credit information, more w eight should be given to derogatory credit
information or late payments occurring w ithin the past tw o years. The follow ing factors should still be considered:
The number, timing and extent of the delinquency
Eventual repayment of delinquent obligations
Any previous bankruptcy, mortgage foreclosures, or deed-in-lieu of foreclosure w ithin the past
seven years
Whether other characteristics of the Borrow ers credit profile, such as age of credit, use of
outstanding credit, and inquiries, make any significant difference in the derogatory credit
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Delinquency and Derogatory Credit

There are a number of factors to consider in the analysis of delinquency or derogatory credit:
The type of accounts on w hich the delinquency occurred
The reason for delinquency
The severity of the delinquency
The frequency of delinquent accounts, AND
How recently the delinquency occurred
More w eight is placed on installment loan delinquency than on revolving debt delinquency. The most w eight is placed
on mortgage payment history. The most serious types of delinquency include foreclosures, bankruptcy, judgments,
collection accounts and tax liens. Explanations and supporting documentation should be in the file to show these
events w ere an isolated occurrence and are unlikely to happen again.
Accounts w hich are currently delinquent are closely scrutinized. All accounts past due must be brought current or
otherw ise resolved prior to closing according to the HF3 Funding program guidelines. Please refer to the HF3
Funding Credit Grade M atrix for details.
CREDIT REPORT REQUIREMENTS

For each Borrow er w hose income or assets are required to qualify for the loan, the Loan File must contain one of the
follow ing:
A full Residential Mortgage Credit Report (RMCR)
An in-file merged credit report that accesses the three national credit repositories
Joint merged credit reports are allow ed w ithout regard to marital status
General Requirements
The follow ing outlines the general requirements for credit reports. The credit report must contain merged credit
information provided by all three national repositories.
Residential Mortgage Credit Reports:
Credit Report must not be dated more than 90 day s from the Note Date. In the event that the
Disbursement Date causes the Borrow ers credit report and/or credit file to be greater than 90 days
old, HF3 reserves the right to request updated credit, asset, and/or income documentation.
Disbursement Date is the day on w hich the loan closes.
Must contain all discovered credit and legal information that is not considered obsolete under the
Fair Credit Reporting Act
Be issued by an independent consumer reporting agency that obtains or verifies all information
from sources other than the Borrow er.
Identify the full name, address, and phone number of the consumer reporting agency
Identify the names of the national credit repositories from w hich the information w as obtained. The
consumer reporting agency must contact at least tw o national credit repositories for each area in w
hich the Borrow er has resided during the most recent tw o-year period.
Indicate the dates the accounts w ere last updated w ith creditors . Each account should have been
updated w ithin 90 days of the credit report.
Include a certification stating that it meets the standards that Fannie Mae, Freddie Mac, the FHA,
and VA prescribe for an RMCR. Separate credit repository inquiries are necessary w hen Co-Borrow
ers have maintained credit individually.
List all credit inquiries received w ithin the previous 90 days.
Evidence the consumer reporting agency verified the Borrow er's current employment and, if
obtainable, income. The report must show the date of verification. Verification may be made by
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telephone. If there has been a change in employment in the past tw o years, the report must also
describe the Borrow er's previous employment and income. In cases in w hich employment w as not
verified, the report must indicate w hy it w as not.
Show responsive statements concerning items on the report. For example, the consumer reporting
agency must report unable to verify or employer refused to verify. The same responsive reporting
applies to trade and credit history.
Must contain specific information regarding legal items found in public records, including
judgments, foreclosures, tax liens, bankruptcies, etc.
Tri-Merged Credit Reports:
Must contain all the information from the three in-file credit reports.
If the information is not exactly the same on each report, then the merged report must repeat the
information as stated on each report or include the most derogatory of the duplicate information
that pertains to the payment history and/or current payment status.
Identify the repositories that w ere used for the in-file credit reports.
Must provide a credit bureau score, accompanied by reason codes, for each Borrow er.
The report must include all of the information verified by the three repositories.
Any social security number discrepancy must be disclosed by the repositories.
Each individual trade line must identify the primary repository that provided the account information.
No Borrow er in a transaction may have frozen credit. Frozen credit is w here the Borrow ers credit has been
involuntarily frozen by a court order, government entity or similar mandate. If a Borrow er has frozen credit and
unfreezes their credit after the original credit report w as ordered, a new credit report must be obtained to reflect
current updated information for evaluation.
Each credit report must contain a Fair Isaac credit score (Empirica on TransUnion, Beacon on Equifax, and FICO
on Experian) for all Borrow ers w hose income and/or assets are used to qualify for the loan. The Seller must provide
at least tw o qualifying credit scores for each Borrow er. These credit scores w ill be used as a component in
determining the credit grade of the loan. A Co-Borrow er w ith no valid credit score w ill be allow ed in cases w here
income and/or assets are not required for qualification purposes. For grade determination, refer to the HF3
Funding Loan Program Matrices.
SELECTING THE CREDIT SCORE

HF3 Funding w ill select the Borrow ers credit score using one of the follow ing methods:
If all three scores are available, the middle score w ill be used.
If only tw o scores are available, the low er score w ill be used.
Once the score is selected for each Borrow er, it is used for loan qualification as follow s:
For Full/Alternative Documentation Loans, the Primary Borrow ers selected score is used.
For Reduced Documentation Loans, the low est selected score among all Borrow ers is used.
If in the case w here both Borrow ers earn equal income, the Borrow er w ith the low er score w ill
be used for grade determination.
To ensure credit score validity, the Originator should review the scores, the score codes and the Borrow ers credit
history, Score codes must be consistent w ith tradeline information and use. Scores that do not appear to represent an
accurate assessment of the Borrow ers credit risk w ill not be considered usable and valid.
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LIMITED, NO CREDIT HISTORY OR ALTERNATIVE CREDIT HISTORY

Borrow ers w ith limited, no credit history, or that do not meet HF3 Fundings minimum credit requirements are
not eligible . Each Borrow er must have at least tw o valid and usable credit scores as defined by HF3 Funding. A
Borrow er not using income to qualify and show ing $0 earned or is not employed does not need to meet the minimum
trade line requirements.
MINIMUM CREDIT REQUIREMENTS/TRADELINES
A Borrow er(s) w ithout an established credit history is ineligible. A valid and usable score is one
that is generated based upon credit history and credit patterns that accurately reflect the
Borrow ers history. It should contain at least:
Three established open and active trade lines that reported for a minimum of 24 months
At least one of the three established trade lines must have a minimum $2,500 high credit
limit
At least one open mortgage trade line in the last 36 months
If the Borrow er is a First-Time Homebuyer, the Borrow ers rental housing payment history for
the previous 12 months is required. Payments must be documented via an institutional VOR or
cancelled checks/bank statements.
For Borrow ers that currently ow n or have ow ned a property f ree and clear, a copy of the title or
credit report must document the free and clear status.
If the Borrow er is in college, is a recent college graduate or living w ith family members and is
not paying rent, he or she must meet the minimum credit requirements.
Borrow ers failing to meet the 3 trade lines criteria but have a minimum of 1 open trade line w ith 12 months or more
reporting history can be considered w ithout exception if the follow ing requirements are met:
8 or more trade lines reported w ith at least one being a mortgage trade line
Minimum 7 years of established credit history
If the mortgage history is not reported on the credit report, it may be verified through cancelled
checks, or verification of mortgage (VOM).
OR
6 months additional reserves and meets one of the follow ing requirements: DTI < 35%, LTV <
70, or the program maximum, w hichever is less.
Unacceptable Tradelines
The follow ing cannot be used to meet the minimum trade line requirement:
Collections
Charge-offs
Public records and derogatory credit, included in or prior to a bankruptcy
Accounts currently over 90 days delinquent
Student loans not currently in repayment
Authorized User accounts
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ADVERSE CREDIT
Collection accounts, charge-off accounts, judgments, liens, delinquent property taxes, repossessions, and
garnishments are considered to be adverse credit. Adverse credit does not impact the grade determination, since
these elements have already been included in the credit score; how ever, the allow ance of adverse credit is restricted
by grade and program.
All delinquent credit that w ill impact title must be paid off prior to or at closing. Title must insure HF3 Fundings lien
position w ithout exception.
How ever, Charge-Off s or collection accounts that do not impact title are not required to be paid off. For eligibility
and restriction details, refer to the HF3 Funding Loan Program Matrices.
Derogatory Credit
Any derogatory information requires a full investigation including:
A w ritten explanation from the Borrow er that outlines the cause of the major derogatory credit
event and the likelihood of re-occurrence.
Explanations must make sense and cannot conflict w ith other verified information or
documentation in the Loan File. When a Borrow er indicates unusual circumstances have
contributed to serious delinquencies or derogatory credit, documentation to support those
circumstances should be obtained to justify a decision to approve a loan w ith recent credit
problems.
Proper consideration must be given in evaluating the Borrow er's creditw orthiness
Proof that the incident has been resolved and documentation supporting the resolution and
conclusion of the matter. If a derogatory item is being paid through this transaction, the file
should note it in the closing statement.
A Borrow er may provide medical information to explain a pattern of late payments. Medical
information must never be specifically requested. How ever, explanation for a pattern of late
payments or derogatory information on the credit report should be requested. The underw riting
decision to grant credit should not be based on a Borrow ers physical, mental or behavioral
health condition.
Divorce Debt
Delinquent credit w hich belongs to an ex-spouse may be excluded from the credit evaluation w hen all of the follow ing
apply:
Loan File contains a copy of the filed/recorded divorce decree or recorded separation
agreement w hich show s the derogatory accounts belong solely to the ex-spouse;
Late payments that have occurred after the date of the divorce or separation; and
If debt in question is a mortgage, evidence of title transfer prior to any delinquent debt must be
provided and evidence of buyout as part of court proceedings.
Co-Signed Debt
Delinquent credit that belongs to a co-signer must be considered in determining the Borrow ers credit acceptance.
BANKRUPTCY
Bankruptcy is defined as court proceedings to relieve the debts of an individual or business unable to pay creditors.
Bankruptcy may be declared under one of the Chapters of the Federal Bankruptcy Code.
Chapter 7. Covers liquidation of individual or business assets.
Chapter 11. Covers reorganization of bankrupt businesses.
Chapter 13. Covers contractual repayment by individuals.
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Requirements and Guidelines

The follow ing requirements and guidelines apply to bankruptcies:
Loans to Borrow ers w ith multiple bankruptcies are ineligible for purchase by HF3 Funding.
For example, a Borrow er w ho filed for bankruptcy in 2009 and later in 2012 is ineligible
under these guidelines regardless of w hether the bankruptcy w as discharged or dismissed.
HF3 Funding does not consider the follow ing scenarios as multiple bankruptcies:
When a Chapter 13 rolls into a Chapter 7 bankruptcy
When individual Borrow ers each have filed separate bankruptcies.
Bankruptcy dismissal dates are treated the same as discharge dates.
If a discharge/dismissal date cannot be established, documentation validating the dates must

be provided.
If a Foreclosure is included in the Bankruptcy, each event is treated separately for grade determination. The
Seller must determine the seasoning for each event and grade the Loan accordingly.
Please refer to the HF3 Funding Credit Grade M atrix for bankruptcy seasoning information, and Loan Program
restrictions. Credit depth requirements must be met post-bankruptcy. Credit prior to bankruptcy w ill not be considered
for meeting the tradeline requirements.
Chapter 7 Bankruptcy
Chapter 7, also called liquidation, is the most common type of bankruptcy. It provides for the absolute and complete
elimination of most types of debt, thereby giving the debtor a fresh start. The goal of a Chapter 7 bankruptcy is to
obtain a court order discharging ones debts.
For all credit grades, the aging of the Chapter 7 bankruptcy is measured from the discharge date. For f urther details,
refer to the HF3 Funding Credit Grade Matrix.
Chapter 11 bankruptcies allow businesses the opportunity to reorganize business debt w ithout having to liquidate all
assets. The debtor presents a plan to creditors that allow s the debtor to reorganize financial obligations in order to
improve the financial stability of the business.
For all credit grades, the aging of the Chapter 11 bankruptcy is measured from the discharge date. For further
details, refer to the HF3 Funding Credit Grade Matrix.
Chapter 13 bankruptcies provide individuals w ho have a regular income, but are overcome w ith debt, the opportunity
to repay w ithin a reasonable period of time. Chapter 13 bankruptcies permit the debtor to file a plan to pay a certain
percentage of future income to the bankruptcy court for payment to creditors. If the court approves the plan, the
debtor w ill be under the courts protection w hile repaying stated debts.
Depending on the Loan Program, the aging of a Chapter 13 bankruptcy is measured from the discharge date. For
further details, refer to the HF3 Funding Credit Grade M atrix. If Borrow er enters into Bankruptcy and cancels, the
seasoning is measured from the Cancellation Date
CONSUMER CREDIT COUNSELING SERVICES (CCCS)

Consumer Credit Counseling Services (CCCS) assist Borrow ers w ith financial management of debts in an attempt to
avoid further delinquencies or possible bankruptcy. Generally, creditors agree to a reduced repayment under a
consumer credit counseling plan. In all cases, the CCCS plan must have been paid in full. A payment history is
required in this situation and if delinquent in the most recent 12 months, the CCCS w ill be treated as an open Chapter
13 and is ineligible. The date the CCCS w as paid off w ill be considered the discharge date. If Borrow er enters into
CCCS and subsequently cancels, the seasoning is measured from the cancellation date.
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FORECLOSURES
A foreclosure is a proceeding that enables the creditor, in accordance with the termsof the security
instrument, to take legal action that could ultimately result in the forced sale of the collateral property
for full or partial satisfaction of the debt. Such action typically extinguishes the property ownersrights,
title, and interest. In the instance where a Borrower has been or is currentlydelinquent 120 days or
longer and the lender has not initiated formal actions, the 120 day plus delinquency will be treatedasa
foreclosure for grading purposes. Documentationshould be provided to show the individual Borrowers
circumstance.
Foreclosure is substantiated by real estate loans that are delinquent 120 days or longer, as mentioned above or the
existence of any of the follow ing:
Breach
Service
Short Payoff
Lis Pendens
Sheriffs Sale
Bankruptcy Notice
Notice of Sale

The follow ing requirements and guidelines apply to foreclosures:
The length of time elapsed since the occurrence or completion of the foreclosure is considered
in the grade determination.
Applicants w ho have undergone foreclosure procedures must provide a mortgage/housing

history in accordance w ith specific Program Guidelines.
A Borrow er w ith a history of more than one foreclosure is ineligible. For example, a Borrow er
w ho had a foreclosure in 2009 and then loses a home through bankruptcy in 2012 is ineligible.
Any repossession or 120-day delinquency on a mobile home, manufactured home or timeshare,

even if show n as an installment debt, w ill be considered a foreclosure.
If a Foreclosure is included in the Bankruptcy, each event is treated separately for grade determination. The
Seller must determine the seasoning for each event and grade the Loan accordingly.
Please refer to the HF3 Funding Credit Grade M atrix for foreclosure seasoning information, and Loan Program
restrictions.
LOSS MITIGATION HISTORY - MODIFICATIONS, FORBEARANCES,

REARRANGEMENTS, EXTENSIONS, OR WORKOUTS
Loss mitigation history includes the follow ing:
Deed-in-Lieu
NOD
Pre-Foreclosure Sale
Short Sale
Short Refinance
Loan Extensions
Loan Modification
For further details, refer to the HF3 Funding Credit Grade M atrix.
An agreement to forbear, w orkout, extend, or rearrange the terms of the original loan does not change the fact that
the loan w as not paid in accordance w ith its original terms. This applies even if the extension or modification w as
initiated by the Borrow er, and the debt w as subsequently paid in accordance w ith the rearranged terms. Any
forbearance on a mortgage including deed-in-lieu, NOD, pre-foreclosure sale, short sale, short refinance, modification
or non-foreclosure action w ill be considered a loss mitigation action for grading purposes.
Please refer to the HF3 Funding Credit Grade M atrix for loss mitigation action seasoning information, and Loan
Program restrictions.
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Lawsuits and Pending Litigation

If the application, title, or credit documents indicate that the Borrow er is involved in a law suit or litigation additional
documentation, such as an attorneys explanation, copy of the complaint and answ er, etc. is required. The title
company closing the loan must provide a letter stating affirmative coverage of subject lien position.
Generally, law suit and pending litigation is not eligible under the HF3 Funding Program. Situations in w hich the law
suit or pending litigation does not have a meaningful impact on the borrow ers ability to repay the mortgage may be
permitted.
MORTGAGE/HOUSING HISTORY
Each loan must include a mortgage/housing history for the Borrow ers primary residence and any other properties the
Borrow er ow ns. On non-ow ner occupied transactions, a mortgage/housing history is required on the Mortgaged
Property as w ell as the primary residence. For specific program requirements refer to the HF3 Funding Loan
Program M atrices.

The requirements and guidelines for mortgage/housing payments are:
Mortgage/housing payment history on any property, regardless of the occupancy or lien status,
is considered mortgage/housing history for grading purposes.
If the Borrow er does not ow n a property, a housing/rental payment history must be provided
Any payments on a manufactured home or timeshare are considered to be mortgage debt,

even if reported as an installment loan. They w ill be treated as installment debt rather than real
estate ow ned.
The existing mortgage on the Mortgaged Property can be no greater than the max delinquency
contractually allow ed by the program.
Each contractual delinquency must be considered separately. (i.e. a first and second lien)
Any delinquency must be explained and documented in a letter of explanation.
Mortgage / Housing HistoryRequirements
If the Borrow er is a First-Time Homebuyer, the Borrow ers rental housing payment history is
required. Payments must be documented via an institutional VOR or cancelled checks/bank
statements.
If the Borrow er is in college, is a recent college graduate, living w ith family members, is not
paying rent, or is otherw ise unable to verify housing history, he or she must meet the minimum
credit requirements
For Borrow ers that currently ow n or have ow ned a property f ree and clear, this requirement w ill
be w aived for any period w here there w as free and clear ow nership. A copy of the title or credit
report must document the free and clear status.
Verification of Mortgage (VOM)

The follow ing are acceptable for verifying mortgage payments:
An institutional verification of mortgage (VOM)
Copies of canceled checks (front and back)
Bank statements
A current credit bureau report
Third-party verification or copies of canceled checks (front and back) are alw ays required for non-arms length
verifications of mortgage (private mortgage, Land Contract/Contract-for-Deed, or Lease Option to purchase).
Verification of Rent (VOR)

Any of the follow ing documents are acceptable for verifying rent payments:
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An institutional Verification of Rent form
A letter and rating from a property management company
Copies of canceled checks (front and back)
A credit supplement for a rental rating
Third-party verification or copies of canceled checks (front and back) are alw ays required for non-arms length or
private party verifications of rent (related landlords, seller landlords, employers or any interested party to the
transaction).
To use rental history as a tradeline, the Borrow er must verify rent using copies of canceled checks (front and back).
If the Borrow er does not have a checking account, money orders may be accepted if they are valid and legible, are
purchased from a legitimate vendor, and can be validated by conducting a telephone audit w ith the vendor.
ANALYZING DELINQUENT MORTGAGE/HOUSING PAYMENTS

Mortgage/housing payment history is determined as follow s:
Rolling Lates. Consecutive, identical delinquencies. There is no limit to the number of rolling
delinquencies that can occur to be counted as one event.
Intermittent Lates A pattern of late payments that is not consecutive, but is broken into
intervals.
Progressive Lates Delinquencies that increase in severity. The most severe delinquency
reached is considered one event.
When evaluating the mortgage/housing history, all delinquencies must be added. For example, if the Borrow er has a
First and Second Mortgage on his or her property and each one had one late payment (1x30) in the last 12 months,
the Borrow ers mortgage/housing history is equal to tw o late payments (2x30).
Mortgage/housing delinquencies must be calculated as follow s (w ith the mortgage history beginning in January and
read from right to left):
Exam ple 1:
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
30
30
30
30
30
30
30
30
60
60
60
This account w ould be counted as 1x60 rolling and 2x30 rolling for determining the mortgage/housing component of
the grade determination. The eight 30-day and the three 60-day delinquent payments are counted as tw o 30-day
rolling delinquencies and one 60-day rolling delinquency because there is no limit to the number of rolling lates that
are considered one event.
Exam ple 2:
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
30
30
30
30
30
90
60
60
This account w ould be counted as 1x90 non-rolling and 1x30 rolling for determining the mortgage/housing component
of grade determination. The tw o 60-day and the one 90-day delinquency are considered a progressive delinquency
and one event. The five 30-day delinquencies are rolling and considered one event because there is no limit to the
number of rolling lates that are considered one event.
GRADE DETERMINATION
The Borrow ers grade is based on the follow ing factors:
Housing (mortgage/rental) payment history
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Credit score
Bankruptcy history
Foreclosure history
Loss mitigation history, including non-foreclosure actions such as deed-in-lieu, NOD, preforeclosure sale, short sale, short refinance and modification
Required Program Reserves
The Borrow ers least favorable factor w ill determine the credit grade. For example, a negative rating on a mortgage
w ill determine the credit grade if it is w orse than the aging of the bankruptcy.
The debt-to-income (DTI) ratio, adverse credit, residual income, and reserve requirements must also be met. For
details on determining grade, refer to the HF3 Funding Credit Grade M atrix.
QUALIFYING RATIOS
Qualifying ratios are ratios used to calculate the Borrow ers debt versus collateral and debt versus income in order to
qualify the Borrow er for a Loan Program. Note that all Loan Programs limit the ratios allow ed w hen underw riting the
loan. For specific details, refer to the HF3 Funding Loan Program Matrices.
LOAN-TO-VALUE (LTV) AND COMBINED LOAN-TO-VALUE (CLTV) RATIOS

Calculating LTV Ratio
The loan-to-value (LTV) ratio is the loan amount divided by the value of the Mortgaged Property. The combined loanto-value (CLTV) ratio is the sum of all liens on the Mortgaged Property divided by the value of the property. Note that
all Loan Programs offered limit the maximum LTV ratio allow ed and may have seasoning requirements w hen
underw riting the loan. Value is determined as follow s:
Determining the Value for LTV/CLTV

Purchase Transactions:
Purchase Transactions. Loans must use the lesser of the purchase price or the Appraised Value
as the value amount for calculating the LTV/CLTV ratios. The purchase price can be documented
using the original, fully executed purchase agreement or the closing statement (HUD-1).
Refinance Transactions:
Cash-Out Refinance. Loans on properties ow ned less than 12 months must use the lesser of the
purchase price plus the added value of any documented improvements or the Appraised Value as
the value amount for calculating the LTV/CLTV ratios. Cash-Out Refinance Loans on properties
ow ned more than 12 months may use the Appraised Value as the value amount for calculating the
LTV/CLTV ratios. The purchase price can be documented using the closing statement (HUD-1)
from the original financing. The value of the improvements must be documented for each
improvement.
Rate/Term Refinance. The Appraised Value can be used as the value amount for calculating the
LTV/CLTV ratios.
Lease Option to Purchase:

Lease Options must be treated as purchases for disclosure/documentation purposes . A rescission notice is
not required.
Less Than 12 Months Seasoning. A documented lease w ith a lease option-to-purchase w ill be
treated as a purchase transaction w hen there is less than 12 months of seasoning. The lesser of
the Lease Option price or the Appraised Value w ill be used to determine the LTV/CLTV.
At Least 12 Months Seasoning. The Lease Option w ill be treated as a refinance transaction if
there is at least 12 months of seasoning. The Appraised Value w ill be used to determine the
LTV/CLTV.
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Construction-to-Permanent Refinances:
A Construction-to-Permanent transaction may be closed as a purchase, limited Cash-Out Refinance or a
Cash-Out Refinance. When a refinance is used, the Borrow er must have held legal title to the lot before he
applied for the construction financing and must be named as the Borrow er for the Construction Loan.
Cash Recapture. When the Borrow er w ishes to recapture monies paid out-of-pocket and to pay off
an existing Construction Loan, the loan w ill be considered a purchase transaction. Evidence of the
acquisition cost of the property w ill be required. The low er of the total acquisition cost (lot plus
improvements) or the Appraised Value w ill be used to determine the LTV/CLTV ratios:
Ow ned Less Than 12 Months. If the lot w as purchased less than 12 months prior to the
date of application, the value of the lot w ill be based on the low er of the purchase price or
land value as indicated on the appraisal.
Ow ned at Least 12 Months. If the lot has been ow ned for more than 12 months, the
value w ill be determined by the appraisal.
Construction Loan Payoff. When the Borrow er does not require cash recapture and the proceeds
from the loan are being used to pay off the construction financing and closing costs, the loan w ill be
considered a Rate/Term Refinance transaction. The Appraised Value w ill be used to determine the
LTV/CLTV ratios.
Equity Withdraw al. When the Borrow er w ishes to w ithdraw equity, the loan w ill be considered a
Cash-Out Refinance transaction. Program guidelines for allow able cash-out limits must be met.
The LTV/CLTV is determined by one of the follow ing:
Ow ned Less Than 12 Months . If the lot w as purchased less than 12 months prior to the
date of application, the lesser of the Appraised Value or acquisition cost of the lot plus
the documented cost of property improvements w ill be used.
Ow ned at Least 12 Months. If the lot has been ow ned for more than 12 months, the
LTV/CLTV w ill be determined by the current Appraised Value.
Borrow er/Builder Transactions are considered non-arms length transactions and are ineligible.
Land Contracts, Installment Land Contract, Contract for Deed Refinance (applies to both recorded
and unrecorded transactions):
Land Contracts must be treated as refinances for documentation purposes. The Borrow er must be given the
right to rescind the transaction.
Executed Less Than 12 Months. If the Land Contract/Contract for Deed has been executed for less
than 12 months, then the LTV w ill be based on the current Appraised Value or the
purchase/contract price, w hichever is less.
Executed at Least 12 Months. If the Land Contract/Contract for Deed has been executed for at
least 12 months, the LTV w ill be based on the current Appraised Value.
Inherited Property:
If the subject property w as inherited less than 12 months prior to application, the transaction is deemed a
Special Purpose Cash-Out Refinance and is subject to the follow ing:
Proceeds are used to buy-out the documented equity interest of others. Equity ow ners must be
paid through settlement
The Mortgaged Property has cleared probate and property is vested in the Borrow ers name, AND
Current Appraised Value is used for LTV/CLTV determination
HOUSING AND DEBT-TO-INCOME RATIOS

The debt-to-income (DTI) ratio is the sum of all the Borrow ers applicable monthly debt obligations divided by the
Borrow ers gross monthly income. The Seller must verify all of the Borrow ers outstanding liabilities. Note that
all Loan Programs offered limit the maximum DTI ratio allow ed w hen underw riting the loan refer to the HF3
Funding Credit Grade M atrix for details. The follow ing debts must be included in the Borrow ers DTI ratio:
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Qualifying rate for monthly housing expense calculation:
Fixed Rate Loans qualified using the fully amortized payment calculated at the note rate
Adjustable Rate (ARM) Loans qualified using the higher of the fully indexed rate or the
initial note rate plus the periodic adjustment (2%)
Interest Only Loans qualified at the note rate based on the fully amortizing Principal &
Interest payment during the principal repayment period. Borrow ers w ill not be qualified on
the interest only payment amount.
Monthly housing expense includes the follow ing charges divided by the Borrow ers stable
monthly income:
Monthly principal and interest payment (as per the qualifying rate)
1/12th of the annual hazard insurance premium
1/12th of the annual real estate taxes and assessments
1/12th of the annual flood insurance premium, w hen applicable
1/12th of the annual private mortgage insurance premium (w hen applicable)
Monthly leasehold payments (w hen applicable)
Monthly HOA dues, condominium maintenance fees, monthly assessments (w hen

applicable)
Monthly payment for other secured financing (w hen applicable).
For equity lines of credit (as applicable), the monthly payment used for qualification should be
based on the greater of:
The payment noted on the credit, OR
1% of the maximum current available draw
The DTI ratio includes the monthly housing expenses plus the follow ing charges:
Revolving charges (if no payment is show ing on the credit report, use 5% of the
outstanding balance)
Installment debt w ith 10 or more remaining payments if the inclusion of this installment debt
w ould cause the Borrow ers DTI to be > 5% over the program allow ance, up to a max DTI
of 60%, additional compensating factors and/or documentation w ould be required to offset
the risk
Real estate loans
Real estate net rental losses from all investment properties ow ned
Automobile loans
Automobile leases (must be included in the DTI even if few er than 10 payments remain)
Net rental losses from real estate ow ned
Alimony, child support, or maintenance payments w ith 10 or more remaining payments
Joint obligations, if applicable, for divorced or separated Borrow ers
Student loans, w hether deferred, in forebearance, or in repayment (not deferred) , 1% of

the unpaid balance or the actual documented payment
Monthly paid charge accounts, such as an Amex account, payment w ill not be included but
outstanding balance amount w ill be netted out of available assets
For maximum DTI ratio allow ed w hen underw riting the loan, refer to the HF3 Funding Credit Grade M atrix for
details.
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PAYMENT SHOCK
Payment shock is the percentage that a Borrow ers mortgage/housing payment increases w ith the new loan. One of
the strongest indicators of a Borrow ers ability to repay is his/her past record of handling housing payments. The
percentage of payment shock, even w hen not limited expressly by the Loan Program w ill be analyzed to determine
the likelihood of the Borrow er to pay promptly. Generally, payment shock >150%, may require further review and
additional compensating factors and/or documentation may be required.
SECOND TRUST DEEDS, JUNIOR LIENS, AND SECONDARY

FINANCING
Second trust deeds, junior liens, and secondary financing (subordinate liens) are defined as mortgages having rights
that are secondary to a First Mortgage. These are encumbrances on real estate (for example, a Second Mortgage, a
tax lien or a mechanics lien), w here the priority of the secondary financing is subordinate to that of another recorded
interest in the same property.
This section outlines the requirements for junior liens or secondary financing that is not the subject Loan being sold
to HF3 Funding.

Seller must investigate w hether the Borrow er has applied for any simultaneous loan or subordinate financing,
including one that w ill occur after consummation of the HF3 Funding First Mortgage if the simultaneous loan w ill
cover the closing costs of the First Mortgage. The follow ing rights and restrictions apply to second trust deeds,
junior liens, and secondary financing w hen HF3 Funding is purchasing a First Mortgage w ith non -HF3
Funding secondary financing:
The CLTV ratio of the first and secondary lien must not exceed the limit outlined in the
applicable HF3 Funding program matrix. Refer to the HF3 Funding Loan Program M atrices
for details. The CLTV is calculated by adding the principal balance of the First Mortgage w ith
the current principal balance of the subordinated closed-end second lien or the maximum
available credit line of a subordinated open-end second lien and then dividing the sum by the
Appraised Value of the property.
A copy of the executed second lien note, recorded trust deed, and signed subordination
agreement must be provided to confirm the loan amount, terms, and lien status.
Terms of the subordinate lien must be less than or equal to the term of the First Mortgage.
The subordinate lien must have a minimum remaining term of no less than five years, unless
the financing fully amortizes prior to that time.
The financing must not permit the note holder to call the financing w ithin the first five years
follow ing the loan closing.
The note rate must be at market rates.
The secondary financing must not have a negative amortization feature.
The terms of the note must provide for regular monthly payments of at least the interest due
w ith no provisions for future advances or w rap-around terms.
Monthly payments on the secondary financing must be included in the Borrow ers debt-toincome ratio.
Payments may be graduated or variable, as long as the annual payment adjustment of the
secondary financing does not exceed a 2% interest rate increase.
The subordinate lien must be from an institutional lender.
Home Equity Lines of Credit

Secondary or subordinate financing that is a Home Equity Line of Credit (HELOC) is subject to the follow ing:
The calculation of the CLTV must include the total usable Home Equity Line of Credit.
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For qualification purposes, in calculating the monthly housing payment, use the follow ing:
For an existing subordinate lien, use the total usable line of credit and the interest rate in
effect at the time of application. If there is no balance, then no payment w ill need to be
used.
For a simultaneous Home Equity Line of Credit (originated w ith a new First Mortgage), use
the amount to be draw n at funding. The ATR repayment calculation method for
simultaneous loans must be used.
Second Trust Deeds, Junior Liens, and Secondary Financing Documentation Requirements
The follow ing outlines the documentation requirements for secondary financing and junior liens.
If the secondary financing is a simultaneous closing, then the follow ing items are required:
A copy of the loan approval from the institution providing the secondary financing prior to
closing, AND
A copy of the executed note at closing
If the secondary financing is a subordinate, then the follow ing items are required.
The terms of the current Second Mortgage. If unable to discern from credit, the Seller must
obtain a copy of the terms from the lender
An unsigned copy of the subordination agreement prior to closing, AND
A copy of the executed subordination agreement at closing.
SALES AND FINANCING CONCESSIONS

For purposes of determining the impact of costs paid by the Seller or an interested third-party, distinctions are made
betw een financing concessions and sales concessions.
Financing concessions are considered to be funds originating from an interested party to pay closing costs on a
purchase transaction. These are sometimes referred to as seller-paid closing costs. Allow able financing concessions
include:
Payments in any form that are related to the financing; for example, discount points,
Commitment fees, appraisal fees, and origination fees
Contributions related to the mortgage financing charges w hich traditionally w ould be paid by the
Borrow er, including but not limited to the payment of discount points, loan fees, Commitment
fees and/or origination fees, property taxes, and insurance escrow s
Cost of other items traditionally paid by the Borrow er such as application fees, appraisal fees,
transfer taxes, tax stamps, attorney fees, surveys, non-recurring closing costs and title
insurance, AND
HOA dues are not allow ed to be included in an interested party contribution
Concessions not addressed above or in excess of the allow ed percentage of the purchase price are considered to be
a sales concession.
The Mortgaged Property sales price must be reduced to reflect the amount of any sales concession that exceeds the
limits below . The LTV ratio is calculated using the lesser of the reduced purchase price or Appraised Value.
Financing concessions for primary residences and second homes are limited to the follow ing percentages:
6% of the value for Loans w ith LTV/CLTV ratios less than or equal to 90%
3% of the value for Loans w ith LTV/CLTV ratios greater than 90%
The appraisal must reflect subsidies, contributions, or sales concessions that have an effect on the market value of
the property.
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LIABILITIES
The Borrow ers liabilities and debts include all installment loans, revolving charge accounts, contingent liabilities (cosigned debts), lines of credit, mortgage loans, alimony/child support, student loans, auto leases, and all other ongoing
debts. Seller must verify payments on all simultaneous loans, such as HELOCs . Auto lease payments are included in
the debt-to-income (DTI) ratio regardless of the remaining months indicated on the credit report.
DEBT TO INCOME CALCULATIONS

In addition to the subject mortgage payment, the follow ing debts should be included in the calculation of the debt-toincome ratio (DTI):
Other mortgage payments including principal, interest, property tax, and property insurance. If
the senior lien is an Adjustable Rate Mortgage (ARM), Borrow ers must be qualified at the
greater of the Note rate plus 2%* or the fully indexed rate using the fully amortizing principal
and interest payment. Private mortgage insurance premiums and Homeow ners Association
dues or ground rents should be included, if applicable.
Monthly payment reflected on credit report can be used to calculate the DTI. If no monthly
payment is stated on the credit report or other form of verification, 5% of the outstanding
balance on the account must be used.
Outstanding installment debts w ith 10 months or less remaining and debts to be paid off at
closing do not have to be calculated in the DTI.
Auto leases must alw ays be included in the DTI, regardless of the number of payments
remaining.
Co-signed debts w ill not be included in the DTI if sufficient proof is provided that the primary debtor makes the
payments. Sufficient proof consists of at least six months canceled checks from the primary debtor evidencing the
proper payment amount and payable to the proper creditor.
INSTALLMENT DEBT
Installment debt is the monthly obligation on accounts w ith fixed payments and terms. Installment debts include car
loans, student loans, etc. The monthly payment may be excluded from the DTI calculation if there are less than 10
monthly payments remaining to pay the debt in full and the payment is not substantial. If there are less than 10
payments remaining and the payment is substantial (exceeds 5% of the Borrow ers qualifying income), the debt must
be included in the Borrow ers DTI calculation.
A payment is defined as substantial w hen it equals or exceeds 5% of the Borrow ers qualifying income. These
payments must be included in the Borrow ers DTI calculation. Installment debts show ing the term of the debt to be 10
months or less at closing w ill not be considered in the debt-to-income (DTI) ratio. Paying dow n of installment debts
to 10 payments or less to qualify is not allow ed. The installment debt must be paid off if the payment is excluded
from the Borrow ers DTI calculation.
Installment debt that is paid in full prior to or at closing may be excluded from the DTI provided the HUD-1 reflects the
payoff.
If an installment debt payment does not show on a credit report, a credit supplement or loan statement is required.
REVOLVING DEBT
Revolving debt is open-ended debt of w hich the principal balance on an account may vary from month to month. The
minimum required payment as stated on the credit report or current statement should be used in calculating the DTI
unless as noted below . Revolving debt may not be paid dow n for qualification purposes but may be paid off and
closed.
The follow ing debts must be considered as a recurring monthly debt obligation:
The credit report balances suggest that more than 10 payments remain to be paid regardless of
w hether the loan application indicates the debts w ill be paid off at or prior to closing
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The credit report does not show a required minimum payment amount and there is no
supplemental documentation to support a payment of less than 5%. In this situation, an amount
equal to a minimum of $10.00 or 5% of the outstanding balance must be used as the
Borrow ers recurring monthly debt obligation.
If a revolving or open account is to be paid off or paid dow n but not closed, a monthly payment
on the current outstanding balance should be considered as a long-term debt.
ALIMONY/CHILD SUPPORT/SEPARATE MAINTENANCE OBLIGATIONS

Monthly alimony, child support or separate maintenance fees w ith 10 or more payments remaining must be included
in the DTI.
Divorce Debt
Debts opened jointly w ith a former spouse w ill be considered an obligation of the Borrow er unless a legal separation
agreement or divorce decree is provided to prove the former spouse is responsible for the debt, otherw ise it w ill be
counted as Adverse Credit.
NEGATIVE CASH FLOW FROM RENTAL PROPERTY/OTHER REAL ESTATE

OWNED
The tax and insurance expense for all properties ow ned by the Borrow er must be documented and accounted for in
Borrow ers Debt-to-Income ratio. For properties that are rented, the expense may be deducted from rental income.
For properties that do not receive rental income, the tax and insurance expense must be part of the Borrow ers
liabilities.
Real estate net rental losses from all investment properties ow ned must be included in the DTI.
CURRENT PRINCIPAL RESIDENCE PENDING SALE

If the Borrow er's current principal residence is pending sale, but the transaction w ill not close w ith title transfer to the
new ow ner prior to the subject transaction, and the Borrow er is purchasing a new primary residence, the current
PITIA and the proposed PITIA must be used in qualifying the borrow er for the new mortgage loan.
How ever, HF3 Funding w ill not require the current principal residence's PITIA to be used in qualifying the Borrow er
as long as the follow ing documentation is provided:
The executed sales contract for the current residence, and
Confirmation that any financing contingencies have been cleared
BUSINESS DEBTS
Business debts for w hich the Borrow er is personally liable must be included in the debt calculation. This includes
business paid personal debt, unless proof of payment by the business is established. If the account is new , it must be
included in the DTI calculations. These debts may be excluded if a minimum of 12 months of consecutive canceled
checks from the business are provided.
Business debts for w hich the Borrow er is not personally liable w ill not be considered in the Borrow ers total monthly
debt if canceled checks draw n on the business account indicate they have been paid on a regular basis for a
minimum of six months.
UN-REIMBURSED BUSINESS EXPENSES

When evaluating the Borrow ers income, the Seller must consider certain tax deductions (as applicable for income
documentation program requirements) reported on IRS Form 2106 (Employee Business Expenses):
Out-of-pocket, unreimbursed business expenses: These expenses must be deducted from the
borrow ers income.
Actual expenses for a leased automobile, rather than the standard mileage rate. The Seller
must analyze the Actual Expenses section of IRS Form 2106 to determine the amount of the
lease payments, and make sure the lease expense is counted only once in its cash flow
analysis, either as an expense on IRS Form 2106 or as a monthly obligation.
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AUTOMOBILE DPRECIATION
If a borrow er claims a standard mileage deduction, the business miles driven should be multiplied by the
depreciation factor for the appropriate year, and the calculated amount added to the borrow ers cash flow .
If a borrow er claims an actual depreciation expense deduction, the amount the borrow er claimed should be added
to the borrow ers cash flow .
DEBT PAYOFF
If the Borrow er indicates debt w ill be paid at the closing of the new mortgage, HF3 Funding w ill not include the
payment in the DTI ratio. The paid statement(s), canceled check(s), or a settlement statement (HUD-1) evidencing
payment must be submitted in the Loan File. Paying dow n of installment debts to less than 10 payments to qualify is
not allow ed.
CO-SIGNED DEBT / CONTINGENT LIABILITIES

If the Borrow er is a co-signer or guarantor on any loans, those liabilities must be indicated on the application. Debts
that have been co-signed by the Borrow er may be excluded from the Borrow ers DTI under the follow ing scenarios. In
every situation, the debt must be paid current and as agreed for at least the previous 12 months.
Satisfactory documentation is provided to prove that the primary debtor has been making the
payments on a regular basis. At least 12 consecutive months of canceled checks from the
primary debtor are required
Property resultant from buyout of former co-ow ner (i.e., divorce). The Loan File must include
evidence of transfer of ow nership
Mortgage assumed by third-party w ithout a release of liability. A copy of the formal assumption
agreement and evidence of transfer of ow nership should be in the Loan File. Do not include
payment history and assumption does not need to release the Borrow er from liability
Court ordered debts - a copy of the court order assigning the debt to another party is required
Co-signed accounts paid by a third-party, w ith 12 months of cancelled checks evidencing

payment by the third-party
If these requirements cannot be satisfied, then the liability must be indicated on the application and considered as a
monthly debt payment for mortgage eligibility purposes. Co-signed debts must be paid satisfactorily (0x30), or they
w ill be counted as Adverse Credit.
RETIREMENT / SAVINGS PLAN LOANS

Repayment for loans against a financial asset such as retirement, savings plan, or insurance policy may be excluded
from the DTI provided the Borrow er can repay the debt by liquidating the asset. The value of the asset must be
reduced by the amount of the debt w hen calculating total assets and/or reserves.
STUDENT LOANS
Deferred student loans are included in the DTI as a long-term obligation. Student loans can be counted in credit
depth as long as they are in repayment and not being deferred. Student loans listed as delinquent must be brought
current.
If no payment is show n on the credit report for a student loan payment, then proof of payment should be provided by
student loan lender. If payment is unable to be determined, use 2% of the original loan amount.
If a student loan is charged off or in collection, the follow ing must be provided:
A copy of repayment agreement and six months cancelled checks
OR
If not in repayment evidence it w ont affect title
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INCOME
This section describes Borrow er income. Income analysis is a key element of the underw riting process and is used to
determine w hether the Borrow ers ability to repay is reasonable.
Income documentation provided by the Borrow er must be review ed and adequately verified. Additionally, the income
must be considered stable, likely to continue, and sufficient to enable the Borrow er to repay the debt in a timely
manner. Material inconsistencies must be investigated.
INCOME VERIFICATION REQUIREMENTS

The Borrow er must provide evidence of tw o years stable income derived from employment or other acceptable and
verifiable sources. A complete 2 year history of employment and/or source of income must be stated on the 1003
application. There must also be a reasonable expectation that the income w ill continue in the foreseeable future and
that such income must be sufficient for repaying the proposed monthly debts. Employment across different jobs in the
same or related line of w ork is acceptable. Borrow ers w ho have made job changes for advancement and maintained
a stable earning capacity, as w ell as Borrow ers w ith demonstrated job stability w ill receive favorable consideration.
Employment gaps that extend beyond 30 days require an explanation letter from the Borrow er.
Paystubs and salary vouchers must be computer-generated or typed, not handw ritten. In
addition, the documents must clearly identify the employer, the Borrow er as an employee, show
the time period covered, and provide year-to-date earnings.
Income derived from a family-ow ned business must be documented by the Borrow ers federal
tax returns for the prior tw o years, in addition to a verification of employment.
A Borrow er w ho finished school or military service and w ho does not meet the length of
employment required must provide a copy of his/her diploma or discharge papers. The potential
for future income based on job opportunities afforded such individuals, due to their extensive
training, may be considered favorable for qualification purposes.
For loan amount and LTV/CLTV limitations, and for income type eligibility for documentation types, refer to the
HF3 Funding Loan Program M atrices.
Significant Increases/Decreases in Income (Trending)

If the Borrow ers monthly income is stable or increasing, the amount of income should be averaged based on the
required number of years of documentation required for the program. A significant increase or decrease is generally
considered to be anything greater than 25%.
Increase in Income: When the Borrow er has experienced a significant increase in income, the higher income may
not be used to qualify the Borrow er, unless there is sufficient documentation 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).
When the Borrow ers current income decreased from the prior year, the low er income amount should be used for
qualifying purposes instead of the averaged income.
Decrease in Income : When the Borrow er has experienced a significant decrease in income, the income cannot be
averaged using a previous higher level unless there is documentation of a one-time occurrence (e.g., injury) that
prevented the Borrow er from w orking or earning full income for a period of time and proof that the Borrow er is back to
the income amount that they previously earned.
Disposable/Residual Income
Borrow ers must have residual income to maintain housing/living expenses. To calculate the Borrow ers residual
income, subtract the total monthly expenses from the total monthly income. For residual income requirement, refer
to the HF3 Funding Loan Program M atrices.
Verbal Verification of Employment (VVOE)

A Verbal Verification of Employment (VVOE) must be performed f or each Loan submitted to HF3 Funding for
purchase. Written evidence of phone contact w ith the Borrow ers employers, completed w ithin 10 calendar days prior
to the Note Date or prior to delivery to HF3 Funding, The verification must identify the name of the person w ho
made the contact, identify the employer and the name and title of the person contacted, show the date of contact,
the
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source of the phone number and confirm that no change in employment status has occurred, regardless of
documentation and that the Borrow er is currently employed.
Verbal Verification of Em ployment for Salaried, Hourly and Commission Income:
A verbal verification must be performed w ithin 10 business days prior to the Note Date or prior
to delivery to HF3 Funding.
The phone number of the employer should be obtained independently and not taken from
the application
Employer should confirm the Borrow ers current employment status and title.
Third-party verification sources may be used
The w ritten VVOE Form should include:
Date of the verification
Source used to obtain the phone number (i.e. internet).
Name and title of the person at the employers office w ho confirmed the employment
Name and title of the person w ho completed the VVOE
Verbal Verification of Employment for Self-Em ployed:
Verbal Verification of Employment (VVOE) for Self -Employed Borrow ers must verify the
existence of the Borrow ers business w ithin 30 calendar days prior to the Note Date or for
escrow states, the Loan funding date, or prior to delivery to HF3 Funding.
This verification can be made w ith a third party, such as a CPA, regulatory agency or applicable
licensing bureau, or by verifying the phone listing and address for the business using the
internet or directory assistance. It is also nec essary to verify the phone listing and address for
the business.
The w ritten VVOE Form should include:
Date of the verification
Source of the verification of the phone listing and the address of the business ( i.e. internet)
Name and title of the CPA or details of other source used to verify the business; and
Name and title of the person w ho completed the VVOE
INCOME TYPES
The Borrow er must be employed as a salary/w age earner, be self -employed, or have a source of verifiable nonemployment income. All income sources must be show n on the application and verified for each applicant.
Salary/Wage Earner Income

A salary/w age earner derives income through employment at a business w here he or she has little or no ow nership
interest. A tw o-year employment history must be established for each Borrow er. Compensation may be based on an
hourly, w eekly, bi-w eekly, semi-monthly or monthly basis.
Bonus, commission, overtime, and gratuity income is compensation in addition to the Borrow ers straight salary or
hourly w age. HF3 Funding w ill accept stable bonus, commission, overtime, or gratuity income that has been
received for tw o years and verified according to HF3 Funding program guidelines . Borrow ers must have a tw o
year history of earning bonus, commission, overtime or gratuity income in order for the income to be included for
qualification purposes.
Self-Employed Income
Self-Employed Borrow ers must be carefully evaluated because their financial ability to repay debts is directly related
to the success of the company and to the stable income and expenses of the business.
Self-Employed Borrow ers are identified as follow s:
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Borrow ers w ho derive 25% or more of their primary income from a business in w hich they hold
a controlling interest.
Borrow ers w ho do not ow n a business but w ho derive their primary income from commissions,
consultation fees, interest, capital gains, gratuities, or real estate rents.
Borrow ers w ho rely on investments for income such as interest, dividends, capital gains, or real
estate.
At least tw o consecutive years of self-employment and evidence of ongoing stable income are required. Business
income must be reported as a sole proprietorship, partnership, or corporation.
Evidence of Self-Em ployment
Documentation to support the Borrow ers self -employment in a legitimate and active business covering the
most recent tw o years must be obtained.
One of the follow ing may be used for verification of the business:
A copy of the business license covering the most recent tw o years.
A copy of the business license for the current business year and a verbal verification through the
issuing municipality confirming the business is current and active and has been in existence for tw o
full years.
Alternative documentation may be used only if a license is not required for the particular type of
business. They include:
Dunn and Bradstreet report
Articles of incorporation
Fictitious business name filing
Title registration
Liability insurance or surety bond
Letter from a certified public accountant (CPA)
Letters of reference (acceptable for small businesses only)
For Borrow ers w ho operate a business from the Mortgaged Property (such as a home day -care facility, a
bed and breakfast, or an auto repair shop), additional property type restrictions exist. For further details,
refer to the Property Type section in this Guide.
Self-Em ployed Income Calculation
Income documentation should be review ed for increasing or decreasing trends by comparing the current
income and the income f rom the prior year. When calculating the Borrow ers self -employed income, use the
Fannie Mae Self-Employed Income Analysis Form 1084A or 1084B.
Sole Proprietorship Income
Self-employed income w ill be determined by averaging the income from the tax returns , including all
schedules and attachments (Schedule C). Income from the year-to-date Profit and Loss Statement (P&L)
may be included in the income calculation if consistent w ith earnings from previous years.
Deductible expenses for the business that are attributable to non-cash expenses are depreciation, depletion,
amortization, or non-operating losses (NOL) that have been carried forw ard (loss taken in previous years
that is taken as a deduction to taxes). These non-cash expenses may be added back to the net income/loss
for qualifying purposes and are defined as follow s:
Depreciation is a deduction for the decline in value of an asset such as real or personal property
and is not an out-of-pocket expense.
Depletion is a deduction for the useful life of a natural resource and is not an out-of-pocket
expense.
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Amortization of an asset spreads the assets cost over the assets useful life. It may include start-up
costs. Examples are a copyright or a patent. Amortization is not an out-of -pocket expense.
Non-operating loss (NOL) is a business loss that occurred prior to the current tax year. The full
loss is not recognized in the year it occurred, but is spread over future years and is not an outof -pocket expense after the year it occurred.
A partnership is formed w hen tw o or more individuals form a business and share profits, losses, and
responsibility for running the business. The partnership does not pay the taxes. The income/loss is passed
through to the partners based on the percentage of capital ow nership and is reported on a K-1.
Partnership cash flow is determined by analyzing the 1065 tax return and giving credit for ordinary income,
depreciation, and depletion. Amortization or casualty loss deductions listed under other deductions may be
added to the total. Discretionary losses w ill be excluded from the cash flow analysis if the business is a
limited partnership and the Borrow er provides a copy of the partnership agreement stating that all
subsequent contributions are voluntary.
Corporate Income
A corporation is a state-chartered business that is ow ned by stockholders. Stockholders are not personally
liable for the debts of the corporation. Although legal control of the corporation rests w ith its stockholders,
they are not responsible for the day-to-day operations of the business, as they delegate that responsibility to
a board of directors and officers of the company.
Corporations must file corporate tax returns (Form 1120) to report income and losses. Officers w ho are
principals of the corporation generally report their income on a W-2. Income may be determined by using an
average of the Borrow ers earnings for the past tw o years. Additionally, business tax returns must be
analyzed to assess the likelihood of continued personal income to the Borrow er.
Corporate Income Analysis
To calculate corporate income, total tax must be deducted from taxable income, and factors such as
depreciation, depletion, or net operating loss (NOL) deductions listed on the return are added back. Other
deductions, including amortization and casualty losses, may also be added back.
Retained earnings in the business are not recognized as cash flow to the Borrow er or to the company.
Income from the corporation is recognized as income to the Borrow er if he or she is the sole and full ow ner,
and if the w ithdraw al of funds w ill have no effect on the corporations continued grow th.
S-Corporation
An S-corporation operates like a standard corporation; how ever, any profit or loss from the company is
passed to the ow ners through Schedule E of the 1040s. Stockholders are taxed at individual tax rates for
each proportionate share of ow nership. Income for an ow ner that comes from w ages is declared on the
individuals tax return.
S- corporation K-1 income is determined by giving credit for any guaranteed payments or salary and property
distributions (including cash) made to the Borrow er.
When analyzing Form 1120S, only the Borrow ers share of income or loss adjustment should be used to
calculate income. The Borrow ers share is based on his or her percentage of stock ow nership as reported on
the Schedule K-1. Depreciation, depletion, and amortization or casualty loss may be added back to income.
Other non-recurring income/loss should be subtracted/added back.
Retained earnings in the business are not recognized as personal cash flow to the Borrow er or to the
company.
Allowable Age of Federal Income Tax Returns

The most recent years tax return is defined as the last return scheduled to have filed w ith the IRS.
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If Todays Date is:
Then the Most Recent Years Tax

Return w ould be:
February 15, 2015
2013
April 15, 2015
2014
December 15. 2015
2014
For business tax returns, if the Borrow ers business uses a fiscal year (a year ending on the last day of
any month except December), the Seller may adjust the dates in the above chart to determine w hat year(s)
of business tax returns are required.
In all cases, the tax returns for the current year are required as of June 30, rather than October 15th.
If the Borrow er has filed an extension and does not file by June 30th, the Loan is ineligible.
Under the Alt Doc- 12 Month Verification (Self-Em ployed only) program, the Borrow er must
submit the current years required tax returns. Extensions are not allow ed.
Application Date
Disbursement
Date
Documentation Required
October 15th
(current year
m inus 1) to April
14th, current year
October 15th
(current year
minus 1) to April
14th, current year
The most recent years tax return is required. The use

of Tax Extension (IRS Form 4868) is not permitted.
April 15, current

year to June 30,
current year
The previous years tax return (the return date is April

of the current year)
If the Borrow er has files their tax return for the previous
year, the Seller must obtain copies of that return. If the
Borrow er has not filed their tax returns, the Seller must
obtain copies of the tax returns for the prior tw o years.
HF3 Funding requires tax transcripts on all Borrow ers for
the number of years required to verify income.
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July 1 current year

to December 31,
current year
January 1, (current
year plus 1) to April
14th, (current year
plus 1)
The Seller must obtain:
The most recent years tax return, OR all of the

follow ing:
A copy of IRS Form 4868 (Application for

automatic Extension of Time to file U.S Individual
Income Tax Return) filed w ith the IRS
The Seller must review the total tax liability

reported on IRS Form 4868 and compare it w ith
the Borrow ers tax liability from the previous tw o
years as a measure of income source stability and
continuance.
An estimated tax liability that is inconsistent w ith

previous years may make it necessary to require
the current returns in order to proceed.
IRS Form 4506-T transcripts confirming No

Transcripts Available for the applicable tax year,
AND
Tax Returns for the prior tw o years.
The most recent years tax return is required. The use of a

Tax Extension (IRS Form 4868) is not permitted.
Examples:
If the 2014 self-employed income has increased from 2013, is being used for qualifying purposes and the
Borrow er has filed an extension for the 2014 tax returns:
The Seller must obtain the 2013 and 2012 tax returns and a year-to-date Profit and
Loss Statement (audited)
If the 2014 self-employed income has decreased from 2013, is being used for qualifying purposes and the
Borrow er has filed an extension for the 2014 tax returns:
The Seller must obtain the 2013 and 2012 tax returns and a year-to-date Profit and
Loss Statement (Unaudited)
Borrow ers Not Required to File Tax Returns w ith the IRS
There are some instances w here a Borrow er w as not required to file a tax return for the prior year. Acceptable
examples may include:
New ly employed Borrow er w ho w as a full-time student the most recent tax year
School transcripts are required for documentation
Borrow er w hose income level w as below the minimum reporting standards as required by
the IRS
Examples include Borrow ers w ho receive disability, Social Security, or pension

income and indicate that they are not required to file tax returns
Active duty military that meet all the requirements to be granted an extension by IRS in
accordance w ith IRS Publication 3-Armed Forces Tax Guide.
In addition to the specific requirements noted above, the Loan must be satisfactorily documented to:
Support the income used for qualifying
Document the reason a tax transcript is not available
Include a tax transcript indication No Record Found or IRS Verification of Non-Filing Form
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Amended Tax Returns

Tax Returns that are amended and filed by the Borrow er w ith the IRS are acceptable in the follow ing circumstances:
Tax Return Amendment filed prior to the Loan application date
Tax returns filed prior to application are acceptable. The original filed return, the amended return
and a letter of explanation from the Borrow er (or Borrow ers accountant) are required.
If the file w as amended 60 days or less prior to the application, evidence of payment must also be
provided.
Tax Return Amendment filed after the Loan application date
A letter of explanation regarding the reason for the re-file
Evidence of filing
Evidence of payment or the evidence of the ability to pay the tax
Borrow er does not require use of amended income (if increased) for qualification
Under no circumstances are amended returns acceptable if the Loan has already been review ed and/or deemed
ineligible for purchase by HF3 Funding.
Bank Statement Income

For qualifying information and eligibility for use of Bank Statement Income, please refer to the Loan Programs
chapter of this guide.
Fixed Income
HF3 Funding defines fixed income as income derived from sources such as social security and supplemental
(dependents) social security, temporary or permanent disability, VA disability, retirement/pension, or alimony/child
support. If a type of fixed income is used to qualify the Borrow er, proof of income and probability of continuance for at
least three years must be provided. Some forms of fixed income can be non-taxable. Verified non-taxable income w ill
be given special consideration if it is determined that such income w ill continue for three years and that it w ill remain
untaxed.
Acceptable forms of non-taxable income include:
Certain military allow ances
Disability retirement payments
Child support payments
Social security distributions
Non-taxable public assistance payments
Workers compensation benefits
Non-taxable income that is not allow ed to be grossed up includes:
Foreign earned income
Foster care income
Housing allow ance
Fixed Income Calculation

In order to evaluate a Borrow er w ith non-taxable income in the same manner as a Borrow er w ho has a
higher taxable income, the non-taxable income may be adjusted or grossed-up by 125%, provided that:
Only the net income w ill be used for determining disposable/residual income; Medicare and
insurance payments are to be omitted.
The Borrow er clearly benefits as a result of income being grossed-up to qualify.

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The Borrow ers net income (before gross-up) is sufficient to pay all debts.
Rental Income
Rental income may be used in qualifying a Borrow er for a loan. All ow ner occupied tw o-to-four unit properties and
all investment properties require a rental income analysis to determine positive or negative cash flow . Rental
income on a second home is not allow ed. One of the follow ing is required to support leases or rental income on
the application:
Rent Survey Form 1007 and Operating Income Statement (FNMA Form 216)
Personal 1040s w ith Schedule E
Rental Income Calculation

Income received from rental properties w ill be calculated using one of the follow ing methods:
Ow ned at Least One Year. For properties ow ned for one or more tax years, cash flow can
be calculated in one of the follow ing manners:
75% of actual rents, established by copies of signed leases,

OR
Net income from 1040 tax return Schedule E, plus depreciation
Ow ned Less Than One Year. For properties ow ned less than one tax year, cash flow must
be based on 75% of the lesser of actual or market rents
Actual rents must be documented w ith copies of the signed leases. Net cash flow for properties, other
than the subject property, w ill be calculated using Schedule E from the Borrow ers tax returns for the
past tw o years.
A positive cash flow w ill be added to gross income; negative cash flow w ill be added to total liabilities and
used to qualify the Borrow er.
Room rents are an ineligible source of income. If any of the units in a property are receiving
room rents than none of the rental income received for the property may be used as qualifying
income.
Loans for investment properties that generate a negative cash flow w ill be closely scrutinized and must be
appropriate for the Borrow ers circumstances.
Rental income received from a family member may not be used as income w ithout copies of a minimum of
six months cancelled rent checks provided by the tenant family member.
Rental Income from Departing Residence:
If the Borrow er's current principal residence is going to be rented, the follow ing documentation must be provided
or the entire PITIA w ill be included in the Borrow ers qualifying ratios. The rental amount must be documented w
ith either of the follow ing:
If a fully executed lease is not available:
Rent Survey from the appraiser
75% of the rental amount w ill be used
If an executed lease is available:
Fully executed lease (must be non-arms length)

Copy of cancelled check for the first months rent
Copy of cancelled check for the security deposit
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Interest and Dividend Income

Interest and dividend income may be used if verified through tax returns as stable for tw o years and if additional
verification is obtained as proof that the funds are still on deposit in the financial institution or investment portfolio
account.
Income must be proportionately reduced if funds are used to close in a purchase money transaction.
Capital Gain Income

Capital gain or loss that is a one-time transaction w ill not be considered as a gain or loss in determining the income
available to the Borrow er. How ever, if the Borrow ers business has a constant turnover of assets that produce
recurring gains or losses, the capital gain or loss may be considered in line w ith the follow ing:
An average of the gains or losses for the last tw o years as disclosed on the Borrow ers
Form 1040 (Schedule D) w ill to be used to calculate the income.
When the income from this source represents a substantial portion of the Borrow ers income,
the Borrow ers tax returns for the past tw o years must be review ed (regardless of
documentation type) to determine a more accurate estimate of average earnings. For example,
an asset sold during the year might be an income-producing asset, w hich could result in a
reduction in future income.
Borrow ers must document an asset base in order to use capital gain or loss on an ongoing basis.
Farm Income
Net farm income reported on the Borrow ers income tax return (Schedule F) is eligible w ith the addition of
depreciation, pension, amortization, and depletion.
Military Income
Income verified for clothing allow ance, quarters allow ance, hardship or hazard pay may be included as stable
income if there is a likelihood of continuance. BAH and BAS allow ances may be grossed up due to the nontaxable
status.
Other allow ances may be grossed up if documentation is provided evidencing it is nontaxable.
Employed by a Relative
Income derived from a family-ow ned business or from a relative must be Full or Alt documentation. Reduced income
documentation types are not eligible.
Trust Income
Trust income may only be derived from an irrevocable trust or a revocable trust w here a Borrow er w ho is the
beneficiary has also established the trust. In order to verify trust income, a copy must be provided of the original
Trust Agreement show ing the length of time and amount of income that w ill be received. The income must
continue for at least three (3) years after closing. A Borrow ers trust income may be taxed at a low er rate or it may
be part of a partnership that w rites off losses resulting in no tax liability.
A complete copy of trust agreement or certification letter from bank trust administrator outlining total income paid to
the Borrow er, method of payment, duration of trust and any non-taxable portion is required. Additionally, personal
tax returns w ith all schedules, K-1s, or 1041s or other documentation per program guidelines are required.
Lump sum distributions made before loan closing may be used for dow n payment or closing costs if they are
verified by a copy of the check or the Trustees letter that show s the distribution amount. If a distribution w as made
that reduces the Trust income, the reduction must be taken into consideration in computing the income.
Annuity Income
Income from a retirement annuity may be used for qualification w ith proper documentation. A statement from the
financial institution managing the annuity is required to verify the balance in the annuity, the monthly payments and
the term of the payments to be distributed. Payments to the borrow er must continue for a minimum of three
years.
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Note Income
Ongoing note income is eligible for loan qualification. A copy of the note outlining the amount and terms of repayment
must be provided. The repayment period must extend at least three years from the date of the new loan.
The Seller must document the regular receipt to the income for the most recent tw elve months. Payments on a note
executed w ithin the past tw elve months, regardless of the duration, may not be used as stable income.
Inherited and Guaranteed Income

Ongoing income received from inheritance, prize earnings, or lottery w innings are eligible for loan qualification.
Documentation must verify that the income w ill continue for at least three years.
Other Income
The follow ing income types w ill be considered provided that all of the specific stipulations outlined below are met,
and the income is fully documented. Furthermore, probability of income continuance for at least three years must
be
verified.
Second Job Income. Second job income w ill be considered if income is based on a tw o-year average.
Seasonal Em ployment Income: Seasonal employment income, such as farm labor or construction
labor, w ill be considered if it is properly documented and consistent for a minimum of tw o years.
Seasonal employment income and unemployment income must be combined in order to calculate the
average annual income.
Unemployment Income: Unemployment Income may also be used if documentation show s that it
has been received for a specified length of time (usually a six month period) during the previous tw o
years.
Housing Allow ance: Housing allow ance may be used as income for members of the military or clergy
only, provided that the income w ill continue for a minimum of tw o years, and the Borrow er has a history
of receiving the income.
Trailing or Relocating Co-Borrow ers Income: A trailing or relocating Co-Borrow er is one w ho

trails behind the primary Borrow er during relocation. A trailing or relocating Co-Borrow ers income is
the amount of income previously received by the trailing or relocating Co-Borrow er from employment at
the previous location. The use of a trailing or relocating Co-Borrow ers income for loan qualification w ill
be done on a case-by-case basis, and the follow ing apply:
The transaction must be a full documentation purchase that is secured by an ow ner

occupied primary residence.
The Primary Borrow er must be relocating w ith the same employer.
The trailing or relocating Co-Borrow er must be a spouse, domestic partner, or future spouse
of the Primary Borrow er.
The Primary Borrow er and the trailing or relocating Co-Borrow er must have verified cash
reserves (or other verified assets that are easily converted to cash) equal to six months
of payments for the mortgage and all other recurring debt obligations.
The trailing or relocating Co-Borrow er must have been employed as a salaried employee in the
same profession for the last tw o years and must provide documentation.
As long as it can be determined and documented that a reasonable employment market exists
for positions that are the same as, or similar to, the trailing or relocating Co-Borrow ers
previous position, HF3 Funding may consider 70% of the trailing or relocating Co-Borrow ers
documented income from his or her previous employment as anticipated income for future
employment. This income may be used for loan qualification.
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Ineligible Income
The follow ing income types are ineligible:
Foreign Income
Contributions or support from family members (other than alimony/child support)
Deferred income not presently available
Educational benefits
Illegal income
One-time capital gains (continuing capital gains is an acceptable source of income)
Projected income
Refund of federal or state income tax
Rental income on a second home or an ineligible second unit
Reimbursable income
Gambling w innings
Automobile allow ances this is used to offset the auto payment only
Per diem income
Unverified sources
FULL DOCUMENTATION
HF3 Funding w ill accept these types of Full Documentation (Full Doc) w ith a verified tw o-year history of receipt.
Salary/Wage Earner Full Documentation Requirements

One of tw o methods must be used to provide full income documentation:
Pay stubs for the most recent 30-day period show ing year-to-date income and tw o years W2 forms as follow s:
If the Borrow er has had different employers over the past tw o years, W-2 forms for the
past tw o years are required.
If the bonus or commission income represents 25% or more of the Borrow ers income, tw o
years of personal tax returns may be required
Personal tax returns for the past tw o years, including all schedules.
Signed and executed 4506-T
Verbal Verification of Em ployment:
A verbal verification of employment is required w ithin 5 days of the loan closing.
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Self-Employed Full Documentation Requirements

Documentation includes the follow ing:
Tw o years of personal tax returns, w ith all schedules
If the borrow er has 25% or more ow nership interest in a Partnership, S-Corp, or Corporation,
business tax returns for the past tw o years including all schedules must be provided.
For all self-employed borrow ers, if more than 120 days has lapsed since filing the latest
Schedule C or business tax return, a dated year-to-date profit and loss (P&L) statement is
required.
A Certified Public Accountant (CPA) letter
A signed and executed 4506T
Verbal Verification of Em ployment:
A verbal verification of employment is required w ithin 5 days of the loan closing.
Alternative Documentation Asset Utilization Requirements:

Please refer to Chapter Six, Loan Programs for specifics regarding this income documentation type and program
requirements.
Alternative Documentation Asset Qualifier Requirements:

requirements.
Alternative Documentation Bank Statements (24-Month):

requirements.
Alternative Documentation - Salary/Wage Earner Requirements:

Alternative documentation may be used to document qualifying income for w age earners w ho have been w ith their
current employer for the past tw o years. The follow ing documentation is required:
Pay stubs for the most recent 30-day period show ing year-to-date income and one years W-2 forms
If the Borrow er earns over 25% of their income from self -employment, commission, bonus, or tip
sources, tw o years of personal tax returns may be required (see Self-Employed Reduced
Documentation Requirements section below )
Signed and executed 4506-T
If the Borrow er has been employed less than tw o years w ith the current employer, the Borrow er is ineligible. W-2
form(s) from the prior year w ill also be required.
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REDUCED DOCUMENTATION
HF3 Funding w ill accept these types of Reduced Documentation (Reduced Doc) w ith a verified, one-year history of
receipt. Anything less than a 12-month history of receipt is not allow ed. Verification of tw o years of employment
history is required. The income must be reasonable for the profession and experience level of the Borrow er.
Reduced Bank Statements (12-Month):

requirements.
Reduced Documentation - Self-Employed Only Requirements
Personal tax returns for the past one year, including all schedules in addition to the follow ing:
One year business tax returns, w ith all schedules. If more than 120 days has lapsed since filing,
a signed and dated year-to-date profit and loss (P&L) statement is required.
If the Borrow er has 25% or more ow nership interest in an S-corp., business tax returns for the
past one year including all schedules must be provided for the S-corp.
Proof of the existence of the business for tw o years. Acceptable documentation includes a copy
of the business license, business credit report, or a certified public accountant (CPA) letter.
INELIGIBLE INCOME DOCUMENTATION TYPES

No Ratio, NINA, Stated Income, and No Doc income documentation types are not allow ed.
ASSETS
The Seller must determine and provide evidence that the Borrow er has sufficient cash to pay the dow n payment,
prepaid items, financing cost, and closing costs, along w ith adequate cash reserves as the documentation type or
program requires. When the Borrow er w ill be paying off debts, adequate funds should be documented to complete
the debt payoff, in addition to the funds required to close the transaction and any required cash reserves. For details
on a specific programs asset verification requirements, refer to HF3 Funding Loan Program Matrices.
The financial strength of the Borrow er, including accumulation of verifiable assets, is a strong indication of
creditw orthiness. An established pattern of savings demonstrates skill in financial management. Evidence that the
savings are liquid also strengthens the loan transaction as these funds are readily available to repay debt obligations,
pay unexpected expenses and provide protection against short-term interruption of income.
HF3 Funding encourages the Seller to verify sources of liquid assets beyond the amount needed to meet the
requirement of the transaction so that, if necessary, these assets may be considered as a compensating factor w hen
the loan is review ed.
REQUIREMENTS AND GUIDELINES
Assets and reserves must be sourced and seasoned for at least 60 days
All assets need to be deposited in U.S. financial institutions
If Borrow er is not of retirement age, the Borrow er must document that they have unrestricted
access to all retirement-based funds, including funds used for closing costs, dow n payments
and reserves
Large disparities betw een the current balance and the opening balances may require additional
verification or documentation
Large or irregular deposits must be explained and may require further documentation.
A large deposit is considered any amount that exceeds 50% of the Borrow ers gross
monthly income.
A signed letter of explanation from the Borrow er is required and must sufficiently explain
and source the funds
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Documentation supporting the source of the funds may be required
Gift funds may not be used to meet the reserve requirements
Proceeds from a Cash-out Refinance on the Mortgaged Property may not be used to meet
reserve requirements.
ASSET DOCUMENTATION
The Loan File must disclose all sources of funds to close, unless it is not required by the income documentation
program. Assets must be sourced and seasoned for 60 days and may be verified w ith the follow ing documentation:
Direct, w ritten verification of deposit (VOD), completed by the depository. In cases w here the
Borrow er has a joint account w ith someone other than the Co-Borrow er(s), the VOD must
clearly show the Borrow er has authorized access to all the funds. The VOD must cover a
minimum of 60 consecutive days.
Tw o months current and consecutive account statements from each bank, brokerage, mutual
fund account, or investment portfolio covering a minimum of 60 consecutive days.
Account statements must include the follow ing information:
Borrow er as the account holder
Account number
Time period covered
Current balance
Statement date
Name of the depository or investment institution
The Borrow er must explain any recent large deposits, new ly opened accounts (w ithin the last
90 days), or account balances that are considerably greater than the average balance over the
previous few months. Any indications of borrow ed funds must be investigated.
A w ritten explanation of the source of funds from the Borrow er must be obtained and the
source of funds verified.
MINIMUM DOWN PAYMENT

HF3 Funding requires the Borrow er to make a minimum dow n payment of 5% from his or her ow n funds. The
balance must be paid from cash, other equity, gift funds, or secondary financing. At LTVs of 80% or less, the full
dow n payment may come from a gift w hen no secondary financing exists. In this instance, closing costs may also be
in the form of a gift. The Loan File should clearly state the source of funds for the dow n payment and closing costs.
EARNEST MONEY DEPOSITS

Earnest money deposits are considered part of the dow n payment. The source of the earnest money deposit(s) must
be verified using the follow ing:
Copy of the Borrow ers cancelled check and tw o months bank statements, up to and including
the date the check cleared, to evidence a sufficient average balance to support the amount of
the earnest money deposit.
Any large deposit to the account must be addressed in w riting w ith supporting documentation.
Verification that there are sufficient funds on deposit to cover the earnest money deposit and
any other required funds to close.
The canceled check or bank statement and the deposit receipt must agree w ith the Purchase
Agreement.
If additional earnest money deposits are made, an amendment to the original Purchase
Agreement must be provided
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AGE OF ASSET DOCUMENTATION

The verification of assets, including the source of funds, may not be greater than 90 days old at the time of closing. If
the funds are required for closing, then the most recent account statement(s) at the time of the validation w ill be
required. In the event that the Disbursement Date causes the Borrow ers verification of assets to be greater than 90
days old, HF3 reserves the right to request updated credit, asset, and/or income documentation. Disbursement Date
is the day on w hich the loan closes.
RESERVE REQUIREMENTS
When reserves are required by a HF3 Funding program and documentation type, the number of months re quired w
ill be indicated in the HF3 Funding Loan Program Matrices. To calculate the dollar amount of the required
reserves, multiply the Borrow ers new PITIA payment by the number of months indicated. Reserves are defined as
assets remaining, from dow n payment and closing costs, exclusive of cash-out received from the transaction.
Reserves must be verified, sourced, and seasoned for 60 days.
PITIA is defined as:
Principal and interest
Hazard, flood, mortgage insurance premiums (as applicable)
Real estate taxes
Ground rent
Special assessments
Association dues
Any subordinate financing payments on mortgages secured by the Mortgaged Property
INELIGIBLE ASSETS AND SOURCES OF FUNDS

The follow ing are ineligible assets and sources of funds:
Stocks held by privately held corporations
Stock options
Non-vested restricted stock
Windfall assets (i.e., inherited funds, proceeds from a law suit, lottery w innings)
Cash-Out Refinance proceeds
Non-financial assets (collectibles, stamps, coins, artw ork, etc.) unless liquidated
Assets titled in an irrevocable trust
Custodial accounts
Escrow accounts
529 Accounts
Accounts pledged as collateral on another loan
Below investment grade corporate and municipal bonds
Cash value of life insurance
Foreign assets.
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ACCEPTABLE ASSETS AND SOURCES OF FUNDS

Checking/Savings/Deposit Accounts
Funds held in checking, savings, certificates of deposit, money market and other deposit accounts are acceptable
sources of funds provided verification of deposit (VOD) or acceptable alternative documentation is used to verify
these accounts.
The source of funds for a recently opened account or for a large increase must be explained and verified. Copies of
the Borrow ers bank statements must reliably document that the funds w ere not recently borrow ed. The statements
should show that the funds w ere accumulated prior to funding.
Business Funds
The use of business funds for dow n payment, closing costs and reserves is allow ed for sole proprietors, partnerships
and corporations, including S-corporations. When using these funds, each transaction must be analyzed in order to
determine the Borrow ers percentage of ow nership in the business, validate the Borrow ers ability to access business
funds w ithout any detrimental effect to the business and to ensure there is strength and stability w ithin the business.
Ow nership Verification:
Borrow ers ow nership or interest in the business must be confirmed by documentation such as a business
license or corporate or partnership tax returns.
Verification of the Availability of Funds:
Sole Proprietor: Verification that the Borrow er has 100% ow nership of the business, for example
using the tax returns provided or a copy of the business license.
Partnership: Borrow er must be a general partner and verification of the percent of ow nership is
required. Verification of the ability to w ithdraw funds to the extent of the percentage of ow nership
and approval of the other general partners is required. The percentage of ow nership can be
validated using the U.S. Partnership Return of Income (IRS Form 1065) and the Partners Share of
Income, Credits, Deductions, etc. (IRS Schedule K-1) for filing income tax returns for the
partnership.
Corporation: Verification that the Borrow er is 100% ow ner of the corporation or if the Borrow er is
not a 100% stockholder verification of the percent of ow nership. In addition, verification of the ability
to w ithdraw funds to the extent of the percentage of ow nership is required, along w ith approval of
the stockholders w ith a corporate resolution. The Borrow ers percentage of ow nership can usually
be determined from the Compensation of Officers section of the corporate tax return.
Self-Em ployed Borrow ers

The follow ing requirements are applicable for Self-Employed Borrow ers using business funds:
All funds must be seasoned w ith the source of funds for any large deposits fully documented and
explained.
Business assets must be verified using standard documentation requirements.
A cash flow analysis on the business is required. The cash flow analysis can be performed by the
accountant or CPA. The file must contain evidence the Borrow er has full use of business funds and
there is no required repayment.
The Loan File must contain evidence that the funds are not advancement against future earnings or
future cash distributions. The Loan File documentation must include a review of any potential tax
implications on funds received.
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Credit Card Financing

Certain loan costs may be paid outside of closing by the Borrow ers use of a credit card. The follow ing costs can be
financed:
Appraisal
Lock-in fees
Credit report
The aggregate total may not exceed $1,000. Sufficient funds to pay off the charged amounts must be verified. The
Borrow er does not need to pay off the charged amounts. The minimum monthly payment w ill be added to the debt
ratios.
Retirement Accounts
Vested funds f rom individual retirement accounts (IRA/Keogh accounts) and tax-favored retirement savings accounts
(401(k) are acceptable sources of funds for dow n payment, closing costs and reserves.
Seller must verify the ow nership of the accounts and the Borrow ers actual receipt of the funds from the liquidation of
the assets, if needed to complete the transaction.
When funds from retirement accounts are used for reserves, it is not necessary to w ithdraw the funds from the
account. It is necessary, how ever, to exercise caution w hen considering retirement accounts as reserves since these
accounts often feature significant penalties for early w ithdraw al or have limited access and have vesting
requirements.
When using the funds as reserves, the Seller may use the follow ing percentage of the vested amount:
Retirement Accounts (401 (K) IRA, SEP, KEOUGH):
If the Borrow er is < 59.5 years old)
55%
If the Borrow er is > 59.5 years old)
65%
If the retirement account only allow s w ithdraw als in connection w ith Borrow ers termination of employment, retirement
or death, the Seller may not consider the vested funds for reserves.
Stocks, Bonds, and Other Securities

If the source of funds to close is proceeds from the sale of stocks, bonds, or other securities, then the Loan File must
document their value and must contain proof that the Borrow er ow ned such commodities. Acceptable evidence of
ow nership and value include:
A statement from the brokerage company indicating ow nership of the securities and verifying
the sale.
Verification from the bank w here the securities w ere sold or redeemed.
Copies of sale documents.
A copy of the bond redemption tables (for value verification), and proof of liquidation, is required for government bond
proceeds.
Other Accounts
Accounts such as annuities, trust funds and hedge funds may be utilized. Documentation must be provided to show
that the funds are available to the Borrow er and under w hat conditions the funds may be w ithdraw n. If being used for
reserves, annuities are treated the same as retirement accounts.
Borrowed Funds Secured by Assets

Proceeds from a loan that w as fully secured by the Borrow ers assets qualify as a source of funds to close, subject to
the follow ing requirements and guidelines:
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The loan must be secured by an asset ow ned by the Borrow er, such as a certificate of deposit,
stock, bond, real estate (other than the Mortgaged Property), life insurance policy, savings
account, or a bridge loan.
The loan must be from an institutional lender.
The DTI ratio calculation must show that the Borrow er is qualified to pay the additional debt.
A copy of the executed note reflecting the terms and proof of the receipt of the funds must be
provided.
Sale of Real Property

If the source of funds to close is proceeds from the sale of real estate ow ned by the Borrow er, the amount of net
proceeds must be documented w ith a copy of the final HUD-1 along w ith the receipt of the proceeds by the borrow er.
Gift Funds
A Borrow er purchasing may receive a gift to be used tow ards the dow n payment, prepaid items, closing cost and
financing cost. For details on a specific programs gift of equity or gift fund requirements, refer to the HF3 Funding
Loan Program M atrices.
Gift of equity is defined as equity in a property given by the ow ner to the Borrow er w hen the Borrow er purchases a
home from an immediate family member, defined as parents, grandparents, siblings, spouse, children, aunts, and
uncles. . Gift of equity is acceptable from immediate family members and no repayment is expected. Property must
be ow ner occupied. Verification of a gift of equity must be reflected on the purchase agreement or HUD-1. Gift of
equity transactions must also comply w ith Interfamily Transfer requirements in this chapter.
A dow n payment of 100% from gift funds is allow ed for LTVs of less than or equal to 80% or the program max w hen
no secondary financing exists. In this instance, closing costs and reserves may also be in the form of a gift. Reserve
requirements must be met by the Borrow ers ow n funds.
Gift funds must be verified by the follow ing:
Signed gift letter
Must indicate the donors relationship to the Borrow er
Donors address and phone number
Subject property address
Dollar amount of the gift
Certification that it is a gift w ith no repayment required
Receipt of funds*
Proof of the donors ability to provide the funds

Must be sourced and seasoned for 60 days
Examples of acceptable proof of receipt of funds are a bank statement show ing the deposit or a copy of the cashiers
check.
If the Borrow er received a gift from a relative or domestic partner w ho has lived w ith the Borrow er for the last 12
months, or from a fiance, the gift is considered the Borrow ers ow n funds and may be used to satisfy the minimum
Borrow er contribution requirement if all individuals occupy the property.
Gift funds are not permitted from any donor that is a party to the transaction (except gifts of equity from the Seller) or
is a real estate builder, developer, or in the business of ow ning, financing, or selling real estate.
Gifts of Equity
Gift of equity is defined as equity in a property given by the ow ner to the Borrow er w hen the Borrow er purchases a
home from an immediate family member, defined as parents, grandparents, siblings, spouse, children, aunts, and
uncles. Gift of equity is acceptable from immediate family members and no repayment is expected. Property must be
ow ner occupied. Verification of a gift of equity must be ref lected on the purchase agreement or HUD-1. Gift of equity
transactions must also comply w ith Interfamily Transfer requirements in this chapter. Gift of equity transactions
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should be supported by an appraisal at fair market value. Generally, sales prices less than or greater than 10% of fair
market value established by the appraisal are subject to further review and documentation.
TRANSACTIONTYPES
This section describes the types of transactions for w hich HF3 Funding w ill purchase loans.
PURCHASE
A Purchase transaction involves the purchase of a real property, as defined by a Sale and Purchase Agreement
executed by the Borrow er and home Seller that represents a First or Second Mortgage on the property.
Non-Arms Length
A non-arms length transaction is a transaction betw een family members, co-w orkers, friends or anyone associated
w ith the transaction such as the listing agent, mortgage lender or broker.
Non-Arms length transactions are not eligible for purchase except for Gift of Equity (GOE) or inherited
properties. Examples of non-arms length transactions include but are not limited to:
Relatives: Relatives are defined as individuals related by blood, marriage, adoption, or legal
guardianship. Transactions betw een an individual and their spouse, parent, sibling,
grandparent, aunt, uncle, cousin, stepparent or stepchild, regardless of w hether the relationship
is by blood, adoption, marriage, or legal guardianship are considered non-arms length. The
definition also includes domestic partners and fiances.
A purchase and sale transaction betw een relatives, including the estate of a deceased family
member unless the transaction is a probate sale.
A financing transaction betw een relatives, such as the processing or origination of a Loan for
a relative by an employee of the Seller.
Parents purchasing and financing a property for a child w ho then w ants to refinance to payoff the parents
Employer/Em ployee
A purchase and sale transaction betw een an employer and an employee.
A financing transaction betw een an employer and an employee, including a Loan originated
by the Seller for the Sellers employee, contractor, or principal.
Landlord/Tenant
A purchase and sale transactions betw een a landlord and tenant, including lease option
purchase options.
A financing transaction betw een a landlord and tenant, such as the processing or origination
of a Loan for a tenant w hen the landlord is an employee of the Seller.
Home Builders
Purchase transactions w here the Borrow er is the ow ner of, or is employed by the
homebuilder w ho has constructed the subject property.
Transactions w here the principals of construction companies are involved in the sale and
financing of the subject property, w ith the exception of qualifying builder ow ned lending
operation transactions.
Real Estate Brokers/Agents: A transaction w here the Borrow er or a relative of the Borrow er,
is a licensed real estate broker or agent employed in the real estate industry and is involved in
the financing or sale of the subject property, regardless of w hether he/she receives a sales
commission. This includes a Borrow er or a relative of the Borrow er.
Acting as the property sellers agent under a listing agreement w ith the seller of the
property;
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Acting as his/her selling agent for a real estate broker;
Acting as both the listing agent and as the seller agent (dual representation); and
Employed by the HF3 Funding Seller acting as the Loan interview er.
A transaction w here the Borrow er acts as his/her ow n real estate agent (buyers agent) in
the purchase of a property w ill be considered arms length.
Third Party Service Vendors: A transaction w here the Borrow er is also a principal of a third
party vendor, such as a settlement agent, escrow company, title company, appraisal company,
or credit reporting company providing such service for the subject Loan.
Seller Employees
A Borrow er w ho is employed by the Seller of the Loan (i.e. no employee loans)
Seller Financed
The payoff of a loan currently financed by the Seller
Interfamily Transfer
The HUD-1 must reflect the gift of equity as part of the transaction or the purchase
price.
The property must be ow ner occupied (non-ow ner occupied interfamily transfers w ill be
review ed by HF3 Funding on a case-by-case basis).
Interfamily transfers are considered Purchase transactions. For an interfamily transfer to be eligible for purchase
by HF3 Funding, the appraisal must support the value, AND:
Existing liens on the property must be current.
Full Documentation loans only.
The HUD-1 must reflect the gift of equity as part of the transaction or the purchase price.
For ow ner occupied properties, the maximum LTV/CLTV is 80% or the program maximum,
w hichever is low er.
For non-ow ner occupied properties, the maximum LTV/CLTV is 70% or the program maximum,
w hichever is low er.
Family members are defined as parents, grandparents, siblings, spouses, children, aunts and uncles
Renting Back the Current Residence

The Borrow er may rent back their current home for up to 30 days from the closing sale date. In some cases such as
relocations, HF3 Funding, at their sole discretion may allow the rent-back period to be greater than 30 days
RATE/TERM REFINANCE
A Rate/Term Refinance represents a First Mortgage that is used to pay off an existing mortgage(s) or lien(s) w ith a
new loan. This loan secures the Mortgaged Property in order to acquire a different interest rate or loan ter m. Cash
removal or debt consolidation other than incidental cash (the low er of 1% of the loan amount or $2,000), is not
permitted.
A Rate/Term Refinance is w hen the Mortgage Loan proceeds are used for:
Reasonable and customary loan closing costs/fees.
Payoff of the First Mortgage.
Payoff of closed end subordinate mortgage(s) that:
Are at least 12 months seasoned
Were used to purchase the Mortgaged Property
Were used for documented home improvements
Payoff of Home Equity Lines of Credit w here:

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A cash draw greater than $2,000 has not been taken in the last 12 months.
OR
Proceeds have been used for documented home improvements.
Refinance Resulting from Divorce

A refinance transaction resulting from a divorce settlement w herein either the Borrow er or the Co-Borrow er is
required to buy out the interest of the other spouse in the Mortgaged Property may be considered a Rate/Term
Refinance transaction if:
The Borrow er w ho w ill be acquiring sole ow nership of the property receives no cash-out from
the proceeds of the transaction.
The Borrow er provides a copy of the divorce decree or the property settlement agreement
reflecting the required buy-out.
Other divorce-related property right dissolution shall be treated as a Cash-Out Refinance transaction.
CASH-OUT REFINANCE
A Cash-Out Refinance is a loan w hose proceeds are distributed for:
Debt consolidation
Cash-in-hand
Payoff of non-seasoned, closed-end subordinate mortgage(s)
Payoff of Home Equity Lines of Credit w here cash has been draw n in the last 12 months and/or
is greater than $2,000
Payoff of property tax liens
Payoff of federal and state tax liens
Here is an example of a Cash-Out Refinance:
Loan amount
$175,000
Mortgage payoffs
- $131,400
Consumer debt payoffs
- $ 25,000 (cash-out)
Payoff property tax liens
- $ 5,000 (cash-out)
Closing costs
- $ 7,000
Cash to Borrow er
= $ 6,600 (cash-in-hand)
Total cash-out
= $ 36,600 (cash-in-hand + cash-out)
Debt Consolidation
A debt consolidation refinance transaction involves the repayment of an existing loan from the proceeds of a new
mortgage. If payment of credit cards or installment loans is a condition of loan qualification, the payoff must be
indicated on the HUD-1 or otherw ise documented.
In all cases, a 6-month property seasoning is required for cash-out/cash-in-hand transactions.
Property Owned Free and Clear

A Borrow er w ho obtains a mortgage on a property that does not already have a mortgage lien against it is also
defined as a Cash-Out Refinance transaction.
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CONTINUITY OF OBLIGATION
For Refinance Transactions, there must be a continuity of obligation if there is currently an outstanding lien that w ill
be satisfied through the refinance transaction. Continuity of obligation is met w hen any one of the follow ing exists:
At least one (1) borrow er is obligated on the new loan w ho w as also a borrow er obligated on the
existing loan being refinanced;
The borrow er has been on title and residing in the property for at least tw elve (12) months or can
demonstrate a relationship (relative, domestic partner, etc.) w ith the current obligor;
The loan being refinanced and the title to the property are in the name of a natural person or a limited
liability company (LLC), as long as the borrow er w as a member of the LLC prior to transfer. Transfer of
ow nership from a corporation to an individual does not meet the continuity of obligation requirements.
The borrow er has recently inherited, or w as legally aw arded, the property (divorce, separation or
dissolution of a domestic partnership).
Loans w ith an acceptable continuity of obligation may be considered either a Cash Out or Limited Cash Out as
described in this Chapter.
If the borrow er is currently on title but is unable to demonstrate an acceptable continuity of obligation, or if there is no
outstanding lien against the property, the loan is still acceptable as a Cash Out Refinance, as detailed below :
If the purchase date is w ithin six (6) to tw elve (12) months prior to application date and there is no lien,
the LTV must be based on the lesser of the original sales price or the current appraised value
If the purchase date is more than tw elve (12) months and there is no lien, the LTV may be based on the
current appraised value
If there is a lien and the borrow er has been on title for at least six (6) months, the LTV is limited to 50%,
or the program maximum, w hichever is less based on the appraised value
DELAYED FINANCING
Borrow ers w ho purchased the subject property less than six months prior to application are ineligible for a cash-out
refinance. This includes transactions w here the Borrow er purchased the Subject Property for cash and is looking to
obtain delayed financing.
CONSTRUCTION-TO-PERMANENT REFINANCE
A Construction-to-Permanent Refinance is a loan obtained to pay off an interim (short-term) loan used to finance the
construction of the subject property. The transaction may be treated as a Purchase, Rate/Term Refinance, or CashOut Refinance. For information regarding the treatment of the Construction-to-Permanent financing, refer to the Loanto-Value Ratio section in this chapter.
LAND CONTRACT REFINANCE

A Land Contract is an installment contract for the sale of land and improved structures. The home seller has legal title
until the installment is paid and the buyer has equitable title during the term of the contract. Land Contracts are
treated as refinance transactions. Land Contract transactions are acceptable on ow ner occupied properties only.
Land Contract/Contract for Deed (Recorded or Unrecorded)

A Land Contract/Contract for Deed is subject to the follow ing:
The home seller must be the current ow ner of the property as reflected on the Preliminary Title
Report/Commitment.
A copy of the Land Contract/Contract for Deed is required.
Canceled checks (front and back) or bank statements are required to evidence the dow n
payment.
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Copies of canceled checks (front and back) to evidence the monthly payments covering all
months of residency for the past 12 months are required.
The Borrow er might be eligible for a cash-out transaction depending on w hen the Land Contract/Contract for Deed
w as executed:
Executed Less Than 12 Months. If the Land Contract/Contract for Deed has been executed
for less than 12 months, then the transaction must be Rate/Term Refinance and it w ill be based
on the Appraised Value or contract price, w hichever is less; OR
Executed at Least 12 Months. If the Land Contract/Contract for Deed has been executed for
at least 12 months, the Borrow er may be eligible for a Cash-Out Refinance, and the transaction
may be based on the Appraised Value.
Note: Some states do not recognize the Borrow er as having an equitable position in the property until they
have made their last payment under the Contract for Deed. In this case, the state w ould consider the
transaction to be a Purchase. How ever, pursuant to these underw riting guidelines, all loans that pay off a
Contract for Deed w ill be considered as a refinance.
Since the tax rate w ill be reassessed for the new transaction, the new ly established tax rate w ill be used for
qualifying the borrow er.
Multiple Transactions Executed by One Seller
Multiple applications for Land Contract/Contract for Deed transactions that are executed by the same Seller,
company, and/or individual are unacceptable.
A Land Contract/Contract for Deed executed by a company or property ow ner w hose primary business is
investments in real estate or rehabilitation of deferred maintenance properties are not be eligible.
LEASE OPTION-TO-PURCHASE
A Lease Option-to-Purchase is an agreement to lease a property for a specified period of time at an agreed-upon
monthly rent payment. Under this option, a portion of the payments in excess of the market rents w ill be applied
tow ard the dow n payment. Once the potential buyer has satisfied the terms of the dow n payment, he or she may
execute the Option-to-Purchase the property at the sale price agreed upon in the Lease Option-to-Purchase
agreement. Lease Option-to-Purchase transactions are eligible on ow ner occupied properties only. Loan proceeds
can only be used to pay off the contract.
Rent Credit
Rent credit tow ards dow n payment w ill be accepted only for the portion of rent paid over and above established
market rents per the appraiser by a market rent analysis. The appraiser must determine the fair market rent on Form
1007 Single-Family Residence or Form 216 Multi-Family Residence. Any rents in excess of fair market rent may be
applied to the dow n payment.
Refund of Excess Deposit

If the Borrow er earned a large amount of rental credit during the term of the Lease Option-to-Purchase, the Borrow er
may receive a refund of excess deposits at close. For example:
Purchase price
Option credit earned
$100,000
- $36,000
Subtotal
$64,000
Loan amount (85% LTV)
$85,000
Balance due on lease
- $64,000
Excess deposit
= $21,000
(Refund of excess deposit)
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S E LLE R G UIDE
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L OAN P ROGR
AM S

The follow ing requirements and guidelines apply to Lease Option-to-Purchase transactions:
A copy of the executed Lease Option-to-Purchase agreement is required.
Proof of the Borrow ers earnest money deposit, in the form of copies of canceled checks (front
and back) must be provided.
Copies of canceled checks (front and back) to evidence the monthly payments covering all
months of residency for the past 12 months.
A documented lease w ith a Lease Option-to-Purchase and less than 12 months of seasoning w ill be treated as a
Purchase transaction. The lesser of the purchase price or the Appraised Value w ill be used to determine the
LTV/CLTV.
A Lease Option-to-Purchase w ith at least 12 months of seasoning w ill be treated as a refinance transaction. The
Appraised Value w ill be used to determine the LTV/CLTV. Lease Option-to-Purchase transactions are eligible for
Rate/Term Refinances only to pay off the contract. They are ineligible for Cash-Out Refinance transactions.
Lease Option-to-Purchase transactions that do not involve an earnest money deposit and/or monthly rent in excess of
proven market rents w ill not be considered a Lease Option-to-Purchase transaction and must comply w ith standard
Purchase guidelines.
INHERITED PROPERTIES
If a Mortgaged Property w as inherited w ithin the past 12 months, the follow ing limitations apply:
The Borrow er must have clear title.
If the Borrow er is paying only existing mortgages and heirs w ith cash-out, the maximum LTV/
CLTV is 80%, or the maximum allow ed for the grade and program, w hichever is less. This w ill
be treated as a Rate-Term Refinance.
The maximum LTV/CLTV on Cash-Out Refinances w here the proceeds for debt consolidation
or cash-in-hand is 70% or the maximum allow ed for the program, w hichever is less.
Rate/Term Refinances only for non-ow ner occupied properties.
Buying out additional heirs identified in the related w ill is allow ed. A copy of the w ill must be provided, along w ith the
buyout agreement signed by all of the beneficiaries identified in the w ill.
For inherited properties, there is no restriction for occupancy.
If the property w as inherited more than 12 months ago, standard refinance guidelines apply.
INELIGIBLE TRANSACTION TYPES

A Lease Back Purchase Transaction, w here the lease-back period is greater than 30 days is an ineligible
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6. LOAN PROGRAMS
Asset Utilization .....................................................................................................................................
Program Eligibility ................................................................................................................................
Asset Qualifier Program.......................................................................................................................

Bank Statement Program (24-Month and 12-Month Verification Options) ..................................
Income Documentation Requirements ................................................................................................
Bank Statement Requirements.............................................................................................................
Home Equity Loan Programs (A+ and A Grades only) ...................................................................

Simultaneous Second Lien Program Restrictions .............................................................................
Stand-Alone Second Lien Program Restrictions ...............................................................................
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ASSET UTILIZATION
Asset utilization is a calculation used to generate a monthly income stream from a Borrow er's personal assets for the
purpose of satisfying monthly debt and living expenses. Typically, the eligible Borrow er w ill be of retirement age (59
1/2 or greater) to use this income stream and not be employed full-time. This income can be combined w ith other
income sources such as social security, pension, or other investment income. Please refer to the HF3 Funding
Loan Program M atrices for specific program guidelines.
PROGRAM ELIGIBILITY
The Asset Utilization Loan program is eligible for Prime A+ and A credit grades only.
Property Type Restrictions

Eligible Properties include:
Single family residence
PUD (attached and detached)
Condominiums
2-unit properties
Transaction Types Allowed

Purchase, Rate/Term, and Cash-out Refinances
Occupancy
Ow ner-occupied (Primary and Second Homes) transactions only.
INCOME VERIFICATION
This program utilizes a qualifying calculation based on the verification of assets as an alternative method to income
verification to document a Borrow ers ability to repay. As such, tax returns are neither requested nor required and
must not be submitted w ith the Loan file. A 4506T is not required.
Employment and income must not be disclosed on the 1003. Not applicable to this Loan must be inserted into the
employment section. The income section is to remain blank. Business phone number, if applicable and contact
information must be reflected on the 1003. This w ill be used for contact and verification purposes only. A Debt-toIncome (DTI) is not calculated.
If employment or income information is provided on the 1003, the Loan is not eligible for this Loan program.
ASSET DOCUMENTATION
Full asset documentation is required for both funds to close and reserves. For most as set types, this w ould include all
pages of the most recent tw elve (12) months. Asset levels in the verified accounts are expected to be consistent and
sustained over the tw elve (12) month period. Assets must be in liquid or semi-liquid form.
Assets must be unencumbered and titled in the name of the Borrow er, the Borrow er's revocable trust, or a nonoperating LLC that is 100% ow ned by the Borrow er. The Borrow er or Co-Borrow er must be individual or co-ow ners of
all verified asset accounts and no other accountholders may be listed on the documentation. Joint accounts to be
used must have both accountholders on the Loan. The sum of eligible assets should be net any discounts and minus
any funds used for closing and/or minimum required reserves for the program. All assets must be located in a U.S
financial institution. Eligible liquid assets include the follow ing listed below .
Eligible Assets
Asset Type
Qualifying Amount
Checking, Savings, Certificate of Deposit (CD), and

Money Market Accounts
100%
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Publicly traded Stocks, Bonds, Treasury Instruments, and

Bonds
70%
Investment grade Corporate and Municipal bonds
70%
Equities, REITs, ADRS, and exchange trade funds that

are w idely traded on major U.S. exchanges
70%
Mutual Funds
70%

-
If the Borrow er is < 59.5 years old
55%
If the Borrow er is > 59.5 years old
65%
For eligible asset types, any debt tied to that asset must be netted out. For example, if stocks w ere purchased on
margin or a 401(K) Loan w as taken against the 401(K) account.
If the Borrow er is taking distributions from a retirement account, funds eligible to be used for asset utilization
are the account balance minus the qualifying distribution income over a 10-year distribution period utilizing
70% of the remaining balance.
For example:
Qualifying distribution income is $50,000 annually x 10 years = $500,000.
Retirement balance of $1,200,000 minus $500,000 = $700,000 x70% = $490,000 that can be applied tow ard
the asset utilization income calculation.
Other Accounts
Accounts such as annuities, trust funds and hedge funds may be utilized. Documentation must be provided to show
that the funds are available to the Borrow er and under w hat condition the funds may be w ithdraw n.
Ineligible Assets
Business accounts, stock held in privately-held corporations, stock options, non-vested restricted stock, gift funds,
w indfall assets (i.e., proceeds from a law suit, lottery w inning), proceeds from a Cash-Out Refinance, non-financial
assets (collectibles, stamps, coins, artw ork, etc.), assets titled in an irrevocable trust, custodial accounts, escrow
accounts, 529 accounts, accounts pledged as collateral for a Loan, below investment grade corporate and municipal
bonds, cash value of life insurance and foreign assets are not eligible.
Business Funds
Business funds are not eligible to be included in the total available asset calculation or qualifying calculation.
Interest/Dividend and Capital Gain Income

Other reported earnings from sources such as capital gains or interest/dividend income already considered and
averaged as effective income cannot be included or double counted as part of this income stream.
Reserve Requirements
Borrow ers must have the greater of $250,000 or the reserves required by the HF3 Funding program guidelines.
Funds used to meet reserve requirements may not be included in the asset utilization income calculation.
Income Calculation
Asset utilization income is calculated using a standard rate of return for the verified eligible assets based on the
follow ing:
Rate of return is equal to the Ten-Year Treasury Bond yield as published w ith the Wall Street
Journal
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Total eligible asset amount used to calculate annual rate of return For
example:
$800,000 at 2.15% (Ten-Year Treasury Bond yield as published in the Wall Street Journal) = $17,200 divided
by 12 = $ 1,433 in monthly qualifying income.
Requirement
Not required.
Borrower Affirmation Regarding Ability to Repay

Each Loan submitted to HF3 Funding must contain a signed acknow ledgement from the Borrow er regarding their
ability to repay the Loan under this program. The Seller may utilize their ow n form, if the language contained is similar
and inclusive of the language on the HF3 Funding Form.
ASSET QUALIFIER PROGRAM

This program is designed for high net w orth Borrow ers. Borrow ers are qualified on documented and verified liquid
assets. In all cases, the Borrow er must have the demonstrated ability to repay the Loan. This program offers the
opportunity to utilize a qualifying calculation based on the verification of assets and accumulated w ealth as an
alternative method to income verification to document the Borrow ers ability to repay.
PROGRAM ELIGIBILITY
The Asset Qualifier Loan program is eligible for Prime A+ and A credit grades only.
Loan amounts and LTV Limitations

Primary Residence Purchase and Rate & Term Refinance
Property Type
Single-family, PUDS, Condos ,

and 2-4 Units
Credit
Score
LTV/CLTV
Maximum Loan Amount
680
70%/70%
$1,500,000
680
65%/65%
$2,000,000
720
60%/60%
$2,500,000
Primary Residence Cash-out Refinance

Property Type
Single-family, PUDS,
Condos, and 2-4 Units
Credit
Score
LTV/CLTV
Maximum Loan
Amount
Maximum Cash-out
Amount
680
65%/65%
$1,500,000
$300,000
680
60%/60%
$2,000,000
$500,000
720
55%/55%
$2,500,000
$500,000
Second Home Purchase and Rate &Term Refinance

Property Type
Single-family, PUDS, and

Condos
Credit
Score
LTV/CLTV
Maximum Loan Amount
680
65%/65%
$1,500,000
680
60%/60%
$2,000,000
720
55%/55%
$2,500,000
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Second Home Cash-out Refinance

Property Type
Single-family, PUDS,
and Condos
Credit
Score
LTV/CLTV
Maximum Loan
Amount
Maximum Cash-out
Amount
680
60%/60%
$1,500,000
$300,000
680
55%/55%
$2,000,000
$500,000
720
55%/55%
$2,500,000
$500,000
Prior Housing History

Borrow ers w ith no history of mortgage or paying rent in the last tw o (2) years are not eligible. Borrow ers w ho ow n
property free and clear are considered to have a mortgage history.
Eligible Borrowers:
U.S. Citizens
Permanent Resident Aliens
First-time Home Buyer
A tw o (2) year rental history must be provided
Maximum Loan amount of $1,500,000
Maximum 60% LTV/CLTV or program maximum, w hichever is less
Non-occupant co-borrow ers are not allow ed
Inter Vivos Revocable Trust
Must meet HF3 Funding guidelines

Non-Permanent Resident Alien
Ineligible Borrowers
Non-occupant Co-Borrow ers
Foreign Nationals
INCOME VERIFICATION
This program utilizes a qualifying calculation based on the verification of assets as an alternative method to income
verification to document a Borrow ers ability to repay. As such, tax returns are neither requested nor required and
must not be submitted w ith the Loan file. A 4506T is not required.
Employment and income must not be disclosed on the 1003. Not applicable to this Loan must be inserted into the
employment section. The income section is to remain blank. Business phone number, if applicable and contact
information must be reflected on the 1003. This w ill be used for contact and verification purposes only. A Debt-toIncome (DTI) is not calculated.
If employment or income information is provided on the 1003, the Loan is not eligible for this Loan program.
ASSET DOCUMENTATION
Full asset documentation is required for both funds to close and reserves. Assets can be cash, stocks, bonds, IRAs,
401Ks, mutual funds or retirement accounts. For most asset types, this w ould include all pages of the most recent
tw elve (12) months. Asset levels in the verified accounts are expected to be consistent and sustained over the tw elve
(12) month period. Assets must be in liquid or semi-liquid form.
Assets must be verified sufficient to cover the Loan amount requested w ith sufficient additional reserves to cover all
revolving, installment, alimony/child support, and other monthly debt for a period of no less than five (5) years, plus
the separate program reserve requirement based on the Loan amount.
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Tw elve (12) months of consecutive statements are required for each asset account. Any large increases or
decreases must be adequately sourced. Increases or decreases greater than 15% over the tw elve (12) month period
must be explained by the Borrow er. Additional supporting documentation may be required.
Eligible Assets
Eligible assets must be comprised of the follow ing asset types, be available to the Borrow er, and are limited as
follow s:
Asset Type
Qualifying Amount
Checking, Savings, and Money Market Accounts
100%
Publicly traded Stocks and Bonds
70%
Mutual Funds
70%

-
If the Borrow er is < 59.5 years old
55%
If the Borrow er is > 59.5 years old
65%
The above amounts show n for retirement accounts can only be used if a distribution has not already been set up. If a
distribution has begun, the asset is not eligible for this program.
For eligible asset types, any debt tied to that asset must be netted out. For example, if stocks w ere purchased on
margin or a 401(K) Loan w as taken against the 401(K) account.
Ineligible Assets
Business funds
Stock options
Privately held stock
Deferred compensation
Non-regulated financial companies
Non-liquid assets (automobiles, artw ork, business net w orth, etc.)
Business Funds
Business funds are not eligible to be included in the total available asset calculation or qualifying calculation.
Payment Shock
Payment shock should not exceed 100% if the Borrow er is currently renting or 250% if the Borrow er has a mortgage
history in the past tw enty-four months. The payment shock requirement w ill be w aived if the LTV is less than 65%.
Payment shock is calculated by dividing the difference betw een the new and existing housing payments by the
existing housing payment. For example:
New Payment (PITIA)
$1,500
Subtract Existing Payment (Rent or PITIA)
$1,000
Equals difference
$500
Divided by the Existing Payment
$1,000
Equals Payment Shock %
50%
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Reserve requirements are in addition to the residual assets needed to cover debts for the initial sixty (60) month
period.
Loan Amount
Reserves Required
<= $1,000,000
9 months
>$1,000,000 up to $2,000,000
18 months
>$2,000,000 up to $2,500,000
24 months
Borrow ers w ith other investment properties must also meet the follow ing reserve requirement:
Additional tw o (2) months PITIA reserves for each NOO property regardless of financing up to a
maximum of thirty-six (36) months. The reserve calculation is based off the subject property PITIA.
Qualifying Examples
Exam ple #1 - Qualifying Income:
Loan
amount: $300,000
PITIA for subject: $2000

Verified Assets:
$200,000 Checking and Savings (100%usable)
= $200,000
$300,000 Stocks and Bonds ( 70% usable)
= $210,000
$400,000 401K (65% usable)
= $260,000
$300,000 Mutual Funds (70% usable)
= $210,000
Total Allow able Assets
= $880,000
$880,000 (allow able assets) minus $300,000 (Loan amount) = $580,000 residual assets
Total of monthly debt (revolving, installment, alimony/child support, hazard insurance, property tax on the
subject property, etc.) excluding subject P&I = $2500
$2500 X 60 months = $150,000
Required reserves for $300,000 Loan amount = 9
2,000 (PITIA) = $18,000
Since the residual assets are more than the required funds to cover all other debt for 60 months plus
required reserves, the Loan qualifies for the Loan program.
Exam ple #2 - Qualifying Income:
Loan amount: $300,000 PITIA
for subject: $2000
Verified Assets:
$10,000 Checking and Savings (100%usable)
= $10,000
$20,000 Stocks and Bonds ( 70% usable)
= $140,000
$300,000 Mutual Funds (70% usable)
= $ 210,000
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S E LLE R G UIDE
C HAP TE R 6.
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Total Allow able Assets
= $360,000
$360,000 (allow able assets) minus $300,000 (Loan amount) = $60,000 residual assets
Total of monthly debt (revolving, installment, alimony/child support, hazard insurance, property tax on the
subject property, etc.) excluding subject P&I = $800
$700 X 60 months = $48,000

Required reserves for $300,000 Loan amount = 9 months X $2,000 (PITIA) = $18,000
Since the residual assets are less than the required funds to cover all other debt for 60 months plus required
reserves, the Loan does not qualify for the Loan program.
Limitations on Other Real Estate Owned

Ow nership of investment properties by the Borrow er requires additional reserves and Debt Coverage Ratio (DCR)
requirement. Any investment properties ow ned by the Borrow er must show a debt coverage ratio of at least 1.20.
This may be cumulative if multiple properties are ow ned. Lease agreements must be provided for all investment
properties. If the DSC for the Borrow ers other investment properties falls short of the 1.20 requirement, additional
reserves w ill be required.
Debt Service Coverage (DSC)
The debt service coverage ratio is calculated by taking 75% of the gross rents divided by the
PITIA of the respective property
Rents are derived from the rental/lease agreement
DCR requirement is 1.20. Net rents must be > 1.2 times PITIA. This calculation may be
cumulative for all rents and all PITIAs.
Debt Service Coverage Exam ple:

Gross Rent = $1,200
Vacancy/Expense Factor = 25% = $300
Net Rent = $900
DCR Requirement = 1.20
$900 divided by 1.20 = $750
PITIA may not exceed $750 per month
Debt Service Coverage Additional Reserve Requirement Exam ple:
Program DCS Requirement = 1.2
Actual DCR for investment properties = .93 DCR
Shortage = 1.20-.93 = .27
Additional monthly liability for reserve calculation = $1400 X .27 = $378 Additional
reserves = 60 X $378 = $22,680
Gift Funds and Gifts of Equity

Gift funds and gifts of equity are not allow ed.

ability to repay the Loan under this program. The Seller may utilize their ow n form, if the language contained is similar
and inclusive of the language on the HF3 Funding.
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BANK STATEMENT PROGRAM (24-MONTH AND 12-MONTH

VERIFICATIONOPTIONS)
HF3 Funding permits the use of personal or business bank statements to support a self -employed Borrow ers
income for qualification purposes. The documentation provided needs to document that the income is stable, likely
to continue and sufficient to enable the Borrow er to repay the debt. The income presented must be reasonable for
the profession. In addition, w hen using business bank statements to support the Borrow ers income, the nature and
structure of the business must be evaluated to determine if the applied expense assumptions pe r HF3 Fundings
guidelines are reasonable. HF3 Funding reserves the right to require additional documentation, up to and including
full documentation (i.e. tax returns) to determine the Borrow ers qualifying income.
For Loan amount and LTV/CLTV limitations, and for income documentation type and eligibility, refer to the HF3
Eligible Borrowers
To be eligible for this program, the Borrow er must be self -employed or earn over 25% of their income from selfemployment, rental income, commission, bonus, or tip sources. Self -employed borrow ers are:
Borrow ers w ho derive 25% or more of their primary income from a business in w hich they hold
a controlling interest
Borrow er w ho derive their primary income from commissions, consultation fees, interest, ,
gratuities, or real estate rents
Borrow ers w ho rely on investments for income such as interest, dividends, capital gains, or real
estate rents.
If one of the Borrow ers meets this eligibility requirement and the other does not, the Borrow er that is not eligible must
fully document their income. The net deposits used from the bank statements for the self -employed borrow er must
not reflect the income that is fully documented for the other applicant (i.e. deduct Social Security payments, W-2
w ages, etc.).
The Borrow ers business may be a sole proprietorship, a partnership (general or limited), or a
corporation. They may also receive income documented by Form1099, or filed on a Schedule
C.
The Borrow er must have been in the same line of w ork or ow n the same business entity for tw o
years. Self-employed Borrow ers must be able to document by a neutral third-party that the
business has been in operation for the last tw o years and that they have had ow nership for that
period of time. Third-party verification includes:
A letter from a certified public accountant (CPA)
A letter from a regulatory agency or professional organization
Copy of business license
Non-arms length transactions or Borrow ers that receive foreign income are ineligible.
INCOME DOCUMENTATION REQUIREMENTS

The Borrow ers application must include all sources and amounts of income. The bank statements must support the
income listed on the application. Deposits from income sources that are not reflected on the 1003 or those not
needed to qualify w ill not be included in the qualifying income calculation. Income sources separate from self employment must be verified. Examples of verification include social security letter, employment verification, or
divorce decree. If tax returns or VOE are provided for the Borrow er using bank statements to support their income,
the Loan must be fully documented.
Given the difficulty tracking and validating that cash flow s are not moving betw een business entities, Borrow ers that
ow n multiple businesses must use personal bank statements to support their income. Their personal bank statements
should demonstrate the distributions they receive from their business interests to satisfy their personal obligations.
Also, business bank statements may not be used w hen the Borrow ers business has a number of employees,
significant overhead or operating expenses. These w ould suggest that the expense assumption used in this program
w ould not be applicable. This program is designed for the use of business bank statements w hen the Borrow ers
business is small in scope and has limited expenses.
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Non-taxable income, such as child support payments, disability retirement plans, and w orkers compensation may be
adjusted by 25% to determine the qualifying income. Verification must be made that the particular source of income
is nontaxable and that both the income and its nontaxable status are likely to continue.
Bank statements reflecting the occurrence (one time or isolated incident) of NSF checks, w ire transfers overdraft
protection transfers, negative ending balances and transfers from other accounts must be satisfactorily explained and
documented. Bank statements reflecting multiple NSF checks, overdraft protection transfers, negative ending
balances, or lack a satisfactory explanation indicate cash flow problems and are not eligible.
BANK STATEMENT REQUIREMENTS

Income may be documented by either personal or business bank statements. The co-mingling of personal and
business or multiple business accounts is not allow ed. If one account is used to show income and another account
used for reserves, documentation must be provided to show evidence that the funds are separate and distinct.
Please note: Only one set (tw elve or tw enty-four months) of bank statements w ill be used to determine qualifying
income. If another account is used for reserves, only tw o months statements to establish seasoning are required,
If additional bank statements are provided by the Seller they w ill be review ed and become part of the overall review of
the Loan. Given the difficulty to reconcile funds betw een accounts, it may cause the Loan to become ineligible or
require the Loan to be fully documented.
Borrow ers w ho ow n multiple business entities must use personal bank statements to support their income. The most
recent tw enty-four (24) or tw elve (12) months bank statements must be provided depending on the selected Loan
program.
For Loan amount and LTV/CLTV limitations, and for income documentation type and eligibility, refer to the HF3
Ineligible Bank Accounts

The follow ing outlines the types of bank statements that are ineligible for the HF3 Funding bank statement
programs.
Co-mingling of accounts w hether personal and business or multiple business accounts is not
allow ed.
Bank statements reflecting other individuals w ho are not applicants for the Loan are not eligible.
How ever, if the Borrow ers spouse is on the personal bank account and not on the Loan, only
50% of the total deposits may be used for qualifying.
Borrow ers w ith multiple businesses may not use business bank statements to support their
income. Personal accounts are acceptable.
Business bank statements may not be used w hen the Borrow ers business exhibits a number of
employees, overhead, and operating expenses. In this case, personal bank statements may be
used.
Bank statements w hich exhibit recurring NSF, w ire transfers, overdraft protection transfers, and
negative ending balances are unacceptable.
A current tw enty-four (24) or tw elve (12) month history or the same bank account is required.
Changing of accounts is not acceptable.
Eligible Bank Accounts

The follow ing types of bank statements are eligible for the HF3 Funding bank statement programs:
Personal or business account such as a checking or savings account.
Deposits must be consistent and typical w hether personal or business accounts are used.
Deposits that are larger than typical for the account may be included w ith a satisfactory
explanation. Supporting documentation may be required. Atypical deposits are defined as
more than 50% of the gross monthly determined income.
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If the Borrow ers spouse is on the personal bank account and not on the Loan, only 50% of the
total deposits may be used tow ards qualifying income. Business accounts may only be used
w hen the follow ing applies:
Borrow er (s) ow ns 100% of the business.
The business must be small in nature and have minimal overhead and operating expenses.
Low beginning and /or ending balances may require additional documentation up to and
including full tax returns (1040s, 1065s 1120s, etc.).
Determining Cash Flow from Bank Statements

HF3 Funding takes a common sense approach to underw riting a Borrow ers creditw orthiness to de termine the
w illingness and ability to repay the Loan. This program provides for income calculation based on bank statements as
an alternative method to tax returns to document the self -employed Borrow ers ability to repay. Each Borrow er has a
different situation and each Loan needs to be w eighed on its ow n merit. If the Borrow er is self -employed or in a
unique business, a narrative must be provided by the Borrow er that clearly outlines the nature of the business and
the cash flow s. The expense assumptions must be reasonable for the type of self -employment. Decreasing income
trends must be explained and additional documentation may be required.
Any irregularity in the Borrow er profile or the documentation provided may be cause for the Loan to become ineligible
for purchase.
Calculating Income from the Bank Statements:

The follow ing outlines how to calculate the income using the Borrow ers bank statements. The lesser of the income
stated on the application or the calculated income using the cash flow from the bank statements w ill be used to
qualify the Borrow er. The allow ances below may be used to establish qualifying income:
100% of the deposits from the Borrow ers personal accounts
70% of the deposits from the Borrow ers business accounts
If the business expenses appear to be greater than 30%, the use of business bank statements to support the
Borrow ers income w ill not be accepted. Personal bank statements w ill need to be provided. Examples of businesses
that w ould typically have expenses that exceed 30% include a construction company, restaurant, or retail firm.
The average deposits w ill be used to determine the Borrow ers income for qualification purposes. Deposits must be
typical and consistent for the Borrow ers line of w ork. Transfers from a Borrow ers business account to a personal
account are acceptable if they are consistent, i.e. the Borrow er is paying himself regular distributions.
Atypical deposits may not be included unless supporting documentation is provided to show that the monies w ould be
typical for the Borrow ers type of business or line of w ork. Credit back from returns and cash advances from credit
cards are not acceptable to be included in the qualifying income.
For assistance w ith the calculation of income from bank statements, please refer to the HF3 Funding Bank
Statement Calculator . This tool is for reference and is not required at the time of submission to HF3 Funding for
review .
Bank Statements with Rental Income

Rental income may be used in qualifying a Borrow er under the Bank Statement Program. All the rental income must be
show n in the Borrow ers bank statements to be considered in qualifying income. The rental income show n on the bank
statements must support the rental lease amounts.
Room rents are an ineligible source of income. If any of the units in a property are receiving room rents than
none of the rental income received for the property may be used as qualifying income. If the Borrow er is
receiving room rents on any of their properties, the Loan must be fully documented and is not eligible for the
HF3 Funding Bank Statement Programs.
All ow ner- occupied tw o-to-four unit properties and all investment properties require a rental income analysis to
determine positive or negative cash flow . Rental income on a second home is not allow ed. The follow ing is required
to support the rental income show n on the application:
Rent Survey Form 1007 and Operating Income Statement (FNMA Form 216) Subject property
only
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Complete Schedule of Real Estate Ow ned (1003)
Complete Rent Schedule outlining the property address, length of ow nership, rent received, and
payment details (PITIA).
Copies of the fully executed lease agreements
If the rental income is not show n on the bank account used to determine the Borrow ers qualifying income, one
additional account may be used to support the rental income. The follow ing applies:
Documentation must be provided to show the account is separate and distinct from the bank
account being used to determine the Borrow ers qualifying income
The account must have been set up for the management of the rental income only. If other
funds are co-mingled w ith the rental income the account is ineligible.
The bank statements must support the receipt of the income as outlined on the lease(s).
Six months bank statements w ill be required to show evidence of rental income receipt
Actual rents must be documented w ith copies of the signed leases. Room rents are an ineligible source of income. If
any of the units in a property are receiving room rents than none of the rental income received for the property may
be used as qualifying income. Rental income received from a family member may not be used as income w ithout
copies of a minimum of six months cancelled rent checks provided by the tenant family member.
If multiple accounts have to be used to support the receipt of the rental income, the Loan must be fully documented. If
the bank statements presented do not support the rent schedule and the leases presented, the Loan must be fully
documented.
Rental Income Calculation

Income received from rental properties w ill be calculated as follow s:
75% of actual rents, as established by the fully executed lease(s)
If the lease is incomplete, expired, or not yet in effect, the entire payment w ill be included in qualifying
ratios
A positive cash flow w ill be added to gross income; negative cash flow w ill be added to total liabilities and used to
qualify the Borrow er.
A Loan for the refinance of an investment property generating a negative cash flow w ill be ineligible.
Verbal Verification of Employment

A verbal verification of employment w ithin 10 days of the Loan closing must be performed.
4506T Requirement
A 4506T transcript is not required for the bank statement programs.

ability to repay the Loan under this program. The Seller may utilize their ow n form, if the language contained is
similar and inclusive of the language on the HF3 Funding Form.
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HF3 Funding Bank Statement Calculation - Example
Less
Statement Date
Deposits
transfers
1
3/31/2015
$9,800.00
2
2/28/2015
$13,548.00
$2,354.00
3
1/31/2015
$5,489.00
4
12/31/2014
$14,752.00
$4,544.00
5
11/30/2014
$6,352.00
6
10/31/2014
$1,587.00
7
9/30/2014
$15,483.00
$3,254.00
8
8/31/2014
$3,657.00
9
7/31/2014
$45,638.00
$1,500.00
10
6/30/2014
$15,634.00
11
5/31/2014
$8,456.00
12
4/30/2014
$8,955.00
Totals month 1-12
$149,351.00
$11,652.00
Averages
$12,445.92
$971.00
Individual deposits over this amount require explanation
Statement Date
13
3/31/2014
14
2/28/2014
15
1/31/2014
16
12/31/2013
17
11/30/2013
18
10/31/2013
19
9/30/2013
20
8/31/2013
21
7/31/2013
22
6/30/2013
23
5/31/2013
24
4/30/2013
Totals month 13-24
Deposits
$6,500.00
$8,325.00
$4,896.00
$9,865.00
$15,478.00
$12,546.00
$3,520.00
$15,476.00
$9,854.00
$5,368.00
$4,589.00
$1,257.00
$97,674.00
Less
transfers
Less one-time
deposits
$25,000.00
$25,000.00
$2,083.33
Less one-time
deposits
$2,500.00
$2,541.00
$5,041.00
Totals months 1-24

$247,025.00
$16,693.00
Averages
$10,292.71
$695.54
Individual deposits over this amount require explanation
$0.00
$25,000.00
$1,041.67

% Allow ed for Personal

Bank Statements
100.00%
% Allow ed for Business Bank

Statements
70.00%
Total Personal Deposits

$9,800.00
$11,194.00
$5,489.00
$10,208.00
$6,352.00
$1,587.00
$12,229.00
$3,657.00
$19,138.00
$15,634.00
$8,456.00
$8,955.00
$112,699.00
$9,391.58
$14,087.38
Total Business Deposits

$6,860.00
$7,835.80
$3,842.30
$7,145.60
$4,446.40
$1,110.90
$8,560.30
$2,559.90
$13,396.60
$10,943.80
$5,919.20
$6,268.50
$78,889.30
$6,574.11
$9,861.16
Total Deposits
$6,500.00
$8,325.00
$4,896.00
$9,865.00
$15,478.00
$12,546.00
$1,020.00
$15,476.00
$7,313.00
$5,368.00
$4,589.00
$1,257.00
$92,633.00
Total Business
$4,550.00
$5,827.50
$3,427.20
$6,905.50
$10,834.60
$8,782.20
$714.00
$10,833.20
$5,119.10
$3,757.60
$3,212.30
$879.90
$64,843.10
$205,332.00
$8,555.50
$12,833.25
$143,732.40
$5,988.85
$8,983.28
S E LLE R G UIDE
C HAP TE R 6.
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HOME EQUITY LOAN PROGRAMS (A+ AND A GRADES ONLY)

The follow ing sections summarize the HF3 Home Equity Programs. Please refer to the HF3 Loan Program Matrices
and the appropriate HF3 Seller Guide sections for additional information.
SIMULTANEOUS SECOND LIEN PROGRAM RESTRICTIONS

The follow ing restrictions apply to the HF3 Simultaneous Second Lien Program. For additional details, please refer
to the HF3 Loan Program Matrices for additional information.
HF3 1st lien Loan requirements apply to simultaneous second liens.
Simultaneous Second Lien allow able behind Agency (FNMA and FHLMC) and HF3 1st Liens
only
STAND-ALONE SECOND LIEN PROGRAM RESTRICTIONS

The follow ing restrictions apply to the HF3 Stand-Alone Second Lien Program. For additional details, please refer
to the HF3 Loan Program Matrices for additional information.
Allowable First Lien Mortgages (stand-alone second lien)

Eligible:
Jumbo loan
Conventional (Agency) loan
FHA or VA loan
Balloon payment loans w ith remaining term greater than five years from the new HF3 loan
closing date
First mortgage that allow s interest only payments w ith remaining term greater than five years
from the new HF3 loan closing date
Ineligible:
First mortgage w ith a negative amortization feature
Amortization term greater than 40 years
A contract for deed, contract for purchase, or land contract
Privately held 1st liens
Loans w ith provisions prohibiting the placement of additional liens on the mortgaged property
Loans w ith provisions for future advances
Borrower Eligibility
Eligible:
U.S citizens
Permanent Resident Aliens.
Ineligible:
Non-permanent Resident Aliens
Non-occupant Co-Borrow ers
Foreign Nationals
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Occupancy Standards
Eligible:
Primary (1-4 Units) Residences
Second Homes
Investment Properties
Property Types
Eligible:
Single-family (detached, semi-detached, and attached)
PUD (Attached and Detached)
Condominiums (Must be w arrantable, Low and High-Rise acceptable)
2-4 Units
Ineligible:
Non-Warrantable Condominiums
Down Payment
Not applicable for stand-alone seconds
The reserve requirements must meet the reserve requirements for the Galtons first lien mortgage programs.
Loan Balance Restrictions
Minimum Loan Amount - $50,000
Maximum Loan Amount - $500,000
Financing Closing Costs

HF3 Funding does not limit the amount of closing costs that may be financed as part of the Home Equity Loan,
except for any limitations that are imposed by applicable State law s.
Eligible States
The Seller may sell to HF3 Funding home equity loans secured by properties located in the states indicated on the rate
sheet. The Seller should be aw are that certain states may have restrictions regarding loan size, maximum CL TV
or other issues. The Seller is responsible for ensuring compliance w ith all such restrictions.
Ownership Interests
Land Ow nership
Fee Simple
Leasehold
Title Vesting
Individual
Joint Tenants
Tenants in Common
Trust
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Mortgage Insurance Requirements

Mortgage insurance is not required.
Hazard Insurance Requirements

Hazard insurance is required for all home equity loans. Proof of insurance includes a policy or certificate of coverage,
declarations page, a copy of the master policy from the homeow ners association (if applicable), insurance binder,
property insurance form or payment receipt.
The subordinate lender must be added to the hazard insurance policy as second mortgagee. This information should
appear after the first mortgage holder.
The appropriate amount of hazard insurance is determined as the lesser of:
100% of the insurable value of the improvements w ith replacement cost coverage, as established by the
property insurer, or the unpaid principal balance of the mortgage (sufficient coverage for the new combined
loans), OR
The combined unpaid principal balance of the first and any secondary financing, as long as it equals the
minimum amount required to compensate for any damage or loss on a replacement cost basis, typically
80% of the insured value of the improvements. If it does not, then coverage that does provide the minimum
required amount must be obtained.
Individual hazard insurance policies for second lien loan transaction must comply w ith the follow ing:
The coverage must be adequate and in place at time of closing.

If the policy is expiring w ithin 45 days of closing, obtain the paid receipt and updated documentation from the
Borrow er prior to closing.
Escrows
An escrow of funds for the payment of property taxes or hazard insurance premiums should not be set up for the
home equity loan, but the Seller may require such escrow s on the first mortgage in conformance w ith its policies and
procedures, or those of an underlying first mortgage investor.
Rescission Period
The Seller must grant to the Borrow er the right to rescind the home equity loan and notify the Borrow er of that right in
each case to the full extent required under any applicable law s.
Appraisal Requirements
An original signed appraisal or a copy of the appraisal w ith legible copies of the original photographs or computerized
copies of the mortgage premises and comparables are required. All appraisals must be completed for the seller.
Appraisals may not be assigned/transferred to the Seller. Please refer to the HF3 Funding Appraisal Valuation
Summary for additional information.
Additional Property Considerations
Maximum of ten acres allow ed for the Home Equity Program
Properties listed for sale w ithin the last 12 months are not eligible
Rural Properties as classified by the Appraiser
All our other ineligible property types per the Ineligible Property Type section of this Guide
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NON-WARRANTABLE CONDOMINIUMS
Non-w arrantable condos are acceptable under the follow ing circumstances. Projects w ith multiple non-w arrantable
characteristics are ineligible due to risk layering.
Category
Non-Warrantable Allow ances
Litigation
Projects involved in litigation are ineligible.
HOA Reserves
HOA Budget must include a dedicated line item allocation to replacement reserves of
at least 8% of the budget.
Completion Status
The project, or the subjects legal phase along w ith all prior phases, must be
substantially complete (up to buyer preference items). All Common elements in the
project or legal phase must be 100% completed. At least 50% must be sold or under
bona-fide contract.
Investor Concentration
Maximum investor concentration of 60% for new construction projects, recent

conversions, or investment subject properties. Calculation based on total units in
current and previous legal phases.
Single Entity Ow nership
No single entity (an individual, investor group, partnership or corporation) may ow n

more than 20% of the total units in the project.
HOA in Builders Name
The developer may be in control of the condominium association provided the Master
Agreement provides for the homeow ners to take control upon either a predetermined
percentage of unit sales or w ithin a defined time period.
Delinquent HOA Dues
No more than 20% of total units in a project may be 60 days or more past due on the
payment of condominium / association fees.
Property Type
Low -, mid- and high-rise condos are eligible. Complexes over four stories must be
common to the area. Projects less than 10 units must be typical and common for the
market area.
Commercial Space
Maximum 30% of the total space is used for non-residential purposes.
Note: projects w ith a rental desk on site are not allow ed.
Eligible Loan Programs

Non-Warrantable Condominiums are allow ed under the Prime Jumbo and Near Prime Loan programs. Refer
to HF3 Funding Loan Program M atrices for additional information.
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7. COLLATERAL
Eligible Property Types ............................................................................................................. 124
Single-Family Residence ........................................................................................................... 124
Row Home ............................................................................................................................ 124

Townhouse ................................................................................................................................. 124
Multi-Family ................................................................................................................................. 124
Modular Homes (Panelized, Pre-Cut Homes) .......................................................................... 124
Planned Unit Development (PUDs) .......................................................................................... 124

Condominiums ..................................................................................................................................127
Non-Warrantable Condominiums ......................................................................................................133
Rural Properties ......................................................................................................................... 133

Ineligible Property Types ......................................................................................................134
Occupancy........................................................................................................................................ 135
Owner Occupied Primary Residence........................................................................................ 135
Second Home or Vacation Homes.................................................................................................135

Non-Owner Occupied Investment Properties ...............................................................................135
Property Underwriting ..........................................................................................................................136
Seller Considerations....................................................................................................................... 136
Appraiser Qualifications ............................................................................................................. 137
Appraisal Requirements...................................................................................................................137
Appraisal Evaluation................................................................................................................... 139
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C HAP TE R 7.
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ELIGIBLE PROPERTY TYPES

The property types eligible for purchase by HF3 Funding programs are listed below . For property type eligibility,
refer to the HF3 Funding Loan Program M atrices.
SINGLE-FAMILY RESIDENCE
A site-built dw elling designed for single-family use only. The dw elling may share one w all w ith a residence ow ned by
another. The units may be either detached or attached in groupings of tw o (tw in home).
ROW HOME
A site built attached housing unit that is designed for the use of one family and is built on land ow ned by the
Borrow er. A row home is not classified as a Planned Unit Development (PUD) or condo, does not share any common
areas, does not pay Homeow ners Association fees or have covenants, conditions, and restrictions like other
attached dw ellings. These homes are usually tw o or more stories w ith a front and rear entrance only. Row homes are
typically located in communities of row homes w ith similar construction type and appearance and typically fill an
entire block.
TOWNHOUSE
A site built attached dw elling unit generally having tw o or more floors, and attached to other similar units via party
w alls. Tow nhomes are often used in Planned Unit Developments and condominium developments, w hich provide for
clustered or attached housing and common open space.
May be considered single-family, or a PUD depending on the above descriptions.
MULTI-FAMILY
Multi-family homes are a type of residential structure w ith more than one dw elling unit. Properties w ith more than four
units are ineligible.
Tw o-family. A site built dw elling designed for 2 families ow ned by the same party(s)
Three-family. A site built dw elling designed for 3 families ow ned by the same party(s)
Four-family. A site built dw elling designed for 4 families ow ned by the same party(s)
Additional scrutiny w ill be used in situations w here a Borrow er currently ow ns a residence and plans to rent it out
w hile purchasing a 3-4 unit property as an ow ner-occupied property.
The appraiser must provide three rental and three sale comps w ith legible photos. The income appr oach must be
completed.
MODULAR HOMES (PANELIZED, PRE-CUT HOMES)

Modular homes are factory-built homes constructed to the state, local, or regional building codes w here the home w ill
be located. Modular homes are multi-sectioned units that are transported to the site and installed. Modular homes are
treated the same as single-family residences. One comparable must be a modular/prefabricated home. Manufactured
homes are not acceptable as comparables.
PLANNED UNIT DEVELOPMENT (PUDS)

Project Requirements for PUDs
The Seller must ensure that all PUD properties comply w ith the requirements and w arranties described in this
section. A PUD must comply w ith PUD w arranties. HF3 Funding reserves the right to:
Determine w hether a particular Mortgaged Property is a PUD.
Require the Seller to submit, at the Sellers expense, an opinion of legal counsel, in form
and substance, satisfactory to HF3 Funding, and all supporting data that supports the
Sellers PUD w arranties.
Fulfillment of these project requirements does not release the Seller from the responsibility of ensuring that the
project complies w ith additional requirements set forth in this Guide.
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Planned Unit Development (PUD)

A Planned Unit Development (PUD) is a development that has all of the follow ing characteristics:
The individual unit ow ners ow n a parcel of land improved w ith a dw elling. This ow nership is not
in common w ith other unit ow ners.
The development is administered by a Homeow ners Association (HOA) that ow ns and is

obligated to maintain property and improvements w ithin the development for the common use
and benefit of the unit ow ners.
The unit ow ners have an automatic, non-severable interest in the HOA and pay mandatory
assessments.
Classifications of a PUD are not based on its zoning. While there are many styles of homes that can be w ithin a PUD
(tow nhouse, single-family, detached, quads, etc.), this is not the basis of determination. The development must meet the
above definitions, and the Seller must make all w arranties required for this type of ow nership.
Planned Unit Development (PUD) Classifications

There are tw o classifications for PUD projects; 1) Type E are established PUD projects and 2) Type F are new PUD
projects. If the Mortgaged Property is a detached PUD, no additional analysis is required.
If the subject is an attached PUD, the follow ing review is required:
Type E Warranty:
Type E w arranty applies to established PUD projects in w hich the HOA has been turned over to
the unit purchasers.
This is the sole eligibility criterion for qualifying as a Type E project.
Manufactured homes are not allow ed.
Type F Warranty:
Type F w arranty applies to new PUD projects that are still under control of the developer. The
project must meet the follow ing eligibility criteria:
The project cannot have been created by the conversion of existing buildings into a PUD.
The project may not include any multi-dw elling units that represent the security for a single
mortgage.
A sufficient number of the total units in the project (or legal phase) must have been conveyed or
be under contract to be sold to the purchasers in order for the lender to determine w hether the
presales w ill support the responsibilities of the HOA for at least tw o years.
The units must be ow ned in fee simple or leasehold and the unit purchasers must the sole
ow nership interest in, and right to the use or, the projects facilities once control of the ow ners
association has been turned over to them.
Manufactured homes are not allow ed.
The HOA should complete a Limited Project Review Questionnaire (see Forms chapter) for a determination that the
Type F w arranty requirements have been met. The Full Project Review Questionnaire (see Forms chapter) w ill be
required for all New Associations (less than 1 year) and all Non Fannie/Freddie Approved Projects.
HF3 Funding reserves the right to limit the number and/or aggregate dollar amount of loans purchased in any one
subdivision or PUD project or to declare loans in any project ineligible for purchase.
PUD Warranties
The Seller must make the follow ing w arranties for each mortgage secured by a PUD unit:
The property meets the definition of a PUD as described above.
All property insurance requirements, as outlined in this Guide, have been met.
One entity does not ow n more than 10% of the subject project (applies to attached PUDs only).
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Eligible PUD Project Types

If the Mortgaged Property is a detached PUD, additional restrictions are not required.
Attached PUD projects w ith the follow ing characteristics are eligible:
At least 90% of the total units in the project have been conveyed to the unit purchasers
The project is 100% complete, including all units and common elements
The project is not subject to additional phasing or annexation
Ineligible PUD Project Types

Attached PUD projects w ith any of the follow ing characteristics are ineligible:
Properties less than 400 square feet. In all cases, the property must be typical and common for
the market area and supported by tw o comparables.
Projects in current or threatened litigation are typically ineligible. Litigation may be acceptable if
it is determined to be minor and immaterial. Any project for w hich the developer, project
sponsor, or HOA is named as a party to litigation or pending litigation that relates to the safety,
structural soundness, habitability, or functional use.
If the master liability policy does not cover a law suit or judgment, or special assessments
need to be imposed to cover the law suit or judgment
Projects managed and operated as a hotel/motel or contain the w ord hotel/motel in the name.
They may have the follow ing characteristics, how ever, this list is not inclusive:
Daily, monthly or seasonal rentals
Centralized phone and/or key systems
Food or beverage service (room service) is available to the individual units
Lack of a full kitchen w ithin the unit
Housekeeping services on a daily or w eekly basis
Advertising of rental rates
Registration service (check-in desk, off-site desk)
Restrictions on interior decorating or furnishings, or the units are sold fully furnished
Franchise agreements
Low ow ner occupancy density w ith limited or no ow ner-occupants
Affiliation w ith and/or managed by an entity such as a hotel or hospitality chain
Impose black-out dates or do not have year-round access
Shares facilities, common elements or amenities w ith a hotel or resort that is ow ned and
managed by the developer or another third-party entity
Projects w ith mandatory rental pooling agreements that require unit ow ners to either rent their
units or give a management firm control over unit occupancy
Project management and marketing practices such as:
The developer or a third-party entity expects to retain ow nership or control of the project
The developer or a third-party entity retains ow nership or control of any common elements
or amenities
Unit ow ners have no control over any third-party entity that succeeds the developer
Commercial space over w hich the unit ow ners have no control
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The PUD documents and any amendments are silent on the presence of common elements
and/or amenities, their use and/or ow nership, or they state that common elements and/or
amenities may be added to, expanded, or deleted as determined by the developer or another
third-party entity w ithout the consent of the unit ow ners or the HOA.
Manufactured housing projects
Projects w ith revenue sharing by either the HOA or unit ow ner
Projects w ith non-incidental business operations (such as restaurants, health club, spa, etc.)
ow ned and operated by the HOA.
Time-share or segmented ow nership projects
Common interest apartments
The developer, third-party entity, or the HOA operates commercial facilities w ithin the project or
master association, such as retail stores, restaurants, golf course, common areas, recreational
facilities, and amenities usually associated w ith luxury hotels and resorts.
Assisted living or senior care facilities that have a minimum age requirement and/or provide
meal or healthcare services
Continuing care retirement community (CCRC) or life-care facilities. These are residential
projects that are designed to meet the health and housing needs of seniors as their needs
change over time.
Multi-unit PUDs that permit an ow ner to hold title to more than one unit, w ith ow nership of all of
the ow ned unites evidenced by a single deed and financed by a single mortgage
Any project ow ned by several ow ners as tenants-in-common or by a HOA in w hich the

individuals have an undivided interest in a residential apartment building and land, and have the
right of exclusive occupancy of a specific unit in the building.
Live-w ork type PUDs such as artists studio, w orkshops, factories and galleries.
Ow n your ow n property situations w here the legal description gives the Borrow er the right to
occupy a given unit rather than the actual ow nership of the unit.
Projects w ith commercial space used for non-residential purposes that exceeds 20% of the total
space
Projects in w hich a single entity (individual, investor group, partnership, or corporation) other
than the developer, ow ns more than 10% of the units.
New projects in w hich the property seller offers sales/financing structures in excess of the
maximum allow able contributions for individual loans.
Any project that represents a legal, but non-conforming uses of the land, if zoning regulations
prohibit re-building improvement to current density in the event of their full or partial destruction
Projects w ith mandatory club memberships or leased amenities.
CONDOMINIUMS
A condominium unit is a single-family dw elling located in a Condominium Project. Each unit ow ner has title to a single
unit in the building plus an undivided interest in the common areas of the project, and sometimes the exclusive use of
certain limited common areas. A condominium is real estate that is generally defined as separate ow nership in a
residential unit w ith an undivided interest in the real estate designated for common ow nership solely by unit ow ners.
Building types may be low -rise (less than four stories), mid-rise (five to eight stories) or high-rise (greater than eight
stories), attached, detached, and/or site condominiums.
Condominiums create additional risk because the Homeow ners Association (HOA) has legal rights that could
adversely impact the mortgagees rights. Depending on the financial management of the HOA, the value of the
project (unit) can be adversely affected.
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HF3 Funding w ill purchase loans secured by units in Condominium Projects, relying primarily on the Sellers
w arranties. The sustainability, marketability, and financial stability of the project must be supported by the appraisal,
market information, and county records. The project must be located in an area w here condominium ow nership is
common and acceptable.
A Warrantable Condominium is a Condominium Project that meets Agency-eligibility standards and insurance
requirements.
Condominium Project Review

A project review is required for all Condominium Projects. If the project has not been approved by Fannie Mae, the
Originator must initiate the appropriate review , secure the approval, and deliver the approval documentation to HF3
Funding as part of our project review . For projects that are already Fannie Mae-approved, approval-related
documentation must be included in the Loan File submitted for project review .
The follow ing documentation must be supplied for project review s:
The Sellers Loan Approval (Fannie Mae Form 1008) w ith the type/class indicated on the form
Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073/465 or Form
1075/466). Site condominiums can be completed on either the Individual Condominium Unit
Appraisal Report or Single Family Residential Appraisal Report. Common areas and amenities
must be inspected by the appraiser and documented.
A completed copy of the Warranty of Condominium Project Legal Documents (Fannie Mae
Form 1054). Sellers may use their ow n form provided that it includes all the required
information.
HOA certification
Insurance declaration page
Flood determination certificate
Current project budget at least 10% of the budget provides funding for replacement reserves
for capital expenditures and deferred maintenance
CPM/PERS project approval documentation (CPM project acceptance certificate). The

expiration date must not be prior to the Closing Date.
Attorney opinion letter, if applicable
An environmental hazard assessment is required for Condominium Projects if an environmental

problem is identified by the Seller or HF3 Funding through performance of its project
underw riting or Due Diligence. The solution to the problem must be deemed acceptable by
HF3 Funding.
The follow ing Fannie Mae project types are acceptable:
S-CPM Expedited Review or Lender Full Review established projects
Fannie Mae Full Review - Projects that received a final project approval (PERS)
Sellers must provide all documentation referenced above that supports the w arranty of the project. Loans may be
suspended for purchase pending receipt of this information. While the Seller may need to obtain additional
documents as CC&Rs and bylaw s, articles of incorporation, project legal documents, etc. to determine project
eligibility, it is not necessary to provide them in the Loan File. Condominium projects are divided into the follow ing
categories:
New projects : A project in w hich:
Project or legal phase is not fully complete or subject to additional phasing or annexation,
proposed construction, or new construction, or
Less than 90% of the total units in the project have been conveyed (sold) to unit purchasers, or
The control of the HOA has not been turned over to the individual unit ow ners.
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Established projects: A project w hich:
The project is 100% complete, and is not subject to additional phasing or annexation
90% or more of the total units have been conveyed (sold) to the unit purchasers (other than the
developer), and
The control of the HOA has been turned over to the individual unit ow ners.
Site (Detached) Condominium: A detached dw elling unit located in a Condominium Project comprised entirely of
site (detached) condominiums that are not manufactured housing.
Tw o- to Four-Unit Projects: A project that is comprised of at least tw o but no more than four one-unit dw ellings that
are each separately ow ned w ith separate legal descriptions.
Project Concentration Limits

HF3 Funding limits each Seller and Borrow er to no more than the greater of five units or 10% of the total units in a
specific project w ithin a 12-month period. This restriction applies across all product lines. No single entity other than the
developer may ow n more than one unit in a tw o-to-four unit project.
HF3 Funding reserves the right to limit the number and/or aggregate dollar amount of loans purchased in any one
subdivision or Condominium Project, or declare loans in any project ineligible for purchase.
Eligible Project Types

Condominium projects w ith the follow ing characteristics are eligible:
At least 90% of the total units in the project have been conveyed to the unit purchasers.
The project is 100% complete, including all units and common elements
The project is not subject to additional phasing or annexation and;
Control of the HOA has been turned over to the unit ow ners
Note: Non-Warrantable Condominiums are eligible w ith restrictions. Please refer to the Non-Warrantable
Condominium section for program and guideline criteria
Ineligible Project Types

Condominium projects w ith any of the follow ing characteristics are ineligible:
Condominium conversions
Properties less than 400 square feet. In all cases, the property must be typical and common for
the market area and supported by tw o comparables.
Projects in current or threatened litigation are typically ineligible. Litigation may be acceptable if it
is determined to be minor and immaterial. Details of the litigation must be submitted to Galton Funding
to determine acceptability.
Any project for w hich the developer, project sponsor, or HOA is named as a party to
litigation or pending litigation that relates to the safety, structural soundness, habitability, or
functional use.
If the master liability policy does not cover a law suit or judgment, or special assessments
need to be imposed to cover the law suit or judgment
Projects managed and operated as a hotel/motel or contain the w ord hotel/motel in the name.
They may have the follow ing characteristics, how ever, this list is not inclusive:
Daily, monthly or seasonal rentals
Centralized phone and/or key systems
Food or beverage service (room service) is available to the individual units
Lack of a full kitchen w ithin the unit
Housekeeping services on a daily or w eekly basis
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Advertising of rental rates
Registration service (check-in desk, off-site desk)
Restrictions on interior decorating or furnishings, or the units are sold fully furnished
Franchise agreements
Low ow ner occupancy density w ith limited or no ow ner-occupants
Affiliation w ith and/or managed by an entity such as a hotel or hospitality chain
Impose black-out dates or do not have year-round access
Shares facilities, common elements or amenities w ith a hotel or resort that is ow ned and
managed by the developer or another third-party entity
Projects w ith mandatory rental pooling agreements that require unit ow ners to either rent their
units or give a management firm control over unit occupancy
Project management and marketing practices such as:
The developer or a third-party entity expects to retain ow nership or control of the project
The developer or a third-party entity retains ow nership or control of any common elements
or amenities
Unit ow ners have no control over any third-party entity that succeeds the developer
Commercial space over w hich the unit ow ners have no control
The condominium documents and any amendments are silent on the presence of common
elements and/or amenities, their use and/or ow nership, or they state that common elements
and/or amenities may be added to, expanded, or deleted as determined by the developer or
another third-party entity w ithout the consent of the unit ow ners or the HOA.
Manufactured housing projects
Projects w ith revenue sharing by either the HOA or unit ow ner
Projects w ith non-incidental business operations (such as restaurants, health club, spa, etc.)
ow ned and operated by the HOA.
Time-share or segmented ow nership projects
Common interest apartments
The developer, third-party entity, or the HOA operates commercial facilities w ithin the project or
master association, such as retail stores, restaurants, golf course, common areas, recreational
facilities, and amenities usually associated w ith luxury hotels and resorts.
Assisted living or senior care facilities that have a minimum age requirement and provide meal
or healthcare services
Continuing care retirement community (CCRC) or life-care facilities. These are residential
projects that are designed to meet the health and housing needs of seniors as their needs
change over time.
Multi-unit condominiums that permit an ow ner to hold title to more than one unit, w ith ow nership
of all of the ow ned unites evidenced by a single deed and financed by a single mortgage
Any project ow ned by several ow ners as tenants-in-common or by a HOA in w hich the

individuals have an undivided interest in a residential apartment building and land, and have the
right of exclusive occupancy of a specific unit in the building.
Live-w ork type condominiums such as artists studio, w orkshops, factories and galleries.
Ow n your ow n property situations w here the legal description gives the Borrow er the right to
occupy a given unit rather than the actual ow nership of the unit.
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Projects w ith commercial space used for non-residential purposes that exceeds 20% of the total
space
Projects in w hich a single entity (individual, investor group, partnership, or corporation) other
than the developer, ow ns more than 10% of the units.
New projects in w hich the property seller offers sales/financing structures in excess of the
maximum allow able contributions for individual loans.
Any project that represents a legal, but non-conforming uses of the land, if zoning regulations
prohibit re-building improvement to current density in the event of their full or partial destruction
Projects w ith mandatory club memberships or leased amenities.
Multiple property types w ithin the project (e.g., tow nhomes and condominium units w ithin the
same HOA)
Site Condominiums
Condominium projects composed of detached, one-unit dw ellings that meet the follow ing conditions w ill be treated
the same as single-family residences:
The Condominium Project consists solely of detached one-unit dw ellings. (Manufactured homes
are not permitted.)
The Mortgage Property is ow ner occupied.
These transactions must comply w ith all general condominium requirements outlined in this
section.
Warranties for Site Condominiums

If the Mortgaged Property is a site condominium unit, the Seller w arrants the follow ing to HF3 Funding as of the
Purchase Date:
The mortgage on the subject property is covered by a title insurance policy that includes ALTA
Form A, Condominium endorsement.
The property is covered by hazard, flood, liability, and fidelity insurances as required under the
Insurance Requirements section of this chapter.
Insurance Requirements
The Seller must confirm the HOA has a legal obligation to maintain adequate insurance and the budget is sufficient to
cover insurance expenses.
Hazard Insurance. Blanket all risk policy w ith 100% of insurable replacement cost, the
deductible may not to exceed 5% of policy face amount per building. A hazard declaration page
must be included w ith the Loan File as evidence of insurance. The declaration page must also
contain a reference to the subject property. The policy should include a severability of interest
clause or a specific endorsement to preclude the Insurers denial of a unit ow ners claim
because of negligent acts of the HOA or other unit ow ners. The policy should also provide for
10 days notice of cancellation.
Flood Insurance. The policy must be less of 100% of insurable value or the maximum coverage
allow ed per NFIP. Coverage of each unit should be the lesser of $250,000 or the amount of its
replacement cost. Deductible may not exceed $25,000 per building located in the flood zone.
Liability Insurance. General liability of $1,000,000 per occurrence is required for all
condominiums.
Fidelity Bond. Insurance equal to the greater of 1) three months of assessments/maintenance

fees of all units in the project, or 2) the maximum funds that w ill be in the custody of the HOA or
its agent at any time w hile the policy is in force is required or the follow ing review s:
Type R w ith 21 units or more in the project
Type S w ith 21 units or more in the project
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Type T
Type U
HO6- (Walls-In) Coverage: that is no less than 20% of the condo units Appraised Value
(5% deductible limit).
Legal Review
Compliance w ith Law s. The Condominium Project must be created and exist in full compliance
w ith state law requirements of the jurisdiction w here the project is located an all other applicable
law s and regulations.
Right of First Refusal. Any right of first refusal in the Condominium Project documents w ill not
adversely impact the rights of a mortgagee or its assignee to:
Foreclose or take title to a condominium unit pursuant to the remedies in the mortgage.
Accept a deed or assignment in lieu of foreclosure in the event of default by a Borrow er
Sell or lease a unit acquired by the mortgagee or its assignee.
Amendments to Documents. The project documents must provide that amendments of a

material adverse nature to mortgagees by agreed to by mortgagees that represent at least 51%
of the votes of unit estates that are subject to mortgages. The project documents must provide
for any action to terminate the legal status of the project after substantial destruction or
condemnation occurs or for other reasons to be agreed to by mortgagees that represent at least
51% of the votes of the units that are subject to mortgages. Finally the project documents may
provide for implied approval to be assumed w hen a mortgagee fails to submit a response to any
w ritten proposal for an amendment w ithin 60 days after it received proper notice of the
proposal, provided the notice w as delivered by certified or registered mail w ith a return receipt
requested.
Unpaid Dues. Any first mortgagee w ho obtains title to a condominium unit pursuant to the
remedies in the mortgage or through foreclosure w ill not be liable for more than six months of
the units unpaid regularly budgeted dues or charges accrued before acquisition of the title to
the unit by the mortgagee.
Rights of Condominium Mortgagees and Guarantors. The project documents must give the
mortgagee and guarantor of the mortgage on any unit of a project the right to timely w ritten
notice of:
Any condemnation or casualty loss that affects either a material portion of the project or
the unit securing the mortgage.
Any 60-day delinquency in the payment of assessments or charges ow ed by the ow ner of

any unit on w hich it holds the mortgage.
A lapse, cancellation, or materials modification of any insurance policy maintained by the

HOA
Any proposed action that required consent of a specified percentage of mortgagees
First Mortgagees Rights Confirmed. No provision of the Condominium Project documents

gives a condominium unit ow ner or any other party priority over any rights of the first mortgagee
of the condominium unit pursuant to its mortgage in the case of payment to the unit ow ner of
insurance proceeds or condemnation aw ards for losses to or a taking of condominium units
and/or common elements.
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NON-WARRANTABLE CONDOMINIUMS
Non-w arrantable condos are acceptable under the follow ing circumstances. Projects w ith multiple non-w arrantable
characteristics are ineligible due to risk layering.
Category
Non-Warrantable Allow ances
Litigation
Projects involved in litigation are ineligible.
HOA Reserves
HOA Budget must include a dedicated line item allocation to replacement reserves of
at least 8% of the budget.
Completion Status
The project, or the subjects legal phase along w ith all prior phases, must be
substantially complete (up to buyer preference items). All Common elements in the
project or legal phase must be 100% completed. At least 50% must be sold or under
bona-fide contract.
Investor Concentration
Maximum investor concentration of 60% for new construction projects, recent

conversions, or investment subject properties. Calculation based on total units in
current and previous legal phases.
Single Entity Ow nership
No single entity (an individual, investor group, partnership or corporation) may ow n

more than 20% of the total units in the project.
HOA in Builders Name
The developer may be in control of the condominium association provided the Master
Agreement provides for the homeow ners to take control upon either a predetermined
percentage of unit sales or w ithin a defined time period.
Delinquent HOA Dues
No more than 20% of total units in a project may be 60 days or more past due on the
payment of condominium / association fees.
Property Type
Low -, mid- and high-rise condos are eligible. Complexes over four stories must be
common to the area. Projects less than 10 units must be typical and common for the
market area.
Commercial Space
Maximum 30% of the total space is used for non-residential purposes.
Note: projects w ith a rental desk on site are not allow ed.
Eligible Loan Programs

Non-Warrantable Condominiums are allow ed under the Prime Jumbo and Near Prime loan programs. Refer to
HF3 Funding Loan Program M atrices for additional information.
RURAL PROPERTIES
In addition to one of the above property types, a property may be classified as a rural property if any of the follow ing
conditions exits:
The property is classified as rural by the appraiser.
The property is located on a gravel road.
Tw o of the three comparable properties used by the appraiser are more than five miles from the
Mortgaged Property.
Less than 25% of the surrounding market area is developed.
In order to be eligible for any of HF3 Fundings Loan Programs, a rural property must be an ow ner occupied
single -family residence.
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INELIGIBLE PROPERTY TYPES

The follow ing property types are not acceptable for any HF3 Funding Loan Program:
Mixed Use properties
Time share units/projects
Unimproved land
Mobile homes
Condo-hotels
Cooperatives
Log homes
Condominiums and PUDs w ith pending structural litigation
Properties located in a retirement or senior community w ith limited age restrictions.
Manufactured homes
Property that does not have full utilities installed to meet all local health and safety standards
including:
A continuing supply of potable w ater
A public sew er or certified septic system
Public electricity
Natural or LP gas
Properties zoned commercial, industrial, or business (w here highest and best use is
commercial, industrial, or business)
Condominium conversions
Vacant land
Subject to values w ithout a Completion Certificate (Fannie Mae Form 1004D)
Properties w ith square footage of less than 700 square feet (these may be acceptable if
acceptable comparables are w ithin 100 square feet of the size of the Mortgaged Property)
Earth-sheltered or dome home
Any property in below average condition
Working farms, ranches, or orchards
Properties that have been modified to accommodate home businesses, such as catering
service, in-home day care, animal boarding facilities, or auto repair businesses
Properties currently listed for sale, or that have been listed for sale in the past six months are
ineligible for a refinance transaction
Multi-family properties greater than 4 units
Motel conversions
Group homes
Properties located in declining markets
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OCCUPANCY
The follow ing sections outline the occupancy categories and the requirements and guidelines associated w ith them.
Occupancy types are:
Ow ner occupied primary residences
Second/vacation homes
Non-ow ner occupied investment properties
OWNER OCCUPIED PRIMARY RESIDENCE

An ow ner occupied primary residence is a 1-4 unit dw elling that is occupied by the Borrow er as his or her principal
residence. A property w ill not be considered a primary residence unless at least one of the Borrow ers occupies all or
part of the Mortgaged Property as a primary residence w ithin 30 days of the note date. The follow ing define primary
residency:
The Borrow er occupies the property for a major part of the year.
The property location is convenient to the Borrow ers place of employment.
The property must possess the physical characteristics to accommodate the Borrow ers
immediate dependent family. Physical characteristics are considered those typical to both the
ow ner and the neighborhood.
The propertys address is on record for federal income tax reporting, voter registration, drivers
license, and occupational licensing.
In the case of a purchase money transaction, the Borrow er must state his or her intention to
occupy the Mortgaged Property as his or her principal residence.
SECOND HOME OR VACATION HOMES

A second home or vacation home is a one-unit dw elling ow ned and occupied by the Borrow er for his or her exclusive
use and enjoyment. The property should be located at a sufficient distance and time of travel from the primary
residence. The follow ing define a second/vacation home:
The property is suitable for year-round occupancy.
The property is not subject to timesharing, rental agreement ow nership, rental pools, or
agreements that stipulate the rental of the property.
A management firm must not control occupancy.
The property may not be remote or inaccessible and may be used only for residential purposes.
Income from a second/vacation home is not acceptable.
HF3 Funding limits the number of loans a Borrow er may have for second/vacation homes to one. Tw o to four unit
properties are ineligible as second/vacation homes. Second homes are listed in the Ow ner Occupied section of the HF3
Funding Loan Program M atrices.
NON-OWNER OCCUPIED INVESTMENT PROPERTIES

An investment property is a 1-4 unit residential property that is neither the Borrow ers primary residence nor his or her
second/vacation home. Investment property is defined as property ow ned for the purpose of generating a positive net
cash flow .
A loan for investment property that generates a negative cash flow may be eligible for purchase by HF3 Funding as
long as the Borrow ers credit and debt ratios strictly adhere to the Loan Program requirements. The overall
transaction w ill be closely scrutinized and must make sense for the Borrow ers circumstance.
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PROPERTY UNDERWRITING
The property used as collateral for the loan must provide sufficient value to recover the investment should the loan
default. The appraisal provides the basis for evaluating the value of the collateral. The appraiser must present a
concise picture of the neighborhood, the site, and the improvements to support an indic ated value that adequately
supports the estimate of market value. The Seller must perform an audit of the appraisal for the follow ing:
Consistency, logic, and accuracy of the appraisal
Reasonable support for the value of the property
Current and future marketability of the property
Appraiser qualifications
Timeliness and applicability of the data used to determine marketability
Completeness and accuracy of the appraisal forms and exhibits
HF3 Funding may elect to require additional appraisal diligence based on the improvements and condition of the
property or data w ithin the appraisal report. This increased diligence may include additional comparables, an AVM, a
field review , or a second full appraisal on a property.
SELLER CONSIDERATIONS:
The Seller should consider the follow ing w hen review ing collateral for the loan transaction:
The accuracy and completeness of the appraisal and its assessment of the marketability of the
property;
Underw riting the completed appraisal report to determine w hether the Mortgaged Property
presents adequate collateral for the mortgage;
Continually evaluating the quality of the appraisers w ork through normal underw riting review of
all appraisal reports and spot-check field review of appraisals as part of its quality control
program;
Ensuring that the appraiser uses sound reasoning and provides evidence to support the
methodology used for developing the value opinion;
Ensuring that the appraiser provides an accurate opinion, an adequately supported value, and
an accurate description of the property;
Ensuring that the appraiser provides his or her license or certification on the appraisal report;
Complying w ith the appraiser independence requirements outlined in Section 1026.42 of

Regulation Z under the Truth in Lending Act;
Disclosing to the appraiser any information about the Mortgaged Property of w hich it is aw are of
that could impact the marketability of the property;
Providing the appraiser w ith the ratified sales contract and other financing or sales concessions
that are associated w ith the transaction;
Ordering and receiving the appraisal report for each mortgage transaction; and
Ensuring the appraiser does not use unsupported assumptions or use race, color, religion, sex,
handicap, familial status or national origin for any party in the transaction as the basis for
market value.
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APPRAISER QUALIFICATIONS
The Seller should ensure that each appraiser meets the follow ing qualifications:
Has a certified residential appraiser license or a certified general appraiser license in good
standing. All licenses must be issued in the state w here the Mortgaged Property is located.
Meets the independent appraiser requirements for staff appraisers or, as appropriate, fee
appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of
the Federal Reserve System, the FDIC, and the Office of Thrift Supervision w ith their respective
real estate appraisal regulations adopted in accordance w ith Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (regardless of w hether the Seller is subject to
those regulations).
Is actively engaged in appraisal w ork and experienced in the appraisal of properties similar to
the Mortgaged Property.
HF3 Funding may at any time notify the Seller that HF3 Funding w ill no longer approve loans secured by a
Mortgaged Property that w as appraised by a particular appraiser.
APPRAISAL REQUIREMENTS
The mortgage underw riting and approval process depends upon the real estate appraisal report. All appraisals must
be in w riting. The appraisal report must include sufficient and accurate information to assist in the review of the
proposed loans. An appraisal that meets all of the HF3 Funding guideline requirements is required for all Loan
Programs. Each appraisal must satisfy the requirements of Title XI of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (regardless of w hether the Seller is subject to those regulations).
All appraisers must be state licensed and a copy of the license must be submitted w ith the
appraisal
Appraisals must be dated w ithin 90 days of the Note date. In the event that the Disbursement
Date causes the Borrow ers credit report and/or credit file to be greater than 90 days old, Galton
reserves the right to request updated credit, asset, and/or income documentation.
Disbursement Date is the day on w hich the loan closes.
All appraisals obtained during the loan origination and underw riting processes must be included
in the Loan File
Recertification of value is not allow ed
Each Loan must include a third-party valuation review product. Please refer to the HF3 Funding Appraisal
Valuation Summary for complete requirements.
A complete original summary appraisal report is required on each property. The appraisal report must support the
appraisers estimate of the Mortgaged Property market value. It must present a good visual representation of the
neighborhood, site, and improvements. The appraiser should use the comments section of the report to achieve this
goal and attach any additional documentation if needed.
The Seller must ensure that all appraisals are performed in strict accordance w ith all applicable local, state, and
federal law s, regulations, and orders.
All appraisals must conform to the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines adopted
by the Appraisal Standards Board of Appraisal Foundation.
The appraisal report must include the follow ing:
The correct loan transaction type
Occupancy status of the property
Information about property taxes and any special assessments
Property rights appraised
The identity of the Borrow er and the identity of the current ow ner
Address and legal description of the property
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Tax Assessors Parcel Number (APN) for the Mortgaged Property
Any sales concessions and/or loan charges to be paid by the Seller, or any other party that has
a financial interest in the financing or sale of the Mortgaged Property
Identity and address of the appraiser
Required Appraisal Forms

All appraisals must be in w riting. The appraisal report must be submitted on the current version of the appropriate
appraisal forms listed below .
Single-Family Properties and Detached PUD Units
Uniform Residential Appraisal Report (Fannie Mae Form 1004/Freddie Mac Form 70)
Statement of Limiting Conditions and Appraisers Certification (Fannie Mae Form

1004B/Freddie Mac Form 439)
For single-family investment properties, if the income is necessary for qualifying, the follow ing forms are
required:
Single-Family Comparable Rent Schedule (Fannie Mae Form 1007)
Operating Income Statement (Fannie Mae Form 216)
Condominium Units
Individual Condominium or PUD Unit (Fannie Mae Form 1073/Freddie Mac Form 465) w ith
Statement of Limiting Conditions
Appraisers Certification (Fannie Mae Form 1004B/Freddie Mac Form 439)
Tw o-to-Four Unit Properties
Small Residential Income Property Appraisal Reports (Fannie Mae Form 1025)
Statement of Limiting Conditions
Appraisers Certification (Fannie Mae Form 1004B/Freddie Mac Form 430)
Operating Income Statement (Fannie Mae Form 216)
Field Review s
HF3 Funding may, at its discretion, require a field review appraisal to be performed. The Residential
Appraisal Field Review Report (Fannie Mae Form 2000/Freddie Mac Form 1032) must be used for all field
review appraisals. When a field review is requested, the low er value of the original appraisal or field review
w ill be used to determine LTV/CLTV.
Properties w ith Subject to Repairs or Completion
All properties w here the value is defined as subject to repairs, alterations, or conditions or subject to
completion per plans and specifications, require the original Satisfactory Completion Certificate (Freddie
Mac Form 442) along w ith a photo of the completed property. Escrow s for items to be completed or repaired
are not acceptable.
Required Appraisal Attachments

The follow ing attachments must accompany each appraisal:
A location map show ing the Mortgaged Property and comparables.
Three clear descriptive photographs (front, rear, and street scene) of the Mortgaged Property.
One original photograph (may be electronic) of each comparable in the Residential Appraisal
Report. The appraisal must also include photographs of the comparable listings and
comparable rentals in multi-family reports.
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A diagram of the Mortgaged Property floor plan, detailing room layout, location of all rooms, and
exterior doors.
The appraisers cover letter explaining unusual items not adequately addressed in the
appraisal.
Disasters Areas
If the Mortgaged Property is located in an area that is declared a federal disaster area, the Seller must ensure that the
property meets all HF3 Funding pre- or post-disaster collateral requirements. The list of disaster areas can be found
on FEMAs w ebsite at: http://w w w.fema.gov/disasters.
Property Appraised Prior to Disaster
For loans secured by properties appraised before the presidential/state disaster declaration, an interior and
exterior inspection of the Mortgaged Property is required and the follow ing pre-disaster guidelines apply:
The original appraiser should perform the inspection and provide a certificate stating:
Mortgaged Property is free from damaged and is in the same condition as previously
apprised
Marketability and value remain the same
If the original appraiser is not available:
The inspection maybe be completed by any of the follow ing:

o
Property / building inspection company
Licensed general contractor
Building or safety inspector for local municipality
Licensed structural engineer
The inspector must be given a copy of the original appraisal report
The inspector must provide certification, on their letterhead, stating:

o
Original appraisal has been review ed
Interior inspection has been completed
To their best of their know ledge
Subject is free from significant damage
All repairs, if needed, have been completed
Property Appraised After Disaster

For loans secured by properties appraised after the presidential/state disaster declaration, an interior and
exterior inspection of the Mortgaged Property is required and the follow ing post-disaster guidelines apply:
Appraiser must note any damage and its affect on marketability and value
Electronic evaluations are not acceptable
HF3 Funding may at its sole discretion require an interior and exterior inspection of the
property by the original appraiser.
APPRAISAL EVALUATION
The appraisal is an opinion of the value that is objective, unbiased, and supported by research and data. The
follow ing sections are used to evaluate the adequacy of the appraisal:
Neighborhood Analysis
The neighborhood in w hich a property is located is a critical determinant of its marketability and value. All factors
presented in the neighborhood analysis section of the appraisal report must be analyzed. This section must provide
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an accurate description of the neighborhood along w ith any favorable or unfavorable factors and any changes that
influence the market value and marketability of the properties in the neighborhood. The neighborhood analysis should
take into consideration all elements of the propertys neighborhood including:
Neighborhood Property Values
The appraisal must indicate w hether property values in the subject neighborhood are increasing, stable, or
declining. The appraiser must substantiate this by show ing comparable sales w ithin six months of the
appraisal date. Property values should be stable or increasing. Declining values are a conc ern due to the
potential for equity erosion. If the neighborhood property values are declining, the appraiser must explain the
reasons for the decline and its effect on the value of the Mortgaged Property.
Neighborhood Composition
The degree to w hich a neighborhood is built up and its location w ithin a metropolitan area or rural area is
used to assess the reasonableness of the comparable sales. An urban location generally relates to a city,
a suburban location relates to the areas adjacent to a city, and rural location relates to those areas
beyond the urban and suburban areas.
Rural Properties
Rural properties are generally more difficult to assess. Marketing times may be affected by their remote
location. There is greater emphasis placed on the proximity of the comparable sales in determining the rural
propertys marketability.
If any one of the follow ing criteria exists, the property may be classified as rural:
The property is classified as rural by the appraiser.
The property is located on a gravel road.
Tw o of the three comparable properties used by the appraiser are more than 5 miles from the
Mortgaged Property.
Less than 25% of the surrounding market area is developed.
Marketing Time
Properties in the subjects neighborhood should have a marketing time of less than six months.
Present Land Use of the Neighborhood
A likely change in the neighborhoods land use w ould be of concern if the change negatively affects the
propertys future value.
Predominant Value and Price Range
A comparison of the predominant value for the neighborhood should favorably reflect the Mortgaged
Propertys value. If the Mortgaged Property sets the top value for the neighborhood, it may be an indication
that the property represents an over-improvement. Likew ise, a property at the low end of the markets value
may also be a concern. The Seller should consider w hether the property in its current form is likely to
continue to be its highest and best use.
Site Analysis
It is important that the site of the Mortgaged Property is of a size, shape, and topography that is generally acceptable
in its market area in order to have a strong market appeal. The site should have street improvements, utilities, and
other amenities normally expected in the area.
Maximum Acceptable Acreage
The maximum acreage allow ance by HF3 Funding is 10 acres. Generally, value should only be given to 5
acres unless it can be show n w ith comparable sales that 5 to 10 acres is typical for the area. Acreage
exceeding 10 acres w ill be review ed on a case-by-case basis. Comparable market activity of like-sized
parcels must align w ith the acreage of the Mortgaged Property. Ranches, w orking farms, orchards, and/or
commercial operations of any type are not permitted.
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Land Values
Land value and the land-to-value ratio must be review ed. For areas that are built up at more than 25%, the
Mortgaged Propertys land-to-value ratio should be consistent w ith other properties in the area. For areas
that are less than 25% built up, the propertys land-to-value ratio should not be more than 40% and must be
consistent w ith other properties in the area.
Lots w ith More Than One Contiguous Lot
Only the value for the lot upon w hich the Mortgaged Property is located w ill be recognized.
Zoning
The zoning of the Mortgaged Property should be residential in nature.
Recent or pending zone changes that w ould have a negative impact on residential market
values are not acceptable.
Agriculturally zoned properties may be acceptable w hen their use is primarily residential. Value
given to outbuildings w ill not be allow ed unless supported by comparables w ith similar
amenities.
For legal non-conforming property, if the appraisal indicates that the property is of a legal nonconforming use, then one of the follow ing must be occur:
The appraiser must address the issue w ithin the body of the appraisal or present a Letter of
Addendum that states the property can be rebuilt as is in the event of a loss. The source of
the information must also be indicated; OR
A letter from the county stating the property may be rebuilt as-is in the event of a loss must be
obtained.
Flood Zones
Properties that are uninsurable because they are located in a flood hazard area that is ineligible for the
National Flood Insurance Program are not acceptable.
Highest and Best Use
Properties should represent the highest and best use for the site. If the current improvements do not
represent the highest and best use for the Mortgaged Property, the property is not acceptable.
Subject Property Analysis

The Mortgaged Property should conform to the neighborhood in terms of age, design, and materials used for
construction. The appraiser should describe any unacceptable or unusual items that affect marketability. Where
appropriate, adjustments should be made for these items in the estimate of market value.
Acceptable marketability is supported by at least average ratings for quality, construction, condition, and appeal of the
property. Poor or fair ratings should be rare. If there are exceptions, the appraiser must provide suffic ient explanation.
Living Area
Living areas of the Mortgaged Property should be typical of the marketing area. The appraisal should use
comparables of similar size to demonstrate the marketability of the property.
HF3 Funding w ill critically analyze condominiums or attached properties w ith less than 700 square feet
and detached dw ellings w ith less than 800 square feet of living area to determine if their size is typical and
readily marketable in the subject area. Properties w ith less than 700 square feet may be accepted for
purchase by HF3 Funding at HF3 Fundings sole discretion on a case-by-case basis.
Design
The appraiser should assess the design and overall appeal of the Mortgaged Property and evaluate w hether
similarly designed properties exist and are readily marketable in the subject area.
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Outbuildings
Small outbuildings such as barns, stables, w orkshops, or guesthouses must be described on the appraisal
report. Outbuildings must be typical for the subject area and be supported by comparable sales of properties
w ith similar outbuildings.
Building Permits for Additions and Alterations
Building permits are generally not required if the conversion or addition to the living area w as completed in a
w orkman-like manner, confirmed by the appraiser, and supported by photographs of the addition. The
addition or improvements must be of good quality and any possible health or safety violations must be noted
by the appraiser. Room additions or additional units must be permitted to ensure the dw elling w as built to
code.
Properties on Stilts, Posts or Piers
Post and pier foundations are acceptable if it can be show n they are common to the area and the property
meets FEMA standards (FEMA Technical bulletin 9-99).
Condition of Property
All properties are expected to have an average or good rating. The Seller must consider all factors
negatively affecting the propertys condition w hen assessing the overall risk of the loan. These factors may
include:
Deferred Maintenance. Appraisals on properties show ing evidence of deferred maintenance or

subject to items must be described in detail. The appraiser must determine the nature of the
repairs and include the cost to cure. Deferred maintenance that exceeds 2.5% of the property
value or that affects its basic habitability w ill require a Satisfactory Completion Certificate (Form
442).
Debris, Graffiti, or Trash. Properties show ing an excessive amount of debris, graffiti, or trash
may require cleanup. If necessary, a Satisfactory Completion Certificate (Freddie Mac Form
442) and photos w ill be required.
Infestation. If there is any indication of termites or any other infestation, the Seller ensures that
the infestation issue has been investigated, treated, and remedied.
Roof Damage. The Seller must address properties w ith visible evidence of roof leaks and/or
interior w ater damage (ceiling stains) even if the appraisal does not list them. If any of these
conditions exist, the Seller must obtain a roof certification, indicating a remaining useful and
physical life of at least three years.
Other Unacceptable Property Conditions:
Boarded-up properties
Properties that pose an imminent threat to the health and safety of the occupant
Inadequate foundations that do not meet current code requirements for the local
municipality
Inadequate heating (must be permanently affixed legal heating systems)
Properties that lack city or county maintenance services
Properties w ithout w ater or public electricity
Cantilevered properties on stilts, posts, or piers
Shared services for w ell, septic or utilities that are private agreements
Cantilevered properties on stilts, posts, or piers
Properties show ing evidence of mold
Environm ental hazards or nuisances
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Any nuisances or environmental hazards the Seller know s or suspects may exist that could adversely affect
the value of the Mortgaged Property must be disclosed. The appraiser must note these in the appraisal and
document any other nuisances or environmental hazards.
If HF3 Funding suspects a nuisance or environmental hazard, it may require an environmental study be
completed prior to considering the loan for purchase. In this case, the Seller must hire a nationally
recognized and reputable environmental engineering firm to provide a w ritten report. The report must include
an analysis and a detailed list of cleanup costs.
HF3 Funding must be convinced that any know n or suspected hazards w ill not have an adverse effect upon
the Appraised Value of the Mortgaged Property.
Cost Approach
The cost approach is used to determine a propertys market value based on the current cost of constructing a home
from materials that are as similar as possible to those used for the property being appraised. The cost approach is
important w hen appraising new er or substantially rehabilitated properties as a check for the market data approach. If
the appraiser believes that the cost approach is not applicable (turn-of-the-century homes) and if sufficient sales of
comparable properties are available in the market, the cost approach may be omitted w ith comments explaining this
belief.
Whether or not the cost approach is used, the Seller must show an estimated land value. The Seller should base this
figure on the value of the land as though it w ere developed to its highest and best use consistent w ith its present
zoning classification.
External Obsolescence
External obsolescence is a devaluation of property value due to an undesirable or unnecessary condition
outside the property. The appraiser should address the impact on marketability that external obsolescence
has upon the Mortgaged Property. In addition, the appraiser must provide evidence of comparable market
sales that are similarly affected.
Functional Obsolescence
Functional obsolescence is defined as features of a property that has become unfashionable or unnecessary
in the eyes of potential purchasers. The appraiser should describe the functional obsolescence, and provide
similar comparables to demonstrate its marketability or provide the cost to cure, if applicable.
Market Data Approach

The greatest w eight and reliance is placed on the market data approach. The value indicated by this approach must
be supported by an analysis of at least three recently closed comparables located near the Mortgaged Property.
HF3 Funding considers the follow ing key items in its review and analysis of the market data approach:
Proximity of Comparables to the Mortgaged Property
Comparable properties should be located in the same neighborhood and/or school district. Comparable
sales should be located w ithin one mile of the Mortgaged Property in urban and suburban areas. If tw o of
three comparable properties used by the appraiser exceed a distance of five miles from the Mortgaged
Property, the property w ill be considered rural. The appraiser must explain the necessity of using any
comparable property located outside the neighborhood.
Comparables Inside and Outside New Projects
The appraiser must demonstrate the marketability of homes built w ithin new subdivisions or Condominium
Projects through the use of at least one comparable from inside the subdivision or project and one
comparable from a competing subdivision or project.
Age of Comparable Sales
Comparables must have a recent date of sale, preferably w ithin six months of Mortgaged Propertys sale
date. If any of the comparables are over six months old, the appraiser should comment on the market
conditions. If it is necessary to use older comparables, the appraiser should supplement them w ith pending
sales and/or current listings in the neighborhood.
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Similarity of Comparables to Subject

The comparables used by the appraiser must represent the best market data available to support the
propertys estimated value. Comparable sales should be as similar as possible to the Mortgaged Property in
physical attributes, rights of ow nership, zoning, and other amenities.
Adjustments to Comparables
The follow ing are acceptable adjustments to comparables:
Number of Adjustments
The need for numerous adjustments indicates that the comparable is not similar to the Mortgaged Property.
Dollar Amount of Adjustments
The dollar amount of adjustments should reflect the market reaction to the difference betw een the
Mortgaged Property and the comparables, not the cost of a particular difference. The amount should be
realistic and consistent among the comparables.
Adjusted Property Characteristics
Adjustments to certain items such as quality and age are more difficult to justify w ith direct market evidence
than other items such as garages and finished basements. If a comparable contains a significant number of
adjustments for difficult items, its accuracy as a value indicator decreases.
Time Adjustments
The appraiser should keep to a minimum those adjustments made due to the difference in time at w hich the
comparable sold compared to the Mortgaged Property. If used, these comparables should be supported by
documents show ing that they are w arranted.
Square Footage Adjustments
Adjustments for differences in square footage should be realistic for the marketplace.
Total Net Adjustments
Total net adjustments should be minimal if the comparable is truly similar. As a guideline, net adjustments
should not exceed 15% of the sales price of the comparable.
Bracketing
The appraiser should use a bracketing technique during the selection of comparables. This involves
choosing one comparable that is superior to the subject, one that is inferior and one that is most similar.
Through the adjustment process, the superior comparable adjusts dow nw ard to the s ubject, the inferior one
adjusts upw ard, and the most similar comparable requires few , if any, adjustments.
Descriptive Language
The appraiser should describe property characteristics using specific, factual, and detailed language. The
appraiser should use numerals w henever applicable (for lot size, age of improvements, etc.). Clear
descriptions (such as, good, average, fair, or poor) should be used to provide consistency betw een the
property and the comparables.
Sales or Financing Concessions
The subject and all comparables must show the form of financing (financing addenda are helpful).
Adjustments should be considered for different types of financing or special marketing concessions, such as
buy dow ns, apportionment of rent payments tow ard dow n payments, or decorating and other miscellaneous
credits.
The Seller should carefully review the appraisal to determine if the appraiser has adequately demonstrated
the effects of such financing or sales concessions on the propertys value.
Sales History
HF3 Funding w ill review the sales history of the subject and comparables to determine if any substantial
appreciation or property churning has occurred. Large increases in value must be supported by market data
or documented improvements to the property.
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Income Approach
The value indicated by the income approach, if considered applicable by the appraiser, must be derived by the gross
rent multiplier technique using economic market rent. The income approach is required for all tw o-tofour unit
properties and non-ow ner occupied, single-family properties. In general, due to the value dependence on rental
income for investment on tw o-to-four unit properties, HF3 Funding may require additional substantiation if the value
for such properties exceeds a reasonable multiple gross annual economic market rent.
Reconciliation of Valuation Analysis

The value indicated by each of the applicable approaches, together w ith the final reconciliation, must support the
appraisers estimate of market value. This reconciliation is not an averaging technique; rather, it is a process by w hich
the appraiser explains the reasonableness of each approach and its applicability to the final estimate of value.
Additional Review Considerations

Attached housing and multiple units add another level of complexity w hen analyzing the collateral security of the loan.
In addition to the neighborhood, site, and market analysis already discussed above, the Seller should note these
additional components w hen appraising tw o-to-four unit properties, condominiums, and PUDs.
Tw o-to-Four Unit Properties
Tw o-to-four unit properties present an additional level of property risk. Their marketability is tied to the level
of rent commanded by the property and its compatibility w ith the neighborhood.
Neighborhood. The extent to w hich other small residential income properties are located in the
area w ill influence the marketability of the property. Market rents should be stable or increasing.
The appraisers statement of market rents w ill be assessed by the comparable rental properties
used for comparison.
Comparable Rental Data. Market rent is an estimate of the propertys potential to generate
income from its units. Rental data should be supplied from other small, income-producing
properties that are similar in number of units, room count, and living area. Rental comparables
should be readily available and in close proximity to the subject. Going out of the immediate
neighborhood to obtain rental comparables might suggest a lack of rental activity and therefore,
lack of marketability.
Comparable Market Data. HF3 Funding w ill analyze the adequacy of the comparable sales by
the date of sale, proximity to the subject, and number and amount of adjustments. As in the
rental comparables, the appraiser should assess the similarity of the sales comparables to the
subject in terms of gross building area, unit count, and room count.
Condominiums
Neighborhood. The presence of other Condominium Projects in the propertys market area
indicates the appeal and marketability of the condominium under review . Marketability of a
single Condominium Project w ill be difficult to demonstrate if the neighborhood lacks competing
projects.
Project Improvements. Condominium units are affected by the improvements and amenities of
the overall project. As amenities increase, required maintenance and related association fees
increase.
Number of Stories. The selection of comparable sales should be from projects that are similar
in height to the subjects building.
Condominium Conversions. Projects that w ere not originally built for use as a condominium
are considered conversions (a project originally built for use as an apartment or hotel). As a
result, their market appeal may be impaired. Condominium conversions w ill be review ed on a
case-by-case basis.
Age of the Project. A projects age, construction status, and amount of time the Homeow ners
Association has been in control w ill determine the w arranties that the Seller makes w hen selling
the loan to HF3 Funding.
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Stage of Completion. The Seller should consider w hether the amenities are complete.
Under- funded budgets may affect the developers ability to complete all expected
improvements,
w hich may in turn affect the projects future marketability.
Number of Units Sold or Rented. The appraiser should provide information on the number
of units sold and rented. The Seller should analyze the percentage of units sold and rented to
determine w hether the project meets the w arranties published in this Guide.
Project Analysis
A review of the appraisals project analysis section w ill indicate the adequacy of the projects budget and
of the management practices of the Homeow ners Association.
Sales Comparison
HF3 Funding w ill analyze the market sales information in a similar manner to a single-family dw elling.
Recent sales comparables, similarity of living area, and number of adjustments are all considered in
analyzing the appropriateness of the comparables.
The Seller must provide comparables from competing projects that have similar amenities, association
fees, and number of stories. For high-rise condos, the appraiser should select sales comparables w ith a
similar
floor location. For existing projects, re-sales from w ithin the project are desirable along w ith at least one
competing project. When older sales indicate a higher price than more recent sales, project devaluation
may be taking place.
Leasehold Properties
In addition to meeting leasehold loan eligibility requirements, at least one comparable must be leasehold.
Third-Party Property Review Requirements

HF3 Funding w ill require varied third-party appraisal review products, based on loan program, product and
characteristics. Please refer to the HF3 Funding Appraisal Valuation Summary (attached) for appraisal
review requirements by product.
PROPERTY INSURANCE REQUIREMENTS

This section defines the various property insurance and mortgagee clause requirements that must be satisfied for
loans purchased by HF3 Funding.
Name of Insured
The name of the insured stated under each required policy must be similar in form and substance to the follow
ing:
Association of Owners of the [name of condominium] for use and benefit of the individual owners [designated by
name, if required].
Mortgagee Clause
All types of property insurance discussed in this section must contain or have attached the standard (New York)
mortgagee clause, or if unavailable, the standard mortgagee clause commonly accepted by private institutional
mortgage investors in the area w here the Mortgaged Property is located.
In order to protect the interest of HF3 Funding as mortgagee under the terms of the policy and applicable law , the
Seller must notify all insurance carriers of the change in servicer prior to the Servicing Transfer Date.
The Seller must ensure that the mortgagee clause of each insurance policy is properly endorsed and all
necessary notices of transfer have been given or any other necessary action must be taken as reasonably
requested by HF3 Funding.
When permissible, the Seller should have the insurance carrier name the Designated Servicer or its assigns as
the mortgagee under the mortgagee clause, instead of HF3 Funding.
In deed of trust jurisdictions, the name of the servicer beneficiary or the [name of trustee] for benefit of [name
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of Servicer] must be used, instead of the name of the trustee only.

The mortgagee clause must provide that the insurance carrier notify the servicer named at least 10 days before
the effective date of any termination, reduction, or cancellation of the policy.
For condominiums or PUDs, the standard mortgagee clause must be endorsed to provide that any proceeds w ill
be paid to the Association of Ow ners of the [name of condominium or PUD] for the use and benefit of
mortgagees as their interest may appear, or otherw ise endorsed to fully protect the interests of HF3 Funding.
Regardless of how the mortgagee clause is endorsed, the Seller must ensure that all insurance drafts, notices,
policies, invoices, and all other similar documents be delivered directly to the servicer. HF3 Funding w ill not be
responsible for insurance documents that w ere not received by the Designated Servicer due to the Sellers failure
to inform the insurance company of the servicers correct name and address. If HF3 Funding is named as the First
Mortgagee, the servicers address must be used in the endorsements instead of HF3 Funding.
For example:
ABC Corporation
as Servicer for HF3 Funding
14523 SW Millikan Way Suite
200 Beaverton, OR 97005
Property Insurance Types

Hazard Insurance
At a minimum, the Mortgaged Property must be protected against loss or damage from fire and other perils
covered w ithin the scope of standard extended coverage. The policy may not limit or exclude coverage
from damages resulting from w indstorm, hurricane, hail, or any other perils that are normally included under
an extended coverage endorsement. If such coverages are excluded, the Seller must obtain a separate
policy or endorsement that covers these exclusions.
The hazard insurance coverage must cover:
100% of the insurable value of the improvements,
Guaranteed replacement; OR
The total of the actual unpaid balances of the first and all subordinate liens.
The insurance coverage may not be less than the minimum amount required under the terms of coverage
to fully compensate for any damage or loss on a replacement cost basis. The Seller must ensure that the
Mortgaged Property w ill be adequately covered even w hen vacant, and w here necessary, must obtain a
vacancy permit endorsement.
Deductible. Unless applicable law requires a higher deductible, the deductible may not
exceed the lesser of $5,000 or 5% of the applicable coverage amount.
Carrier. The policy must be underw ritten by an Insurer that is acceptable to FNMA or FHLMC
and is currently rated A/VI or better in Bests Insurance Reports. Lloyds of London policies
are also acceptable. The Insurer must also be licensed or authorized by law to conduct
business in the jurisdiction w here the Mortgaged Property is located.
Flood Insurance
If the area w here the Mortgaged Property is located has been identified by the Secretary of HUD or the
Director of the Federal Emergency Management Agency (FEMA) as a special flood hazard area, the Seller
must ensure that flood insurance is maintained and that it provides coverage at least equivalent to the
National Flood Insurance Program (NFIP) in the amount specified in this section. Flood insurance is
required if any part of the principal structure is located w ithin a special flood hazard area. Flood insurance
on detached buildings located w ithin a special flood hazard area is required if they serve as part of the
security for the loan.
HF3 Funding w ill not purchase loans secured by property located in non-participating communities if the
property is located in a special flood hazard area.
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The Seller may w aive the flood insurance requirement if the land, or a portion of it, is in a special flood
hazard area but the improvements are not, or if the Borrow er has provided the Seller w ith a letter of
map amendment from FEMA excluding its improvements or the entire property from the special flood
hazard area.
Building coverage for single-family properties must be maintained in an amount at least equal to the least
of the follow ing:
The maximum available under NFIPs regular program,
The maximum available under NFIPs emergency program if the regular program is not yet in
effect in the area w here the Mortgaged Property is located, OR
The minimum amount required under the terms of coverage to compensate for any damage or
loss on a replacement cost basis, or the unpaid balance of the security instrument if
replacement cost compensation is not available for the type of building insured.
Deductibles may not exceed the low er of $1,000 or 1% of the amount of coverage. Any flood
insurance policy shall contain the standard mortgagee clause as described in the Hazard Insurance
section of this chapter. Flood insurance requirements for single-family properties apply to similar
residential properties w ithin a PUD.
Condominium Insurance
The scope and amount of insurance coverage for condominiums must meet or exceed all local law s,
ordinances, and regulations covering condominiums, and in addition, the follow ing minimum
requirements for insurance coverage must be satisfied:
Scope of Coverage
A multi-peril type of policy covering the entire Condominium Project is required. This policy must provide,
at a minimum, fire and extended coverage and all other coverage in the kinds and amounts commonly
required by private institutional mortgage investors for projects similar in construction, location, and use.
Coverage must be on a replacement cost basis for at least 100% of the insurable value based on
replacement cost.
Boiler Explosion Insurance
If a steam boiler is operating on the Mortgaged Property, boiler explosion insurance must be in force. This
insurance must be evidenced by the standard form of boiler and machinery insurance policy, and must
provide, at a minimum, $100,000 per accident per location.
Fidelity Insurance
The condominium ow ners association must have fidelity coverage against dishonest acts on the part of
directors, managers, trustees, employees, or volunteers responsible for handling funds belonging to or
administered by the Homeow ners Association. The fidelity bond or insurance must name the
condominium ow ners association as the insured. Condominium projects w ith 20 units or less are not
required to have
fidelity insurance.
The coverage must equal the maximum amount of funds held by the condominium ow ners association at
any one time, and must total at least three months of assessments on the entire project, plus reserves.
An appropriate endorsement to the policy to cover any persons w ho serve w ithout compensation must
be added if the policy w ould not otherw ise cover volunteers.
Public Liability Insurance
The condominium ow ners association must have a comprehensive policy of public liability insurance,
covering all of the common elements, commercial spaces, and public w ays in the Condominium Project. The
insurance policy must contain a severability of interest endorsement, precluding the Insurer from denying
the claim of a condominium unit ow ner because of negligent acts of the condominium ow ners
association or other unit ow ners.
Coverage must also include all other coverages in the kinds and amounts required by private institutional
mortgage investors for projects similar in construction, location, and use. Liability coverage must be for at
least $1 million per occurrence for personal injury and/or property damage.
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PUD Insurance
Except as provided for in the follow ing, all coverage required for loans in this Guide is also required for
loans secured by PUD units.
Blanket Insurance Coverage

In lieu of maintaining an individual hazard insurance policy on each PUD unit, the PUD Corporation,
Homeow ners Association, or trust may maintain blanket hazard insurance, providing at a minimum fire,
extended coverage, and all other coverage in the kinds and amounts commonly required by private
institutional mortgage investors for developments similar in construction, location, and use.
The coverage must be in an amount equal to the full replacement value of all of the PUD units w ithout
deductions for depreciation or coinsurance, including the structural portions and fixtures ow ned by the
PUD unit ow ners. Insurance premiums from any blanket insurance coverage must be a common expense
of the PUD Corporation, Homeow ners Association, or trust, and must be included in the regular common
assessments of the PUD unit ow ners. The coverage must name the PUD Corporation, Homeow ners
Association, or trust as the insured for the benefit of the PUD unit ow ners.
Common Property Coverage
The PUD Corporation, Homeow ners Association, or trust must have fire and extended coverage for at
least 100% of the replacement cost of the insurable PUD common property. The insurance must name the
PUD Corporation, Homeow ners Association, or trust as the insured for the benefit of the PUD unit ow
ners. No mortgagee clause in favor of the PUD unit mortgagees is required by HF3 Funding on insurance
covering common property.
Public Liability Insurance
The PUD Corporation, Homeow ners Association, or trust must have a comprehensive policy of public
liability insurance, covering all of the PUDs common property. The insurance policy must contain a
severability of interest clause or endorsement precluding the Insurer from denying the claim of a PUD
unit ow ner because of negligent acts of the PUD Corporation, Homeow ners Association, trust, or other
unit ow ners. Coverage must also include all other coverages in the kinds and amounts commonly
required by private institutional mortgage investors for projects similar in construction, location, and use.
Liability coverage must be for at least $1 million per occurrence for personal injury and/or property
damage.
Other Insurance
If earthquake or other additional insurance coverage is in place due to the location of the Mortgaged Property,
customary practice, or applicable law , the coverage should be maintained after the purchase of the Mortgage
Loan by HF3 Funding.
ESCROW ACCOUNTS
Escrow/Impounds for Taxes and Insurance
All first lien mortgage loans require an escrow impound account for taxes and insurance, unless prohibited by
statute. Where prohibited, the option to include an impound account should be offered to the Borrow er. An escrow
impound account is used to collect monthly property tax and homeow ners insurance; both are included in the
monthly mortgage payment. Once tax and insurance bills come due, the servicer w ill pay each using the funds
from the escrow impound account.
If the Loan Program requires escrow s for taxes and insurance, or if the Borrow er has elected to have escrow s w
here it is not a program requirement, the follow ing applies:
Waiver
Even if the Seller w aives this requirement, the standard escrow /impound provision must remain in the Loan
File.
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Establishm ent of Account

When escrow /impounds are established, all amounts required by the Seller must be paid from the
Borrow ers cash or other equity at closing. These amounts may include prepaid real estate taxes and
hazard and mortgage insurance. The Seller is responsible for determining the amount of the Borrow ers
escrow payment and must take special care in ascertaining and estimating all charges that w ill become due
and payable w ith respect to any Mortgaged Property or relating to the loan. The escrow payments
payable by the Borrow er must be sufficient to pay such expenses as they become due and payable.
Final Escrow Rule

Any loan w ith escrow s must be closed in accordance w ith the Dodd-Frank Act, Public Law 111-203, 124
Stat. 1376 (2010) (2013 Title XIV Final Rules) and the Escrow Requirements Under the Truth in Lending Act
(Regulation Z) (2013 Escrow s Final Rule),rule using the escrow analysis method in compliance w ith all
applicable law s and regulations. The Seller w ill complete and deliver an initial escrow account disclosure
statement that matches the HUD-1 for each loan w ith escrow s.
Interest
When required by applicable law or regulations, interest must be paid to the Borrow er on escrow /impound
accounts.
Amounts Due from Escrow Accounts
All amounts due from the Borrow ers escrow account w ithin 30 days of the Servicing Transfer Date to
HF3 Fundings Designated Servicer must be paid by the Seller on the Borrow ers behalf prior to the transfer
of Servicing.
Responsibility for Penalties and Late Fees
The Seller assumes full responsibility for all penalty payments or late fees that result from incorrect
information or from late or non-payment of any insurance, taxes, or assessments that are due w ithin 30
days of the Servicing Transfer Date.
Second Lien Loans
Escrow s for taxes and insurance should never be set up for second lien loans that are sold to HF3
Funding.
Escrow Holdbacks
Mortgage Loans w ith escrow holdbacks pending are not eligible for delivery. Escrow ed completion funds must have
been fully disbursed and the w ork completed. A completed Form 442; Satisfactory Completion Certificate must be
submitted w ith the Loan.
Escrows for Credit Life/Disability Insurance

Loans w ith credit life/disability insurance are ineligible for purchase by HF3 Funding.
TEMPORARY BUYDOWNS
Loans containing temporary interest rate buydow ns are ineligible for purchase by HF3 Funding.
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DEFINITIONS
The follow ing terms shall have the meanings specified below in this Guide:
Adjustable Rate Mortgage (ARM)

A type of mortgage in w hich the interest rate paid on the outstanding balance varies according to a specific
benchmark. The initial interest rate is normally fixed for a period of time after w hich it resets periodically. The interest
rate paid by the Borrow er w ill be based on a benchmark plus an additional spread, called an ARM margin.
Allonge
An addendum attached to a Note that can be used for endorsements.
Appraised Value
A statement of the Mortgaged Propertys value from a valid property valuation source.
Assignment
An assignment of mortgage is a w ritten document w hich serves as proof of transfer of a loan obligation from the
original Borrow er to a third party. When a loan is sold in the secondary market, the lender is no longer the ow ner of
the note and mortgage. How ever, the lenders rights under the mortgage are not automatically assigned to the
investors. In order to assign such rights, an assignment of mortgage is necessary, since it is a separate document
from the loan document that secures the right to foreclose on the property if the loan is in default.
Borrower
Any applicant for a Mortgage Loan or any obligor under a mortgage Note.
Business Day
Any day other than a Saturday, Sunday, holiday or other day on w hich banking institutions in the State of New York
are required or authorized by executive order to be closed.
Cash-Out Refinance
A mortgage refinancing transaction in w hich the new mortgage amount is greater than the existing mortgage amount,
plus loan settlement costs. The purpose of a Cash-Out Refinance is to extract equity from the Borrow er's home.
Charge-Off
Cessation of collection efforts on a Mortgage Loan w hen the debt is deemed to be uncollectable. A Charge-Off does
not cancel the note or release the lien on the property.
Closing Date
The date of the execution of a Mortgage Note and Mortgage by a Mortgagor (Borrow er) and the Originator.
Co-Borrower
An individual, in addition to the Primary Borrower, w hose credit history, income, or assets are used to qualify for the
Mortgage Loan. The Co-Borrow er is the Primary Borrow ers spouse, domestic partner, or any individual jointly
responsible for repayment of the loan w ith the Borrow er. A Co-Borrow er's obligations are the same as those of the
Primary Borrow er: if the Primary Borrow er does not repay the loan, the Co-Borrow er accepts responsibility for
repaying.
Commitment
A contractual agreement betw een HF3 Funding and the Seller that defines the terms and conditions for the
delivery, sale, and purchase of loans by HF3 Funding according to this Guide and the applicable Program
Documents.
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Condominium Project
A real estate project in w hich each unit ow ner has title to a unit in a building, an undivided interest in the common
areas of the project, and sometimes the exclusive use of certain limited common areas. The project must be legally
established as a Condominium Project in compliance w ith applicable law s in the state in w hich the project is located.
Construction Loan
A loan borrow ed to finance the construction of a home and typically only interest is paid during the construction
period. Once the construction is over, the loan amount becomes due and it becomes a normal mortgage.
Construction-to-Permanent Loan
The conversion of a Construction Loan to a longer-term traditional mortgage after construction has been completed.
Correspondent
Mortgage lenders that are authorized and licensed to originate and sell Mortgage Loans to the Seller.
Custodial File
With respect to any serviced Mortgage Loan, all of the documents that must be maintained on file w ith a document
custodian, ow ner or trustee under applicable servicing requirements w ith respect to such serviced Mortgage Loan.
Delivery Date
The date w hen all loan data and other required information and documentation, and Mortgage Note have been
delivered to the Purchaser or a custodian, and the Purchaser has taken possession of all documentation required for
submission to it.
Designated Custodian
The Document Custodian w ith w hich HF3 Funding has contracted to provide custodial services for Seller / Servicers
that do not have a Custodial Agreement executed w ith another Document Custodian, or for Seller / Servicers selling
Mortgage Loans to HF3 Funding.
Due Diligence
A type of review in w hich the quality of a mortgage portfolio is assessed.
First Mortgage
Any lien that 1) is acceptable to private institutional first-mortgage investors in the area w here Mortgaged Properties
and 2) grants to the lien holder a claim against the Mortgaged Property that, under the law of the jurisdiction w here the
Mortgaged Property is located, is prior to the rights of all others, subject only to prior liens and encumbrances.
First-Time Homebuyers (FTHB)

A Borrow er w ho has not ow ned residential property in the previous three years.
Fixed Rate Mortgage

A type of mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a Fixed
Rate Mortgage is that the interest rate over every time period of the mortgage is know n at the time the mortgage is
originated.
Funding Date
The date w hen HF3 Funding disburses payment to the Seller for a Mortgage Loan HF3 Funding purchased.
Guide
The Seller Guide containing HF3 Funding's selling and Servicing requirements, w hich is periodically updated
through Seller Bulletins and the terms of w hich are incorporated by reference into the MSC.
Home Equity Line of Credit (HELOC)

A line of credit extended to a Borrow er using the Borrow er's home as collateral. Once a maximum loan balance is
established, the Borrow er may draw on the line of credit. Interest is charged on a predetermined variable rate.
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Homeowners Association
An association comprised of unit ow ners that maintain the common elements in a Condominium Project or a Planned
Unit Development for the benefit of the unit ow ners. In a Condominium Project, the association has no ow nership
interest in the common elements. In a Planned Unit Development, the association ow ns the common elements.
Insurer
Any federal or state governmental agency or any federal or state quasi-governmental agency or governmental
sponsored agency or entity or any private mortgage insurer that insures or guarantees any of the Mortgage Loans
and providers of hazard, title or other insurance w ith respect to any of the Mortgage Loans or Mortgaged Properties.
Interest Only
A type of mortgage in w hich, for a set term, the Borrow er pays only the interest on the principal balance, w ith the
principal balance unchanged.
Land Contract/Contract-for-Deed
An agreement betw een a seller and buyer of property in w hich the seller provides financing to the buyer to purchase
the property for an agreed-upon purchase price and the buyer repays the loan in installments.
Lease Option
An agreement that gives a renter the choice to purchase a property during or at the end of the rental period. As long
as the Lease Option period is in effect, the landlord/seller may not offer the property for sale to anyone else.
Loan File
The file containing the loan documents w ith respect to the Mortgage Loan, as w ell as the application package, credit
and closing packages, custodial documents, servicing documents, escrow documents, mortgage documents and all
other files, records and documents necessary to establish the eligibility of the Mortgage Loan for purchase by HF3
Funding, insurance by an Insurer or purchase or pooling by an Investor.
Loan Program / Product

Any one of the specific types of mortgages w hich HF3 Funding w ill purchase as outlined in this Guide.
Lost Note Affidavit

An affidavit filed for the missing or destruction of a Mortgage Note or other indebtedness secured by the deed of trust,
mortgage or other instrument from the ow ner or holder of the instrument. The individual holding the document is at
times the only one w ho can enforce it. These physical documents can be easily misplaced or destroyed. Most of
these instruments can be easily transferred by the lender to a third party. Because of this easy transferability, losing
the document can have dire consequences for the lender. In such cases, Borrow ers must execute new documents, a
process that starts w ith the completion of an Affidavit of Lost Promissory Note. The signing and notarization of the
affidavit w ill be sufficient to prove both the terms and the lenders right of enforcement.
Master Sale Contract (MSC)

An agreement betw een the Purchaser and the Seller providing the terms for origination, underw riting, delivery and
any other relevant terms under w hich the Purchaser w ill purchase eligible Mortgage Loans.
Mixed Use
A Condominium Project w ith both residential and commercial use, are generally located in city centers, and have
limited retail/commercial use on the bottom floors and residential units in on the upper floors. The Mixed Use portion
may be w ithin one building or multiple buildings.
Mortgage Loan
A loan to finance the purchase of real estate w here the Borrow er gives the Originator a lien on the proper as
collateral for the loan.
Mortgage Loan Schedule

Each schedule of one or more Mortgage Loans being sold by a Seller to the Purchaser on any date, setting forth
certain loan-level characteristics w ith respect to each such Mortgage Loan.
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Mortgage Instrument
Any deed of trust, security deed, mortgage, security agreement, financing statement or any other instrument that
constitutes a lien on a one-to-four family residence securing payment by the Originator of a Mortgage Note.
Mortgage Note
The note, deed of trust note, security deed Note or other form of promissory note executed by an obligor and secured
by a Mortgage Instrument evidencing the indebtedness of the obligor under a Mortgage Loan.
Mortgaged Property
Any one-to-four family residence that is encumbered by a Mortgage Instrument.
Maturity Date
The date on w hich payment of the mortgage obligation is due in full.
Non-Borrowing Occupant
An individual w ho is the Primary Borrow ers legal spouse, domestic partner, or any person residing in the Mortgaged
Property w hose credit, income, and/or assets are not considered in the loan qualifying process.
Non-Occupant Co-Borrower
An individual w ho w ill not be living in the Mortgaged Property, but w hose income and/or assets have been used to
qualify for the loan. Although the Non-Occupant Co-Borrow er does not reside in the Mortgaged Property, he or she is
jointly responsible w ith the Primary Borrow er for repaying the loan. A Co-Borrow er's obligations are the same as
those of the Primary Borrow er: if the Primary Borrow er does not repay the loan, the Non-Occupant Co-Borrow er
accepts responsibility for repaying.
Non-Warrantable Condominium
A condominium that does not meet standard agency (Fannie Mae and Freddie Mac) guidelines and is therefore not
eligible for delivery to Fannie Mae and Freddie Mac.
Notice of Default
A w ritten notice sent to the Borrow er stating that the Borrow er is in violation of the terms of the Note or security
instrument.
Originator
The mortgage lender w ho takes the residential mortgage loan application, and offers or negotiates terms of a
residential mortgage loan for compensation or gain.
Pair-Off
A fee charge to a Seller if the Seller fails to deliver the amount of mortgages nec essary to fulfill a loan sale
Commitment w ith HF3 Funding by the specified date.
Planned Unit Development (PUD)

A real estate project in w hich each unit ow ner holds title to a lot and the improvements on the lot, and the
Homeow ners Association (HOA) holds title to the common elements. The unit ow ners have a right to the use of the
common elements, and pay a fee to the HOA to maintain the common elements for their benefit. For the purpose of this
definition, a Condominium Project is not a PUD.
Premium Amount
Premium recapture fees may be charged to the Seller w hen a loan sold to HF3 Funding at a premium is
subsequently paid in full w ithin 180 days from the loan Purchase Date.
Prepayment Premium
The fee charged for early repayment of the Mortgage Loan.
Primary Borrower
The Borrow er earning the largest portion of qualifying income for the Mortgage Loan.
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Prior Eligibility Review Program

The program of HF3 Funding that provides for a determination by the Purchaser, on a date prior to the date on
w hich the Purchaser w ill purchase a Mortgage loan, that such Mortgage Loan meets the underw riting criteria of the
Guide and the Program Documents.
Program Documents
HF3 Fundings Master Sale Contract, Seller Guide, Program Supplements and Commitments governing the sale of any
loans betw een the Purchaser and the Seller.
Program Supplements
Matrices, rate sheets, forms, calculators and additional documentation distributed w ith the Seller Guide.
Purchaser
GMRF Mortgage Acquisition Company, LLC, w hich is the entity that acts as the initial Purchaser of Mortgage Loans from
the Seller under the MSC.
Purchase Date
The date funds are w ired to the Seller or their authorized w arehouse lender by the Purchaser.
Rate/Term Refinance
The refinancing of an existing mortgage for the purpose of changing the interest and/or term of a mortgage w ithout
advancing new money on the loan. This differs from a Cash-Out Refinance, in w hich new money is advanced on the
loan.
Second Mortgage
A type of subordinate mortgage made w hile an original mortgage is still in effect.
Seller
A mortgage banker or institutional lender approved to sell mortgages to HF3 Funding.
Seller ID
A HF3 Funding-assigned number indicating a Seller approved to do business directly w ith HF3 Funding.
Servicing
Processing loan payments, sending statements, managing the escrow /impound account, providing collection services on
delinquent loans, ensuring that insurance and property taxes are made on the property, handling pay-offs and
assumptions, as w ell as various other services.
Warrantable Condominium
A condominium that meets standard agency (Fannie Mae and Freddie Mac) guidelines and is therefore eligible for
delivery to Fannie Mae and Freddie Mac. Guidelines may include but are not limited to pre-sale requirements, occupancy
requirements and LTV/CLTV restrictions.
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FORMS
HF3Funding SellerApplication ............................................................................................ 171

Certificate of Corporate Resolution (Form 102) ........................................................................... 181
Annual Seller Re-Certification Form (Form 200) .......................................................................... 184
Seller Commitment Form (Form 205)...............................................................................................200

New Wire Account Set-Up Form (Form 250)...................................................................................200
Project Review Questionnaire (Form 450)....................................................................................... 202
Delivery File Checklist (Form 500) ............................................................................................... 206
Borrower Affirmation Asset qualifier Loan Program.........................................................................208
Borrower Affirmation asset utilization and Bank Statement Loan Programs ............................. 210
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S ELLER G UIDE

Business Development Manager

Effectiv e Date 10/05/2015

Proprietary and Confidential

Master Sale Contract and Program Documents ...............................................................................

Seller Eligibility Standards ..............................................................................................................

Fidelity Bond and Errors and Omissions Insurance ...................................................................

Quality Control Policies and Reports...............................................................................................

Compliance Policies .....................................................................................................................

Proprietary and Confidential

Continuing Business Obligations...................................................................................................

REPRESENTATIONS AND WARRANTIES ............................................

Pricing and Delivery Options ...........................................................................................................

Underwriting Review ...............................................................................................................................

fraud detection requirements.................................................................................................................

Maximum Loans to One Borrower ........................................................................................................

Credit Report Requirements ..................................................................................................................

Proprietary and Confidential

Loss Mitigation History - Modifications, Forbearances, Rearrangements, Extensions, or

Grade Determination ...................................................................................................................................

Second Trust Deeds, Junior Liens, and Secondary Financing ........................................................

Installment Debt .............................................................................................................................................

Current Principal Residence Pending Sale ...........................................................................

AUTOMOBILE DPRECIATION .............................................................................................................

Income Types ...................................................................................................................................

Requirements and Guidelines..........................................................................................................

Minimum Down Payment .................................................................................................................

Acceptable Assets and Sources of Funds...................................................................................

Rate/Term Refinance .............................................................................................................................

Proprietary and Confidential

Continuity of obligation .....................................................................................................................

Land Contract Refinance .......................................................................................................................

Income Verification ...........................................................................................................................

Asset Documentation .......................................................................................................................

Eligible Property Types ...................................................................................................................

Modular Homes (Panelized, Pre-Cut Homes) ................................................................................

Second Home or Vacation Homes .......................................................................................................

Proprietary and Confidential

Junior Lienholder Notification ....................................................................................................

IRS Reporting .............................................................................................................................

Current Payment History .................................................................................................................

DELIVERY AND FUNDING ................................................................

Delivery and Funding......................................................................................................................

Project Review Questionnaire (Form 450)................................................................................

Proprietary and Confidential

I N TRO DUC TION

Proprietary and Confidential

State Licenses .........................................................................................................................................

Proprietary and Confidential

Proprietary and Confidential

Underwriting Considerations .................................................................................................................

Maximum Loans to One Borrower .......................................................................................................

Selecting the Credit Score ...............................................................................................................

Minimum credit requirements/Tradelines ............................................................................................

Analyzing Delinquent Mortgage/Housing Payments .........................................................................

Sales and Financing Concessions .......................................................................................................

Debt to Income Calculations .................................................................................................................

Current Principal Residence Pending Sale ..........................................................................

Proprietary and Confidential

AUTOMOBILE DPRECIATION ............................................................................................................

Debt Payoff .......................................................................................................................................

Full Documentation ..........................................................................................................................