source:
  type: guide
  id: hud-4000-1-ii-d-underwriting-the-borrower
  authority: FHA Single Family Housing Policy Handbook 4000.1, Part II — d. Underwriting
    the Borrower (05/08/2025)
  description: FHA Single Family Housing Policy Handbook 4000.1, Part II — d. Underwriting
    the Borrower (05/08/2025).
  coverage_tier: operative
obligations:
- id: hud-4000-1-ii-d-underwriting-the-borrower-full
  canonical_id: hud-4000-1-ii-d-underwriting-the-borrower-full
  section: FHA Single Family Housing Policy Handbook 4000.1, Part II — d. Underwriting
    the Borrower (05/08/2025)
  type: do
  tags:
  - regulator-direct
  - fha
  - hud-handbook
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: FHA Single Family Housing Policy Handbook 4000.1, Part II — d. Underwriting
      the Borrower (05/08/2025)
    source_class: hud-handbook
    source_url: https://www.hud.gov/hud-partners/single-family-handbook-4000-1
    snapshot_id: 8c03836f77f317e1
    fetched_at: '2026-05-23T00:28:40Z'
    content_hash: sha256:411430f29b13f9b54a2ebb0e6f6e7087ecd2b90d0da22eb0c8c792eaa2d7d0df
    paragraph_quote: 'd. Underwriting the Borrower (05/08/2025) The Lender must evaluate
      the Borrower’s ability and willingness to repay the Title I Property Improvement
      Loan. The Lender must exercise prudent underwriting practices when evaluating
      the creditworthiness of the Borrower in order to limit the risk of Default.
      Title I Loans are not eligible for automated underwriting through the Technology
      Open To Approved Lenders (TOTAL) Scorecard. Once it is determined that the Borrower
      is eligible, analysis of the Borrower’s credit must be performed for final loan
      approval, including review and documentation of the following: • credit requirements;
      • liabilities; • income requirements; • evaluating liabilities and debt; • asset
      requirements; • debt ratio; and • compensating factors. i. Credit Requirements
      (A) General Credit Requirements FHA’s general credit policy requires Lenders
      to analyze the Borrower’s credit history, liabilities, and debts to determine
      creditworthiness. The Lender must obtain a merged credit report from an independent
      consumer reporting agency. The Lender must obtain a credit report for each Borrower
      who will be obligated on the loan Note. The Lender may obtain a joint report
      for individuals with joint accounts. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      921 Last Revised: 11/26/2025 Before making a determination on the creditworthiness
      of an applicant, a Lender must conduct an interview to resolve any material
      discrepancies between the information on the loan application and information
      on the credit report to determine accurate and complete information. The Lender
      is not required to obtain a credit report for non-credit qualifying Streamline
      Refinance transactions. (B) Types of Credit History (1) Traditional Credit Lenders
      must pull a credit report that draws information from at least one national
      credit bureau. If the Lender obtains credit information from more than one repository,
      the reports should be merged. Lenders are prohibited from developing non-traditional
      credit history to use in place of a traditional credit report. If the credit
      report generates a credit score, the Lender must utilize traditional credit
      history. (a) Requirements for the Credit Report Credit reports must obtain all
      information from at least one credit repository pertaining to credit, residence
      history, and public records information; be in an easy to read and understandable
      format; and not require code translations. The credit report may not contain
      whiteouts, erasures, or alterations. The Lender must retain copies of all credit
      reports. The credit report must include: • the name of the Lender ordering the
      report; • the name, address, and telephone number of the consumer reporting
      agency; • the name and SSN of each Borrower; and • the primary repository from
      which any particular information was pulled, for each account listed. A truncated
      SSN is acceptable for FHA loan insurance purposes provided that the loan application
      captures the full nine-digit SSN. The credit report must also include: • all
      inquiries made within the last 90 Days; • all credit and legal information not
      considered obsolete under the FCRA, including information for the last seven
      years regarding: o bankruptcies; o Judgments; o lawsuits; o foreclosures; and
      II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs
      2. Property Improvement Loan Program Handbook 4000.1 922 Last Revised: 11/26/2025
      o tax liens; and • for each Borrower debt listed: o the date the account was
      opened; o high credit amount; o required monthly payment amount; o unpaid balance;
      and o payment history. (b) Updated Credit Report or Supplement to the Credit
      Report The Lender must obtain an updated credit report or supplement if the
      underwriter identifies material inconsistencies between any information in the
      case binder and the original credit report. (2) Non-traditional Credit For Borrowers
      without a credit score, the Lender must develop the Borrower’s credit history
      using the requirements outlined below. (a) Independent Verification of Non-traditional
      Credit Providers When the Lender uses non-traditional credit, the Lender must
      independently verify the Borrower’s credit references by documenting the existence
      of the credit provider and that the provider extended credit to the Borrower.
      To verify the existence of each credit provider, the Lender must review public
      records from the state, county, or city or other documents providing a similar
      level of objective information. To verify credit information, the Lender must:
      • use a published address or telephone number for the credit provider and not
      rely solely on information provided by the applicant; and • obtain the most
      recent 12 months of canceled checks, or equivalent proof of payment, demonstrating
      the timing of payment to the credit provider. To verify the Borrower’s rental
      payment history, the Lender must obtain a rental reference from the appropriate
      rental management company, provided the Borrower is not renting from a Family
      Member, demonstrating the timing of payment for the most recent 12 months in
      lieu of 12 months of canceled checks or equivalent proof of payment. (b) Sufficiency
      of Non-traditional Credit References To be sufficient to establish the Borrower’s
      credit, the non-traditional credit history must include three credit references,
      including at least one of the following: II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      923 Last Revised: 11/26/2025 • rental housing payments (subject to independent
      verification if the Borrower is a renter); • telephone service; or • utility
      company reference (if not included in the rental housing payment), including:
      o gas; o electricity; o water; o television service; or o internet service.
      If the Lender cannot obtain all three credit references from the list above,
      the Lender may use the following sources of unreported recurring debt: • insurance
      premiums not payroll deducted (e.g., medical, auto, life, renter’s insurance);
      • payment to child care providers made to businesses that provide such services;
      • school tuition; • retail store credit cards (e.g., from department, furniture,
      or appliance stores, or specialty stores); • rent-to-own (e.g., furniture, appliances);
      • payment of that part of medical bills not covered by insurance; • a documented
      12-month history of savings evidenced by regular deposits resulting in an increased
      balance to the account that: o were made at least quarterly; o were not payroll
      deducted; and o caused no Insufficient Funds (NSF) checks; • an automobile lease;
      • a personal loan from an individual with repayment terms in writing and supported
      by canceled checks to document the payments; or • a documented 12-month history
      of payment by the Borrower on an account for which the Borrower is an authorized
      user. (3) Minimum Decision Credit Score (a) Definition The Minimum Decision
      Credit Score (MDCS) refers to the credit score reported on the Borrower’s credit
      report when all reported scores are the same. Where three differing scores are
      reported, the middle score is the MDCS. Where two differing scores are reported,
      the MDCS is the lowest score. Where only one score is reported, that score is
      the MDCS. An MDCS is determined for each Borrower. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      924 Last Revised: 11/26/2025 (b) Standard HUD does not require a minimum credit
      score requirement for the Title I Property Improvement Loan program. (c) Required
      Documentation/Data Entry When credit scores are available, the Lender must report
      all scores in FHAC for each Borrower. (C) Evaluating Credit History (1) General
      Credit The underwriter must examine the Borrower’s overall pattern of credit
      behavior, not just isolated unsatisfactory or slow payments, to determine the
      Borrower’s creditworthiness. (2) Types of Payment Histories The underwriter
      must evaluate the Borrower’s payment histories in the following order: (1) previous
      housing expenses and related expenses, including utilities; (2) installment
      debts; and (3) revolving accounts. (a) Satisfactory Credit The underwriter may
      consider a Borrower to have an acceptable payment history if the Borrower has
      made all housing and installment debt payments on time for the previous 12 months
      and has no more than two 30-Day late Loan Payments or installment payments in
      the previous 24 months. The underwriter may approve the Borrower with an acceptable
      payment history if the Borrower has no major derogatory credit on revolving
      accounts in the previous 12 months. Major derogatory credit excludes medical
      collections. On revolving accounts, major derogatory credit must include any
      payments made more than 90 Days after the due date, or three or more payments
      more than 60 Days after the due date. (b) Payment History Requiring Additional
      Analysis If a Borrower’s credit history does not reflect satisfactory credit
      as stated above, the Borrower’s payment history requires additional analysis.
      The Lender must analyze the Borrower’s delinquent accounts to determine whether
      late payments were based on a disregard for financial obligations, an inability
      to manage debt, or extenuating circumstances. The Lender must II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 925 Last Revised: 11/26/2025 document this analysis
      in the case binder. Any explanation or documentation of delinquent accounts
      must be consistent with other information in the file. The underwriter may only
      approve a Borrower with a credit history not meeting the satisfactory credit
      history above if the underwriter has documented the delinquency was related
      to extenuating circumstances. (3) Payment History on Housing Obligations The
      Lender must determine the Borrower’s housing obligation payment history through:
      • the credit report; • verification of rent received directly from the landlord
      (for landlords with no Identity of Interest with the Borrower); • verification
      of Loan Payments received directly from the loan Servicer; or • a review of
      canceled checks that cover the most recent 12-month period. The Lender must
      verify and document the previous 12 months of housing history. For Borrowers
      who indicate they are living rent-free, the Lender must obtain verification
      from the property owner where they are residing that the Borrower has been living
      rent-free and the amount of time the Borrower has been living rent-free. A Loan
      that has been modified must utilize the payment history in accordance with the
      modification agreement for the time period of modification in determining late
      housing payments. (4) Collection Accounts (a) Definition A Collection Account
      is a Borrower’s loan or debt that has been submitted to a collection agency
      through a creditor. (b) Standard The Lender must determine if collection accounts
      were a result of: • the Borrower’s disregard for financial obligations; • the
      Borrower’s inability to manage debt; or • extenuating circumstances. (c) Required
      Documentation The Lender must document reasons for approving a Loan when the
      Borrower has any collection accounts. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      926 Last Revised: 11/26/2025 The Borrower must provide a letter of explanation,
      which is supported by documentation, for each outstanding collection account.
      The explanation and supporting documentation must be consistent with other credit
      information in the file. (5) Charge Off Accounts (a) Definition Charge Off Account
      refers to a Borrower’s loan or debt that has been written off by the creditor.
      (b) Standard The Lender must determine if Charge Off Accounts were a result
      of: • the Borrower’s disregard for financial obligations; • the Borrower’s inability
      to manage debt; or • extenuating circumstances. (c) Required Documentation The
      Lender must document reasons for approving a Loan when the Borrower has any
      Charge Off Accounts. The Borrower must provide a letter of explanation, which
      is supported by documentation, for each outstanding Charge Off Account. The
      explanation and supporting documentation must be consistent with other credit
      information in the file. (6) Disputed Derogatory Credit Accounts (a) Definition
      Disputed Derogatory Credit Account refers to disputed Charge Off Accounts, disputed
      collection accounts, and disputed accounts with late payments in the last 24
      months. (b) Standard The Lender must analyze the documentation provided for
      consistency with other credit information to determine if the derogatory credit
      account should be considered in the underwriting analysis. The following items
      may be excluded from consideration in the underwriting analysis: • disputed
      medical accounts; and II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title
      I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1 927
      Last Revised: 11/26/2025 • disputed derogatory credit resulting from identity
      theft, credit card theft or unauthorized use provided the Lender includes a
      copy of the police report or other documentation from the creditor to support
      the status of the account in the case binder. (c) Required Documentation If
      the credit report indicates that the Borrower is disputing derogatory credit
      accounts, the Borrower must provide a letter of explanation and documentation
      supporting the basis of the dispute. If the disputed derogatory credit resulted
      from identity theft, credit card theft or unauthorized use balances, the Lender
      must obtain a copy of the police report or other documentation from the creditor
      to support the status of the accounts. (7) Judgments (a) Definition Judgment
      refers to any debt or monetary liability of the Borrower, and the Borrower’s
      spouse in a community property state unless excluded by state law, created by
      a court, or other adjudicating body. (b) Standard The Lender must verify that
      court-ordered Judgments are resolved or paid off prior to or at closing. Regardless
      of the amount of outstanding Judgments, the Lender must determine if the Judgment
      was a result of: • the Borrower’s disregard for financial obligations; • the
      Borrower’s inability to manage debt; or • extenuating circumstances. Exception
      A Judgment is considered resolved if the Borrower has entered into a valid agreement
      with the creditor to make regular payments on the debt, the Borrower has made
      timely payments for at least three months of scheduled payments and the Judgment
      will not supersede the FHA-insured Loan lien. The Borrower cannot prepay scheduled
      payments in order to meet the required minimum of three months of payments.
      The Lender must include the payment amount in the agreement in the calculation
      of the Borrower’s DTI ratio. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      928 Last Revised: 11/26/2025 The Lender must obtain a copy of the agreement
      and evidence that payments were made on time in accordance with the agreement.
      (c) Required Documentation The Lender must provide the following documentation:
      • evidence of payment in full, if paid prior to settlement; • the payoff statement,
      if paid at settlement; or • the payment arrangement with the creditor, if not
      paid prior to or at settlement, and a subordination agreement for any liens
      existing on title. (8) Bankruptcy (a) Standard: Chapter 7 A Chapter 7 bankruptcy
      (liquidation) does not disqualify a Borrower from obtaining an FHA-insured Loan
      if, at the time of case number assignment, at least two years have elapsed since
      the date of the bankruptcy discharge. During the most recent two years, the
      Borrower must have: • re-established good credit; or • chosen not to incur new
      credit obligations. An elapsed period of less than two years, but not less than
      12 months, may be acceptable, if the Borrower: • can show that the bankruptcy
      was caused by extenuating circumstances beyond the Borrower’s control; and •
      has since exhibited a documented ability to manage their financial affairs in
      a responsible manner. (b) Standard: Chapter 13 A Chapter 13 bankruptcy does
      not disqualify a Borrower from obtaining an FHA-insured Loan, if at the time
      of case number assignment at least 12 months of the payout period under the
      bankruptcy has elapsed. The Lender must determine that during the most recent
      12 months, the Borrower’s payment performance has been satisfactory and all
      required payments have been made on time, and the Borrower has received written
      permission from bankruptcy court to enter into the loan transaction. (c) Required
      Documentation If the credit report does not verify the discharge date or additional
      documentation is necessary to determine if any liabilities were discharged in
      the bankruptcy, the Lender must obtain the bankruptcy and discharge documents.
      II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs
      2. Property Improvement Loan Program Handbook 4000.1 929 Last Revised: 11/26/2025
      The Lender must also document that the Borrower’s current situation indicates
      that the events which led to the bankruptcy are not likely to recur. (9) Foreclosure
      and Deed-in-Lieu of Foreclosure (a) Standard A Borrower is generally not eligible
      for a new FHA-insured Loan if the Borrower had a foreclosure or a Deed-in-Lieu
      (DIL) of Foreclosure in the three-year period prior to the date of case number
      assignment. This three-year period begins on the date of the DIL or the date
      that the Borrower transferred ownership of the Property to the foreclosing entity/designee.
      Exception The Lender may grant an exception to the three-year requirement if
      the foreclosure was the result of documented extenuating circumstances that
      were beyond the control of the Borrower, such as a serious illness or death
      of a wage earner, and the Borrower has re-established good credit since the
      foreclosure. Divorce is not considered an extenuating circumstance. An exception
      may, however, be granted where a Borrower’s Mortgage was current at the time
      of the Borrower’s divorce, the ex-spouse received the Property, and the Mortgage
      was later foreclosed. The inability to sell the Property due to a job transfer
      or relocation to another area does not qualify as an extenuating circumstance.
      (b) Required Documentation If the credit report does not indicate the date of
      the foreclosure or DIL of Foreclosure, the Lender must obtain the Settlement
      Statement, deed or other legal documents evidencing the date of property transfer.
      If the foreclosure or DIL of Foreclosure was the result of a circumstance beyond
      the Borrower’s control, the Lender must obtain an explanation of the circumstance
      and document that the circumstance was beyond the Borrower’s control. II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 930 Last Revised: 11/26/2025 (10) Pre-Foreclosure
      Sales (Short Sales) (a) Definition Pre-Foreclosure Sales, also known as Short
      Sales, refer to the sales of real estate that generate proceeds that are less
      than the amount owed on the Property and the lien holders agree to release their
      liens and forgive the deficiency balance on the real estate. (b) Standard A
      Borrower is generally not eligible for a new FHA-insured Loan if they relinquished
      a Property through a Short Sale within three years from the date of case number
      assignment. This three-year period begins on the date of transfer of title by
      Short Sale. (i) Exception for Borrower Current at the Time of Short Sale A Borrower
      is considered eligible for a new FHA-insured Loan if, from the date of case
      number assignment for the new Loan: • all Mortgage Payments on the prior Mortgage
      were made within the month due for the 12-month period preceding the Short Sale;
      and • installment debt payments for the same time period were also made within
      the month due. (ii) Exception for Extenuating Circumstances The Lender may grant
      an exception to the three-year requirement if the Short Sale was the result
      of documented extenuating circumstances that were beyond the control of the
      Borrower, such as a serious illness or death of a wage earner, and the Borrower
      has re-established good credit since the Short Sale. Divorce is not considered
      an extenuating circumstance. An exception may, however, be granted where a Borrower’s
      Mortgage was current at the time the Borrower’s divorce, the ex-spouse received
      the Property, and there was a subsequent Short Sale. The inability to sell the
      Property due to a job transfer or relocation to another area does not qualify
      as an extenuating circumstance. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      931 Last Revised: 11/26/2025 (c) Required Documentation If the credit report
      does not indicate the date of the Short Sale, the Lender must obtain the Settlement
      Statement, deed or other legal documents evidencing the date of property transfer.
      If the Short Sale was the result of a circumstance beyond the Borrower’s control,
      the Lender must obtain an explanation of the circumstance and document that
      the circumstance was beyond the Borrower’s control. (11) Credit Counseling/Payment
      Plan Participating in a consumer credit counseling program does not disqualify
      a Borrower from obtaining an FHA-insured Loan, provided the Lender documents
      that: • one year of the payout period has elapsed under the plan; • the Borrower’s
      payment performance has been satisfactory and all required payments have been
      made on time; and • the Borrower has received written permission from the counseling
      agency to enter into the loan transaction. (D) Evaluating Liabilities and Debt
      (1) General Liabilities and Debt (a) Standard The Lender must determine the
      Borrower’s monthly liabilities by reviewing all debts listed on the credit report,
      the URLA (Fannie Mae Form 1003/Freddie Mac Form 65), and required documentation.
      All applicable monthly liabilities must be included in the qualifying ratio.
      Monthly liabilities do not have to be included if they will be paid off within
      6 months. Accounts for which the Borrower is an authorized user must be included
      in a Borrower’s DTI ratio unless the Borrower provides written certification
      that they do not make payments, and are not expected by the account owner to
      make any payments. Negative income must be subtracted from the Borrower’s gross
      monthly income, and not treated as a recurring monthly liability unless otherwise
      noted. Loans secured against deposited funds, where repayment may be obtained
      through extinguishing the asset and these funds are not included in calculating
      II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs
      2. Property Improvement Loan Program Handbook 4000.1 932 Last Revised: 11/26/2025
      the Borrower’s assets, do not require consideration of repayment for qualifying
      purposes. (b) Required Documentation The Lender must document that the funds
      used to pay off debts prior to closing came from an acceptable source, and the
      Borrower did not incur new debts that were not included in the DTI ratio. (2)
      Undisclosed Debt When a debt or obligation is revealed during the application
      process or the interview with the Borrower that was not listed on the loan application
      and/or credit report, the Lender must: • verify the actual monthly payment amount;
      and • include the monthly payment amount in the agreement in the Borrower’s
      liabilities and debt. (3) Federal Debt (a) Definition Federal Debt refers to
      debt owed to the federal government for which regular payments are being made.
      (b) Standard The Lender must include the debt. The amount of the required payment
      must be included in the calculation of the Borrower’s total DTI. (c) Required
      Documentation The Lender must include documentation from the federal agency
      evidencing the repayment agreement and verification of payments made, if applicable.
      (4) Alimony, Child Support, and Other Maintenance (a) Definition Alimony, Child
      Support, and Other Maintenance are court-ordered or otherwise agreed upon payments.
      (b) Standard For alimony, if the Borrower’s income was not reduced by the amount
      of the monthly alimony obligation in the Lender’s calculation of the Borrower’s
      gross income, the Lender must verify and include the monthly obligation in its
      calculation of the Borrower’s debt. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      933 Last Revised: 11/26/2025 Child support and other maintenance are to be treated
      as a recurring liability and the Lender must include the monthly obligation
      in the Borrower’s liabilities and debt. (c) Required Documentation The Lender
      must obtain the official signed divorce decree, separation agreement, maintenance
      agreement, or other legal order. The Lender must also obtain two of the Borrower’s
      pay stubs covering no less than 28 Days to verify whether the Borrower is subject
      to any order of garnishment relating to the alimony, child support, or other
      maintenance. (d) Calculation of Monthly Obligation The Lender must calculate
      the Borrower’s monthly obligation from the greater of: • the amount shown on
      the most recent decree or agreement establishing the Borrower’s payment obligation;
      or • the monthly amount of the garnishment. (5) Deferred Obligations (a) Definition
      Deferred Obligations (excluding Student Loans) refer to liabilities that have
      been incurred but where payment is deferred or has not yet commenced, including
      accounts in forbearance. (b) Standard The Lender must include deferred obligations
      in the Borrower’s liabilities. (c) Required Documentation The Lender must obtain
      written documentation of the deferral of the liability from the creditor and
      evidence of the outstanding balance and terms of the deferred liability. The
      Lender must obtain evidence of the actual monthly payment obligation, if available.
      (d) Calculation of Monthly Obligation The Lender must use the actual monthly
      payment to be paid on a deferred liability, whenever available. II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 934 Last Revised: 11/26/2025 If the actual monthly
      payment is not available for installment debt, the Lender must utilize the terms
      of the debt or 5 percent of the outstanding balance to establish the monthly
      payment. (6) Student Loans (a) Definition Student Loan refers to liabilities
      incurred for educational purposes. (b) Standard The Lender must include all
      Student Loans in the Borrower’s liabilities, regardless of the payment type
      or status of payments. (c) Required Documentation If the payment used for the
      monthly obligation is less than the monthly payment reported on the Borrower’s
      credit report, the Mortgagee must obtain written documentation of the actual
      monthly payment, the payment status, and evidence of the outstanding balance
      and terms from the creditor or student loan servicer. The Mortgagee may exclude
      the payment from the Borrower’s monthly debt calculation where written documentation
      from the student loan program, creditor, or student loan servicer indicates
      that the loan balance has been forgiven, canceled, discharged, or otherwise
      paid in full. (d) Calculation of Monthly Obligation For outstanding Student
      Loans, regardless of the payment status, the Mortgagee must use: • the payment
      amount reported on the credit report or the actual documented payment, when
      the payment amount is above zero; or • 0.5 percent of the outstanding loan balance,
      when the monthly payment reported on the Borrower’s credit report is zero. Exception
      Where a student loan payment has been suspended in accordance with COVID-19
      emergency relief, the Mortgagee may use the payment amount reported on the credit
      report or the actual documented payment prior to suspension, when that payment
      amount is above $0. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title
      I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1 935
      Last Revised: 11/26/2025 (7) Installment Loans (a) Definition Installment Loans
      (excluding Student Loans) refer to loans, not secured by real estate, that require
      the periodic payment of Principal and Interest (P&I). A loan secured by an interest
      in a timeshare must be considered an Installment Loan. (b) Standard The Lender
      must include the monthly payment shown on the credit report to calculate the
      Borrower’s liabilities. If the credit report does not include a monthly payment
      for the Installment Loan, the Lender must use the amount of the monthly payment
      shown in the loan agreement or payment statement. (c) Required Documentation
      If the monthly payment shown on the credit report is utilized to calculate the
      monthly debts, no further documentation is required. If the credit report does
      not include a monthly payment for the Installment Loan, or the payment reported
      on the credit report is greater than the payment on the loan agreement or payment
      statement, the Lender must use the loan agreement or payment statement to document
      the amount of the monthly payment. If the credit report, loan agreement or payment
      statement shows a deferred payment arrangement for an Installment Loan, refer
      to the Deferred Obligations section. (8) Revolving Charge Accounts (a) Definition
      A Revolving Charge Account refers to a credit arrangement that requires the
      Borrower to make periodic payments but does not require full repayment by a
      specified point of time. (b) Standard The Lender must include the monthly payment
      shown on the credit report for the Revolving Charge Account. Where the credit
      report does not include a monthly payment for the account, the Lender must use
      the payment shown on the current account statement or 5 percent of the outstanding
      balance. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured
      Programs 2. Property Improvement Loan Program Handbook 4000.1 936 Last Revised:
      11/26/2025 (c) Required Documentation The Lender must use the credit report
      to document the terms, balance and payment amount on the account, if available.
      Where the credit report does not reflect the necessary information on the charge
      account, the Lender must obtain a copy of the most recent charge account statement
      or use 5 percent of the outstanding balance to document the monthly payment.
      (9) 30-Day Accounts (a) Definition 30-Day Accounts refer to a credit arrangement
      that requires the Borrower to pay off the outstanding balance on the account
      every month. (b) Standard The Lender must verify the Borrower paid the outstanding
      balance in full on every 30-Day Account each month for the past 12 months. 30-Day
      Accounts that are paid monthly are not included in the Borrower’s debt ratio.
      If the credit report reflects any late payments in the last 12 months, the Lender
      must utilize 5 percent of the outstanding balance as the Borrower’s monthly
      debt to be included in the DTI. (c) Required Documentation The Lender must use
      the credit report to document that the Borrower has paid the balance on the
      account monthly for the previous 12 months or life of the account, if less than
      12 months. The Lender must use the credit report to document the balance, and
      must document sufficient funds are available to pay off the balance after loan
      closing. (10) Business Debt in Borrower’s Name (a) Definition Business Debt
      in the Borrower’s Name refers to liabilities reported on the Borrower’s personal
      credit report, but payment for the debt is attributed to the Borrower’s business.
      (b) Standard When business debt is reported on the Borrower’s personal credit
      report, the debt must be included in the DTI calculation, unless the Lender
      can document that the debt is being paid by the Borrower’s business. II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 937 Last Revised: 11/26/2025 (c) Required Documentation
      When a self-employed Borrower states debt appearing on their personal credit
      report is being paid by their business, the Lender must obtain documentation
      that the debt is paid out of company funds, and the debt was considered in the
      cash flow analysis of the Borrower’s business. (11) Disputed Derogatory Credit
      Accounts (a) Definition Disputed Derogatory Credit Accounts refer to disputed
      Charge Off Accounts, disputed collection accounts, and disputed accounts with
      late payments in the last 24 months. (b) Standard If the Borrower has $1,000
      or more collectively in Disputed Derogatory Credit Accounts, the Lender must
      include a monthly payment in the Borrower’s debt calculation. The following
      items are excluded from the cumulative balance: • disputed medical accounts;
      and • disputed derogatory credit resulting from identity theft, credit card
      theft or unauthorized use. (12) Non-derogatory Disputed Accounts and Disputed
      Accounts Not Indicated on the Credit Report (a) Definition Non-Derogatory Disputed
      Accounts include the following types of accounts: • disputed accounts with zero
      balance; • disputed accounts with late payments aged 24 months or greater; or
      • disputed accounts that are current and paid as agreed. (b) Standard If a Borrower
      is disputing non-derogatory accounts, or is disputing accounts which are not
      indicated on the credit report as being disputed, the Lender must analyze the
      effect of the disputed accounts on the Borrower’s ability to repay the Loan.
      If the dispute results in the Borrower’s monthly debt payments utilized in computing
      the DTI ratio being less than the amount indicated on the credit report, the
      Borrower must provide documentation of the lower payments. II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 938 Last Revised: 11/26/2025 (13) Contingent Liabilities
      (a) Definition A Contingent Liability is a liability that may result in the
      obligation to repay only where a specific event occurs. For example, a contingent
      liability exists when an individual can be held responsible for the repayment
      of a debt if another party defaults on the payment. Contingent liabilities may
      include co- signer liabilities and liabilities resulting from a loan assumption
      without release of liability. (b) Standard The Lender must include monthly payments
      on contingent liabilities in the calculation of the Borrower’s monthly obligations
      unless the Lender verifies that there is no possibility that the debt holder
      will pursue debt collection against the Borrower, should the other party default,
      or the other party has made 12 months of timely payments. (c) Required Documentation
      (i) Mortgage Assumptions The Lender must obtain the agreement creating the contingent
      liability or assumption agreement, and the deed showing transfer of title out
      of the Borrower’s name. (ii) Cosigned Liabilities If the cosigned liability
      is not included in the monthly obligation, the Lender must obtain documentation
      to evidence that the other party to the debt has been making regular on-time
      payments during the previous 12 months. (iii)Court-Ordered Divorce Decree The
      Lender must obtain a copy of the divorce decree ordering the spouse to make
      payments. (d) Calculation of Monthly Obligation The Lender must calculate the
      monthly payment on the contingent liability based on the terms of the agreement
      creating the contingent liability. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      939 Last Revised: 11/26/2025 (14) Collection Accounts (a) Definition A Collection
      Account refers to a Borrower’s loan or debt that has been submitted to a collection
      agency by a creditor. (b) Standard If the credit reports used in the analysis
      show cumulative outstanding collection account balances of $2,000 or greater,
      the Lender must: • verify that the debt is paid in full at the time of or prior
      to settlement using an acceptable source of funds; • verify that the Borrower
      has made payment arrangements with the creditor; or • if a payment arrangement
      is not available, calculate the monthly payment using 5 percent of the outstanding
      balance of each collection and include the monthly payment in the Borrower’s
      DTI ratio. (c) Required Documentation The Lender must provide the following
      documentation: • evidence of payment in full, if paid prior to settlement; •
      the payoff statement, if paid at settlement; or • the payment arrangement with
      the creditor, if not paid prior to or at settlement. If the Lender uses 5 percent
      of the outstanding balance no documentation is required. (15) Charge Off Accounts
      (a) Definition A Charge Off Account refers to a Borrower’s loan or debt that
      has been written off by the creditor. (b) Standard Charge Off Accounts do not
      need to be included in the Borrower’s liabilities or debt. II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 940 Last Revised: 11/26/2025 (16) Private Savings
      Clubs (a) Definition Private Savings Clubs refer to non-traditional methods
      of saving by making deposits into a member-managed resource pool. (b) Standard
      If the Borrower is obligated to continue making ongoing contributions under
      the pooled savings agreement, this obligation must be counted in the Borrower’s
      total debt. The Lender must verify and document the establishment and duration
      of the Borrower’s membership in the club and the amount of the Borrower’s required
      contribution to the club. (c) Required Documentation The Lender must also obtain
      the club’s account ledgers and receipts, and verification from the club treasurer
      that the club is still active. (17) Obligations Not Considered Debt Obligations
      not considered debt include: • medical collections; • federal, state, and local
      taxes, if not delinquent and no payments required; • automatic deductions from
      savings, when not associated with another type of obligation; • Federal Insurance
      Contributions Act (FICA) and other retirement contributions, such as 401(k)
      accounts; • collateralized loans that secure cash, stock, or bond assets; •
      utilities; • child care; • commuting costs; • union dues; • insurance, other
      than property insurance; • open accounts with zero balances; and • voluntary
      deductions, when not associated with another type of obligation. II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 941 Last Revised: 11/26/2025 ii. Income Requirements
      (A) Definition of Effective Income Effective Income refers to income that may
      be used to qualify a Borrower for a Loan. Effective Income must be reasonably
      likely to continue through at least the first three years of the Loan, and meet
      the specific requirements described below. (B) General Income Requirements The
      Lender must document the Borrower’s income and employment history, verify the
      accuracy of the amounts of income being reported, and determine if the income
      can be considered as Effective Income in accordance with the requirements listed
      below. The Lender may only consider income if it is legally derived and, when
      required, properly reported as income on the Borrower’s Tax Returns. Negative
      income must be subtracted from the Borrower’s gross monthly income, and not
      treated as a recurring monthly liability unless otherwise noted. If FHA requires
      Tax Returns as required documentation for any type of Effective Income, the
      Lender must also analyze the Tax Returns in accordance with Appendix 2.0 – Analyzing
      IRS Forms. If the income documents are not received in English, the Lender must
      provide a complete and accurate translation for each document. (C) Employment
      Income (1) Definition Employment Income refers to income received as an employee
      of a business that is reported on IRS Form W-2. (2) Standard The Lender may
      use Employment Income as Effective Income in accordance with the standards provided
      for each type of Employment Income. (3) Required Documentation For all Employment
      Income, the Lender must verify the Borrower’s most recent one year of employment
      and income, and document it using one of the following methods. II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 942 Last Revised: 11/26/2025 (a) Traditional Current
      Employment Documentation The Lender must obtain one of the following to verify
      current employment: • a written Verification of Employment (VOE) covering one
      year; • direct verification by a TPV vendor covering one year, subject to the
      following requirements: o the Borrower has authorized the Lender to verify income
      and employment; and o the date of the data contained in the completed verification
      conforms with FHA requirements in Maximum Age of Mortgage Documents; or • an
      electronic verification acceptable to FHA. (b) Alternative Current Employment
      Documentation If using alternative documentation, the Lender must: • obtain
      a copy of the most recent pay stub that shows the Borrower’s year-to-date earnings;
      • obtain a copy of the IRS Form W-2 from the previous year, if the Borrower
      has been employed by the current employer for less than one year; and • document
      current employment by telephone, sign and date the verification documentation,
      and note the name, title, and telephone number of the person with whom employment
      was verified. (c) Past Employment Documentation Direct verification of the Borrower’s
      employment history for the previous two years is not required if all of the
      following conditions are met: • the current employer confirms a two-year employment
      history, or a paystub reflects a hiring date; • only base pay is used to qualify
      (no overtime, bonuses, or tips); and • the Borrower executes IRS Form 4506,
      Request for Copy of Tax Return, or IRS Form 8821, Tax Information Authorization,
      for the previous two tax years. If the applicant has not been employed with
      the same employer for the previous two years and/or not all conditions immediately
      above can be met, then the Lender must obtain one or a combination of the following
      for the most recent two years to verify the applicant’s employment history:
      • IRS Form W-2(s); • VOE(s); • electronic verification acceptable to FHA; and
      • evidence supporting enrollment in school or the military during the most recent
      two full years. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I
      Insured Programs 2. Property Improvement Loan Program Handbook 4000.1 943 Last
      Revised: 11/26/2025 (D) Primary Employment (1) Definition Primary Employment
      is the Borrower’s principal employment, unless the income falls within a specific
      category identified below. Primary employment is generally full-time employment
      and may be either salaried or hourly. (2) Standard The Lender may use primary
      income as Effective Income. (3) Calculation of Effective Income (a) Salary For
      employees who are salaried and whose income has been and will likely be consistently
      earned, the Lender must use the current salary to calculate Effective Income.
      (b) Hourly For employees who are paid hourly and whose hours do not vary, the
      Lender must consider the Borrower’s current hourly rate to calculate Effective
      Income. For employees who are paid hourly and whose hours vary, the Lender must
      average the income over the previous two years. If the Lender can document an
      increase in pay rate the Lender may use the most recent 12-month average of
      hours at the current pay rate. (E) Part-Time Employment (1) Definition Part-Time
      Employment refers to employment that is not the Borrower’s primary employment
      and is generally performed for less than 40 hours per week. (2) Standard The
      Lender may use part-time income as Effective Income if the Borrower has worked
      a part-time job uninterrupted for the past two years and the current position
      is reasonably likely to continue. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      944 Last Revised: 11/26/2025 (3) Calculation of Effective Income The Lender
      must average the income over the previous two years. If the Lender can document
      an increase in pay rate the Lender may use a 12-month average of hours at the
      current pay rate. (F) Overtime, Bonus, or Tip Income (1) Definition Overtime,
      Bonus, or Tip Income refers to income that the Borrower receives in addition
      to the Borrower’s normal salary. (2) Standard The Lender may use Overtime, Bonus,
      or Tip Income as Effective Income if the Borrower has received this income for
      the past two years and it is reasonably likely to continue. Periods of Overtime,
      Bonus, or Tip Income less than two years may be considered Effective Income
      if the Lender documents that the Overtime, Bonus, or Tip Income has been consistently
      earned over a period of not less than one year and is reasonably likely to continue.
      (3) Calculation of Effective Income For employees with Overtime, Bonus, or Tip
      Income, the Lender must average the income earned over the previous two years
      to calculate Effective Income. However, if the Overtime, Bonus, or Tip Income
      from the current year decreases by 20 percent or more from the previous year,
      the Lender must use the current year’s income. (G) Seasonal Employment (1) Definition
      Seasonal Employment refers to employment that is not year round, regardless
      of the number of hours per week the Borrower works on the job. (2) Standard
      The Lender may consider Seasonal Employment as Effective Income if the Borrower
      has worked the same line of work for the past two years and is reasonably likely
      to be rehired for the next season. The Lender may consider unemployment income
      as Effective Income for those with effective seasonal employment income. II.
      ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2.
      Property Improvement Loan Program Handbook 4000.1 945 Last Revised: 11/26/2025
      (3) Required Documentation For seasonal employees with unemployment income,
      the Lender must document the unemployment income for two full years and there
      must be reasonable assurance that this income will continue. (4) Calculation
      of Effective Income For employees with Employment Income from Seasonal Employment,
      the Lender must average the income earned over the previous two full years to
      calculate Effective Income. (H) Employer Housing Subsidy (1) Definition Employer
      Housing Subsidy refers to employer-provided loan assistance. (2) Standard The
      Lender may utilize Employer Housing Subsidy as Effective Income. (3) Required
      Documentation The Lender must verify and document the existence and the amount
      of the housing subsidy. (4) Calculation of Effective Income For employees receiving
      an Employer Housing Subsidy, the Lender may add the Employer Housing Subsidy
      to the total Effective Income but may not use it to offset the Loan Payment.
      (I) Employed by Family-Owned Business (1) Definition Family-Owned Business Income
      refers to Employment Income earned from a business owned by the Borrower’s family,
      but in which the Borrower owns less than 25 percent. (2) Standard The Lender
      may consider Family-Owned Business Income as Effective Income if the Borrower
      is not an owner in the family-owned business. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      946 Last Revised: 11/26/2025 (3) Required Documentation The Lender must verify
      and document that the Borrower is not an owner in the family-owned business
      by using official business documents showing the ownership percentage. Official
      business documents include corporate resolutions or other business organizational
      documents, business Tax Returns or Schedule K-1 (IRS Form 1065), U.S. Return
      of Partnership Income, or an official letter from a certified public accountant
      on their business letterhead. In addition to traditional or alternative documentation
      requirements, the Lender must obtain copies of signed personal Tax Returns or
      tax transcripts. (4) Calculation of Effective Income (a) Salary For employees
      who are salaried and whose income has been and will likely continue to be consistently
      earned, the Lender must use the current salary to calculate Effective Income.
      (b) Hourly For employees who are paid hourly and whose hours do not vary, the
      Lender must consider the Borrower’s current hourly rate to calculate Effective
      Income. For employees who are paid hourly and whose hours vary, the Lender must
      average the income over the previous two years. If the Lender can document an
      increase in pay rate the Lender may use the most recent 12-month average of
      hours at the current pay rate. (J) Commission Income (1) Definition Commission
      Income refers to income that is paid contingent upon the conducting of a business
      transaction or the performance of a service. (2) Standard The Lender may use
      Commission Income as Effective Income if the Borrower earned the income for
      at least one year in the same or similar line of work and it is reasonably likely
      to continue. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured
      Programs 2. Property Improvement Loan Program Handbook 4000.1 947 Last Revised:
      11/26/2025 (3) Required Documentation For Commission Income less than or equal
      to 25 percent of the Borrower’s total earnings, the Lender must use traditional
      or alternative employment documentation. For Commission Income greater than
      25 percent of the Borrower’s total earnings, the Lender must obtain signed Tax
      Returns, including all applicable schedules, for the last two years. In lieu
      of signed Tax Returns from the Borrower, the Lender may obtain a signed IRS
      Form 4506, IRS Form 4506-C, IVES Request for Transcript of Tax Return, or IRS
      Form 8821, and tax transcripts directly from the IRS. (4) Calculation of Effective
      Income The Lender must calculate Effective Income for commission by using the
      lesser of (a) the average net Commission Income earned over the previous two
      years, or the length of time Commission Income has been earned if less than
      two years; or (b) the average net Commission Income earned over the previous
      one year. The Lender must calculate net Commission Income by subtracting the
      unreimbursed business expenses from the gross Commission Income. (5) Unreimbursed
      Expenses The Lender must reduce the Effective Income by the amount of any unreimbursed
      employee business expenses, as shown on the Borrower’s Schedule A. For information
      on analyzing the Borrower’s IRS Form 1040, U.S. Individual Income Tax Return,
      review Appendix 2.0 – Analyzing IRS Forms. (K) Self-Employment Income (1) Definition
      Self-Employment Income refers to income generated by a business in which the
      Borrower has a 25 percent or greater ownership interest. There are four basic
      types of business structures. They are: • sole proprietorships; • corporations;
      • limited liability or “S” corporations; and • partnerships. II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 948 Last Revised: 11/26/2025 (2) Standard (a) Minimum
      Length of Self-Employment The Lender may consider self-employed borrower income
      if the Borrower has been self-employed for at least two years. If the Borrower
      has been self-employed between one and two years, the Lender may only consider
      the income as Effective Income if the Borrower was previously employed in the
      same line of work in which the Borrower is self-employed or in a related occupation
      for at least two years. (b) Stability of Self-Employment Income Income obtained
      from businesses with annual earnings that are stable or increasing is acceptable.
      If the income from businesses shows a greater than 20 percent decline in Effective
      Income over the analysis period, the Lender must document that the business
      income is now stable. A Lender may consider income as stable after a 20 percent
      reduction if the Lender can document the reduction in income was the result
      of an extenuating circumstance, the Borrower can demonstrate the income has
      been stable or increasing for a minimum of 12 months, and the Borrower qualifies
      utilizing the reduced income. (3) Required Documentation (a) Individual and
      Business Tax Returns The Lender must obtain complete individual and business
      Tax Returns for the most recent two years, including all schedules. In lieu
      of signed individual or business Tax Returns from the Borrower, the Lender may
      obtain a signed IRS Form 4506, IRS Form 4506-C, or IRS Form 8821 and tax transcripts
      directly from the IRS. (b) Profit and Loss Statements and Balance Sheets The
      Lender must obtain a year-to-date Profit and Loss (P&L) statement and balance
      sheet if more than a calendar quarter has elapsed since the date of the most
      recent calendar or fiscal year-end Tax Return was filed by the Borrower. A balance
      sheet is not required for self-employed Borrowers filing Schedule C income.
      If income used to qualify the Borrower exceeds the two-year average of Tax Returns,
      an audited P&L or signed quarterly Tax Return must be obtained from the IRS.
      II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs
      2. Property Improvement Loan Program Handbook 4000.1 949 Last Revised: 11/26/2025
      (c) Business Credit Reports The Lender must obtain a business credit report
      for all corporations and “S” corporations. (4) Calculation of Effective Income
      The Lender must analyze the Borrower’s Tax Returns to determine gross Self-
      Employment Income. Requirements for analyzing self-employment documentation
      are found in Appendix 2.0 – Analyzing IRS Forms. The Lender must calculate gross
      Self-Employment Income by using the lesser of: • the average gross Self-Employment
      Income earned over the previous two years; or • the average gross Self-Employment
      Income earned over the previous one year. (L) Additional Required Analysis of
      Stability of Employment Income (1) Frequent Changes in Employment If the Borrower
      has frequently changed jobs more than three times in the prior 12- month period,
      or has changed lines of work, the Lender must take additional steps to verify
      and document the stability of the Borrower’s Employment Income. The Lender must
      obtain: • transcripts of training and education demonstrating qualification
      for a new position; or • employment documentation evidencing continual increases
      in income and/or benefits. (2) Addressing Gaps in Employment For Borrowers with
      gaps in employment of six months or more (an extended absence), the Lender may
      consider the Borrower’s current income as Effective Income if it can verify
      and document that: • the Borrower has been employed in the current job for at
      least six months at the time of case number assignment; and • the Borrower has
      a two-year work history prior to the absence from employment using standard
      or alternative employment verification. (3) Addressing Temporary Reduction in
      Income (a) Standard For Borrowers with a temporary reduction of income due to
      a short-term disability or similar temporary leave, the Lender may consider
      the Borrower’s current income as Effective Income, if it can verify and document
      that: II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs
      2. Property Improvement Loan Program Handbook 4000.1 950 Last Revised: 11/26/2025
      • the Borrower intends to return to work; • the Borrower has the right to return
      to work; and • the Borrower qualifies for the Loan, taking into account any
      reduction of income due to the circumstance. For Borrowers returning to work
      before or at the time of the first Loan Payment due date, the Lender may use
      the Borrower’s pre-leave income. For Borrowers returning to work after the first
      Loan Payment due date, the Lender may use the Borrower’s current income plus
      available surplus liquid asset Reserves, above and beyond any required Reserves,
      as an income supplement, up to the amount of the Borrower’s pre-leave income.
      The amount of the monthly income supplement is the total amount of surplus Reserves
      divided by the number of months between the first payment due date and the Borrower’s
      intended date of return to work. (b) Required Documentation The Lender must
      provide the following documentation for Borrowers on temporary leave: • a written
      statement from the Borrower confirming the Borrower’s intent to return to work,
      and the intended date of return; • documentation generated by the current employer
      confirming the Borrower’s eligibility to return to current employer at the same
      level of hours/earnings; and • documentation of sufficient liquid assets, in
      accordance with Sources of Funds, used to supplement the Borrower’s income through
      the intended date of return to work with their current employer. (M) Other Sources
      of Effective Income (1) Disability Benefits (a) Definition Disability Benefits
      are benefits received from the Social Security Administration (SSA), Department
      of Veterans Affairs (VA), or a private disability insurance provider. (b) Required
      Documentation The Lender must verify and document the Borrower’s receipt of
      benefits from the SSA, VA, or private disability insurance provider. The Lender
      must obtain documentation that establishes award benefits to the Borrower. II.
      ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2.
      Property Improvement Loan Program Handbook 4000.1 951 Last Revised: 11/26/2025
      If any disability income is due to expire within three years from the date of
      loan application, the Lender should treat that income as a temporary reduction
      in income. If the Notice of Award or equivalent document does not have a defined
      expiration date, the Lender may consider the income effective and reasonably
      likely to continue. The Lender may not rely upon a pending or current re- evaluation
      of medical eligibility for benefit payments as evidence that the benefit payment
      is not reasonably likely to continue. Under no circumstance may the Lender inquire
      into or request documentation concerning the nature of the disability or the
      medical condition of the Borrower. (i) Social Security Disability For Social
      Security Disability income, including Supplemental Security Income (SSI), the
      Lender must obtain a copy of the last Notice of Award letter, or an equivalent
      document that establishes award benefits to the Borrower, and one of the following
      documents: • Tax Returns; • the most recent bank statement evidencing receipt
      of income from the SSA; • a Proof of Income Letter, also known as a “Budget
      Letter” or “Benefits Letter” that evidences income from the SSA; or • a copy
      of the Borrower’s form SSA-1099/1042S, Social Security Benefit Statement. (ii)
      Department of Veterans Affairs Disability For VA disability benefits, the Lender
      must obtain from the Borrower a copy of the veteran’s last Benefits Letter showing
      the amount of the assistance, and one of the following documents: • Tax Returns;
      or • the most recent bank statement evidencing receipt of income from the VA.
      If the Benefits Letter does not have a defined expiration date, the Lender may
      consider the income effective and reasonably likely to continue for at least
      three years. (iii)Private Disability For private disability benefits, the Lender
      must obtain documentation from the private disability insurance provider showing
      the amount of the II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title
      I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1 952
      Last Revised: 11/26/2025 assistance and the expiration date of the benefits,
      if any, and one of the following documents: • Tax Returns; or • the most recent
      bank statement evidencing receipt of income from the insurance provider. (c)
      Calculation of Effective Income The Lender must use the most recent amount of
      benefits received to calculate Effective Income. (2) Alimony, Child Support,
      and/or Maintenance Income (a) Definition Alimony, Child Support, and/or Maintenance
      Income refers to income received from a former spouse or partner or from a noncustodial
      parent of the Borrower’s minor dependent. (b) Required Documentation The Lender
      must obtain a copy of the Borrower’s final divorce decree, legal separation
      agreement, court order, or voluntary payment agreement with documented receipt.
      When using a final divorce decree, legal separation agreement or court order,
      the Lender must obtain evidence of receipt using deposits on bank statements,
      canceled checks, or documentation from the child support agency for the most
      recent three months that supports the amount used in qualifying. The Lender
      must document the voluntary payment agreement with 12 months of canceled checks,
      deposit slips, or Tax Returns. The Lender must provide evidence that the claimed
      income will continue for at least three years. Use the front and pertinent pages
      of the divorce decree/ settlement agreement and/or court order showing the financial
      details. (c) Calculation of Effective Income When using a final divorce decree,
      legal separation agreement or court order, if the Borrower has received consistent
      Alimony, Child Support, and/or Maintenance Income for the most recent three
      months, the Lender may use the current payment to calculate Effective Income.
      When using evidence of voluntary payments, if the Borrower has received consistent
      Alimony, Child Support, and/or Maintenance Income for the most II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 953 Last Revised: 11/26/2025 recent six months,
      the Lender may use the current payment to calculate Effective Income. If the
      alimony, child support or other maintenance payments have not been consistently
      received for the most recent six months, the Lender must use the average of
      the income received over the previous two years to calculate Effective Income.
      If Alimony, Child Support, and/or Maintenance Income has been received for less
      than two years, the Lender must use the average over the time of receipt. (3)
      Military Income (a) Definition Military Income refers to income received by
      military personnel during their period of active, Reserve, or National Guard
      service, including: • base pay • Basic Allowance for Housing • clothing allowances
      • flight or hazard pay • Basic Allowance for Subsistence • proficiency pay The
      Lender may not use education benefits as Effective Income. (b) Required Documentation
      The Lender must obtain a copy of the Borrower’s military Leave and Earnings
      Statement (LES). The Lender must verify the Expiration Term of Service date
      on the LES. If the Expiration Term of Service date is within the first 12 months
      of the Loan, Military Income may only be considered Effective Income if the
      Borrower represents their intent to continue military service. (c) Calculation
      of Effective Income The Lender must use the current amount of Military Income
      received to calculate Effective Income. (4) Mortgage Credit Certificates (a)
      Definition Mortgage Credit Certificates refer to government loan payment subsidies
      other than Section 8 Housing Choice Vouchers. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      954 Last Revised: 11/26/2025 (b) Required Documentation The Lender must verify
      and document that the Governmental Entity subsidizes the Borrower’s Loan Payments
      either through direct payments or tax rebates. (c) Calculation of Effective
      Income Mortgage credit certificate income that is not used to directly offset
      the Loan Payment before calculating the qualifying ratio may be included as
      Effective Income. The Lender must use the current subsidy rate to calculate
      the Effective Income. The mortgage credit certificate must not be used to offset
      the Title I Property Improvement Loan Payment. (5) Section 8 Housing Choice
      Vouchers (a) Definition Section 8 Housing Choice Vouchers refer to housing subsidies
      received under the Housing Choice Voucher homeownership option from a Public
      Housing Agency (PHA). (b) Required Documentation The Lender must verify and
      document the Borrower’s receipt of the Housing Choice Voucher homeownership
      subsidies. The Lender may consider that this income is reasonably likely to
      continue for three years. (c) Calculation of Effective Income The Lender may
      only use Section 8 Housing Choice Voucher subsidies as Effective Income if it
      is not used as an offset to the monthly Loan Payment. The Lender must use the
      current subsidy rate to calculate the Effective Income. The Section 8 Housing
      Choice Voucher must not be used to offset the Title I Property Improvement Loan
      Payment. (6) Other Public Assistance (a) Definition Public Assistance refers
      to income received from government assistance programs. II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 955 Last Revised: 11/26/2025 (b) Required Documentation
      Lenders must verify and document the income received from the government agency.
      If any Public Assistance income is due to expire within three years from the
      date of loan application, that income cannot be used as Effective Income. If
      the documentation does not have a defined expiration date, the Lender may consider
      the income effective and reasonably likely to continue. (c) Calculation of Effective
      Income The Lender must use the current rate of Public Assistance received to
      calculate Effective Income. (7) Automobile Allowance (a) Definition Automobile
      Allowance refers to the funds provided by the Borrower’s employer for automobile
      related expenses. (b) Required Documentation The Lender must verify and document
      the Automobile Allowance received from the employer for the previous two years.
      The Lender must also obtain IRS Form 2106, Employee Business Expenses, for the
      previous two years. (c) Calculation of Effective Income The Lender must determine
      the portion of the allowance that can be considered Effective Income. The Lender
      must subtract automobile expenses as shown on IRS Form 2106 from the Automobile
      Allowance before calculating Effective Income based on the current amount of
      the allowance received. If the Borrower uses the standard per-mile rate in calculating
      automobile expenses, as opposed to the actual cost method, the portion that
      the IRS considers depreciation may be added back to income. Expenses that must
      be treated as recurring debt include: • the Borrower’s monthly car payment;
      and • any loss resulting from the calculation of the difference between the
      actual expenditures and the expense account allowance. II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 956 Last Revised: 11/26/2025 (8) Retirement Income
      Retirement Income refers to income received from Pensions, 401(k) distributions,
      and Social Security. (a) Social Security Income (i) Definition Social Security
      Income or Supplemental Security Income (SSI) refers to income received from
      the SSA other than disability income. (ii) Required Documentation The Lender
      must verify and document the Borrower’s receipt of income from the SSA and that
      it is likely to continue for at least a three-year period from the date of form
      HUD-92900-TI. For SSI, the Lender must obtain any one of the following documents:
      • Tax Returns (minimum one year); • the most recent bank statement evidencing
      receipt of income from the SSA; • a Proof of Income Letter, also known as a
      “Budget Letter” or “Benefits Letter” that evidences income from the SSA; or
      • a copy of the Borrower’s form SSA-1099/1042S. In addition to verification
      of income, the Lender must document the continuance of this income by obtaining
      from the Borrower (1) a copy of the last Notice of Award letter which states
      the SSA’s determination on the Borrower’s eligibility for SSA income, or (2)
      equivalent document that establishes award benefits to the Borrower (equivalent
      document). If any income from the SSA is due to expire within three years from
      the date of form HUD-92900-TI that income may not be used for qualifying. If
      the Notice of Award or equivalent document does not have a defined expiration
      date, the Lender must consider the income effective and reasonably likely to
      continue. The Lender should not request additional documentation from the Borrower
      to demonstrate continuance of SSA income. If the Notice of Award letter or equivalent
      document specifies a future start date for receipt of income, this income may
      only be considered effective on the specified start date. II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 957 Last Revised: 11/26/2025 (iii)Calculation of
      Effective Income The Lender must use the current amount of Social Security Income
      received to calculate Effective Income. (b) Pension (i) Definition Pension refers
      to income received from the Borrower’s former employer(s). (ii) Required Documentation
      The Lender must verify and document the Borrower’s receipt of periodic payments
      from the Borrower’s Pension and that the payments are likely to continue for
      at least three years. The Lender must obtain any one of the following documents:
      • Tax Returns; • the most recent bank statement evidencing receipt of income
      from the former employer; or • a copy of the Borrower’s pension/retirement letter
      from the former employer. (iii)Calculation of Effective Income The Lender must
      use the current amount of Pension income received to calculate Effective Income.
      (c) Individual Retirement Account and 401(k) (i) Definition Individual Retirement
      Account (IRA)/401(k) Income refers to income received from an IRA. (ii) Required
      Documentation The Lender must verify and document the Borrower’s receipt of
      recurring IRA/401(k) distribution Income and that it is reasonably likely to
      continue for three years. The Lender must obtain the most recent IRA/401(k)
      statement and any one of the following documents: • Tax Returns; or • the most
      recent bank statement evidencing receipt of income. II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 958 Last Revised: 11/26/2025 (iii)Calculation of
      Effective Income For Borrowers with IRA/401(k) Income that has been and will
      be consistently received, the Lender must use the current amount of IRA Income
      received to calculate Effective Income. For Borrowers with fluctuating IRA/401(k)
      Income, the Lender must use the average of the IRA/401(k) Income received over
      the previous two years to calculate Effective Income. If IRA/401(k) Income has
      been received for less than two years, the Lender must use the average over
      the time of receipt. (9) Rental Income (a) Definition Rental Income refers to
      income received or to be received from the subject Property or other real estate
      holdings. (b) Rental Income Received from the Subject Property (i) Standard
      The Lender may consider Rental Income from existing and prospective tenants
      if documented in accordance with the following requirements. Net Rental Income
      may be included in the calculation of the Borrower’s DTI ratio if it is stable,
      properly documented, and expected to continue for at least two years. Rental
      Income may be considered if it is shown on an executed lease or the Borrower’s
      Tax Return. (ii) Required Documentation Lenders must obtain Tax Returns and
      all schedules, including Schedule E to IRS Form 1040. The Lender must also obtain
      a current lease or other documentation to verify with reasonable assurance that
      the Rental Income shown on the Tax Return is still being received and can be
      expected to continue. (iii)Calculation of Effective Income The Lender must add
      the net Rental Income to the Borrower’s gross income. The Lender must calculate
      the Rental Income by averaging the net amount shown on the Schedule E of federal
      tax returns. Depreciation, mortgage interest, taxes, insurance, and any HOA
      dues shown on Schedule E may be added back to the net income or loss. II. ORIGINATION
      THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 959 Last Revised: 11/26/2025 Positive net Rental
      Income must be added to the Borrower’s Effective Income. Negative net Rental
      Income must be included as a debt/liability. The Lender may not reduce the Borrower’s
      total Title I Loan Payment by the net subject property Rental Income. (c) Rental
      Income from Owner-Occupied Properties If a Borrower resides in one unit of a
      two- to four-unit Property, Rental Income from the additional units may be added
      to the gross income. The Rental Income must not be used to offset the Loan,
      taxes, insurance, or other shared expense for the Property; these items must
      be considered in the DTI ratio. The net Rental Income may be verified with an
      executed one-year lease or the Borrower’s Schedule E. The net Rental Income
      from Schedule E may be increased by the amount of the loan interest, taxes,
      insurance, and depreciation for the rental unit(s). (d) Boarders of the Subject
      Property (i) Definition Boarder refers to an individual renting space inside
      the Borrower’s Dwelling Unit. (ii) Standard Rental Income from Boarders is only
      acceptable if the Borrower has a two-year history of receiving income from Boarders
      that is shown on the Tax Return and the Borrower is currently receiving boarder
      income. (iii)Required Documentation The Lender must obtain two years of the
      Borrower’s Tax Returns evidencing income from Boarders and the current lease.
      (iv) Calculation of Effective Income The Lender must calculate the Effective
      Income by using the lesser of the two-year average or the current lease. II.
      ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2.
      Property Improvement Loan Program Handbook 4000.1 960 Last Revised: 11/26/2025
      (10) Investment Income (a) Definition Investment Income refers to interest and
      dividend income received from assets such as certificates of deposits, mutual
      funds, stocks, bonds, money markets, and savings and checking accounts. (b)
      Required Documentation The Lender must verify and document the Borrower’s Investment
      Income by obtaining Tax Returns for the previous two years and the most recent
      account statement. (c) Calculation of Effective Income The Lender must calculate
      Investment Income by using the lesser of: • the average Investment Income earned
      over the previous two years; or • the average Investment Income earned over
      the previous one year. The Lender must subtract any of the assets needed to
      fund the property improvement project prior to calculating any interest or dividend
      income. (11) Capital Gains and Losses (a) Definitions Capital Gains refer to
      a profit that results from a disposition of a capital asset, such as a stock,
      bond or real estate, where the amount realized on the disposition exceeds the
      purchase price. Capital Losses refer to a loss that results from a disposition
      of a capital asset, such as a stock, bond or real estate, where the amount realized
      on the disposition is less than the purchase price. (b) Standard Capital gains
      or losses must be considered when determining Effective Income, when the individual
      has a constant turnover of assets resulting in gains or losses. (c) Required
      Documentation Three years’ Tax Returns are required to evaluate an earnings
      trend. If the trend: • results in a gain, it may be added as Effective Income;
      or • consistently shows a loss, it must be deducted from the total income. II.
      ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2.
      Property Improvement Loan Program Handbook 4000.1 961 Last Revised: 11/26/2025
      (12) Expected Income (a) Definition Expected Income refers to income from cost-of-living
      adjustments, performance raises, a new job, or retirement that has not been,
      but will be received within 60 Days of loan closing. (b) Standard The Lender
      may consider Expected Income as Effective Income except when Expected Income
      is to be derived from a family-owned business. (c) Required Documentation The
      Lender must verify and document the existence and amount of Expected Income
      with the employer in writing and that it is guaranteed to begin within 60 Days
      of loan closing. For expected Retirement Income, the Lender must verify the
      amount and that it is guaranteed to begin within 60 Days of the loan closing.
      (d) Calculation of Effective Income Income is calculated in accordance with
      the standards for the type of income being received. The Lender must also verify
      that the Borrower will have sufficient income or Cash Reserves to support the
      Loan Payment and any other obligations between loan closing and the beginning
      of the receipt of the income. (13) Trust Accounts (a) Definition Trust Income
      refers to income that is regularly distributed to a Borrower from a trust. (b)
      Required Documentation The Lender must verify and document the existence of
      the Trust Agreement or other trustee statement. The Lender must also verify
      and document the frequency, duration, and amount of the distribution by obtaining
      a bank statement or transaction history from the bank. The Lender must verify
      that regular payments will continue for at least the first three years of the
      loan term. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured
      Programs 2. Property Improvement Loan Program Handbook 4000.1 962 Last Revised:
      11/26/2025 (c) Calculation of Effective Income The Lender must use the income
      based on the terms and conditions in the Trust Agreement or other trustee statement
      to calculate Effective Income. (14) Annuities or Similar (a) Definition Annuity
      Income refers to a fixed sum of money periodically paid to the Borrower from
      a source other than employment. (b) Required Documentation The Lender must verify
      and document the legal agreement establishing the annuity and guaranteeing the
      continuation of the annuity for the first three years of the Loan. The Lender
      must also obtain a bank statement or a transaction history from a bank evidencing
      receipt of the annuity. (c) Calculation of Effective Income The Lender must
      use the current rate of the annuity to calculate Effective Income. The Lender
      must subtract any of the assets used for the MCI to purchase the subject Property
      from the Borrower’s liquid assets prior to calculating any Annuity Income. (15)
      Notes Receivable Income (a) Definition Notes Receivable Income refers to income
      received by the Borrower as payee or holder in due course of a promissory Note
      or other similar credit instrument. (b) Required Documentation The Lender must
      verify and document the existence of the Note. The Lender must also verify and
      document that payments have been consistently received for the previous 12 months
      by obtaining Tax Returns, deposit slips, or canceled checks and that such payments
      are guaranteed to continue for the first three years of the Loan. (c) Calculation
      of Effective Income For Borrowers who have been and will be receiving a consistent
      amount of Notes Receivable Income, the Lender must use the current rate of income
      to II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs
      2. Property Improvement Loan Program Handbook 4000.1 963 Last Revised: 11/26/2025
      calculate Effective Income. For Borrowers whose Notes Receivable Income fluctuates,
      the Lender must use the average of the Notes Receivable Income received over
      the previous year to calculate Effective Income. (16) Nontaxable Income (Grossing
      Up) (a) Definition Nontaxable Income refers to types of income not subject to
      federal taxes, which includes, but is not limited to: • some portion of Social
      Security Income; • some federal government employee Retirement Income; • Railroad
      Retirement benefits; • some state government Retirement Income; • certain types
      of disability and public assistance payments; • Child Support; • Section 8 Housing
      Choice Vouchers • military allowances; and • other income that is documented
      as being exempt from federal income taxes. (b) Required Documentation The Lender
      must document and support the amount of income to be Grossed Up for any Nontaxable
      Income source and the current tax rate applicable to the Borrower’s income that
      is being Grossed Up. (c) Calculation of Effective Income The amount of continuing
      tax savings attributed to Nontaxable Income may be added to the Borrower’s gross
      income. The percentage of Nontaxable Income that may be added cannot exceed
      15 percent. Higher tax rates may be used based on the Borrower’s tax rate for
      the previous year. If the Borrower was not required to file a Tax Return for
      the previous tax reporting period, the Lender may Gross Up the Nontaxable Income
      by 15 percent. The Lender may not make any additional adjustments or allowances
      based on the number of the Borrower’s dependents. iii. Asset Requirements (A)
      General Asset Requirements If a contract or work estimate exceeds the amount
      of the Title I Loan by the lesser of $1,000 or 5 percent of the loan amount,
      the Lender must verify the source of the II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      964 Last Revised: 11/26/2025 additional funds needed to complete the work and
      for fees and charges that may not be financed in the Title I Loan. (1) No Minimum
      Downpayment Required A Title I Property Improvement Loan does not require a
      minimum borrower payment toward eligible improvements and/or loan fees. (2)
      Cash to Close and Reserves The Lender must document funds in excess of the lesser
      of $1,000 or 5 percent of the loan amount that are used for the purpose of qualifying
      for or closing the Loan, including those to satisfy debt or pay costs outside
      of closing. (a) Determining the Amount Needed for Closing (Initial Payment)
      For a Title I Property Improvement Loan, the amount of cash needed by the Borrower
      to close is the difference between the total cost of the property improvements
      plus non-financed fees and charges, and the Total Loan Amount. For a refinance
      transaction, the amount of cash needed by the Borrower to close a Property Improvement
      Loan is the difference between the total Payoff plus non-financed fees and charges
      associated with the new Loan, and the total new Title I loan amount. (b) Initial
      Payment (i) Definition Initial Payment refers to the amount of money that a
      Borrower must pay for Non-financeable Fees and Charges and to fund any portion
      of the improvement work not covered by the loan amount. (ii) Standard The Lender
      must verify and document the source of the Initial Payment if it exceeds 5 percent
      of the loan amount. This requirement applies to money from all sources including
      funds from a Borrower’s savings, a Gift, or a secured loan. However, if the
      case binder includes asset verification that reveals large deposits, the Lender
      must obtain a credible explanation and document that the funds came from an
      acceptable source. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title
      I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1 965
      Last Revised: 11/26/2025 In addition to the Initial Payment, additional Borrower
      expenses not financed into the Loan must be included in the total amount of
      cash that the Borrower must provide at loan settlement. (c) Fees and Charges
      The Lender or sponsored TPO may charge and collect from Borrowers those customary
      and reasonable closing costs necessary to close the Loan, in compliance with
      permissible fees and charges described in this section. Fees and charges must
      not exceed the actual costs. (3) Financeable Fees and Charges The following
      fees and charges incurred in connection with a Property Improvement Loan may
      be included in the loan amount provided their inclusion does not increase the
      total principal balance beyond the maximum loan amount permitted: • the origination
      fee, not to exceed amount allowed for points and fees in HUD’s regulations at
      § 203.19(b)(1) (see 12 CFR § 1026.43(e)(3)) as of January 10, 2014, indexed
      for inflation: currently 8 percent of the total loan amount for a loan amount
      less than $12,862; $1,029 for a total loan amount greater than or equal to $12,862
      but less than $20,578.99; and 5 percent of the total loan amount for a loan
      amount greater than or equal to $20,579. The origination fee includes Lender-related
      costs of doing business. Origination expenses for document preparation, copying,
      processing, underwriting, and courier fees and similar origination expenses
      are part the origination fee and must not be charged separately; • fees for
      architectural and engineering services; • building permits; • the credit report;
      • a fee for the services of a qualified third-party closing agent to act on
      behalf of a Lender in closing a Direct Loan transaction; • title examination;
      • fees for determining whether the Property is in an SFHA; • recording fees,
      recording taxes, filing fees, and documentary stamp taxes; and • a fee for inspection
      of the Property by a Lender or its agent, not to exceed $250. (4) Non-financeable
      Fees and Charges The following are fees and charges in connection with the Title
      I Loan that must not be financed into the Title I Loan or advanced by the Dealer,
      contractor or any party to the loan transaction. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      966 Last Revised: 11/26/2025 When applicable, these costs must be included in
      the total amount of cash that the Borrower must provide at loan settlement:
      • Discount Points to be paid by a Borrower to a Lender; • Title I Loan annual
      insurance premiums; • premiums for Flood Insurance, if Flood Insurance is required;
      • optional insurance premiums including for credit life and disability; • title
      insurance; • monthly escrow payment amounts for property tax and hazard insurance,
      and Flood Insurance; • other fees necessary to establish the validity of a lien;
      • survey costs; • a handling charge to refinance an existing Title I Loan, not
      to exceed 1 percent of the new loan amount; • an assumption fee not to exceed
      1 percent of the unpaid principal balance on the Loan; • a fee for recording
      a release of the Lender’s security in the Property, if permitted under state
      law; and • other customary and reasonable closing costs necessary to close the
      loan. (5) Fees and Charges that May Not be Paid (a) Referral Fees A Referral
      Fee is a payment for recommending the services of a Lender or contractor/Dealer.
      Neither the Lender nor the Borrower may pay a referral fee to any Dealer, home
      manufacturer, contractor, supplier, real estate broker, loan broker, or any
      other party in connection with the origination of a Loan insured under Title
      I. (b) Third Party Origination Fees Lenders may negotiate payment with sponsored
      Third-Party Originators (TPO) for their origination of Title I Loans, but the
      fee must not be charged to the Borrower. The insuring Lender may pass on the
      origination fee to its TPO. Title I Lenders engaged with sponsored TPOs must
      comply with the standards for Sponsor/Sponsored Third-Party Originator Relationship.
      (6) Premium Pricing on FHA-Insured Loans Premium Pricing refers to a credit
      from a Lender for the interest rate chosen. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      967 Last Revised: 11/26/2025 Premium Pricing may be used to pay a Borrower’s
      actual closing costs and/or prepaid items. Closing costs paid in this manner
      do not need to be included as part of the Interested Party limitation. The funds
      derived from a premium priced Loan: • must be disclosed in accordance with RESPA;
      • must be used to reduce the principal balance if the credit amount exceeds
      the actual dollar amount for closing costs and prepaid expenses; and • may not
      be used for payment of debts, collection accounts, escrow shortages or missed
      Loan Payments, or Judgments. (7) Interested Party Contributions on the Settlement
      Statement The Lender may apply Interested Party credits to the closing costs
      and prepaid items, including any items Paid Outside Closing (POC). The Lender
      must identify the total Interested Party credits on the Settlement Statement
      or other similar legal document. The Lender must identify each item paid by
      Interested Party Contributions. (8) Minimum Verified and Documented Cash Reserves
      (a) Definition Cash Reserves include all non-retirement liquid assets available
      for withdrawal or liquidation from all financial institutions. (b) Standard
      A minimum amount of Cash Reserves is not required for the Title I Property Improvement
      Loan program. Lenders must document Cash Reserves as required for Acceptable
      Compensating Factors. (B) Sources of Funds (1) Checking and Savings Accounts
      (a) Definition Checking and Savings Accounts refer to funds from Borrower-held
      accounts in a financial institution that allow for withdrawals and deposits.
      (b) Standard The Lender must verify and document the existence of and amounts
      in the Borrower’s checking and savings accounts. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      968 Last Revised: 11/26/2025 For recently opened accounts and recent individual
      deposits of more than 1 percent of the loan amount, the Lender must obtain documentation
      of the deposits. (c) Required Documentation Documentation must show that at
      least one Borrower is an owner of the account. (i) Traditional Documentation
      The Lender must obtain a written Verification of Deposit (VOD) and the Borrower’s
      most recent statement for each account. (ii) Alternative Documentation If a
      VOD is not obtained, a statement provided by the financial institution showing
      the previous month’s ending balance for the most recent month is required. If
      the previous month’s balance is not shown, the Lender must obtain statement(s)
      for the most recent two months. (iii)Source of Large Deposit If the Lender finds
      a large, unexplained increase in a Borrower’s account balance, the Lender must
      request an explanation from the Borrower and verify the source of the funds.
      The Lender must evaluate the Borrower’s explanation as part of the underwriting
      process. (2) Cash on Hand (a) Definition Cash on Hand refers to cash held by
      the Borrower outside of a financial institution. (b) Standard The Lender must
      verify that the Borrower’s Cash on Hand is deposited in a financial institution
      or held by the Lender or retailer. (c) Required Documentation The Lender must
      verify and document the Borrower’s Cash on Hand by obtaining an explanation
      from the Borrower describing how the funds were accumulated and the amount of
      time it took to accumulate the funds. The Lender must also determine the reasonableness
      of the accumulation based on the time period during which the funds were saved
      and the Borrower’s: II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title
      I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1 969
      Last Revised: 11/26/2025 • income stream; • spending habits; • documented expenses;
      and • history of using financial institutions. (3) Retirement Accounts (a) Definition
      Retirement Accounts refer to assets accumulated by the Borrower for the purpose
      of retirement. (b) Standard The Lender may include up to 60 percent of the value
      of assets, less any existing Loans, from the Borrower’s retirement accounts,
      such as IRAs, thrift savings plans, 401(k) plans, and Keogh accounts, unless
      the Borrower provides conclusive evidence that a higher percentage may be withdrawn
      after subtracting any federal income tax and withdrawal penalties. The portion
      of the assets not used to meet closing requirements, after adjusting for taxes
      and penalties, may be counted as Reserves. (c) Required Documentation The Lender
      must obtain the most recent monthly or quarterly statement to verify and document
      the existence and amounts in the Borrower’s retirement accounts, the Borrower’s
      eligibility for withdrawals, and the terms and conditions for withdrawal from
      any retirement account. If any portion of the asset is required for funds to
      close, evidence of liquidation is required. (4) Stocks and Bonds (a) Definition
      Stocks and Bonds are investment assets accumulated by the Borrower. (b) Standard
      The Lender must determine the value of the stocks and bonds from the most recent
      monthly or quarterly statement. If the stocks and bonds are not held in a brokerage
      account, the Lender must determine the current value of the stocks and bonds
      through third-party verification. Government-issued savings bonds are valued
      at the original II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I
      Insured Programs 2. Property Improvement Loan Program Handbook 4000.1 970 Last
      Revised: 11/26/2025 purchase price, unless the Lender verifies and documents
      that the bonds are eligible for redemption when cash to close is calculated.
      (c) Required Documentation The Lender must verify and document the existence
      of the Borrower’s stocks and bonds by obtaining brokerage statement(s) for each
      account for the most recent two months. Evidence of liquidation is not required.
      For stocks and bonds not held in a brokerage account, the Lender must obtain
      a copy of each stock or bond certificate. (5) Private Savings Clubs (a) Definition
      Private Savings Club refers to a non-traditional method of saving by making
      deposits into a member-managed resource pool. (b) Standard The Lender may consider
      Private Savings Club funds that are distributed to and received by the Borrower
      as an acceptable source of funds. The Lender must verify and document the establishment
      and duration of the club, and the Borrower’s receipt of funds from the club.
      The Lender must also determine that the received funds were reasonably accumulated,
      and not borrowed. (c) Required Documentation The Lender must obtain the club’s
      account ledgers and receipts, and verification from the club treasurer that
      the club is still active. (6) Gifts (Personal and Equity) (a) Definition Gifts
      refer to contributions of cash or equity with no expectation of repayment. (b)
      Standard for Gifts (i) Acceptable Sources of Gifts Funds Gifts may be provided
      by: • the Borrower’s Family Member; • the Borrower’s employer or labor union;
      II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs
      2. Property Improvement Loan Program Handbook 4000.1 971 Last Revised: 11/26/2025
      • a close friend with a clearly defined and documented interest in the Borrower;
      • a charitable organization; or • a governmental agency or public entity that
      has a program providing homeownership assistance to: o Low- to Moderate-Income
      families; or o first-time homebuyers. The gift donor may not be a person or
      entity with an interest in the transaction, such as the contractor, Dealer,
      or any person or any other affiliated entity. Gifts from these sources are not
      permitted on Title I Property Improvement Loans. (ii) Reserves Gift funds in
      excess of funds needed for Initial Payment must not be considered as Reserves.
      (iii)Donor’s Source of Funds Cash on Hand is not an acceptable source of donor
      gift funds. (c) Required Documentation The Lender must obtain a gift letter
      signed and dated by the donor and Borrower that includes the following: • the
      donor’s name, address, and telephone number; • the donor’s relationship to the
      Borrower; • the dollar amount of the Gift; and • a statement that no repayment
      is required. Documenting the Transfer of Gifts The Lender must verify and document
      the transfer of Gifts from the donor to the Borrower in accordance with the
      requirements below. • For Gifts that will be verified prior to settlement, the
      Lender must obtain one of the following: o the donor’s bank statement showing
      the withdrawal and evidence of the deposit into the Borrower’s account; o a
      copy of the donor’s canceled check and evidence of deposit into the Borrower’s
      deposit slip; o a copy of the donor’s withdrawal receipt and evidence of deposit
      into the Borrower’s account; or o evidence of the electronic transfer of funds
      from the donor’s account to the Borrower’s account. II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 972 Last Revised: 11/26/2025 • For Gifts that will
      be verified at settlement, the Lender must obtain one of the following evidencing
      payment to the settlement agent: o evidence of electronic transfer of funds
      from the donor’s account; o bank certified check; o cashier’s check; or o other
      official bank check. Regardless of when gift funds are made available to a Borrower
      or settlement agent, the Lender must be able to make a reasonable determination
      that the gift funds were not provided by an unacceptable source. (7) Interested
      Party Contributions (a) Definitions Interested Parties refer to sellers, real
      estate agents, builders, developers, lenders, Third-Party Originators (TPO),
      or other parties with an interest in the transaction. Interested Party Contribution
      refers to a payment by an Interested Party, or combination of parties, toward
      the Borrower’s origination fees, other closing costs, and Discount Points. Discount
      Points refer to a charge from the Lender for the interest rate chosen. They
      can be paid by the Borrower and become part of the total cash required to close.
      (b) Standard Interested Party Contributions must not exceed actual loan costs
      or result in cash to the Borrower. Interested Parties may contribute up to 6
      percent of the loan amount toward the Borrower’s loan fees, including the origination
      fee and Fees and Charges. (c) Required Documentation The Lender must identify
      the total Interested Party credits on the Settlement Statement or similar legal
      document, and the sales contract. The Lender must identify each item paid by
      Interested Party Contributions. (d) Exceptions to Interested Party Contributions
      to Address Premium Pricing Premium Pricing credits from the Lender or TPO are
      excluded from the 6 percent limit provided the Lender or TPO is not the seller,
      real estate agent, builder, or developer. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      973 Last Revised: 11/26/2025 (8) Split Financing (a) Definition Split Financing
      refers to a loan used in conjunction with the Title I Property Improvement Loan
      to finance the improvement project. (b) Standard If a contract or work estimate
      exceeds the amount of the Title I Loan, the Lender must verify the source of
      the additional funds needed to complete the work. If the additional funds are
      borrowed or will be borrowed, the monthly repayment amount must be included
      in the Borrower’s qualifying ratio. When the proceeds of other financing secure
      the subject Property, Lenders must ensure that Title I Lien Priority requirements
      are met. (c) Required Documentation The Lender must obtain from the provider
      of any other financing: • documentation showing the amount of funds provided
      to the Borrower for each transaction, and • copies of the loan instruments evidencing
      the monthly payment and loan term. If the term of the loan is six months or
      more, the Lender must include the monthly payment in the qualifying ratio. iv.
      Final Underwriting Decision The underwriter is ultimately responsible for making
      an underwriting decision on behalf of their Lender in compliance with HUD requirements.
      Before making a final determination on the creditworthiness of the Borrower,
      the Lender must conduct a face-to-face or telephone interview with the Borrower
      and any co-maker or Co-signer to resolve any discrepancies in the information
      on the credit application and to ensure that the information is accurate and
      complete. (A) Specific Underwriter Responsibilities The underwriter must review
      each Loan as a separate and unique transaction, recognizing that there may be
      multiple factors that demonstrate a Borrower’s ability and willingness to make
      timely Loan Payments in order to make an underwriting decision. The underwriter
      must evaluate the totality of the Borrower’s circumstances II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 974 Last Revised: 11/26/2025 and the impact of
      layering risks on the probability that a Borrower will be able to repay the
      loan obligation according to the terms of the Loan. As the responsible party,
      the underwriter must: • perform credit analyses to ensure reasonable conclusions,
      sound reports, and compliance with HUD requirements regardless of who prepared
      the documentation; • determine the acceptability of the property improvements,
      the Borrower’s capacity to repay the Loan, and the overall acceptability of
      the Loan for FHA insurance; • identify any inconsistencies in information obtained
      by the Lender in the course of reviewing the Borrower’s application regardless
      of the materiality of such information to the origination and underwriting of
      a Loan; • resolve all inconsistencies identified before approving the Borrower’s
      application; and • document the inconsistencies and the resolutions of the inconsistencies
      in the file. The underwriter must identify and report any misrepresentations,
      violations of HUD requirements, and fraud to the appropriate party within their
      organization. (B) Underwriting of Credit and Debt The underwriter must determine
      the creditworthiness of the Borrower, which includes analyzing the Borrower’s
      overall pattern of credit behavior. (C) Underwriting of Income The underwriter
      must review the income of a Borrower and verify that it has been supported with
      the proper documentation. See Income Requirements. (D) Underwriting of Assets
      The underwriter must review the assets of a Borrower required to close the Loan
      and verify that they have been supported with the proper documentation. See
      Asset Requirements. (E) Verifying Loan Amount and Annual Insurance Premium The
      underwriter must review the loan amount and annual insurance premium. The underwriter
      must ensure that the loan amount does not exceed Title I Property Improvement
      Nationwide Loan Limits, or the total improvement cost, as reflected in the work
      contract and supporting documentation. See Improvement Contract and Required
      Documentation. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured
      Programs 2. Property Improvement Loan Program Handbook 4000.1 975 Last Revised:
      11/26/2025 (F) Calculating Qualifying Ratio For all transactions, except Streamline
      Refinances, the underwriter must calculate the Borrower’s DTI, and verify compliance
      with the maximum ratio requirements. (1) Calculating the Total Debt The Borrower’s
      total property payment expense includes: • the monthly payment on the Property
      Improvement Loan; • all other Mortgage Payments on the Property, including:
      o real estate taxes; o hazard insurance; o Flood Insurance, as applicable; o
      annual insurance premium; o Homeowners’ Association (HOA) or manufactured home
      community or park association fees or expenses; o lot rent; and o special assessments.
      (2) Calculating Total Debt Payment The total fixed payment includes: • the total
      monthly property payment; and • monthly obligations on all other debts and liabilities.
      (3) Approvable Qualifying Ratio The maximum Total Debt Payment to Effective
      Income Ratio, or DTI, for a Title I Property Improvement Loan is 45 percent,
      unless Acceptable Compensating Factors are met. (4) Acceptable Compensating
      Factors The maximum DTI may exceed 45 percent up to a maximum of 47 percent
      provided the Borrower has at least one compensating factor. The following describes
      the compensating factors and required documentation that may be used to justify
      approval of Loans with the credit sufficiency and qualifying ratio described
      above. (a) Verified and Documented Cash Reserves Verified and documented Cash
      Reserves may be cited as a compensating factor when the Cash Reserves are equal
      to or exceed three total monthly Loan Payments. Cash Reserves are calculated
      as the Borrower’s total assets less: II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
      E. Title I Insured Programs 2. Property Improvement Loan Program Handbook 4000.1
      976 Last Revised: 11/26/2025 • the Initial Payment; • Gifts; and • borrowed
      funds. (b) Significant Additional Income Not Reflected in Effective Income Additional
      income or benefits not included in effective gross income that directly impacts
      the applicant’s ability to meet financial obligations include: • bonuses, part-time
      or Seasonal Employment that is not reflected in Effective Income; • employee
      benefits (company car, clothing allowance); and • public benefits (nutritional
      assistance/food stamps/seasonal unemployment). Significant additional income
      can be cited as a compensating factor subject to the following requirements:
      • the Lender must verify and document that the Borrower has received this income,
      and it will likely continue; and • the income, if it were included in gross
      Effective Income, is sufficient to reduce the qualifying ratio to not more than
      47. (c) Potential for Increased Future Earnings A Borrower that has potential
      for increased future earnings may be cited as a compensating factor with documented
      justification, such as job training or education in the applicant’s profession.
      (d) Secondary Wage Earner Potential (Employment Relocation) Potential income
      for a secondary wage earner may be cited as a compensating factor under the
      following condition: the secondary wage earner has accompanied a primary wage
      earner, who is purchasing a property as a result of a recent employment relocation.
      The case binder must document all of the following: • evidence that the primary
      wage earner relocated for a new job; • at least a 12 month work history for
      the secondary wage earner, prior to relocation; and • the prospects of available
      employment. (e) Residual Income Residual income may be cited as a compensating
      factor for owner-occupied Properties, provided it can be documented and it is
      at least equal to the applicable amounts for household size and geographic region
      found in the II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured
      Programs 2. Property Improvement Loan Program Handbook 4000.1 977 Last Revised:
      11/26/2025 Table of Residual Incomes By Region in the Department of Veterans
      Affairs (VA) Lenders Handbook - VA Pamphlet 26-7, Chapter 4.9 b and e. (i) Calculating
      Residual Income Residual income is calculated as total Effective Income of all
      occupying Borrowers less: • state income taxes; • federal income taxes; • municipal
      or other income taxes; • retirement or Social Security; • proposed total Loan
      Payment; • estimated maintenance and utilities; • job related expenses (e.g.,
      child care); and • the amount of the Gross Up of any Nontaxable Income. If available,
      Lenders must use Tax Returns and where applicable, state tax returns, from the
      most recent tax year to document state and local taxes, retirement, Social Security
      and Medicare. If tax returns are not available, Lenders may rely upon current
      pay stubs. For estimated maintenance and utilities, Lenders must multiply the
      Gross Living Area (GLA) of the Property by the maintenance and utility factor
      found in the Lenders Handbook - VA Pamphlet 26-7. (ii) Using Residual Income
      as a Compensating Factor To use residual income as a compensating factor, the
      Lender must count all members of the household of the occupying Borrower without
      regard to the nature of their relationship and without regard to whether they
      are joining on title or the Note to determine “family size.” Exception The Lender
      may omit any individuals from “family size” who are fully supported by a source
      of verified income that is not included in the Effective Income in the loan
      analysis. These individuals must voluntarily provide sufficient documentation
      to verify their income to qualify for this exception. From the table provided
      in Lenders Handbook - VA Pamphlet 26-7, select the applicable loan amount, region
      and household size. If residual income equals or exceeds the corresponding amount
      on the table, it may be cited as a compensating factor. II. ORIGINATION THROUGH
      POST-CLOSING/ENDORSEMENT E. Title I Insured Programs 2. Property Improvement
      Loan Program Handbook 4000.1 978 Last Revised: 11/26/2025 (f) Energy Efficient
      Homes Energy Efficient Homes (EEH) may be cited as a compensating factor when
      the Property meets one of the following conditions: • the home currently scores
      a “6” or higher on the Home Energy Score scale; • homes where documented cost-effective
      energy improvements, as identified in the Home Energy Score Report, would increase
      a home’s score to a “6” or higher will be completed in connection with the subject
      loan; or • Manufactured Home that is certified as ENERGY STAR to the Quality
      Assurance Provider and is evidenced by a photo of the ENERGY STAR label that
      is affixed inside the home, commonly near the HUD Data Plate or inside the home’s
      electric panel cover. Required Documentation A copy of the Home Energy Score
      Report must be included in the case binder. (G) Borrower Approval or Denial
      (1) Re-underwriting Before closing a Title I Property Improvement Loan, the
      Lender must re- underwrite a Loan when any data element of the Loan changes
      and/or new Borrower information becomes available. (2) Required Documentation
      of Final Underwriting Review Decision The underwriter must complete the underwriter
      report or worksheet to evidence their final underwriting decision. For cases
      involving Loans to HUD employees, the Lender submits the complete underwriting
      package to FHA prior to closing. (3) HUD Employee Loans If the Loan involves
      a HUD employee, the Lender must condition the Loan on the approval of the Loan
      by HUD. The Lender must submit the underwritten loan application package to
      the Director of the FOC for final underwriting approval. (4) Responsibilities
      upon Denial When a Loan is denied, the Lender must comply with all requirements
      of the FCRA, and the ECOA, as implemented by Regulation B (12 CFR Part 1002).
      II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT E. Title I Insured Programs
      2. Property Improvement Loan Program Handbook 4000.1 979 Last Revised: 11/26/2025'
  judgment: false
