(3) tear it down - do so before the loan is closed or you'll have a violation. I'd also document the file, even with photos if available, that it was removed and that is why it wasn't insurable. An examiner is likely to see whatever it was saying it was a covered loan, and you'll want to immediately show why that changed.
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AndyZ CRCM
My opinions are not necessarily my employers.
R+R-R=R+R
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell