HB-1-3550

4.1 OVERVIEW

Ensuring that all applicants served are eligible and receive the correct amount of 

assistance is a significant responsibility of Loan Originators and Loan Approval Officials. A 

borrower must be income-eligible, demonstrate a credit history that indicates ability and 

willingness to repay a loan, and meet a variety of other program requirements. This chapter 

provides guidance for each of these areas.

• Section 1: Evaluating Borrower Income provides instructions for calculating and 

verifying annual, adjusted, and repayment income.

• Section 2: Evaluating Borrower Assets discusses Agency requirements for cash 

contributions to the purchase and methods for computing income from assets.

• Section 3: Credit History identifies indicators of acceptable and unacceptable credit 

and provides instructions for reviewing an applicant’s credit history.

• Section 4: Other Eligibility Requirements addresses a variety of other 

requirements applicants must meet to be eligible for the program.

• Section 5: Processing the Certificate of Eligibility provides policies and 

procedures for processing Form FD 1944-59, Certificate of Eligibility.

SECTION 1: EVALUATING BORROWER INCOME

4.2 OVERVIEW [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

Loan Originators use income information to: (1) help determine whether an applicant is 

eligible for a loan; (2) calculate the applicant’s ability to repay a loan; and (3) determine the 

amount of the loan and the amount of payment subsidy the household can obtain. When 

reviewing an applicant’s repayment income, the Loan Originator must determine whether the 

income is stable and dependable. This will typically be accomplished by reviewing information 

provided in the application, paystubs, and tax returns. The Loan Originator will generally need 

to look at two years of history to determine the dependability of the income. In addition, the 

Loan Originator must determine that there is a reasonable expectation that the income will 

continue. This section provides guidance for verifying and calculating income for each of these 

purposes.

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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

CHAPTER 4: BORROWER ELIGIBILITY
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HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

A. Key Concepts for Income Determinations

1. Income Definitions

Three income definitions are used. Whenever income determinations are made, it is 

essential that the Loan Originator use the correct income definition and consider income 

from the appropriate household members. To determine whether the applicant will be 

able to repay a loan, the Loan Originator must use repayment income. To determine 

whether an applicant is income-eligible to receive a program loan or payment subsidies, 

the Loan Originator must use adjusted income. Adjusted income is calculated in 2 steps. 

First, the annual income of all household members is calculated. Then, certain 

household deductions for which the family may qualify are subtracted from annual 

income to compute adjusted income.

• Annual Income is the amount of income that is used to determine an 

applicant’s eligibility for assistance. Annual income is defined as all amounts, 

monetary or not that are not specifically excluded by regulations, that go to, or 

are received on behalf of, the applicant/borrower, co-applicant/co-borrower, 

or any other household member (even if the household member is temporarily 

absent).

• Adjusted Income is used to determine whether a household is income eligible 

for payment assistance. It is based on annual income and provides for 

deductions to account for varying household circumstances and expenses.

• Repayment Income is used to determine whether an applicant has the ability 

to make monthly loan payments. It is based only on the income attributable to 

parties to the note and includes some income sources excluded for the purpose 

of adjusted income. Repayment income is used during servicing only to 

determine if a borrower is eligible for a Moratorium or Reamortization as 

described in Paragraph 5.5 of HB-2-3550. 

2. Whose Income To Count

For repayment income, the Loan Originator must consider only the income of 

household members who will be parties to the note. For adjusted income, the income of 

all household members must be considered. For both types, live-in aides, foster 

children, and foster adults living in the household are not considered household 

members.
4-3 (01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Exhibit 4-1

INCOME TO BE COUNTED

NOTE: The earned income of a full-time student 18 years old or older who is not the Applicant,

Co- Applicant/Borrower, or Spouse is excluded after it exceeds $480. All unearned income of a 

full-time student who is not the Applicant, Co-Applicant/Borrower, or Spouse is counted. 

*Reminder: The family chooses to include or exclude the permanently confined individual’s 

income.

HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

An individual permanently confined to a nursing home or hospital may not be the 

applicant or co-applicant but may continue as a family member at the family’s discretion. 

The family has a choice with regard to how the permanently confined individual’s 

income will be counted. The family may elect either of the following: 

• Include the individual’s income and receive allowable deductions related to 

the medical care of the permanently confined individual; or

• Exclude the individual’s income and not receive allowable deductions based

on the medical care of the permanently confined individual.

Exhibit 4-1 is a table which lists whose income is to be counted.

Members Employment 

Income

Other Income

(including income from assets)

Applicant, Co-Applicant/Borrower Yes Yes

Spouse Yes Yes

Other Adult Yes Yes

Permanently Confined Family Member Optional* Optional*

Dependents(children under 18) No Yes

Full-time Student over 18 See Note Yes

Non-Members

Foster Child No No

Foster Adult No No

Live-in Aide No No
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HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

3. Income Limits

Some program rules differ according to the income of the applicant. Three different 

income limits are used for the Section 502 and 504 programs. The National Office 

provides the income limits and updates the limits whenever they are revised. The income 

limits can be found online at: https://www.rd.usda.gov/files/RD-DirectLimitMap.pdf. 

Adjusted income should be compared to the income limit to determine the category 

in which each household falls. Income limits are as follows:

• The very low-income limit is an adjusted income limit developed in 

consultation with HUD; 

• The low-income limit is an adjusted income limit developed in consultation 

with HUD; and

• The moderate-income limit is an adjusted income that does not exceed the 

moderate-income limit for the guaranteed single family housing loan program.

4. Applicant Certification and Verification Requirements

Each applicant must provide the income, expense, and household information needed 

to enable the Agency to make income determinations. Most of this information is 

provided on the application, but some additional follow-up with the applicant may be 

required, as described in Paragraph 3.8. The applicant should be requested to provide 

two years of history (as applicable) for a reasonable determination of income. The 

documentation required will vary with the source of income. In most cases, the Loan 

Originator will compare information provided on the application with the tax returns, W2s, and other preferred verification sources to evaluate the two-year history of income

and make the determination if income is stable and dependable. 

The need to use Form RD 1910-5, Request for Verification of Employment (VOE), 

to document previous employment (Part III of the form) should be rare and limited to 

cases where the preferred verification sources are insufficient to document the 

applicant’s employment history. The Loan Originator and Loan Approval Official will 

not routinely require a VOE or contact the employer. In some instances, less than two 

years of history may be acceptable when the applicant provides, and the Loan Originator

documents sound justification. For example, an applicant whose compensation changed 

from hourly to salary income with the same employer in a similar job/position may be 

considered to have dependable and stable income. While not typical, more than two 

years of history (i.e., obtaining an additional year’s tax return) may be needed. 
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HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

For example, when an applicant’s income varies significantly from year to year, the 

Loan Originator may need to review a longer work/self-employment history to establish 

an average income. This can typically be accomplished by obtaining an additional year’s 

tax return with accompanying attachments. In no case will more than 3 years of history be 

obtained. 

Example – Comparing income

When calculating Jorge’s income based on the paystub’s year to date income, the Loan 

Originator notices that the historical income from last year’s tax return reflects $10,000 more in 

income. 

Inappropriate response: Automatically require a VOE. 

Appropriate response: Contact the applicant and ask what has changed with their income as 

compared to last year (such as: change in hours, pay rate, or overtime). Document the 

applicant’s response and determine which income source will be used as a result. 

For instance, the paystub information is through May, but the applicant reports that the bulk of 

their overtime is received in November and December each year. In this case, using historical 

data is more appropriate than year to date. 

In the limited situations when verification from a third party is requested, a copy of 

Form RD 3550-1, Authorization to Release Information, must accompany the request. 

Authorization from each adult household member on the Form RD 3550-1 permits the 

Loan Originator to ask for, and verification sources to release, the needed information. 

Application processing should not be delayed if a third party does not respond to a 

request for information. In these instances, the Loan Originator must seek to obtain the 

most relevant information which can be obtained from the applicant to verify the 

information. This may include, but is not limited to, evidence of deposits/withdrawals, 

copies of cancelled checks, etc.

The verification and certification formats that are provided in Appendix 2 are not 

official Agency forms. They are samples that may be adapted as needed for particular 

circumstances. In some instances, the same format can be used whether a third party

is providing the verification, or the applicant is making a certification.

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

5. Stable and Dependable Income

The Agency has no minimum history requirement for employment in a particular 

position. The key concept is whether the applicant has a history of receiving stable 

income and a reasonable expectation that the income will continue. Instead, the Loan 

Originator must carefully assess the applicant’s income to establish whether it can 

reasonably be expected to continue for the next two years (e.g., child support and 

contractual income). Nonetheless, most income cannot be guaranteed, nor will employers 

certify that income will continue for the next two years. A VOE should not be requested 

to obtain ‘probability of continued employment’ in order to make this determination. 

Instead, the Loan Originator and Loan Approval Official will compare projected income 

with the last two years of income (if applicable) to determine if the applicant has 

demonstrated an income level which is likely to continue. 

The applicant must provide an explanation letter for employment gaps in excess of 

30 days unless their income history is clearly seasonal in nature (e.g., construction, farm 

labor, recreational). The Loan Originator must review the employment gap explanation, 

as well as the historical/projected income to determine the applicant’s ability to receive 

stable and dependable income. If the Loan Originator determines that an applicant’s

income source is unstable and undependable, the income must be excluded from 

repayment but included in annual income.

• Wage and Salary Income. Income from employment may include a base 

hourly wage or salary, overtime pay, commissions, fees, tips, bonuses, 

housing allowances, and other compensation for personal services of all adult 

members of the household. When the applicant demonstrates a two-year 

history of stable or rising income, current income from each of these sources 

may be used unless there is evidence to the contrary. Wage and salary 

income may be determined from paystubs and historical data. 

____________________________________________________________________________________________

4-6
Example – Dependable Income

Mary Brown receives SSI income for her dependent child who is 17 years of age. The SSI income should not be 

counted as repayment income because it clearly cannot be expected to continue. It would be counted as annual 

income since it is current verified income.

Example – Self-Employment, Commission and Other Irregular Income

Julie McAhren sells beauty products door-to-door on commission. She makes most of her money in the 

months prior to Christmas but has some income throughout the year. She has no formal records of her income 

other than a copy of the IRS Form 1040 she files each year. With no other information available, use the 

income reflected on Julie’s copy of her Form 1040 as her annual income and make the income adjustments 

according to Attachment 4-C.

Betty House sells real estate on commission. She makes most of her money during the summer months. She 

has no formal records of her income other than a copy of a 1099 and the Tax Return (Form 1040) she files each 

year. The gross earning on the 1099 should not be used as her annual income. Use the income and other 

information on the tax return in conjunction with Attachment 4-C to calculate the self-employment income.

HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

Seasonal Income Example 2 – Stable Income

Martha George harvests cherries, apricots, and apples. Each year, she works for different employers and 

processing plants. Last year’s tax return reflects income and unemployment benefits of $42,000 and the year 

prior indicates $40,000. She applied for the loan in May just at the start of cherry season and provided a paystub 

for her current employer. However, since she has multiple employers, the historical income should be used. 

Since the prior two years reflect similar income, her income can be considered stable and dependable and would 

be used for annual and repayment income. 

• Self-employment Income. Income based on a two-year history of selfemployment, in the same line of work, is an acceptable indicator of stable and 

dependable income. Refer to Attachment 4-C for guidance on what 

documentation is needed for each business structure.

____________________________________________________________________________________________

(01-23-03) SPECIAL PN 4-7

Revised (06-02-23) PN 583

Seasonal Income Example 1 – Stable Income

Steven Green has been working for the last 6 months for LMN Contractors as a Construction Foreman. Before that, 

he worked for PDQ Building Supply for 8 months as a Shift Supervisor. There is a 6-week gap in his employment

history that he explains as being the result of a lay-off after a large construction project (where he was employed for

15 months as a construction worker) was completed. Mr. Green’s income is considered stable because the reasons 

for his job changes were related to changes in job opportunities. Even though his job changed several times, his line

of work was similar.
Examples – Other Sources of Income

__________________________________________________________________________________________

Janis Phillips is not always well enough to work full-time. When she is well, she works as a typist with a 

temporary agency. Last year was a good year and she worked a total of nearly six months. This year, 

however, she has more medical problems and does not know when or how much she will be able to work. 

Because she is not working at the time, it will be best to exclude her employment income and remind her 

that she must report the date when she resumes work.

Sam Shah receives social security disability. He reports that he works as a handyman periodically. He 

cannot remember when or how often he worked last year; he says it was a couple of times. Sam’s earnings 

appear to fit into the category of nonrecurring, sporadic income that is not included in annual income. Tell 

Sam his earnings are not being included in his annual income this year, but he must report any regular work 

or steady jobs he takes.

Jane Smith receives child support payments for her sixteen and a half-year old son. She has a copy of the 

court appointed child support agreement, which states that the child support will end when son turns 18, and

a computer print-out of a 12-month child support payment history. The child support income should be 

counted in the annual income but excluded from the repayment income calculation because it is not 

expected to continue for the next two years.

Sheila Thornback has a 10-year-old daughter with Duke Johnson; and there is no written agreement or court 

decree of child support. Duke has paid Sheila $350 per month since their daughter was born. Sheila has 

provided a 12-month history of canceled checks reflecting Duke’s child support payments. Although there 

is not a written agreement between Sheila and Duke the child support income should be counted as annual 

and repayment income, since the income is stable and dependable and expected to continue.

HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

• Other Sources of Income. Income from public assistance, child support

(including back child support), alimony, or retirement that is consistently

received is considered stable when such payments are based on: (1) a law, 

written agreement or court decree, or have been consistently received over a 

12 month period (even if there is no written agreement or court decree), (2)

the amount and regularity of the payments, (3) the eligibility criteria for the

payments, such as the age of the child (when applicable) or the length of the 

alimony agreement, and (4) the availability of means to compel payments.

____________________________________________________________________________________________

4-8
Example – Irregular Income

Ross Bosser is a roofer who works from April through September. He does not work in rain or windstorms. Based 

on the two-year history of Federal taxes and his 1099 tax forms, the income is considered stable and dependable, 

since Ross shows a two-year history working in the same line of work. To calculate Ross’s anticipated income, use

the average gross earnings and seasonal unemployment compensations from the Federal income taxes (Form 1040) 

over the past two years.

HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

• Irregular Income. Irregular income from employment are earnings that may vary on 

a weekly, monthly, or seasonal basis depending on the type of income. This income 

is not guaranteed, nor received on a regular basis. Irregular income includes overtime, bonus, second job, part-time, and seasonal income (e.g., farmworker, 

construction, union labor, etc., which is typically in the same line of work but may 

involve multiple employers and periods of unemployment). Irregular income may be 

considered stable when the applicant has worked in the same line of work (not 

necessarily the same employer) for at least two years. Loan Originators may accept 

less than a two-year history (but no less than 12-months) of irregular income if there 

is a strong likelihood that the applicant will continue to receive that income. Loan 

Originators must establish the income trend and calculate a monthly average for the 

irregular income. When the applicant receives seasonal unemployment 

compensation, it must be clearly associated with seasonal layoffs expected to recur 

and be reported on the applicant’s federal income tax returns. If unemployment is 

associated with seasonal layoffs, the Loan Originator does not need to contact the 

employer or obtain a letter of explanation from the applicant for gaps in 

employment. Commission-based pay is also considered irregular income. Additional 

guidance on calculating commission income is provided in Attachment 4-C.

____________________________________________________________________________________________

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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
Example – Less Than Two Years History

For the last few years, Ellen Dixon has been a homemaker with no outside employment. Now that her children 

are old enough, she has taken a job as a teacher for which she has the necessary education and certifications. She 

is currently half way through her 6-month probation period and we have confirmed that she is a permanent 

employee. Ms. Dixon’s income can be considered stable and dependable.

HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

Less Than Two Years of History. In some cases, a history of less than two years is 

acceptable. The determination requires a careful analysis by the Loan Originator. This may 

include an applicant who is either new to the work force, is on a probationary period, or has 

returned to the work force after an extended absence. The Loan Originator may consider 

reasonable allowances for less than a two-year history under the followingcircumstances:

• The applicant has recently changed jobs but remains in the same line of work.

• The applicant frequently changes jobs but demonstrates income continuity.

• The applicant is a recent graduate, as evidenced by college transcripts, or a

recent member of the military, as evidenced by discharge papers, entering 

the civilian workforce.

• The applicant has recently re-entered the workforce after an absence due to an

extended medical illness, to care for a family member or minor child, or other 

similar circumstances.

B. Using UniFi and the Income Worksheet to Compute Income

Packagers and Loan Originators must use Attachment 4-A, the Worksheet for Computing Income,

to organize the household information and calculate each household member’s income using the four 

calculation methods (straight-based, average, year-to-date, and historical). The Loan Originator must 

determine annual, adjusted annual, and repayment income on Attachment 4-A and enter the data into 

UniFi. Attachment 4-A and the Eligibility Summary must be completed, signed, and placed in the 

applicant’s electronic case file at the eligibility determination, loan approval and closing stages. 

When a packager or self-help grantee submits Attachment 4-A, the name of the preparer will be 

provided. The Loan Originator will review the submitted Attachment 4-A and compare the data to the 

paystubs (i.e., no more than 60 days old) and historical data provided in the loan application package. If 

the income calculations are reasonable based on the data provided in the loan application package, the 

Loan Originator should concur and continue processing. If the income calculations are not supported by 

the paystubs and historical data provided, the Loan Originator will prepare a corrected version for the 

file. The corrected version will be retained with the original submission in the file. A copy of the 

corrected version, along with a brief explanation of what corrections were made and any resulting 

changes to the requested loan amount or eligibility, must be provided to the packager for their records. ____________________________________________________________________________________________

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HB-1-3550

Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]

Attachment 4-A, Worksheet for Computing Income

Example 1

Homes-R-Us, a self-help packager, submitted an income calculator which was based on paystubs 

through June, as well as two years of historical tax returns. The data on the calculator matches the 

paystub information in the loan application package. All four income methods were calculated, and the 

income range from the lowest to the highest value is within $500. The packager selected the year-todate income for both annual and repayment income. Although the year-to-date income is $300 less than 

historical, the packager documented that the applicant has never previously worked overtime, but the 

historical income is higher is due to extra hours worked by the applicant to fill the hours of two staff 

members that were on maternity leave at the same time, which is not likely to continue. The information 

is reasonable and well documented, therefore, there is no need to re-calculate the income. The Loan 

Originator may concur with the calculations and continue processing.

Example 2

Orcas County Community Action (OCCA) submitted an income calculator based on paystubs and tax 

returns. The year-to-date income based on the paystub is $5,839 but the year-to-date entered on the 

calculator is $8,539 due to a typographical error. As a result, the income projections for the family of 

eight are considerably more than they should be. The Loan Originator will need to prepare a corrected 

version and send it to OCCA to document the corrections to the income calculations, which resulted in a 

lower loan amount. 

4.3 SOURCES OF INCOME

Loan Originators will consider sources of income to determine annual and repayment 

income. This section provides guidance on income that will and/or will not be counted. 

A. Income Considered for Annual and Repayment Income

For annual income, consider income from the following sources that are attributable to 

any household member. For repayment income, consider income from the following sources 

that are: attributable to parties to the note and represent a source of dependable income.

1. The gross amount, before any payroll deductions, of base wages and salaries, 

overtime pay, commissions, fees, tips, bonuses, housing allowances, and other 

compensation for personal services of all adult members of the household. If a cost 

of living allowance or a proposed increase in income has been estimated to take 

place on or before loan approval, loan closing, or the effective date of the payment 

assistance agreement, it will be included as income. For annual income, count only 

the first $480 of earned income from adult full-time students who are not the 

borrower, co-borrower, or spouse. 

____________________________________________________________________________________________

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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
Employer paid and provided fringe benefits are not included in annual income

regardless of whether the benefits are reported on the employee wage statement. 

Fringe benefits may include, but are not limited to:

• Child care/pet-sitting,

• Medical/life insurance,

• Car/mileage allowance,

• Stock options,

• Discounts for merchandise,

• Sport/concert/movie tickets or entertainment,

• Charity donations in employee name,

• Any reimbursement of actual work expenses. 

Housing allowances may include, but are not limited to:

• Cash or non-cash contributions paid on behalf of the applicant/borrower 

by persons not living in the house,

• Allowances for members of the Armed Forces,

• Allowances for members of the Clergy,

• Allowances paid by employer.

HB-1-3550

Paragraph 4.3 Source of Income

Funds received for goods or services (e.g., piano lessons, home-based craft 

business, etc.) through centralized, online payment platforms (e.g., Cash 

Applications such as Venmo, PayPal, Zelle, etc.) should be considered if they 

appear to be recurring. If funds are not transferred to a U.S. Financial Institution 

(bank, credit union, etc.), the applicant must provide a transaction history from the 

Cash Application. 

2. The net income from the operation of a farm, business, or profession 

Below are certain deductions the IRS allows to reduce taxable income: 

(Refer to Attachment 4-C for guidance on what non-cash deductions can 

be added back to repayment income.) 

• Expenditures for business or farm expansion, capital improvements, or payments 

of principal on capital indebtedness shall not be used as deductions in 

determining income. A deduction is allowed in the manner prescribed by Internal 

Revenue Service (IRS) regulations only for interest paid in amortizing capital 

indebtedness.

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HB-1-3550

Paragraph 4.3 Source of Income

• Farm and non-farm business losses are considered "0" in determining annual

income. Loan Originators should analyze federal tax returns and review if there 

are any non-cash deductions that should be added back into repayment income, 

which could result in a positive repayment income figure. A negative amount

must not be used to offset other family income for annual and repayment 

income.

• A deduction, based on straight line depreciation, is allowed in the manner 

prescribed by IRS regulations for the exhaustion, wear and tear, and obsolescence 

of depreciable property used in the operation of a farm, business, or profession by 

a member of the household. The deduction must be based on an itemized 

schedule showing the amount of straight-line depreciation. This non-cash

deduction, based on straight line depreciation, can be added back into repayment 

income, but should not be added back into annual income.

• Depletion is the using up of natural resources extracted from a mineral property 

by mining, drilling, quarrying stone, or cutting timber. A depletion deduction is 

allowed to account for the reduction of the mineral property’s value or basis as a 

result of the extraction of the natural resource. This non-cash deduction can be 

added back into repayment income but should not be added back into annual 

income. 

• Any withdrawal of cash or assets from the operation of a farm, business, or 

profession, or salaries or other amounts distributed to family members from the 

farm, business, or profession, will be included in income, except to the extent the 

withdrawal is for reimbursement of cash or assets invested in the operation by a 

member of the household.

• A deduction is allowed for verified business expenses, such as lodging, meals, 

and fuel, for business trips made by salaried employees, such as long-distance 

truck drivers, who must meet these expenses without reimbursement.

• For home-based operations such as childcare, product sales, and the production 

of crafts, housing related expenses for the property being financed such as 

mortgage interest, real estate taxes, and insurance, which may be claimed as 

business expense deductions for income tax purposes, will not be deducted from 

annual income.

__________________________________________________________________________________________

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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.3 Source of Income

3. Interest, dividends, and other net income of any kind from real or personal property, 

including:

• The share received by adult members of the household from income distributed 

from a trust fund.

• Any withdrawal of cash or assets from an investment except to the extent the 

withdrawal is reimbursement of cash or assets invested by a member of the 

household.

4. The full amount of periodic payments received from Social Security (including 

Social Security received by adults on behalf of minors or by minors intended for 

their own support, or by an applicant who is a representative payee for an adult 

household member who will reside in the property), annuities, insurance policies, 

retirement funds, pensions, disability or death benefits, and other similar types of 

periodic receipts. However, deferred periodic amounts from supplemental income 

and social security benefits that are received in a lump sum amount or in prospective 

monthly amounts are not counted.

5. Payments in lieu of earnings, such as unemployment and disability compensation, 

worker’s compensation, and severance pay. Unemployment income requires a 

two year documentation of receipt and reasonable assurance of its

continuance. This may be appropriate for individuals employed on a 

seasonal basis (e.g., farm laborers, construction workers, etc.).

6. Public assistance except as indicated in Paragraphs 4.3 C. andD.

7. Periodic allowances, such as:

• Alimony and child support received by the household; or

• Recurring monetary gifts or contributions from an organization or person who is 

not a member of the household.

 ________________________________________________________________________________________

 4-14

Example – Adjustment for Prior Overpayment of Benefits

Dan Steven’s social security payment of $250 per month is being reduced by $25 per month 

for a period of six months to make up for a prior overpayment. Count Dan’s social security 

income as $225 per month for the next six months and as $250 per month for the remaining 

six months.
Examples – Regular Cash Contributions

The father of a young single parent pays her monthly utility bills. On average, he provides the applicant $100

each month. The $100 per month must be included in the family’s annual income.

The daughter of an elderly applicant gives her mother $175 each month to assist with her living expenses. The

daughter plans to continue subsidizing her mother’s expenses. The $175 per month must be included in the 

annual income.

HB-1-3550

Paragraph 4.3 Source of Income

• If another party provides funds to the applicant for a monthly debt 

(owed by the applicant), the recurring funds received by the applicant 

should be considered as recurring gift income and the debt must be

included in the total debt (TD) ratio. If another party assumes the 

responsibility for the debt and pays the creditor directly, the payment 

paid directly to the creditor should not be included as recurring gift 

income and the debt can be excluded from the TD ratio (see 

Paragraph 4.22). 

8. All regular pay, special pay (except for persons exposed to hostile fire), and 

allowances of a member of the armed forces who is the applicant or spouse, whether 

or not that family member lives in the home.

B. AdditionalIncome Considerations for Repayment Income

Consider these additional sources of income that are attributable to parties to the note 

and represent a source of dependable income for repayment income only. 

1. Housing assistance payment (HAP). (HUD’s Housing Choice Voucher– 

Homeownership Program sometimes referred to as Section 8 for Homeownership.) 

See Paragraph 8.9 on how HAP payments should be handled. For additional 

information on the Housing Choice Voucher – Homeownership Program, visit 

https://www.hud.gov/topics/housing_choice_voucher_program_section_8. 

2. Adoption assistance payments in excess of $480 per adopted child.

3. Reparation payments paid by a foreign government arising out of the Holocaust. If 

any applicant for an Agency loan was deemed ineligible because the applicant’s 

income exceeded the low-income limit because of the applicant’s Nazi persecution 

benefits, the Agency Loan Approval Official should notify the applicant to reapply 

for a loan.

4-15

(01-23-03) SPECIAL PN 

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.3 Source of Income

4. Certain income tax credits regularly received via the applicant’s employer.

5. The full amount of student financial assistance received by household members or 

paid directly to the educational institution who are parties to the note. Financial

assistance includes grants, educational entitlements, work study programs, and 

financial aid packages. It does not include tuition, fees, student loans, books, 

equipment, materials and transportation. Any amount provided for living expenses 

may be counted as repayment income. 

6. Amounts received by the family in the form of refunds or rebates under State or local 

law for property taxes paid on the dwelling unit. 

7. Any other revenue which a Federal statute exempts will be considered repayment

income. This includes:

• The imminent danger duty pay to a service person applicant or spouse away from 

home and exposed to hostile fire.

• Payments to volunteers under the Domestic Volunteer Service Act of 1973, 

including, but not limited to:

◊ National Volunteer Antipoverty Programs which include Volunteers In 

Service To America (VISTA), Peace Corps, Service Learning Programs, and 

Special Volunteer Programs.

◊ National Older American Volunteer Programs for persons age 60 and over 

which include Retired Senior Volunteer Programs, Foster Grandparent 

Program, Older American Community Services Program, and National 

Volunteer Programs to Assist Small Business and Promote Volunteer Service 

to Persons with Business Experience, Service Corps of Retired Executives 

(SCORE), and Active Corps of Executives (ACE).

• Payments received after January 1, 1989, from the Agent Orange Settlement Fund 

or any other fund established pursuant to the settlement in the “In Re Agent 

Orange” product liability litigations, M.D.L. No. 381 (E.D.N.Y.).

• Payments received under the “Alaska Native Claims Settlement Act” or the 

“Maine Indian Claims Settlement Act.”

• Income derived from certain sub-marginal land of the United States that is held in 

trust for certain American Indian tribes.

____________________________________________________________________________________________

4-16
HB-1-3550

Paragraph 4.3 Source of Income

• Payments or allowances made under the Department of Health and Human 

Services Low-Income Home Energy Assistance Program.

• Payments received from the Job Training PartnershipAct.

• Income derived from the disposition of funds of the Grand River Band of Ottawa 

Indians.

• The first $2,000 of per capita shares received from judgment funds awarded by 

the Indian Claims Commission or the Court of Claims, or from funds held in trust 

for an American Indian tribe by the Secretary of Interior.

• Payments received from programs funded under Title V of the Older Americans 

Act of 1965.

• Any other income which is exempted under Federal statute.

8. Amounts paid by a State Agency to a family with a developmentally disabled family 

member living at home to offset the cost of services and equipment needed to keep 

the developmentally disabled family member in the home.

9. The special pay to a family member serving in the Armed Forces who is exposed to 

hostile fire.

10. Income received from the Supplemental Nutrition Assistance Program (SNAP) may 

be considered to calculate repayment income in an amount not to exceed 20 percent

of the total repayment income (“not to exceed” amount). The following provisions 

apply:

• Only the SNAP benefits attributable to the note signers can be considered for 

repayment income.

• Only the lesser of the “not to exceed” amount or the actual SNAP benefits can be 

included in the applicant’s repayment income.

____________________________________________________________________________________________

4-17

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
Example – Income from SNAP Benefits

Eloise Thompson’s monthly income from employment is $800. She also receives $300 per month in 

child support payments for her 6-year-old daughter and $200 per month in SNAP benefits. To consider 

the SNAP benefits in the repayment income calculation, the “not to exceed” amount must be calculated.

Monthly repayment income excluding SNAP benefits ($800 + $300): $1,100 

To calculate Income from SNAP benefits:

1. Equalize the repayment income ($1,100 / .80): $1,375

2. Calculate the “not to exceed” amount ($1,375 - $1,100): $ 275

3. Compare to actual SNAP benefits received: $ 200

The amount of SNAP that can be considered in repayment is the lesser of the “not to exceed”

amount ($275) or the actual SNAP benefits ($200), therefore, the amount considered in repayment is 

the actual SNAP benefit of $200. 

Monthly repayment income after SNAP consideration: $1,300

HB-1-3550

Paragraph 4.3 Source of Income

C. Income Never Considered for Annual and Repayment Income

The following sources are never considered when calculating annual income or 

repayment income: 

1. Income from the employment of persons under 18 years of age, except parties to the 

note and their spouses. 

2. Special-Purpose Payments. These are payments made to the applicant’s household 

that would be discontinued if not spent for a specific purpose. Payments which are 

intended to defray specific expenses of an unusual nature, and which are expended 

solely for those expenses should not be considered as income. Examples include, but 

are not necessarily limited to, the following: 

a. Medical Expenses. Funds provided by a charitable organization to defray 

medical expenses, to the extent to which they are actually spent to meet those 

expenses.

b. Foster Children/Adults. Payments for the care of foster children or adults. 

NOTE: Foster children are not considered members of the family. Therefore, no 

adjustments to income are to be made because of their presence.

3. Temporary, nonrecurring, or sporadic income (including gifts).

____________________________________________________________________________________________

 4-18
HB-1-3550

Paragraph 4.3 Source of Income

4. Lump-sum additions to family assets such as inheritances, capital gains, insurance 

payments included under health, accident, hazard, or worker’s compensation policies, 

and settlements for personal or property losses.

5. Amounts that are granted specifically for, or in reimbursement of, the cost of medical

expenses for any family member.

6. Payments received on reverse amortization mortgages (these payments are 

considered draw-down on the applicant’s assets).

7. Income received by foster children or foster adults who live in the household, or 

live-in aides, regardless of whether the live-in aide is paid by the family or a social

services program (family members cannot be considered live-in aides unless they are 

being paid by a health agency and have an address, other than a post office box, 

elsewhere).

8. Amounts received by any family member participating in programs under the 

Workforce Investment Act of 1998 (29 U.S.C. 2931).

• Amounts received by a person with a disability that are disregarded for a 

limited time for purposes of Supplemental Security Income eligibility and 

benefits because they are set aside for use under a Plan to Attain SelfSufficiency (PASS).

• Amounts received by a participant in other publicly assisted programs which 

are specifically for or in reimbursement of out-of-pocket expenses incurred 

(special equipment, clothing, transportation, childcare, etc.) and which are 

made solely to allow participation in a specific program.

9. Earned income tax credits.

10. Incremental earnings and benefits resulting to any family members from participation

in qualifying State or local employment training programs (including training 

programs not affiliated with a local government) and training of a family member as 

resident management staff. Amounts excluded by this provision must be received 

under employment training programs with clearly defined goals and objectives and 

are excluded only for the period during which the family participates in the 

employment training program.

 

4-19

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.3 Source of Income

11. Allowances, earnings and payments to AmeriCorps participants under the National 

and Community Service Act of 1990 (42 E.S.C. 12637{d}). 

12. Income earned on a retirement account (by non-retirees), from interest, dividends, or 

capital gains when funds can only be accessed by retiring, terminating employment, 

loaning against the account, or withdrawing with penalties. 

D. Additional Income Never Considered for Annual Income

In addition, the following sources are never considered when calculating annual income: 

1. Payments received for the care of foster children, or foster adults (usually individuals 

with disabilities who are unable to live alone). 

2. Deferred periodic payments of supplemental security income and Social Security 

benefits that are received in a lump sum amount or in prospective monthly amounts. 

3. Any amount of crime victim compensation received through crime victim assistance 

(or payment or reimbursement of the cost of such assistance) because of the 

commission of a crime against the applicant under the Victims of Crime Act (42

U.S.C. 10602).

4. Any allowance paid under 38 U.S.C. 1805 to a child suffering from spina bifida who 

is the child of a Vietnam veteran.

5. Payments by the Indian Claims Commission to the Confederated Tribes and Bands of 

Yakima Indian Nation or the Apache Tribe of Mescalero Reservation

(Pub.L. 95-433).

6. Housing assistance payment (HAP) (HUD’S Housing Choice Voucher 

Homeownership Program, sometimes referred to as Section 8 for Homeownership). 

The HAP is not included in the household’s annual income for the purpose of 

determining the income category in which the household falls or determining 

payment assistance.

7. Adoption assistance payments in excess of $480 per adopted child.

4-20
HB-1-3550

Paragraph 4.3 Sources of Income 

E. Verifying Sources and Amounts

The Loan Originator must verify income information provided by the applicant. 

Paragraph 3.15 describes the different types of verifications. Federal Income Tax Returns 

with supporting documentation are the preferred verification source for prior 

income/previous employment. These documents along with award letters, court orders 

and/or paystubs (supported by oral verification when the applicant has been with the 

employer for less than a year or the verifications are inconsistent) are preferred when 

reviewing current income sources and projecting both annual and repayment income. Written

Verifications of Employment (VOE) provided by third-party sources or other similar 

documents prepared by third-party sources are only required when the applicant is unable to 

provide sufficient recent, reliable and consistent third-party documentation which is readily 

available to them (paystubs, award letters, etc.). 

4-21

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Examples – Income Exclusions

• The Value of Food Provided through the Meals on Wheels Program or Other 

Programs Providing Food for the Needy. Shane Michaels received a hot lunch each 

day during the week in the community room and an evening meal in his apartment. One 

meal is provided through the Meals on Wheels program. A local church provided the 

other. The value of the meals he receives is not counted as income.

• Groceries provided by persons not living in the household. Melissa Bostic’s mother 

purchases and delivers groceries each week for Melissa and her two year old. The value 

of these groceries is not counted as income despite the fact that these are a regular 

contribution or gift.

• Amounts Received Under WIC or the School Lunch Act. Cody Britt’s two children 

receive a free breakfast and reduced priced lunches at school every day through the 

Special Supplemental Food Program for Women, Infants and Children (WIC). The 

value of this food is not counted as income. 

• Deferred periodic payments of social security benefits. Andrew Ray received

$32,000 in deferred social security benefits following a lengthy eligibility dispute. This 

delayed payment of social security benefits is treated as an asset, not as income.

• Income from training programs. Jamey Hawkins is participating in a qualified statesupported employment training program every afternoon to learn improved computer 

skills. Each morning, she continues her regular job as a typist. The $250 a week she 

receives as a part-time typist is included in annual income. The $150 a week she 

receives for participation in the training program is excluded in annual income.

• Student financial assistance. Dylan Nessel won a scholarship from the local civic 

association. The association sends him a $1,000 check each semester to help with tuition 

costs. These funds are excluded from annual income.
HB-1-3550

Paragraph 4.3 Source of Income

Each applicant must sign Form RD 3550-1, Authorization to Release Information, at 

the time of application. Copies of this form must accompany any request for verification 

from third-party sources. Form SSA-3288, Consent for Release of Information, may also be 

used for Social Security verifications when the applicant is unable to provide a copy of an 

award letter. A complete copy of the last two filed and signed IRS Form 1040, U.S. 

Individual Income Tax Returns must be provided by the applicant. IRS Form W-2, Wage 

and Tax Statement, and/or IRS Form 1099-MISC, Miscellaneous Income, must be attached 

to the applicant’s federal income tax return in order for it to be considered a complete return. 

When reviewing W-2 information, Block 5 is typically used for gross income.

For electronically filed tax returns, it is not necessary to require the applicant(s) to 

manually sign the return for application purposes if there is sufficient documentation the 

applicant has signed and filed the return electronically (e.g. use of Self-Select PIN for Free 

File Fillable Forms, Electronic Filing PIN, authorized E-File Provider, etc.).

The Agency will ask the applicant to directly request, obtain, and provide a copy of their 

tax return transcript for the previous two tax years (using IRS Form 4506-T, Request for 

Transcript of Tax Return) if additional income validation is needed. If there are 

inconsistencies between the income verifications (e.g. pay stubs, tax returns, etc.), or if the 

applicant was unable to furnish complete copies of their last two filed returns (e.g. a W-2 

was missing), then the transcript should be requested. The transcript should also be 

requested if the income verifications appear suspicious (e.g. there is evidence of alteration).

Appendix 2 provides sample certification and verification formats for a number of 

purposes.

The following chart provides guidance on acceptable alternative sources of 

verifications of different types of income:

4-22
Revised (07-22-19) SPECIAL PN

HB-1-3550

Paragraph 4.3 Source of Income

INCOME (If Preferred Source of Verification cannot be obtained without cost,

Acceptable Alternative may be used.)

Type of Income or 

Verification Source Verification Requirements and Procedures

WAGES or SALARY

Paycheck Stubs or The applicant must list all household members on the application and provide

Payroll Earnings their employment status. They must be consecutive and “most recent” (i.e., no 

more than 60 days old) as of the date the loan application is made; must clearly

identify the applicant (or adult household member) as the employee by name

and/or social security number; must show the gross earnings for that pay period

and year-to-date; and must be computer-generated or typed. Oral verifications

should only be used if the applicant has worked for the employer for less than a 

year or the other types of verifications are inconsistent or suspicious,

documented as follows:

Statements for not less

than four (4) consecutive

weeks

Preferred Source

AND

Oral Verification as

permitted in Paragraph

3.15 A.3.

Preferred Source

If an oral verification is needed, document in the running record the date of

contact and list: The employer’s name/address/phone number/contact person

and title; the employee’s name, date of employment, present position and

probability of continued employment; the source of the phone number

(applicant, realtor, yellow pages, website); and the name and title of the Rural 

Development employee that contacted the employer. Note: It is not necessary 

to contact the employer (for an oral verification) to determine probability of 

continued employment or whether overtime is likely to continue. By 

evaluating the historical and year to date information, the Loan Originator and 

Loan Approval Official should be able to determine whether the income is 

likely to continue.

Electronic Verification It must clearly identify the applicant (or adult household member) as the

Acceptable Alternative employee by name and/or social security number, cover the most recent pay

(in lieu of paycheck period as of the date the initial loan application is made, and show the gross

stubs only) earnings for the most recent 30-day pay period and year-to-date. Obtain oral

verification of employment only if the applicant has worked for the

employer for less than a year or the other types of verifications are

inconsistent or suspicious.

Written Verification of 

Employment

Acceptable Alternative

Only if paycheck stubs or earnings statements are unpredictable, appear 

fraudulent, or are not available, the Loan Originator must send Form RD 1910-

5, Request for Verification of Employment, to each employer for verification.

4-23

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.3 Sources of Income

Type of Income or 

Verification Source

Verification Requirements and Procedures

For SELF-EMPLOYED 

PERSONS

Federal Tax 

Returns and 

Income & Expense 

Statement 

Preferred Source

Self-employed applicants (or adult household members) must provide the 

last two complete, signed, and filed individual and business Federal Income 

Tax Returns (IRS Form 1040) along with all schedules. If the applicant has 

wage income, all IRS Form W-2s must be attached to the applicant’s 

Federal Income Tax Return for the tax returns to be considered complete. 

Refer to Attachment 4-C for guidance on what documentation is needed for 

each business structure. 

If the applicant reports a significant increase or decrease in their selfemployment income or does not have two full years of filed tax returns, the 

applicant must also provide the most recent income and expense, and 

balance sheet, or Verification of Business Expenses. The Loan Originator

must compare the income and expense and balance sheet or Verification of 

Business Expenses provided by the applicant to analyze the income trend of

the business. 

(NOTE: The Verification of Business Expenses, found in Appendix 8 

provides a sample format for recording business expenses.)

SUPPLEMENTAL 

VERIFICATION

Seasonal Employment

(to include wages and 

unemployment benefits)

Preferred Source

A household member who is a seasonal worker must provide the last two years 

of complete, signed, and filed Federal Income Tax Returns (e.g. all W-2 forms, 

schedules, 1099-MISC forms, etc.) If the applicant has less than two years of 

seasonal employment, the Loan Originator must document there is a strong 

likelihood that the applicant will continue to receive that income. 

If an applicant receives unemployment compensation, that is clearly 

associated with seasonal layoffs expected to recur, the Loan Originator does 

not need to contact the employer or obtain a letter of explanation for gaps of 

seasonal layoffs, as long as unemployment compensation is reported and 

documented with the last two years of the applicant’s federal income tax

returns. 

Unemployment Benefits 

(not associated with 

seasonal employment),

All applicants (or adult household members) must complete Form RD

3550-4, Employment and Asset Certification, which provides his/her current

employment status and requires them to agree to inform the Agency

immediately, in writing, if the employment status changes. If an applicant

has recently become unemployed, the Loan Originator should contact the

former employer to confirm that the applicant is no longer employed and that

re-employment is not expected.

Applicants (or adult household members) receiving unemployment benefits 

(not associated with seasonal employment), must provide the most recent award

or benefit letter prepared and signed by the authorizing agency to verify the

non-employment income. Appendix 8 provides a sample format for requesting

information about unemployment benefits. 

Disability & Worker’s

Compensation, Severance

Pay (except lump-sum

additions)

Preferred Source

It must clearly identify the adult household member as the employee by

name and/or social security number and cover the most recent earnings as of

the date the verification is submitted.

4-24 
HB-1-3550

Paragraph 4.3 Source of Income

Electronic Verification

Acceptable Alternative

Electronic verification of self-employment income for that period, copy of

checks, or bank statements, all showing gross earnings. All authorized 

deductions must be added back to checks or bank statements to reflect gross 

amount.

Mortgage Credit An applicant receiving a MCC must file IRS Form W-4, Employee’s

Withholding Allowance Certificate. This IRS form enables the applicant’s

employer to include a portion of the applicant’s income tax credit in their

regular paycheck. Income tax credits not advanced through the applicant’s

employer on at least a monthly basis cannot be included in repayment

income but may warrant consideration as a compensating factor.

The documents must be the “most recent” and identify the applicant by name

and/or social security number.

Signed copies of the applicable IRS Form or a letter from the employer stating

the applicant has executed and the employer has accepted the

document.

Preferred Source for

MCC

Applicable IRS Form or

Letter from Employer

Regular, Unearned The applicant (or adult household member, including adult full-time students)

must provide a copy of the most recent award or benefit letter prepared and

signed by the authorizing agency. If the date of the letter is not within the last

12 months, require the applicant to submit information updating the award, for

example, a cost-of-living (COLA) payment notice, Social Security Benefits

Statement, or a notice of change in benefits. Appendix 8 provides sample

formats for requesting this information.

Income (e.g., Social

Security, SSI, Retirement

Funds, Pensions, Annuities,

Disability or Death

Benefits) (except deferred 

periodic payments)

Preferred Source

Acceptable Alternative The two most recent bank statements showing the amount of monthly

benefits received and IRS Form 1099 for the previous year. The Social 

Security debit card (i.e., Direct Express card) is an alternate way for 

applicants to receive their monthly federal benefits. The federal benefits are 

paid directly to the debit card on the monthly payment date. Similar to 

obtaining bank statements, the two most recent debit card statements 

showing the amount of the monthly benefits deposited can be used as an 

acceptable alternative. 

Loan Originators must verify that the benefit shown on the bank statement

reflects the gross amount of the benefit prior to deductions for items such as

taxes, health benefits, insurance premiums, etc.

Student Financial Aid

Preferred Source

Acceptable Alternative

Electronic verification or copy from the Financial Aid Office at the applicable

school may be used to verify student financial aid. 

Verification of Student Income and Expenses

____________________________________________________________________________________________

4-25

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.3 Source of Income

Alimony or Child Support 

Payments

Preferred Source

Electronic Verification

Acceptable Alternative

Cancelled Checks / 

Electronic Verification

Acceptable Alternative

The applicant (or adult household member) must obtain a payment history 

for the last 12 months from the court appointed entity responsible for 

handling payments. The average amount received will be used in the income 

calculations.

The two most recent bank statements showing electronic deposit of the 

monthly alimony and/or child support received AND a copy of the court 

appointed divorce decree or separation agreement (if the divorce is not final) 

that provides for the payment of alimony or child support and states the 

amount and the period of time over which it will be received.

If (and only if) there is not a court appointed entity responsible for handling

payments and formal documents were never issued, support payments can be

certified as being received by obtaining cancelled checks or bank statements 

for the last 12 months to verify the amount received.

Divorce Decree/Separation 

Agreement/Court Order of 

Support Payments

If (and only if) a source of income was awarded in the decree, and there is

not a court appointed entity responsible for handling payments, the applicant

(or adult household member) may provide a copy of the divorce decree,

separation agreement, or other court ordered document indicating the amount of

the required support payments. If the applicant reports that the amount required

by the agreement is not being received, the applicant must provide adequate

documentation of the amount being received (i.e., copies of the checks or

money orders from the payer, etc.) and certify the payments are being

received or not received.

If (and only if) there is not a court appointed entity responsible for handling

payments and formal documents were never issued, support payments can be

certified as being received or not received.

Acceptable Alternative

Cancelled Checks

Acceptable Alternative

Verification of Assets and Form RD 3550-4, Employment and Asset Certification, will be used to

Income from Assets and confirm the level of the household’s combined net assets. Obtain the two

Investments most recent complete bank or brokerage statements showing the transaction

Preferred Source history and the current balance. If the applicant has a Social Security debit 

card (i.e. Direct Express card), obtain the two most recent debit card 

statements showing the transaction history and the current balance. If account

information is reported on a quarterly basis, obtain the most recent quarterly

statement. To further document interest and dividend income the applicant

must provide copy of Federal tax forms and schedules clearly identifying

income from interest, dividends, and capital gains. For some assets such as

mutual funds or 401(k) accounts, copies of year-end statements can provide

information about annual income.

If the Loan Originator has reasons to question the accuracy of the applicant’s 

self-certification or bank statements, the Loan Originator sends Form RD 

1944-62, Request for Verification of Deposit, to financial institutions to verify 

account balances.

____________________________________________________________________________________________

4-26
HB-1-3550

Paragraph 4.3 Source of Income

Verification of Gifts

Preferred Source

If funds needed for the purchase will be provided by an organization or 

another person not living in the household, the Loan Originator must send 

the donor Form RD 3550-2, Request for Verification of Gift/Gift Letter, to 

verify whether the gift must be repaid and whether the funds have already 

been transferred. Form RD 3550-2 is used to verify gifts that are nonrecurring and intended for down payment or closing costs purposes only.

Verification of Recurring 

Gifts

Preferred Source

For recurring gifts, if there is no history of the gift being received prior to 

application and the gift amount is needed to establish the applicant has 

repayment ability, the Loan Originator must determine and document that 

the gift is stable and dependable.

DEDUCTIONS

Type of Expense or 

Verification Source Verification Requirements and Procedures

Disability Assistance 

Expenses

Preferred Source

To qualify for disability deductions, the applicant must describe the nature of 

the expense, provide documentation of the costs, and demonstrate that the 

expense enables a family member to work. If the household member 

receives a form of income because of a verified disability (such as social 

security disability or disability compensation), that may be used as a method 

to verify the disability. Otherwise, Form RD 1944-4, Certification of 

Disability or Handicap, or other 3rd party documents prepared by a physician 

or other medical professional should be used to verify the household

member’s disability.

Medical Expenses

Preferred Source

For elderly households only, allowable medical expenses may be deducted 

from annual income. Therefore, documentation of medical expenses is not 

generally required for non-elderly households. In such cases, these medical 

expenses must be verified as well. Appendix 8 provides a sample format for 

documenting medical expenses. Note: while medical expenses are an 

allowable deduction from annual income, medical expenses/debts must not 

be considered in the total debt ratio when calculating repayment ability.

Childcare Expenses Reasonable childcare expenses may be deducted from annual income. To 

qualify for the deduction, the applicant must:

• Identify the children receiving child care and the family member

who can work or go to school as a result of the care;

• Demonstrate there is no adult household member available to care

for the children;

• Identify the child care provider, hours of care provided, and costs 

(e.g., letter on the child care provider’s letterhead or a copy of a 

signed child care contract); and

• Identify the educational institution and provide documentation

of enrollment (if appropriate).

Appendix 8 provides a sample format for requesting childcare information.

____________________________________________________________________________________________

4-27

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.3 Source of Income

1. Timing

Documentation used to verify employment, income, assets, and deductions must be 

no more than 120 days old, or 180 days old for new construction by closing date. If any 

of the verification documents are older than allowed, the Loan Originator must update 

them before settlement. The age of certain documents, such as divorce decree and tax 

returns, do not necessarily affect the validity of the underwriting decision. These types of 

documents are exempt from the document age restriction unless there is evidence that the 

applicant’s circumstances have changed thus warranting updated verifications.

2. Projecting Expected Income for the Next 12 Months

Once an income source is verified, the Loan Originator must project the expected 

income from this source for the next 12 months. This projection should be based on a 

comparison and analysis of the figures derived from using all applicable calculation 

methods. To establish earning trends and avoid miscalculating income, all four methods

should be considered; however, some income sources will only lend themselves to one 

method (such as; seasonal income, retirement benefits, or social security benefits). If all 

four methods are not used, the Loan Originator must document why. In some cases, there 

may be multiple types of income generated from one source (overtime, bonus, hourly); 

therefore, the income calculation method used will depend on the type of income 

received, rather than the source of income. The four calculation methods are:

• Straight-based where the benefit or wage amount is converted to the annual 

equivalent. This method is most appropriate when the hourly rate/number of 

hours worked, or the fixed weekly/monthly income is known and typically 

does not vary. 

• Average where the income as reported on the benefit statements or pay stubsfor

the last 30 days is averaged and then converted to the annual equivalent. This

method is most appropriate when the wage rate/type (overtime, shift differential, 

etc.) or the number of hours worked vary from paycheck to paycheck.

• Year-to-date (YTD) where the YTD gross earnings are divided by the YTD 

interval, which is the number of calendar days elapsed between January 1 of the 

current year and the last date covered by the most recent income verification, and 

then multiplied by 365. The earning activity during the YTD interval should be 

closely examined to determine the appropriateness of this method. Do not use

this method if the earning activity during the YTD interval is insufficient to make 

an annual projection or is not reflective of the likely earning activity for the period 

outside the YTD interval (the time between the last date covered by the most 

recent income verification and December 31 of the current year).

4-28
HB-1-3550

Paragraph 4.3 Source of Income

• Historical where the income as reported on the previous year’s tax return is used.

Any declining income trend, especially for repayment income, must be carefully

document in the underwriting analysis.

If the applicant receives a fixed income, such as social security benefits, it is not necessary to 

calculate all four methods. In the case of a fixed income, it would be appropriate to calculate the 

straight based and historical methods. If the two methods do not match (perhaps because of an 

increase in benefits for the current year), document the file accordingly. For seasonal and selfemployment, consider two years of historical records to include wages and unemployment. It is not 

necessary to calculate the other three methods since you should not rely on paystub verification and 

the applicant may have multiple employers, making it difficult to verify from all sources. For all 

other incomes, calculate the four methods and compare the results. If there appear to be 

discrepancies, ask the applicant for additional information. For instance, if last year’s income is 

$10,000 more than what was calculated using year to date information, ask the applicant if they 

have had a change in their hourly rate, number of hours declined or perhaps if their overtime is 

typically earned at the end of the year and is not yet reflected in the paystub. Document the results 

of the applicant interview and select the most appropriate income calculation after analyzing the 

data. 

After the Loan Originator determines the suitable methods and performs the calculations,

he/she must determine which figure is most representative of income likely to be received during 

the next 12 months. If the figures are disparate and one figure is not clearly the most 

representative, an average of the resulting figures may be used. Selecting the lowest figure without

analysis is not acceptable. The selection must be carefully deliberated and may require additional 

verification.

____________________________________________________________________________________________

4-29

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.3 Source of Income

3. Income of Temporarily Absent Family Members

Household members may be temporarily absent from the household for a variety of 

reasons, such as temporary employment or students who live away from home during the 

school year. The income of these household members is considered when computing 

annual income and, if the person is a party to the note, for repayment income.

If the absent person is not considered a member of the household and is not a party to 

the note, the Loan Originator must not count their income, must not consider them when 

determining deductions for adjusted income, and must not consider them as a family 

member for determining which income limit to use.

____________________________________________________________________________________________

4-30

Example - Projecting Expected Income for the Next 12 Months

Ken Anderson has worked for B & N Auto for the last two years. According to the application, Mr.

Anderson reported that he earns $10/hour, works 40 hours per week. Since Mr. Anderson is paid weekly, 

he submitted his last four pay stubs through the pay period ending May 1st that show gross pay (including 

overtime) of $460, $415, $475, and $445. His most recent paystub reflects gross YTD earnings of $5,885.

Mr. Anderson’s tax return for last year showed gross wages of

$16,640.

Straight-based: Base pay: $10/hour x 40 hours/week x 52 weeks/year = $20,800 

Average: ($460 + $415 + $475 + $445) / 4) x 52 weeks/year = $23,335

YTD: ($5,885 / 121 days) x 365 = $17,752

Historical: $16,640

Looking at the four results, there is no clear earning pattern. The Loan Originator should investigate 

further to determine why significant discrepancies exist between the calculation methods and what figure

should be used. Is B & N experiencing an unusual and temporary large workload? Was Mr. Anderson 

absent from work for an extended period of time? Did Mr. Anderson recently receive a pay increase? Do 

his recent paystubs include overtime earnings? These are just a few examples of the questions that should 

be answered.

NOTE: These calculations should be documented using the Worksheet for Computing Income and 

Maximum Loan Amount Calculator and included in the Electronic Customer File (ECF).
Examples - Temporarily Absent Family Member

James Brown and his wife have applied for a loan. At the moment, James is working on a 

construction job on the other side of the State and comes home every other weekend. He earns

$600/week and uses approximately one-third of that amount for temporary living expenses. The full 

amount of the income earned would be counted for both repayment and annual income.

Adam Watson works as an accountant. However, he suffers from a disability that 

periodically requires lengthy stays at a rehabilitation center. When he is confined to the 

rehabilitation center, he receives disability payments equaling 80% of his usual income. During the 

time he is not in the unit, he will continue to be considered a family member. Even though he is not 

currently in the unit, his total disability income will be counted as part of the family’s annual 

income.

Desirae Bitz accepts temporary employment in another location and needs a portion of her 

income to cover living expenses in the new location. The full amount of the income must be 

included in annual income.

Terri Glass is on active military duty. Her principal residence is her parents’ home where 

her husband and children live. Terri is not currently exposed to hostile fire. Therefore, because her 

spouse and children are in the parents’ home, her military pay must be included in annual income.

HB-1-3550

Paragraph 4.3 Source of Income

____________________________________________________________________________________________

4-31

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

4.4 CALCULATING ANNUAL AND ADJUSTEDINCOME

Adjusted income is used to determine eligibility for the Section 502 and 504 programs, as 

well as eligibility for and the amount of payment subsidies under Section 502.

A. Calculating AnnualIncome

Annual income is used as the base for computing adjusted income. Income of all 

household members, not just parties to the note, should be considered when computing annual 

income.

B. Calculating Deductions from Annual Income

Adjusted income is calculated by subtracting from annual income any of 5 deductions 

that apply to the household. Not all households are eligible for all deductions. Exhibit 4-2 

summarizes these deductions. The remainder of this paragraph provides guidance on 

determining whether a family is eligible for each deduction and verifying and calculating these 

amounts.

Exhibit 4-2

Allowable Deductions from Annual Income

Deduction

Elderly 

Households

Nonelderly 

Households

Dependent Deduction Yes Yes

Child Care Expenses Yes Yes

Elderly Household Yes No

Medical Expenses Yes No

Disability Assistance Yes Yes

C. Dependent Deduction

A deduction from annual income of $480 is made for each household member who 

qualifies as a dependent. Dependents are members of the household who are not the borrower, 

co-borrower, or spouse, are age 17 or younger, are an individual with a disability, or are a fulltime student. The applicant/borrower, co-applicant/co-borrower, or spouse of applicant/borrower 

(even if the household member is temporarily absent) may never qualify as a dependent. A 

foster child, an unborn child, a child who has not yet joined the family, or a live-in aide may 

never be counted as a dependent. __________________________________________________________________________________________

 4-32
HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

D. Child Care Expenses

Reasonable unreimbursed childcare expenses for the care of children age 12 and under 

are deducted from annual income if:

(1) the care enables a household member to work, actively seek employment, or go to 

school;

(2) no other adult household member is available to care for the children; and

(3) in the case of childcare that enables a household member to work, the expenses 

deducted do not exceed the income earned by that household member. This limitation 

does not apply if the childcare allows a household member to go to school.

If the childcare provider is a household member, the cost of the children’s care cannot be 

deducted.

Childcare attributable to the work of a full-time student (except for applicant/borrower, 

co-applicant/co-borrower, or spouse of applicant/borrower) is limited to not more than $480, 

since the employment income of full-time students in excess of $480 is not counted in the annual 

income calculation. Childcare payments on behalf of a minor who is not living in the household 

cannot be deducted.

To qualify for the deduction, the applicant must:

• Identify the children who are receiving childcare and the family member who can 

work, seek employment or go to school (academic or vocational) as a result of the 

care;

• Demonstrate there is no adult household member available to care for the children 

during the hours care is needed;

• Identify the childcare provider, hours of child care provided, andcosts;

• Verify the expense is not reimbursed by an agency or individual outside the family; 

and

• If the expenses enable a family member to go to school, identify the educational 

institution. The family member need not be a full-time student. ____________________________________________________________________________________________

4-33

(01-23-03) SPECIAL PN

Revised (07-22-19) SPECIAL PN
Example – Child Care Deduction

Separate Expenses for Time at Work and Time at School

Lou and Bryce have two children. Both parents work, but Lou works only part-time and goes to 

school half-time. She pays $4 an hour for eight hours of childcare a day. For four of those 

hours, she is at work; for four of them she attends school. She receives no reimbursement for her 

childcare expense.

Her annual expense for childcare during the hours she works is $4,000 and at school is $4,000. 

She earns $6,000 a year. Bryce earns $18,000.

Lou’s childcare expense while she is working cannot exceed the amount she is earning while at 

work. In this case, that is not a problem. Lou earns $6,000 during the time she is paying $4,000. 

Therefore, her deduction for the hours while she is working is $4,000.

Lou’s expense while she is at school is not compared to her earnings. Her expense during those 

hours is $4,000 and her deduction for those hours will also be $4,000.

Lou’s total childcare deduction is $8,000 ($4,000 + $4,000). The total deduction exceeds the 

amount of Lou’s total earnings, but the amount she pays during the hours she works does not 

exceed her earnings. If Lou’s childcare costs for the hours she worked were greater than her 

earnings, she would not be able to deduct all of her child care costs.

HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

4-34

Verification of Child Care Expenses

Childcare hours must parallel the hours the family member works or goes to school. Appendix 2 

provides a sample format applicants can use to document childcare. Other acceptable formats 

include a letter on the childcare provider’s letterhead or a copy of a signed childcare contract.
Typical Disability Expenses

• Care attendant to assist an individual with disabilities 

with activities of daily living directly related to 

permitting the individual or another family member to 

work.

• Special apparatus, such as wheelchairs, ramps, adaptations 

to vehicles or workplace equipment, if directly related to 

permitting the individual with disabilities or another family 

member to work.

HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

E. Elderly Household Deduction

A single $400 deduction is subtracted from annual income for any elderly household. To 

be considered an elderly household, a party

to the note must be 62 years of age or older 

or an individual with a disability. Because 

this is a “family deduction” each household 

receives only one deduction, even if more 

than one member is elderly or disabled.

In the case of a family where the 

deceased applicant/borrower or spouse was at 

least 62 years old or an individual with

disabilities, the surviving family member shall continue to be classified as an “elderly 

household” for the purposes of determining adjusted income if:

• At the time of death of the deceased family member, the dwelling was financed by the 

Agency;

• The surviving family member occupied the dwelling with the deceased family 

member at the time of death; and

• The surviving spouse (if any) has not remarried.

F. Deduction for Disability Assistance Expense

Families are entitled to a deduction for un-reimbursed, anticipated costs for attendant care and 

“auxiliary apparatus” for each family member who is a person with disabilities, to the extent these 

expenses are reasonable and necessary to enable any family member 18 years of age or older who may 

or may not be the member who is a person with disabilities (including the member who is a person 

with disabilities) to be employed. The applicant must describe the nature of the expense, provide 

documentation of the costs, and demonstrate that the expense enables a family member to work. 

Reasonable documented expenses for care of the individual with disabilities in excess of 3 percent of 

annual income may be deducted from annual income if the expenses:

• Enable the individual with disabilities or another family member to work;

• Are not reimbursable from insurance or any other source; and

• Do not exceed the amount of earned income included in annual income by the person 

who is able to work as a result of the expenses. If the disability assistance enables 

more than one person to be employed, the combined incomes of all persons must be

included. ____________________________________________________________________________________________

 4-35

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
Example – Eligible Disability Assistance Expenses

The payments made on a motorized wheelchair for the 42-year-old son of the applicant/borrower enable the 

son to leave the house and go to work each day on his own. Prior to purchase of the motorized wheelchair, the 

son was unable to make the commute to work. These payments are an eligible disability assistance expense.

NOTE: Auxiliary apparatus includes, but is not limited to, items such as wheelchairs, ramps, 

adaptations to vehicles, or special equipment to enable a sight-impaired person to read or type, but only 

if these items are directly related to permitting the disabled person or other family member to work. If 

the apparatus is not used exclusively by the person with a disability, the total cost must be prorated to 

allow a specific amount for disability assistance.

• Include payments on a specially equipped van to the extent they exceed the payments that 

would be required on a car purchased for transportation of a person who does not have a disability.

• The cost of maintenance and upkeep of an auxiliary apparatus is considered a disability 

assistance expense (e.g., veterinarian and food costs of a service animal; cost of maintaining 

equipment that is added to a car, but not the cost of maintaining the car).

Payments to a care attendant to stay with a disabled 16-year-old child allow the child’s mother to go to work 

every day. These payments are an eligible disability assistance expense. When the same provider takes care of 

children and a disabled person over age 12, prorate the total cost and allocate a specific cost to attendant care. 

The sum of both childcare and disability assistance expenses cannot exceed the employment income of the 

family member enabled to work.

NOTE: Attendant care includes, but is not limited to, expenses for home medical care, nursing services, 

housekeeping and errand services, interpreters for hearing-impaired, and readers for persons with 

visual disabilities.

HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

To qualify for this deduction, applicants must identify the individual with a disability on 

the application. If the household member receives a form of income because of a verified 

disability (such as social security disability or disability compensation), that may be used as a 

method to verify the disability. Otherwise, Form RD 1944-4, Certification of Disability or 

Handicap, or other 3rd party documents prepared by a physician or other medical professional, 

should be used to verify the individual’s disability from a physician or other medical

professional. 

4-36 
Example – Calculating a Deduction for Disability Assistance Expenses

(NOTE: $3,034 is not greater than amount earned by co-applicant/co-borrower, who is enabled to work.)

HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

Applicant/Borrower earned income $14,500

Co-Applicant/Co-Borrower earned income +$12,700

Total Income $27,200

Care expenses for disabled 15-year-old $ 3,850

Calculation: $ 3,850

(3% of annual income) -$ 816

Allowable disability assistance expenses $ 3,034

G. Deduction for Medical Expenses (for Elderly Households Only)

Medical expenses may be deducted from annual income for elderly households if the 

expenses: (1) will not be reimbursed by insurance or another source; and (2) when

unreimbursed medical expenses, which can be combined with any disability assistance 

expense, are in excess of 3 percent of annual income. 

If the household qualifies for the medical expense deduction, expenses of the entire 

family are considered. For example, if a household included the head (grandmother, age 64), her 

son (age 37), and her granddaughter (age 6), the medical expenses of all 3 family members 

would be considered. Note: while medical expenses are an allowable deduction from annual 

income, medical expenses/debt must not be considered in the total debt ratio when calculating 

repayment ability. 

 ____________________________________________________________________________________________

 4-37

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
Examples - Typical Medical Expenses

• Services of physicians, nurses, dentists, opticians, chiropractors, and other health care providers

• Services of hospitals, laboratories, clinics, and other health care facilities

• Medical, Medicaid, supplemental insurance and long-term care premiums, and expenses to Health 

Maintenance Organization (HMO); such as, co-payments

• Prescription drug coverage, pharmacy expenses, and nonprescription medicine prescribed by a physician

• Dental expenses, x-rays, fillings, braces, extractions, dentures, and examinations

• Eyeglasses, contact lenses, and eye examinations

• Medical or health products or apparatus (hearing aids, batteries, wheelchairs, etc.)

• Attendant care or periodic medical care (visiting nurses or assistance animal and its upkeep)

• Periodic scheduled payments on accumulated medical bills

• The greater of the actual travel costs for medical appointments or the published Internal Revenue 

Service standard medical mileage rate. (https://www.irs.gov/tax-professionals/standard-mileage-rates) 

HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

___________________________________________________________________________________________

4-38

Examples - Excluded Medical Expenses

• Unnecessary cosmetic surgery to improve the patient’s appearance such as face lifts, hair 

transplants/removal, and liposuction

• Health Club or YMCA dues, steam baths for general health or to relieve physical or mental discomfort not 

related to a particular medical condition

• Household help even if recommended by a doctor

• Medicalsavings account(MSA)

• Nutritional and herbal supplements, vitamins, and “natural medicines” unless these can be obtained 

legally only with a physician’s prescription

• Non-prescription medications unless prescribed by a physician for a particular medical condition (e.g., 

acid reflux medication can be taken without a prescription which would be an excluded expense, but a 

physician may also prescribe it which could then be included)

• Personal use items (such as toothpaste, toiletries, cosmetics, etc.) unless used primarily to prevent or 

alleviate a physical or mental defect or illness

• Life Insurance

• Funeral or Burial Plot expenses
Example – Medical Expense Paid over a Period of Time

Chynna Ray and Justin Grog did not have insurance to cover Justin’s operation four years ago. They have 

been paying $105 a month toward the $5,040 debt. Each year that amount

($105 x 12 months or $1,260) has been included in total medical expenses. A review of their file indicates 

that a total of $5,040 has been added to total medical expenses over the four-year period. Over the four-year 

period they have missed five payments and still owe $525. Although they still owe this amount, the bill 

cannot be included in their current medical expenses because the expense has already been deducted.

HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

One of the most challenging aspects of 

determining allowable medical expenses is 

estimating a household’s medical expenses for 

the coming year. While some anticipated 

expenses can be documented easily (for 

example, Medicare or other health insurance 

premiums and ongoing prescriptions), others 

need to be estimated. The Loan Originator 

should use historical information about 

medical bills to estimate future expenses.

However, the estimates should be realistic. 

For example, if the household has a 

significant medical bill, the Loan Originator

would count only that portion of the bill that is likely to be paid during the coming year.

 ____________________________________________________________________________________________

4-39

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Example - Calculating the 

Medical Expense Deduction

The Jensons are an elderly household with annual 

income of $25,000 and anticipated medical expenses 

of $3,000 that are not covered by insurance or another 

source. The allowable medical expenses would be:

Total Medical Expenses $3,000

(less) 3% Annual Income $ 750

($25,000 x 0.03)

Allowable Medical Expenses $2,250
Example – “Grossing Up” Nontaxable Income

The applicant’s repayment income of $22,000 includes $5,000 of nontaxable income. 

The revised repayment income for the applicant would be calculated as follows:

HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

H. Calculating RepaymentIncome

Repayment income is the amount of the household’s income that is available to repay the 

Agency’s debt. To compute repayment income, the Loan Originator should count only the 

income of persons who will be parties to the note. 

The Standard PITI and TD ratio limitations assume that applicant income is taxable. If a 

particular source of income is not subject to Federal taxes, for example, certain types of 

disability payments or military allowances, the amount of continuing tax savings attributable to 

the nontaxable income source will be added to the applicant’s repayment income.

Nontaxable income, such as Housing Choice Vouchers, social security, child 

support, or alimony payments (if the instrument was executed or modified after 

12/31/18), will be multiplied by 120 percent to “gross up” such income (provided the 

nontaxable income is stable and is expected to continue for at least two years). 

$17,000 Taxable income

+ 6,000 “Grossed-Up” Nontaxable Income ($5,000 x 1.2)

$23,000 Revised Repayment

Under current tax law some State and local issuers of mortgage bonds may issue MCC to 

provide a Federal income tax credit to assist low-income home buyers and home owners. The 

credit permits an eligible household to claim a specific percentage of the annual interest paid on 

a mortgage as a tax credit rather than a deduction. If an applicant will receive the credit, the 

benefit of the credit will be “grossed up” for the repayment ability income calculation as 

described in Paragraph 4.4 H when the applicant adjusts their Federal tax withholdings via IRS

Form W-4 to reflect the decrease in their tax liability. MCCs are issued through private lenders 

and rarely encountered in the 502 Direct program. 

 ____________________________________________________________________________________________

4-40
HB-1-3550

SECTION 2: EVALUATING BORROWER ASSETS [7 CFR 3550.54(d)]

4.5 OVERVIEW OF POLICIES RELATED TO ASSETS

Assets affect an applicant’s ability to obtain a loan in 2 ways. First, applicants may be 

required to use non-retirement assets to make a down payment covering some of the costs of 

purchasing a home. Second, many types of assets generate income that must be included in the 

calculations of annual and repayment income. 

An applicant’s assets are considered for annual and repayment income, as well as for 

down payment purposes, as applicable. The cash value of all household members assets are 

considered for annual income and down payment purposes, as applicable, but shall be excluded

from repayment income. Asset documentation may also provide useful information for loan 

underwriting. Exhibit 4-3 presents a list of assets that must be considered when making these 

determinations and also identifies certain types of assets that are not considered.

Exhibit 4-3 

Types of Assets

The following types of assets must be considered.

Non-retirement assetsincluding:

• Savings accounts; the average 2-month balance of checking accounts; safe deposit boxes;

• The average 2-month balance of a Social Security debit card (i.e., Direct Express card)

• Stocks, bonds, Treasury bills,savings certificates, money market funds, and other investment accounts;

• Equity in real property or other capitalinvestments;

• Revocable trust funds that are available to the household;

• Lump-sum receipts, such as inheritances, capital gains, lottery winnings and settlement on insurance 

claims (including health and accident insurance, worker’s compensation, and personal or property losses);

• Assets held in foreign countries; and

• Personal property (such as jewelry, coin collection or antique cars) held as an investment.

The following types of assets are not considered.

• The value of necessary items of personal property, such as furniture, clothing, cars, wedding rings and 

other jewelry not held as an investment, and vehicles specially equipped for persons with disabilities;

• Assets that are part of any business, trade, or farming operation in which any member of the household 

is actively engaged;

• The value of an irrevocable trust fund, or the value of any trust over which no member of the household 

has control;

• The cash value of life insurance policies;

• Interests in American Indian restrictedland;

• The value of tax advantaged health, medical savings or spending accounts, and college savings plans; and

• For income calculations, any assets on hand that will be used to reduce the amount of loan.

• Retirement asset and income earned on retirement accounts, from interest, dividends, or capital gains 

when funds can only be accessed by retiring, terminating employment, loaning against the account, or 

withdrawing with penalties is never considered as repayment or annual income. 

 ____________________________________________________________________________________________

4-41

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
Example – Assets that are Part of an Active Business

Megan and Tylar Wasson own a copier and courier service. None of the equipment that they use in their 

business is counted as an asset (e.g., the copiers, the fax machines, the bicycles).

HB-1-3550

Paragraph 4.5 Overview of Policies Related to Assets

A. Reporting Assets

Applicants must provide information about household assets at the time of loan 

application and whenever an income determination is made. Applicants must provide sufficient 

documentation to enable the Loan Originator to verify the asset information and compute the 

market and cash value of the asset. Applicants must provide assets documentation as required on 

Paragraph 4.3 regardless of the balance or value of the assets disclosed. In addition, Form RD 

3550-4, Employment and Asset Certification, will be used to confirm the level of the 

household’s combined net assets.

B. Verification of Assets

Copies of bank or brokerage company statements provide more information than just 

account balances. The transaction history reveals recurring deposits or debits that may impact 

the applicant’s ability to qualify for a loan. Assets statements must cover account activity for the 

most recent two-month period (or, if account information is reported on a quarterly basis, for the 

most recent quarter). Loan originators must:

• Confirm that the applicant has enough funds for closing.

• Obtain a credible explanation from the applicant regarding the source of funds for any 

large deposits or increase in the account balance. A large deposit may be the 

proceeds from a new personal loan not yet reported to the credit bureaus.

C. Calculating Market and Cash Value

The market value of an asset is simply its dollar value on the open market. For example, 

the market value of $2,000 in a savings account is $2,000 and the market value of real estate is 

its appraised value. The cash value of an asset is the market value, less reasonable expenses to 

convert the asset to cash. For example, the cash value of stock worth $5,000 would be $5,000 

less any broker’s fee.

____________________________________________________________________________________________

4-42
Example – Withdrawals from IRAs or 401(k) Accounts

Jim Dunn retired recently. He has an IRA account but is not receiving periodic payments from it because his pension

is adequate for his routine expenses. However, he has withdrawn $2,000 for a trip with his children. The withdrawal 

is not a periodic payment and is not counted as income.

HB-1-3550 

Paragraph 4.5 Overview of Policies Related to Assets

D. Retirement Assets

Retirement assets are savings and 

investments that have been specifically 

designated as retirement funds. Access 

to retirement assets is restricted by law, 

employer policy, or both, depending on 

the retirement arrangement’s legal form. 

Typical restrictions include retirement 

age, vesting requirements, and ability to 

access funds.

4.6 LIMITATIONS ON ASSETS

If the cash value of non-retirement assets is greater than $15,000 for nonelderly 

households or $20,000 for elderly households, the cash value in excess of these amounts must be 

used toward the purchase of the property. 

Applicants will not be required to use retirement assets as a down payment, regardless of 

their retirement status.

4.7 CALCULATING INCOME FROM ASSETS FOR ANNUALINCOME

For the purpose of computing annual income, the cash value of all non-retirement 

assets of all applicants and co-applicants, as well as all household members (adults and 

children), are considered. Reference Exhibit 4-1 for additional information. 

Form RD 3550-4, Employment and Asset Certification should be used to certify 

the cash value of the household’s family assets.

4.8 CALCULATING INCOME FROM ASSETS FOR REPAYMENT INCOME

When calculating assets for repayment income, only the assets of the note signers are 

considered, and the actual income derived from the assets, which are determined stable and 

dependable, are used. 

Note: for non-retired applicants income earned on a retirement account, from interest, 

dividends, or capital gains when funds can only be accessed by retiring, terminating 

employment, loaning against the account, or withdrawing with penalties is never considered 

for annual or repayment income. 

4-43

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Typical Retirement Plans

• Employer-sponsored retirement plans: 401(k), 403(b), 457 

plans, employer and employee association trust accounts,

money purchase plans, profit-sharing plans, SEP-IRAs 

(Simplified Employee Pensions) and SIMPLE IRAs (Savings 

Incentive Match Plans for Employees).

• Individual Retirement Arrangements (IRAs): Traditional IRA, 

Roth IRA, and Keogh plans.
HB-1-3550

SECTION 3: CREDIT HISTORY [7 CFR 3550.53(h)]

4.9 OVERVIEW

To be eligible for a Section 502 loan, applicants must demonstrate that they are 

reasonably able and willing to repay an Agency loan. This section discusses the credit 

requirements, the additional credit checks, how to conduct the full credit history review, when 

to use Form RD 1944-61, and the criteria for making credit exceptions.

4.10 CREDIT REQUIREMENTS

The Loan Originator must evaluate the credit history of each proposed party to the 

note. An applicant’s credit record does not have to be perfect; a few instances of credit 

problems can be acceptable if an applicant’s overall credit record demonstrates an ability and 

willingness to repay obligations. Exhibit 4-4 outlines indicators of unacceptable credit that

must be investigated by the Loan Originator. These indicators are not automatic disqualifiers. 

The Loan Approval Official can make exceptions in limited circumstances, as described in 

Paragraph 4.14.

The Loan Originator must investigate 

indicators of unacceptable credit to determine 

whether they are accurate, and whether there is 

an acceptable explanation for the problem that 

might justify an exception. Failure to understand 

the nature of a credit problem could put the

Agency at risk of providing financing to an applicant who is unable or unwilling to repay the 

debt or could cause the Agency to reject an applicant on the basis of inaccurate or 

incomplete information.

For instance, an applicant with little or no credit history reflected on a credit report 

will require further examination. Since some creditors do not report to the credit repositories, 

the Loan Originator should identify nontraditional credit sources to develop a credit history. 

Nontraditional credit information that may demonstrate the applicant’s ability and willingness 

to meet debt obligations should be verified using the guidelines in Paragraph 4.12, which

include third party verifications from impartial and unrelated parties, canceled checks that cover 

a sufficient period of time, or other acceptable means. ____________________________________________________________________________________________

4-44

Cosigners

Cosigners must meet the same creditworthiness requirements as applicants and cannot 

be used to compensate for an applicant’s 

unacceptable credit history.
HB-1-3550

Paragraph 4.10 Credit Requirements

Exhibit 4-4

Indicators of Unacceptable Credit

• Little or no credit history. The lack of credit history on the credit report may be mitigated if the applicant 

can document a willingness to pay recurring debts through other acceptable means such as third-party 

verifications or canceled checks. Due to impartiality issues, third party verifications from relatives of 

household members are not permissible.

• Payments on any installment account, (on a per account basis, not cumulative of any and all of 

these account types), where the amount of the delinquency exceeded one installment for more than 

30 days within the last 12months.

• Payments on any revolving account, (on a per account basis, not cumulative of any and all of these account 

types), which was delinquent for more than 30 days on two or more occasions within the last 12 months.

• A foreclosure that has been completed within the last 36months.

• An outstanding Internal Revenue Service (IRS) tax lien or any other outstanding tax liens with no 

satisfactory arrangement for payment.

• Two or more rent or mortgage payments paid 30 or more days late within the last 2 years. If the applicant 

has experienced no other credit problems in the past 2 years, only 1 year of rent history will be evaluated. 

This requirement may be waived if the program loan will reduce shelter costs significantly and contribute 

to improved repayment ability.

• Outstanding collection accounts with a record of irregular payments with no satisfactory arrangements for 

repayment, or collection accounts that were paid in full within the last 6 months, unless the applicant had 

been making regular payments previously.

• Non-Agency debts written off within the last 36 months, unless the debt was paid in full at least 12 months ago.

• Agency debts that were debt settled within the past 36 months or are being considered for debt settlement.

• Delinquency on a federal debt.

• A court-created or court-affirmed obligation or judgment caused by nonpayment that is currently 

outstanding (see Paragraph 8.5 regarding required clearance or approval upon closing), or has 

been outstanding within the last 12 months, except:

◊ A bankruptcy in which:

◊ Debts were discharged more than 36 months prior to the date of application;or

◊ Where an applicant successfully completed a bankruptcy debt restructuring plan and has 

demonstrated a willingness to meet obligations when due for the 12 months prior to the date of 

application.

◊ A judgment satisfied more than 12 months before the date of application.

An applicant with an outstanding judgment obtained by the United States in a Federal court, other than 

the United States Tax Court, is not eligible for a Section 502 loan. This requirement is statutory and 

cannot be waived.

4-45

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.10 Credit Requirements

If an applicant’s credit history is unacceptable, the Loan Originator should counsel the 

applicant about the specific problems identified, and ways to improve the household’s credit 

record for the future. The Loan Originator should make it clear that establishing a pattern of 

meeting obligations that conforms to the Agency’s standards might make it possible for the 

applicant to qualify for a Section 502 loan in the future. 

The Loan Originator must use consistent standards and procedures when 

evaluating credit qualifications to ensure equity and fairness. Special areas of concern 

include:

• Determining what constitutes acceptable documentation;

• Counseling applicants about ways to correct adverse credit; and

• Interpreting subjective information.

4.11 CONDUCTING ADDITIONAL CREDITCHECKS

Over and above ordering a Tri-Merge Credit Report (TMCR), the Loan Originator should 

check the Department of Treasury’s Do Not Pay (DNP) portal and LoanServ’s “SSN CROSS 

REFERENCE” softlink key.

A. Do Not Pay Portal

The Do Not Pay (DNP) Portal is used to prevent Fraud, Waste, and Abuse of federal 

dollars. Except in very unusual circumstances, an applicant who is delinquent on a Federal debt 

is not eligible for the direct programs. The Loan Originator can verify whether the applicant has 

delinquent Federal debt through the DNP portal. 

Rural Development staff should visit the Agency’s DNP SharePoint page for more information 

including training, FAQ’s, newsletters, etc.: 

https://usdagcc.sharepoint.com/sites/rd_cfo/icd/DoNotPay/SitePages/Home.aspx

Through the DNP portal, the following data sources will be checked: American 

InfoSource Death Data (AIS-OBIT), American InfoSource Death Data-Probate (AIS-PROB), 

Department of Defense Death Data (DOD), Department of State Death Data (DOS), Credit Alert 

System (CAIVRS); Health & Human Services (HHS) List of Excluded Individuals & Entities – 

Public (LEIE-PUB), Internal Revenue Service (IRS) Automatic Revocation of Exemption List 

(ARL), Social Security Administration (SSA) Death Master File (DMF), System for Award 

Management (SAM) System for Award Management (SAM) Exclusion Records (SAM-EXCLRES); System for Award Management (SAM) Entity Registration Records (SAMENT), and 

Treasury Offset Program (TOP) Debt Check (DBCK). 

 ____________________________________________________________________________________________

4-46
HB-1-3550

Paragraph 4.11 Conducting Additional Credit Checks

For the Credit Alert System, a checked result (i.e. a hit was return) could indicate a “Case 

Type” of B (multiple hits), C (claim), D (default), F (foreclosure), or J (judgment). The applicant 

has no adverse credit found in the Credit Alert 

System if there is no checked result.

The Loan Originator should add the DNP 

results page to the applicant’s ECF to document 

that the applicant’s delinquency status has been 

checked.

If DNP indicates that the applicant has a 

delinquent Federal debt, the Loan Originator should notify the applicant of the result from the 

DNP portal and provide the debt agency name and debt agency telephone number from the 

DNP Portal, as a point of contact for the applicant to resolve the delinquency (do not provide 

screen shots or printouts to the applicant). If the applicant does not notify the Agency within 

15 days that the problem has been resolved, the Loan Approval Official must reject the 

application and the applicant should be notified in writing using Handbook Letter 15. The

application should be fully processed, and the denial letter should include the delinquent 

federal debt and all other reasons for denial. The Administrator may grant an exception to this 

requirement if it is in the best interest of the Government.

If the delinquency is paid in full or if evidence of satisfactory payment arrangement with 

the debt agency has been reached with a 6-month history of payments can be provided within the 

15-day time frame, application processing can continue. If the applicant resolves the issue after 

the application has been rejected, and wishes to reapply, the applicant must submit a new 

application, which must be processed according to the new submission date. 

B. Infile Credit Report

Infile credit reports can only be used for pre-qualification reviews completed by 

Agency staff, which should be limited as outlined in Section 1 of Chapter 3. 

Infile credit reports will not be obtained for 502 direct packaged loan applications, as the 

packager is responsible for conducting the review. The only credit report pulled by the Agency 

will be a TMCR when a complete 502 direct application is received.

Infile credit reports will be obtained by the Agency for all 504 applicants with adjusted 

income greater than 30% of adjusted median income, regardless of the size of the loan being 

requested.

Since infile credit reports for pre-qualifications and TMCRs for complete applications are 

considered a hard inquiry on the applicant’s credit report, care must be taken to avoid 

unnecessary orders. Do not order an infile credit report to confirm that a debt has been paid or 

for other similar reasons and do not order an infile credit report once an application has been 

received.

4-47 

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Exceptions to 

Delinquent Federal Debt

If the applicant has a delinquent Federal debt, the

Administrator has the authority to grant an 

exception if arrangements for payment have been 

made and it is in the best interest of the 

Government.
HB-1-3550

4.12 CONDUCTING FULL REVIEW OF CREDITHISTORY

Once an application is selected for 

processing, the Loan Originator must order a 

tri-merge credit report through UniFi. When an 

incomplete application packet and credit report 

fee have been received, the Loan Originator will 

order the tri-merge credit report through UniFi 

as long as, at a minimum, Form RD 3550-1, 

Authorization to Release Information has been received. Otherwise, the fee must be returned to 

the applicant if it cannot be deposited within 3 business days of receipt.

A credit report from another party (e.g. Self-Help Grantee, loan application packager, or 

leveraged lender) cannot be used in the Agency’s decision-making process. The Loan Originator 

must also obtain the applicable third-party credit verifications to determine whether the 

applicant’s credit history meets the Agency’s criteria.

Procedures for obtaining third-party verifications are described in Paragraph 3.15.

Guidelines for reviewing the applicant’s credit history are provided here.

If an applicant is denied assistance based upon information contained in a tri-merge credit 

report, the Agency must provide the applicant:

• The name, address, and toll-free number of the credit bureau;

• A statement to the applicant that the denial of their loan request was made by the 

Agency, and not the credit bureau; 

• Notice of their right to obtain a free copy of their credit report from the credit bureau 

within 60 days from the date of the Agency’s adverse action; and 

• Notice of the applicant’s right to dispute to the credit bureau the accuracy or 

completeness of the credit report provided to the Agency. 

 

____________________________________________________________________________________________________

4-48

Helpful Hint

Unless the applicant makes a written request for a 

copy of their tri-merge credit report, the Agency will 

not provide a copy. Applicants are not entitled to a 

copy of their infile credit report that may have been 

pulled during the pre-qualification process.
HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

A. Tri-Merge Credit Report

The Tri-Merge Credit Report (TMCR) will include Equifax Beacon 5.0, TransUnion 

FICO Risk Score 04, and Experian Fair Isaac v2 credit scores, if available. The report will include 

data from the three main repositories, updated verifications on all trade lines with a balance 

(updated to within 90 days), and a court records check that includes adverse items for the prior 7- 

year period. The TMCR will also provide the results of a check against the U.S. Department of 

the Treasury’s Office of Foreign Assets Control (OFAC) database. OFAC administers and 

enforces economic and trade sanctions against targeted foreign countries, terrorists, international 

narcotics traffickers, and those engaged in activities related to the proliferation of weapons of 

mass destruction. If an OFAC match message appears on the TMCR, refer to the U.S. Treasury 

website at https://www.treasury.gov/about/organizational- structure/offices/Pages/Office-ofForeign-Assets-Control.aspx for guidance on how to determine if the match is valid. If a due 

diligence review concludes that the match is valid, the applicant should be denied assistance and 

referred to the OFAC contact number for further information as per the aforementioned website.

If there is no OFAC match message on the TMCR, or the match was not valid, processing may 

continue as directed in the following paragraphs. 

For applicants with no outstanding judgments obtained by the United States in a Federal 

court, with no significant delinquency, and who have more than one credit score listed on their 

TMCR that result in a credit score of 640 or higher on their TMCR, Exhibit 4-4 need not be used 

to identify indicators of unacceptable credit handling. In addition, a verification of rent and Form 

RD 1944-61, Credit History Worksheet, need not be completed. These applicants are 

automatically classified as having acceptable credit histories regardless of what is listed on the 

TMCR. To avoid potential disparate treatment, additional credit analysis is not appropriate.

Credit scores are used to reduce the time necessary to conduct credit analyses, but under no 

circumstance can credit scores be used to make adverse decisions. 

An applicant with significant delinquency on the credit report, even with a credit score of 

640 or higher, will be subject to further credit analysis and Form RD 1944-61 must be completed. 

Significant delinquency includes the following: 

• A foreclosure, deed-in-lieu of foreclosure, short sale, or mortgage charge-off that has 

been completed within the last 36 months.

• A Chapter 7 bankruptcy discharged less than 36 months prior to the application date.

____________________________________________________________________________________________

4-49

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

• A Chapter 13 bankruptcy where the applicant has not successfully completed the 

debt restructuring plan and has not demonstrated a willingness to meet

obligations when considering the last 12-month payments made under the 

restructuring plan. 

• Agency debts that were debt settled within the past 36 months or are 

being considered for debt settlement. 

Having an insufficient credit score does not mean the applicant has demonstrated 

inability or unwillingness to repay debt; it means the Loan Originator must obtain 

nontraditional credit sources to make this determination and use Form RD 1944-61, Credit 

History Worksheet to conduct the credit analysis. To preclude the use of Exhibit 4-4 to identify 

indicators of unacceptable credit handling, the following practice will be established:

• If the three credit scores are listed on the TMCR, the middle numerical score 

should be used. 

• If the TMCR only contains two scores, the lower of the two should be used.

• If the TMCR only contains one score, a full credit analysis must be completed.

• If no score is available, the credit bureau will report a “zero.” Zero in these cases 

has the literal meaning of null, or indicating there was not enough information or 

credit references for the statistical model to compute a credit score value. 

• If there is more than one applicant, each applicant must be viewed separately.

• Loan Originators must obtain nontraditional credit verifications to augment a credit 

report if the applicant has less than two scores. However, non- traditional credit must 

never be used to enhance the credit of an applicant with a negligent credit history 

(poor payment history, excessive use of credit, over the credit limit balances, etc.) or

to offset derogatory references found in the applicant's traditional credit report, such as 

collections and judgments, even if the traditional credit isinsufficient.

If the resulting credit score is less than 640 and the TMCR contains any indicators of 

unacceptable credit as outlined in Exhibit 4-4, the Loan Originator should discuss the findings 

with the applicant and ask for third-party verifications that support the applicant’s assertions. A 

copy of the TMCR must be retained in the case file. If the TMCR is expected to be more than 

nine months old when the underwriting decision is to be made or at the time of closing, a new 

report must be ordered at no cost to the applicant. ____________________________________________________________________________________________

4-50
HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

Credit Score # of 

Scores

Form RD 1944-61 

“Credit History 

Worksheet” 

required?

Additional information needed

Any score, with a 

judgment obtained in U.S. 

Federal Court (other than 

a U.S. Tax Court)

n/a

Yes. 

Application must be 

denied.

N/A

640 or above, no 

significant delinquency >1

No. 

This qualifies as 

streamlined 

processing & does 

not need to be 

evaluated for 

indicators of 

unacceptable credit.

N/A

Any other score (640 and 

above with significant 

delinquency, 640 or 

below)

>1

Yes

- If score < 640 and indicators of unacceptable 

credit exist, need 3rd party verifications to

support applicant’s explanation.

- For significant delinquencies, if not shown on 

credit report, need 3rd party documentation to 

confirm applicable dates, 12-month payment 

history for Ch. 13 bankruptcy, etc. 

- If only 1 score (whether above or below 640), 

develop credit history from at least 3 sources 

(can be combination of traditional and 

nontraditional). However, only 2 sources are 

required if 1 of those is a verification of rent or 

mortgage payments.

No Score n/a

- Develop credit history from at least 3 sources 

(can be combination of traditional and 

nontraditional). However, only 2 sources are 

required if 1 of those is a verification of rent or 

mortgage payments.

B. Fair and Accurate CreditTransactions

In accordance with the Fair and Accurate Credit Transactions (FACT) Act of 2003, the 

Agency is required to disclose to the applicant, upon request, the score that a credit bureau 

distributed and was used in connection with their loan. In addition, we are required to disclose 

the key factors affecting the applicant’s credit scores. Therefore, Attachment 3-H, Credit Score 

Disclosure, must be provided to the applicant. It must be explained to the applicant that the credit 

score was not used to determine loan approval. The Agency only uses the credit score to presume 

acceptable credit in lieu of other credit underwriting practices.

____________________________________________________________________________________________

4-51

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

Consumers have the right to dispute information on their credit report, which they 

believe to be inaccurate. This can be done directly with the furnisher of credit, as well as a 

consumer reporting agency. Generally, disputes are investigated by the consumer reporting 

agency(s) within 30 to 45 days of receipt of the notice of dispute from the consumer; and written

results of the investigation are provided to the consumer within 5 business days after completion 

of the investigation. For more information visit https://www.ftc.gov/ and 

http://www.consumerfinance.gov/askcfpb/.

• Non-Derogatory Disputed Accounts:

If the applicant has a non-derogatory disputed account, the Loan Originator can 

determine the non-derogatory disputed account acceptable and proceed with 

underwriting. The disputed account is considered non-derogatory if one of the 

following apply:

o The disputed account has a zero balance;

o The disputed account states “paid in full” or “resolved” on the credit report;

o The disputed account with late payments are aged 24 months or greater;

o The disputed account is current and paid as agreed. 

The applicant must provide the Agency with applicable documentation to support the 

reason and basis of the dispute with the creditor. The Loan Originator must determine 

the impact of the disputed account on the repayment of the proposed mortgage debt. 

The Loan Originator must include the minimum monthly payment stated on the credit 

report, five percent of the balance of the account, or the amount documented from the 

creditor for each account. 

• Derogatory Disputed Accounts:

Disputed derogatory credit accounts refer to disputed charge-off accounts, disputed 

collection accounts, and disputed accounts with late payments in the last 24 months. 

The Agency’s credit determination may be subject to change upon resolution of the 

derogatory disputed account. The Loan Originator must determine the impact of the 

disputed accounts on the repayment of the proposed mortgage debt. The Loan 

Originator must include the minimum monthly payment stated on the credit report, 

five percent of the balance of the account, or the amount documented from the creditor 

for each account. The Loan Originator may issue Form RD 1944-59, Certificate of 

Eligibility, subject to the receipt of the disputed resolution prior to approval. 

____________________________________________________________________________________________

4-52
HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

The following disputed accounts can be excluded from consideration in the underwriting 

analysis: 

o Disputed medical accounts/collections;

o Disputed derogatory accounts that are the result of identity theft, credit card 

theft, or unauthorized use when evidence (police report, attorney 

correspondence, creditor statement) is provided to support the applicant’s 

explanation; or 

o Disputed accounts of a non-purchasing spouse in a community property state. 

The FACT Act also added a new section to the Fair Credit Reporting Act to prohibit 

creditors from obtaining or using medical information pertaining to a consumer in connection 

with any determination of the consumer's eligibility, or continued eligibility, for credit.

Consumer reporting agencies are prohibited from providing a lender with a credit report 

that contains identifying information for medical debts (be it a collection, judgment, etc.). The 

name of the medical service provider and the nature of the medical service is suppressed or 

coded so that lender decisions are not based on discriminatory factors. However, suppression or 

coding of identifying information for medical debts does not eliminate the need for 

consideration. Medical debts that are chronically late, placed in collection, or turned into 

judgments remain indicators of unacceptable credit handling that must be addressed (unless the 

applicant has a credit score of 640 or higher). 

Since the indicators of unacceptable credit handling are general guidelines that aid in 

determining the degree of risk and are not absolute underwriting criteria, the Loan Originator 

must subjectively consider the circumstances that resulted in the blemished debt. If the 

identifying information for a medical debt is suppressed or coded and the applicant is claiming 

that the debt resulted from a situation that was beyond their control, the applicant must provide 

adequate third-party documentation to support their claim. 

If the applicant cannot identify the medical debt given the payment information (date 

opened, balance owing, etc.), the applicant will have to contact the repository directly to obtain a 

copy of their credit report. Credit reports provided by a repository directly to a consumer will 

not have the medical information suppressed. To avoid a fee, the applicant can obtain a free 

credit report by calling 1-877-322-8228 or logging into https://www.annualcreditreport.com. By 

law, individuals are entitled to receive one free credit file disclosure every 12 months from each 

of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. 

An exception cannot be granted on that the applicant’s assertion that they were unaware 

of the blemished debt or that the blemished debt is not theirs. Supporting documentation must be 

furnished before a Loan Approval Official considers granting an exception. 

____________________________________________________________________________________________

4-53

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

C. Other Credit Verifications

If, and only if, the applicant’s credit score is less than 640, the Loan Originator should 

send Form RD 1944-60, Landlord’s Verification, and Form RD 410-8, Applicant Reference 

Letter, to the parties indicated in the application. The forms should be accompanied by a 

preaddressed, pre-stamped envelope and Form RD 3550-1, Authorization to Release 

Information, which authorizes the respondent to release the information.

1. Verification of Rent

Form RD 1944-60, Landlord’s Verification may be used to verify the applicant’s past

record of making timely rental payments. The Loan Originator should generate separate 

copies of Form RD 1944-60 for each landlord listed on the application for the past 2 

years. A landlord’s verification is required when the applicant’s credit score is less than 

640.

If the landlord reports that during the past 24 months (or whatever is applicable) the 

applicant “always pays by the due date” and is current on the rent, the applicant’s rental 

history should be considered satisfactory. If the landlord reports that the applicant “pays 

over 30 days late” or “generally stays behind schedule,” or if the applicant is currently 

behind on the rent, the Loan Originator should follow up with a call to the landlord.

The rental payment history may also be verified by obtaining the past 24 months of 

canceled checks, money order receipts, or electronic payment confirmation reflecting 

payments were made directly to the landlord. 

Confirmation that the applicant has paid 2 or more rent payments 30 or more days 

late within the last 2 years generally would be an indicator of unacceptable credit.

However, if the amount of rent paid by the applicant was significantly higher than the 

likely cost of principal, interest, taxes and insurance (PITI) with a Section 502 loan, an 

exception might be appropriate.

2. Applicant Reference Letter

Form RD 410-8 is used to obtain information about an applicant’s credit history that 

might not appear on a credit report, for example, credit from a local store. It can be used 

to document an ability to handle credit effectively for applicants who have not used 

sources of credit that appear on a credit report. It also provides a mechanism for 

following up on repayment history for debts reported by the applicant on the application 

that do not appear on the credit report.

3. Non Traditional / Alternative Credit

For applicants who do not use traditional credit, or that have less than two credit 

scores, the Loan Originator must develop a credit history from at least three sources. 

However, only two sources are required if one of those is a verification of rent or 

mortgage payments.

4-54
HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

A combination of traditional and nontraditional sources may be used to develop the 

credit history; and the non-traditional payments should have been made for at least 12 

months within the past 24 months from the date of the credit report.

Loan Originators must verify that the providers of nontraditional credit exist, and 

confirm that the applicant, in fact, has credit history with the creditor. Payments made to 

relatives for credit sources are ineligible as a nontraditional credit reference.

• Verification of a Nontraditional Credit Provider: To verify the credit provider 

information, Loan Originators must use a published address or telephone number

for that creditor, such as listing in the yellow pages.

• Confirming the Existence of a Nontraditional Credit: Documentation to

confirm that the nontraditional credit exists and that the applicant has sufficient 

credit references to evaluate his/her ability and willingness to repay debt may 

include a sufficient payment history from the following sources:

◊ Preferred Sources: Rental housing; utilities (if not included in the rent 

payment); telephone service, cable television, and internet service;insurance 

payments (payroll deductions to pay for insurance premiums are not 

considered alternative credit). These expenses must not be included in the 

Total Debt (TD) ratio when calculating repayment ability.

◊ Alternative Sources: Payments to childcare providers (provided the 

provider is an established child care business); school tuition; payments to 

local retail stores; storage units companies; monthly subscriptions (e.g., 

Hulu, Netflix, Xbox, etc.); payment arrangements for the uninsured portion 

of any medical bills; a history of saving by regular deposits resulting in a 

balance equal to three months of the proposed mortgage payments; and

similar credit sources. Child support paid is not an acceptable source. These 

expenses must not be included in the Total Debt (TD) ratio when calculating 

repayment ability. 

The payment history may be obtained by sending Form RD 410-8, Applicant 

Reference Letter, to the nontraditional creditors indicated by the applicant or by obtaining 

canceled checks, money order receipts, billing statements, and/or payment history printouts from the creditor. Loan Originators should carefully evaluate the billing statements 

to establish the payment history (past due amounts, late payment charges) for the Loan ____________________________________________________________________________________________

4-55

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

Approval Official’s review. General statements such as “satisfactory” or “in good standing” 

are not sufficient to establish a satisfactory repayment history. 

The payment history should cover 12 months within the past 24 months from the date of 

the application. However, other payment installments (such as quarterly or annually) can be 

considered when verifying nontraditional credit sources. When other payment installments 

are used, the length of the payment history should be adjusted accordingly. If the payments 

are made quarterly, verify that the last four payments were made. If the payments are made 

annually, verify that at least the last two payments were made. 

D. Non-Purchasing Spouse Credit History

In community property states, the non-purchasing spouse’s obligations must be considered 

in the total-debt ratio to determine the applicant’s purchasing capacity, unless excluded by State

law. However, the non-purchasing spouse’s credit history is never considered a reason to deny a 

loan application. The Loan Originator must comply with applicable lending laws in community 

property states. 

To assist the Agency in verifying the non-purchasing spouse’s obligations, and since UniFi 

will allow the ordering of credit reports on applicants only, the applicant’s non-purchasing spouse 

must provide a copy of a credit report (or reports) which contains information from each of the 

nationwide consumer credit reporting companies – Equifax, Experian, and TransUnion. 

The application will be considered incomplete until this information is provided. Ideally, the nonpurchasing spouse will be able to furnish a copy of their free report obtained through 

https://www.annualcreditreport.com. The provided report (or reports) cannot be more than nine 

months old when the underwriting decision is to be made or at the time of closing. The Housing 

Program Director may waive this requirement on a case-by case if obtaining the non-purchasing 

spouse’s credit report isn’t feasible. For instance, the non-purchasing spouse is not a citizen or is an 

emancipated minor. The non-purchasing spouse’s obligations will be evaluated in the same way the 

applicant’s debts are evaluated and in accordance with the guidance in Paragraph 

4.22.B. Unless excluded by State law, judgments of a non-purchasing spouse in a community 

property state will be paid in full unless an exception is obtained from the Loan Approval Official.

Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New 

Mexico, Texas, Washington and Wisconsin. Puerto Rico allows property to be owned as community 

property as do several Indian jurisdictions. Alaska is an opt-in community property state, where 

property is separate unless both parties agree to make it community property through a community 

property agreement or a community property trust. As laws vary from state to state, Loan 

Originators should contact the appropriate Office of General Counsel with questions regarding the 

consideration of a non-purchasing spouse’s credit history. 

 ____________________________________________________________________________________________

4-56
HB-1-3550

Paragraph 4.12 Conducting Full Review Of Credit History

Exhibit 4-5

Guidelines for Evaluating Credit Reports

• Different credit bureaus or repositories present information in different formats. Be familiar 

with the different formats and take time in reviewing the report to avoid errors.

• Obtain clarification of any questionable items or terms (for example, terms such as “slow” or 

“late pay” have varied meanings). No decisions should be made until the terms in question are 

translated into defined terms (e.g., for this repository, “slow pay” means 30 days late). 

Document clarification of terms in the casefile.

• Upon receiving the credit report, verify the name, address, and Social Security Number.

• Compare the employment information and rental data on the credit report, if available, with 

the information on the application.

• Compare the remainder of the credit report to the application. Consider the following questions 

when reviewing the application.

◊ Are all the accounts reported on the credit report listed on the application? (Note: There 

may be additional accounts on the application that are not on the credit reports because 

not all creditors furnish information to a credit bureau or repository.)

◊ Does any of the information on the credit report contradict the application?

◊ What information indicates unacceptable credit? List late payments, charge offs and 

other relevant information.

◊ Does the credit report have accounts included in a consumer credit counseling program? If 

so, document a12-months repayment history under the plan with all payments made on time 

and the applicant has written permission from the counseling Agency to enter into a 

mortgage transaction.

◊ Are there any disputed accounts? 

◊ Is the applicant responsible for the trade line or an authorized user? An authorized user 

account may not be considered when determining the applicant’s creditworthiness 

unless the applicant provides supporting documentation to demonstrate that they have 

made the monthly payments for the past 12 months.

• If the credit report reflects no credit history, ask the applicant for other nontraditional credit that 

may demonstrate a willingness to pay recurring debts like rent, utilities, phone, medical, etc. 

Third party verifications from impartial and unrelated parties or canceled checks that cover a 

sufficient period of time are acceptable forms of documentation.

• Review the number and dates of credit inquiries. The presence of many and recent credit 

inquiries in different industries may indicate that the applicant is looking for credit to finance 

purchases. Confirm that the applicant has not obtained new credit that is yet to be reflected in 

the credit report.

• Highlight areas of concern and develop a list of questions or issues that need clarification 

from the applicant.

____________________________________________________________________________________________

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HB-1-3550

4.13 CREDIT HISTORYWORKSHEET

If the applicant’s credit score is less than 640, Form RD 1944-61, Credit History 

Worksheet, must be used to summarize the applicant’s credit history and to determine whether 

there are any indicators of unacceptable credit as outlined in Exhibit 4-4. The Loan Originator 

should complete this form and include it in the case file to aid the Loan Approval Official in 

reviewing the applicant’s credit history. The Loan Approval Official must confirm the 

completeness and accuracy of this form before making a credit decision.

4.14 ASSESSING ADVERSE CREDIT

A. Making Exceptions

The Loan Originator should review the credit history for any signs of unacceptable 

credit using the criteria outlined in Exhibit 4-4. Credit history problems may be more reflective 

of an inability than an unwillingness to meet financial obligations. However, derogatory credit 

may also be the result of extenuating circumstances causing a significant reduction in income 

and/or increase in financial obligations. Extenuating circumstances are events beyond the 

applicant’s control and unlikely to reoccur. The applicant must provide a letter to explain the 

nature of the event that led to the derogatory credit and provide supporting documentation 

accordingly. The Loan Approval Official must carefully review the documentation provided by 

the applicant to confirm that the adverse credit was in fact due to extenuating circumstances 

(e.g. the dates of the derogatory credit must be consistent with the dates of the event) and not 

financial mismanagement. The loan file must include an underwriting analysis explaining the 

rationale for the credit exception and determination that the events causing the financial 

difficulties were, in fact, beyond the applicant’s control and are unlikely to reoccur.

The Loan Approval Official may consider an exception in the following 

types of situations.

• Reduced shelter costs. The applicant’s rental or mortgage payment history has been 

unacceptable and the loan will significantly reduce the applicant’s shelter costs, which 

will result in improved debt repayment ability. Anticipated utility cost savings due to 

energy efficiency improvements (e.g. furnace replacement, insulation, energy efficient 

windows, etc.) may also be considered a reduced shelter cost for an existing homeowner.

• Temporary situation. The circumstances that caused the credit problems were

temporary in nature and beyond the applicant’s control. Examples include loss of job, 

delay or reduction in benefits, illness, or dispute over payment of defective goods or 

services. ____________________________________________________________________________________________

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HB-1-3550

Paragraph 4.14 Assessing Adverse Credit

• Benefit to the Government. The applicant is delinquent on a Federal debt, and the 

Agency loan will allow the applicant to take actions that benefit the Government.

This type of exception can only be made by the Administrator.

The Loan Approval Official is not authorized to make an exception in the case of an

applicant with an outstanding judgment obtained by the United States in a Federal court, other than 

the United States Tax Court.

B. Reviewing Significant Delinquencies

1. Chapter 7 Bankruptcy

A Chapter 7 bankruptcy, also known as liquidation bankruptcy, eliminates all of an individual’s 

unsecured debt. Applicants with a Chapter 7 bankruptcy discharged more than 36 months prior to 

the loan application are not considered to have unacceptable credit as long as they have reestablished good credit. Re-establishing good credit includes consistently making payments on time, 

not incurring additional or excessive debt, and keeping balances significantly below the credit limit.

If the bankruptcy has been discharged less than 36 months from the date of application, the

Loan Approval Official may make a credit exception if the bankruptcy was due to extenuating 

circumstances and the applicant has been able to re-establish good credit since the factors leading to 

the extenuating circumstance were removed. The loan file must include the loan documentation 

requirements for making a credit exception using extenuating circumstances.

2. Chapter 13Bankruptcy

A Chapter 13 bankruptcy is a repayment plan that protects individuals from collection action 

during the plan period, from three to five years, and discharges any unpaid balance at the end of 

the plan. The repayment amount is determined by the court based on the individual’s income. An 

applicant with a Chapter 13 Bankruptcy reported on the credit profile may be able to qualify for a 

loan if the following requirements are met:

• Successful completion of the debt restructuring plan. The completion date isthe 

bankruptcy discharge date; and

• Demonstrate willingness to meet obligations when due for the 12 months prior to 

the date of application. The last 12-month payments made under the bankruptcy 

restructuring plan may be used to document the applicant’s willingness to repay 

debt. This means that all required payments were made on time and for the 

amount agreed upon under the plan.

A Chapter 13 bankruptcy is not considered unacceptable credit, and a credit exception is 

not required, when the aforementioned requirements have been met. However, the applicant 

must obtain written permission from the Bankruptcy Court to enter into a financial obligation 

with the Agency. ____________________________________________________________________________________________

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HB-1-3550

Paragraph 4.14 Assessing Adverse Credit

3. Significant Mortgage Delinquency

A foreclosure is a significant mortgage delinquency. Other significant mortgage 

delinquencies are deeds-in-lieu of foreclosure, short sales, and mortgage charge-offs. These 

are significant mortgage delinquency events that, when present in the credit report, 

drastically increase the risk of a loan and must be carefully considered in the loan risk 

analysis when reviewing the loan application. For any significant mortgage delinquency 

transaction, the Loan Originator must confirm that the applicant has been completely 

released from the previous mortgage liability and is not responsible for any deficiency 

judgement. The following describes the most common significant mortgage delinquency 

actions reported to the credit bureaus that are used as an alternative to a formal foreclosure 

because they reduce the time and cost of repossessing a property and borrowers avoid the 

public notoriety of a foreclosure:

• Deed-in-lieu of Foreclosure. In a “deed-in-lieu of foreclosure” transaction the 

borrower voluntarily transfers the property rights back to the creditor in an exchange 

for a mortgage cancellation. These transactions are most common when the property

subject to the potential foreclosure has positive equity or if the homeowner meets the 

requirements for financial hardship relief.

• Short Sale. Short sale is a term used to describe a sale where the debt owing against a 

property combined with the costs associated with the sale exceeds the property’s 

market value. Short sales are also known as pre-foreclosure sales because the lender 

has not completed the foreclosure process but plans to foreclose if the property is not

sold by the homeowner under the terms approved by the lien holders. Depending on 

the short sale agreement, the applicant may still be responsible for the amount that 

“fell short” as a result of the short sale transaction. The loan deficiency remaining after 

the sale is typically forgiven; however, this is not always the case.

• Mortgage Charge-Off. A mortgage charge-off is a debt classification used by 

creditors when they believe a mortgage debt is not collectible. This action does not 

mean that the debt is no longer valid or that has been forgiven. An applicant with a 

mortgage charge-off reported on the credit report may still be responsible for the debt.

If the significant mortgage delinquency was due to the applicant’s failure to meet 

financial obligations, the applicant is not eligible for a loan for 36 months from the date the 

obligation was released. However, if the delinquency was due to extenuating circumstances, 

the applicant may be eligible for a loan if:

• More than 12 months have elapsed between the date the applicant was

released from the mortgage debt and the application date; and,

• The applicant has demonstrated an ability and willingness to meet

obligations when due for the 12 months prior to the date of application; and,

• The circumstances leading to the delinquency are properly documented andjustified.

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Paragraph 4.14 Assessing Adverse Credit

Selling a home through a short sale merely because the property value decreased 

significantly is not an extenuating circumstance.

4. Agency debts that were debt settled within the past 36 months or are being 

considered for debt settlement.

C. Resolving Collection Accounts

Paying an outstanding account is not, in itself, justification to say the applicant has 

demonstrated a willingness to meet obligations. Payment of a collection account could deplete 

the applicant’s cash resources that could be used for reserve or closing costs. The Loan 

Approval Official may determine it is not necessary to pay a collection account if there is 

evidence that the account does not affect the Agency’s first lien position. If there were 

extenuating circumstances to the adverse credit, the Loan Approval Official may determine that 

the late payments are not reflective of the applicant’s ability to meet financial obligations or 

manage debts. All extenuating circumstances must be documented on the Credit History 

Worksheet.

___________________________________________________________________________________________

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HB-1-3550

SECTION 4: OTHER ELIGIBILITY REQUIREMENTS

4.15 OWNING A DWELLING

A 502 borrower may not have outstanding RD direct or guaranteed loans at the same 

time on two or more homes. An applicant who owns a dwelling generally is not eligible for a 

Section 502 loan, except for refinancing assistance, as described in Paragraph 6.5 B. However, 

if the applicant’s dwelling is structurally unsound, functionally inadequate, or too small to 

accommodate the needs of the household, funds may be provided to improve the existing

dwelling or to purchase a new one.

The following are examples where the Agency can assist an applicant in the purchase of a 

new home provided, they meet all other eligibility criteria, and the existing property is properly 

handled 

• An applicant lives adjacent to an industrial operation. The business’s operations result 

in vibrations that have caused the foundation of the applicant’s home to severely shift 

causing cracks in the home and an unsafe living condition.

• An applicant lives in a two-story dwelling which is not accessible to a household 

member with a disability.

• An applicant lives in a manufactured home that is not affixed to a permanent 

foundation.

• An applicant is dealing with an overcrowded situation now that their family has grown 

(i.e., there are more than two household members per bedroom).

The existing property must be (1) sold prior or simultaneously/same day as the Agency’s 

loan closing and the proceeds in excess of the program’s asset threshold are used for a down 

payment or used for allowed purposes; or (2) the sale of the home is a loan closing condition. Form 

RD 3550-7, Funding Commitment and Notification of Loan Closing and the closing documents 

must clearly state that the Agency will place a lien (i.e., judgment lien) against the existing 

property. The amount of the lien placed against the property is based on the current market value, 

minus typical closing costs, minus the program’s asset threshold. If the property is sold, future 

proceeds from the sale in excess of the program’s asset threshold are to be used as a principal 

reduction. Taxes and insurance payments and any long term debt obligation against the existing 

property are considered in the total debt ratio.

____________________________________________________________________________________________

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HB-1-3550

4.16 ABILITY TO OBTAIN OTHER CREDIT

To be eligible, the applicant must be unable to obtain credit from other sources on terms 

and conditions they can reasonably be expected to fulfill. All applicants are presumed to be 

unable to obtain credit from other sources unless all four conditions apply: (1) the applicant is 

Low income; (2) the applicant has a credit score that is 680 or higher; (3) payment assistance is 

not needed and (4) the applicant has been with the same employer for at least two years. 

If the applicant meets all four conditions, the Loan Approval Official should request the 

applicant to provide written documentation from a lender that they are unable to obtain credit 

for the same loan amount as they would obtain from Rural Development, without regard to the 

interest rate, closing costs or payment. If the applicant can obtain financing from other sources 

for the same loan amount or greater, the applicant is deemed to have the ability to obtain other 

credit. 

Applicants must reduce the need for credit by using available non-retirement assets, as 

described in Section 2. In addition, applicants should be encouraged to obtain a portion of the 

needed funds in the form of affordable housing products.

4.17 OCCUPYING THE PROPERTY [7 CFR3550.53(C)]

To be eligible for a Section 502 loan, applicants must agree and have the ability to 

occupy the dwelling as their principal residence. A dwelling is considered a principal 

residence when physically occupied by the owner on a permanent basis (i.e. lives there for the 

majority of the year and is the address of record for such activities as Federal income tax 

reporting, voter registration, occupational licensing, etc.).

4.18 LEGAL CAPACITY [7 CFR3550.53(e)]

To be eligible for a loan, the applicant must be considered an adult under State law, and 

must have the legal capacity to incur the loan obligation. An applicant with a court-appointed 

guardian or conservator who is empowered to obligate the applicant in real estate matters is 

eligible for a loan. The Loan Originator should assume that any applicant has the legal capacity 

to enter into the loan unless there is evidence to the contrary.

4.19 SUSPENSION OR DEBARMENT [7 CFR3550.53(f)]

Individuals who have been suspended or debarred from participation in Federal 

programs are not eligible for Agency assistance. ____________________________________________________________________________________________

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HB-1-3550

4.20 CITIZENSHIP STATUS [7 CFR3550.53(b)]

To be eligible for Agency assistance, the applicant must be a U.S. citizen, a U.S. noncitizen national, or a qualified alien and provide acceptable evidence of eligible immigration 

status. Any applicant who is not a U.S. citizen, a U.S. non-citizen national, or a qualified alien 

will be denied assistance. Aliens and alien non-citizen nationals must provide acceptable 

evidence that they are qualified aliens as listed in Attachment 4-D.

The Rural Development has entered into an “Interagency Agreement” with the 

Department of Homeland Security, U. S. Customs and Immigration Service (USCIS) to 

allow access to the Systematic Alien Verification for Entitlements (SAVE) database.

This program enables Housing Program staff to obtain online immigration status 

information to determine a non-citizen applicant’s program eligibility. In most cases, 

SAVE will provide immediate responses concerning the immigration status of an 

applicant.

4.21 TRUTHFUL APPLICATION

Applicants must provide truthful information when applying for assistance. Any 

inconsistencies discovered throughout the application process must be addressed. The Loan 

Originator must obtain sufficient documentation to verify the applicant’s identity.

Documentation will include picture identification (ID), evidence of age, and evidence of 

the taxpayer’s identification number for each person that will sign the promissory note. A 

photocopy of these documents shall be placed in the case file. Acceptable forms of identification 

include a driver’s license, passport, work related ID cards, or similar documents. If 

photographic ID is not available, the Loan Originator must thoroughly document why it is not 

available and how identity of the applicant was verified. In addition, if the applicant’s taxpayer 

identification number is not included on the picture ID, another means of documentation is 

required to verify the taxpayer’s identification number such as a copy of the social security card, 

a pay stub, or a bank statement. Applicants who provide false information, or who fail to 

disclose relevant information, will be denied program assistance.

If Form RD 410-4, Uniform Residential Loan Application, indicates the applicant is a 

U.S. citizen, no additional due diligence is generally required unless there is a reason to believe 

the applicant is not a U.S. citizen, such as a Social Security card that reads “work only”. Always 

require evidence if Form RD 410-4 indicates that the applicant is a qualified alien.

Non-citizen nationals are persons born in American Samoa or Swains Island or after the 

date the U.S. acquired American Samoa or Swains Island, or a person whose parents are U.S. 

non- citizen nationals. Always require evidence of this relatively uncommon status. 

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HB-1-3550

SECTION 5: PROCESSING THE CERTIFICATE OF ELIGIBILITY

4.22 DETERMINING REPAYMENT ABILITY [7 CFR3550.53(g)]

The primary consideration in determining whether an applicant can afford to purchase a home is 

the applicant's repayment income. Repayment income, as described in Paragraph 4.4 H., is the amount 

of income parties to the note will have available to repay the debt.

However, other household expenses and debts 

and the availability of payment subsidies also greatly 

affect an applicant's repayment ability. The Agency 

bases underwriting decisions on an analysis of the 

percentage of income the applicant would be required

to spend on housing costs and the applicant’s Total Debt (TD) if the loan is approved. Using these 2 

percentages, called ratios, is a standard practice throughout the lending industry. Borrowers must 

meet the Agency’s standards for both ratios.

A. The PITI Ratio

The PITI ratio compares the amount the 

applicant must spend on housing costs 

(including Principal on the loan, Interest on the 

loan, real estate Taxes, and property Insurance) 

and flood Insurance (as applicable) to the 

applicant's repayment income. The leveraged 

loan payment is included in PITI. 

For new construction, the fully assessed tax amount will be used to determine repayment ability. 

Applicants are considered to have repayment ability if they do not have to pay more than 33 percent of 

repayment income for PITI expenses.

B. The TD Ratio

1. Maximum TD Ratio

The TD ratio compares the applicant’s total debt to repayment income. Applicants are considered to have 

repayment ability when they do not have to spend more than 41 percent of repayment income on total debt.

____________________________________________________________________________________________

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Example - Calculating PITI Ratios

$360 Principal and Interest payments

$ 50 Taxes

$ 10 Flood Insurance

$ 50 Insurance

$470 Total for PITI

$18,000 Annual Repayment Income

$ 1,500 Monthly Repayment Income ($18,000 ÷ 12)

PITI Ratio = $470 ÷ $1,500 = 31.33%

Taxes: Must be on full assessed value

Maximum Ratios

PITI Ratio 33%

TD Ratio 41%
HB-1-3550

Paragraph 4.22 Determining Repayment Ability [7 CFR3550.53(g)]

2. Establishing TD

Total debt includes PITI, all long-term (non-medical) obligations, and short-term 

(non-medical) obligations that have a significant impact on repayment ability. The 

following items should be counted:

• PITI -- Principal, Interest, Taxes, and Insurance (including leverage loan 

payments).

• Regular assessments, such as homeowner association or condominium 

assessments.

• Long-term installment obligations with more than 10 months repayment remaining, 

including loans, alimony, and child support (including back child support

payments), but excluding revolving accounts. Funds borrowed from a retirement 

account are excluded since the applicant is repaying a loan to themselves. In the 

event an applicant does not repay the loan as agreed, the debt is reported as taxable

income during that tax year but will be treated as sporadic income. All medical 

debts (be it a collection, judgment, etc.) are excluded.

• Payments that come due in the next 12 months.

• Deferred debt regardless of the length of the deferment period. If the credit report 

does not reflect the anticipated monthly payment due at the end of deferment, the 

Loan Originator should obtain verification of the monthly payment directly from 

the creditor or request a copy of the loan agreement from the applicant.

 ____________________________________________________________________________________________

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HB-1-3550

Paragraph 4.22 Determining Repayment Ability [7 CFR 3550.53(g)]

• Student loan payments. The Loan Originator must use the actual monthly 

payment under the existing repayment plan (as verified by the lender) if (1) the 

loan is in repayment status, (2) the applicant has a credit score of 640 or 

higher, (3) the applicant has no significant delinquency as outlined in 

Paragraph 4.14 B., and (4) the applicant’s payment shock can be measured and 

is not more than 100%. If all four conditions are met and the applicant who is 

responsible for the student loan has, for example, a $0 monthly payment 

because they are on an income-driven repayment plan, there will be no student 

loan payment considered in the TD ratio. The State Office may grant a caseby-case waiver to any condition if the overall risk assessment on the 

application warrants it and is well documented in the casefile. If all four 

conditions are not met or a waiver has not been granted, the higher of the 

monthly student loan payment listed on the credit report or one- half percent 

(.50%) of the student loan balance must be used in the TD ratio.

• Short-term obligations that are considered to have a significant impact on 

repayment ability, such as car or other credit payments. All medical debts 

(including medical collections) are excluded.

• The minimum monthly payment required for revolving credit card debts using the 

following applicable approach: 1) Use $0 if the credit report indicates no 

outstanding balance. 2) Use the minimum monthly payment as reflected on the 

credit report if the credit report indicates an outstanding balance and a minimum 

monthly payment. 3) Use 5 percent of the outstanding balance if the credit report 

indicates an outstanding balance but no specific minimum monthly payment or 

obtain a copy of the most recent billing statement that reflects the actual monthly 

payment and use that amount if lower. 4) If the credit report indicates an 

outstanding balance but the applicant indicates that it will be (or has been) paid in 

full, a monthly payment will not be used provided the Loan Originator obtains 

documentation of payment in full.

 ____________________________________________________________________________________________

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Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.22 Determining Repayment Ability [7 CFR 3550.53(g)]

• Debt from which the applicant 

has not been released need not 

be counted if the applicant can 

demonstrate that another party

has assumed responsibility for 

the debt and the creditor is paid

directly. The debt does not need 

to be a joint account originally

in order to be excluded from the

ratios, as long as the debt has

been paid directly to the creditor 

for at least 12 months. For 

example, if a divorced applicant 

can show that the former spouse 

has made the last 12 months of 

mortgage payments directly to

the lender, the mortgage payments on that property need not be counted when

establishing total debt. If the payments are paid directly to the applicant, the payments 

are counted as recurring gift income and the payment will be included in the ratios. 

• Contingent liabilities. If the applicant is a cosigner on a loan or any other 

obligation, the debt must be included in the TD ratio. The Loan Originator should 

never omit a credit report liability with a balance greater than zero from the loan 

application unless strong supporting documentation is provided to evidence that the 

primary signer has been making on time payments during the previous 12 months. 

• If the applicant recently obtained additional credit, verify the terms of the 

new obligation and include the monthly payment in the total debt ratio.

C. Determining the Maximum Loan Amount

The Loan Originator enters information provided by the applicant about household 

size, income and debts, and general program information, including the Maximum loan limit 

and median income for the area. Because a specific dwelling has not yet been identified, 

estimates can be used for taxes, insurance, and purchase-related costs. Once this information 

is entered, UniFi: 

• Computes the PITI and TD ratios;

• Determines whether the applicant is eligible for payment subsidy, and how 

much payment subsidy the applicant would receive; and 

4-68 

Example - Calculating TD Ratios

$300 Principal and Interest payments

$ 60

$ 50

$410

$300

$100

$810

Taxes 

Insurance

PITI Subtotal

Car payment

Payments on credit card debt

Total Debt

$25,000 Annual Repayment Income

$ 2,083 Monthly Repayment Income ($25,000 ÷ 12)

TD Ratio = $810 ÷ $2,083 = 38.89%
HB-1-3550

Paragraph 4.22 Determining Repayment Ability [7 CFR 3550.53(g)]

• Computes the maximum loan amount for which the applicant qualifies, first using 

standard loan terms and then using any adjusted terms for which the applicant may 

qualify. Once a property is identified, if the adjusted term is not necessary than the 

loan should be closed using the standard loan term.

• The Loan Originator will print as a PDF and digitally sign the estimated UniFi

Eligibility Summary and place it in the Electronic Customer File (ECF).

D. Using Market Data to Interpret UniFi Results

Each Field Office should collect and maintain sales information for each market area in 

its jurisdiction. By comparing the results of an applicant’s maximum loan calculation to market 

data, Loan Originators can provide appropriate counseling for applicants and identify candidates 

for 100 percent private financing or leveraged loans. MLS and comparable sales data collected 

through appraisals are valuable sources of market information.

4.23 RESERVED

4.24 OTHER CONSIDERATIONS RELATED TO MAXIMUM LOAN AMOUNTS

The maximum loan amount that the applicant qualifies for as shown on the Eligibility 

Summary generated from UniFi may be too low to enable the applicant to purchase a property that 

meets program standards. Exhibit 4-6 outlines the procedure on how to handle this situation.

Conversely, the maximum loan amount and the resulting payment may be too high, setting the 

stage for payment shock.

This paragraph provides guidance on additional financial resources and compensating 

factors that the Loan Originator should consider to improve the applicant’s purchasing ability 

only and concludes with a discussion on payment shock.

____________________________________________________________________________________________

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Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.24 Other Considerations Related To Maximum Loan Amounts

A. Using CompensatingFactors

Exceptions to the standard method of determining repayment ability may be made if there 

is information -- called compensating factors -- that indicates the prospective borrower may be 

able to make larger regular loan payments than the ratio analysis suggests. Compensating factors 

must be clearly documented in the applicant’s case file.

All compensating factors must be approved by the next level supervisor. To obtain 

approval, the Loan Originator must prepare a written request that supports the use of 

compensating factors and the higher amount requested. The Loan Originator should forward the 

request and case file to the next level supervisor for approval.

Some of the compensating factors that can affect the amount of debt an applicant is permitted to 

have are discussed below:

1. Payment History

The PITI and TD ratio analyses assume that households are able to contribute a 

specified percentage of income toward housing costs. However, if an applicant has 

historically paid a greater share of income for housing with the same income and debt 

level, a higher payment may be approved. Utility and maintenance costs must be 

considered as part of this analysis.

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Exhibit 4-6

Establishing a Minimum Area Loan Amount

Each Field Office should set, following the methodology provided by their State Office, a 

minimum loan amount in each area that is “clearly less than” the amount needed to purchase a 

decent, safe, and sanitary dwelling in that area. For example, if a county’s area loan limit is

$265,000, but based on an examination of properties financed by the Agency in that county during the last

12 months shows that the lowest amount of financing needed to purchase a decent, safe, and sanitary 

home was $75,000, a minimum loan amount of $60,000 may be set. Consideration should be made for 

properties with a purchase price below the minimum loan amount parameters when, if repaired (using 

loan funds or other means), would provide a decent, safe, and sanitary dwelling. For example, the 

Minimum Area Loan Limit is $60,000, the applicant signs a purchase agreement for $55,000; however, the 

local housing authority is providing repair funds to replace the roof and furnace in the amount of $15,000.

The Field Office should consider financing the property, since the repair funds will bring the property value 

above the minimum area loan limit. 

If the applicant does not qualify for the minimum loan amount and the Loan Originator has 

concluded that compensating factors are not applicable and adding a party to the application is not viable, 

the Loan Approval Official must sign and send Handbook Letter 15 (3550), Standardized Adverse 

Decision Letter, to the applicant along with Attachment 1-B. The letter should state that the applicant’s 

qualifying loan amount (be sure to enter that amount) is not sufficient to meet the program’s purpose as 

outlined in the 7 CFR Part 3550, Paragraph 3550.2.
HB-1-3550

Paragraph 4.24 Other Considerations Related To Maximum Loan Amounts

2. Savings History

Applicants with accumulated 

savings and a savings history that

shows a capacity to set aside a largerthan- average portion of income may be 

approved for a higher payment. 

3. Job Prospects

If an applicant has recently entered 

a profession in which they can expect 

significant pay increases, the Loan 

Originator may base repayment income 

on the anticipated future earnings of that applicant.

Similarly, if overtime income is available to increase the applicant’s income, the 

Loan Originator may project the household’s income with extra overtime included. 

4. Homes Constructed Under Specific Energy Efficiency Programs

A new home built to exceed the prevailing International Energy Conservation Code is 

more energy efficient, which significantly lowers the homeowner’s utility costs. The 

lower utility costs associated with these energy efficient homes indicate that a prospective 

borrower will be able to make larger loan payments than the ratio analysis suggests.

Given their resulting energy efficiency savings of up to 30 percent relative to typical 

new homes, as well as their progressive and routinely updated building standards, new 

homes constructed under the following national programs will be considered as a 

compensating factor:

• Energy Star for New Homes under the U.S. Environmental Protection 

Agency (https://www.energystar.gov/newhomes) 

• Zero Energy Ready Home under the U.S. Department of Energy 

(https://www.energy.gov/eere/buildings/zero-energy-ready- homes)

• Leadership in Energy and Environmental Design (LEED) for Homes

under the U.S. Green Building Council: (US Green Building Council's

Leadership in Energy and Environmental Design (LEED®) | US EPA) 

• Home Innovation’s “National Green Building Standard” under the National 

Association of Home Builders https://www.nahb.org/advocacy/industryissues/sustainability-and-green-building ) ____________________________________________________________________________________________

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(01-23-03) SPECIAL PN Revised (06-02-23) PN 583

Example - Using Savings History 

As A Compensating Factor

An applicant is currently paying $400 per 

month in rent and putting $175 per month in a 

savings account. Utility costs should be similar 

to those the applicant is currently paying, but 

maintenance costs will be about $50 per month 

higher. According to ratios, the applicant’s 

repayment ability is $500 per month. However, 

since the applicant is currently using a total of

$575 per month for a combination of rent and 

savings, a loan that requires a monthly payment 

of up to $525 ($575-$50) may be considered.
HB-1-3550

Paragraph 4.24 Other Considerations Related to Maximum Loan Amounts

• Green Communities under the Enterprise Community Partners:

(https://www.enterprisecommunity.org/impact-areas/resilience/green-communities)

• Passive House under the Passive House Institute US (https://www.phius.org)

• Living Building Challenge under Insurance Institute for Business and Home

Safety (http://living-future.org/lbc)

When a new home to be constructed under a specific energy efficiency program 

will be used as a compensating factor, the qualifying ratios may exceed the established 

thresholds by up to two percentage points provided the Field Office obtains reasonable 

documentation that the property will be built to certification standards through one of the 

above programs. Once construction is complete, the Field Office must obtain verification 

that the property is certified through one of the above programs. 

B. Adding Additional Parties or Cosigners to the Note

Additional financial resources may be added by adding additional parties to the note 

or locating cosigners. 

1. Additional Parties to theNote

Additional parties to the note must agree to occupy the dwelling and must qualify as 

borrowers, as described in this chapter. Counting the income of the additional parties 

increases repayment income.

2. Cosigners

Individuals who will not reside in the dwelling, but who are willing to be responsible 

for the debt may be cosigners to the note. To supplement the applicant’s purchasing 

power, a cosigner must demonstrate an ability and willingness to meet debt 

obligations as outlined in Section 3 and possess a TD ratio that does not exceed 41 

percent. The cosigner’s TD calculation would include the applicant’s full note 

payment through Rural Development, the applicant’s leveraged loan payments (if 

applicable), the applicant’s escrow payment, and all of the cosigner’s long-term (nonmedical) obligations (including their mortgage) as well as their short-term (nonmedical) obligations that have a significant impact on repayment ability. 

Again, cosigners can only be used to improve the applicant’s purchasing power.

Cosigners cannot be used to compensate for an applicant’s unacceptable credit history.

C. Payment Shock

Payment shock represents the applicant’s projected increase in housing expenses. The 

following formula is used to calculate payment shock as a percentage: 

Payment shock = (Total proposed principal, interest, taxes, and insurance payment 

after subsidy / current housing expense excluding utilities) – 1 

4-72
HB-1-3550

Paragraph 4.24 Other Considerations Related to Maximum Loan Amounts

By way of example, presume that the Rural Development payment after subsidy is $550, 

the leveraged lender’s payment is $250, taxes and insurance are approximately $120, and the 

applicant’s current rent is $400. In this scenario, the applicant’s payment shock is 130 percent:

($550 + 250 + 120) / 400 = 2.30; 2.30 – 1 = 1.30 = 130 percent

In cases where payment shock is greater than 100 percent or could not be measured since 

the applicant does not currently have any housing expenses, no additional risk layering (i.e., 

adverse credit waivers, use of compensating factors, etc.) should be allowed without strong 

justification. Multiple layers of risk may be justified if the applicant has an excellent credit 

history reflecting timely repayment of credit obligations or a credit score of 640 or higher on 

their TMCR. Perhaps the applicant has demonstrated a careful attitude toward the use of credit 

and an ability to accumulate savings or a stable employment history over the past two years, 

demonstrating a dependable income stream. Regardless of the justification, the Loan Approval 

Official must thoroughly document their rationale for allowing multiple layers of risk in the 

running case record. 

4.25 ISSUING THE CERTIFICATE OFELIGIBILITY

If the Loan Originator determines that an applicant is eligible for a loan, the decision will 

be documented in the form of a written narrative in the running record of the applicant case file.

When funds are available, eligible applicants who have not yet located properties or, 

who own their building site but have not provided a construction package, should be issued 

Form RD 1944-59, Certificate of Eligibility. First-time homebuyers must be informed that by 

accepting a Certificate of Eligibility (COE) they agree to provide documentation of 

completion of an approved homeownership education course prior to entering into a contract 

to purchase or construct a home for maximum benefit (or shortly thereafter). The Loan 

Originator must note on the running record that they informed the Applicant of the 

homeownership education requirement. 

The certificate is valid for a period of 120 days for all applications. Within that time the 

applicant must provide sufficient information to enable the Agency to conduct an appraisal of 

the property to be financed. The COE will be honored even if loan limits change before the 

expiration of the commitment. If the applicant has already submitted a contract for a property, 

Form RD 1944-59 will not be issued. If an applicant’s sales contract falls through, a new Form 

RD 1944-59, good for 120 days, should be issued. An application is no longer considered active 

and will be withdrawn when the certificate of eligibility has expired.

____________________________________________________________________________________________

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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Paragraph 4.25 Issuing The Certificate Of Eligibility

Applicants for a self-help loan will be issued Handbook Letter 16 (3550), Eligibility of 

Self- Help Applicants. UniFi may indicate the applicant qualifies for a higher loan amount than 

the actual cost of building a modest home using the self-help method. The dollar amount to be 

inserted in the eligibility letter will be based on the following:

A. The average cost of the most recent group of homes built in the area by the self-help

method with consideration given to known price increases or decreases in materials,

labor, land and/or time of construction (unless the applicant qualifies for less); or

B. The average cost of the homes that are to be built by the self-help method as determined

by detailed cost estimates of the plans and specifications prepared by the self-help grant

organization, in consultation with the local Rural Development staff and/or Technical

and Management Assistant (T&MA) contractor. Consideration will also be given to

known price increases or decreases in material, labor and/or time of construction

(unless the applicant qualifies for less).

If it is determined that a loan applicant cannot be determined eligible, the Loan Approval 

Official must sign and send Handbook Letter 15 (3550), Standardized Adverse Decision Letter to

the applicant. The form explains why the loan is not approvable. The appropriate attachment from 

Chapter 1 should be attached to provide the applicable review, mediation, and appeal rights. 

4.26 APPLICANT ORIENTATION

Applicants should be well-informed of Agency requirements and borrower responsibilities. 

After an applicant is determined eligible, the Loan Originator should provide them with Form RD 

3550-23, Applicant Orientation Guide. The Loan Originator should instruct the applicant to watch

the Agency’s Applicant Orientation Guide video on YouTube and sign and return Form RD 3550-23 

within 15 days. 

4-74
ATTACHMENT 4-A 

WORKSHEET FOR COMPUTING INCOME

HB-1-3550

Attachment 4-A 

Page 1 of 1 

The worksheet for Computing Income & Max Loan Amount Calculator is located on the Direct 

SharePoint in the General Info > Useful_Documents folder, or can be located on the Direct Loan 

Application Packagers webpage. 

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Attachment 4-B 

Page 1 of 1

ATTACHMENT 4-B

[RESERVED]

(01-23-03) SPECIAL PN

Revised (01-6-17) PN 492
HB-1-3550

Attachment 4-C 

Page 1 of 8

ATTACHMENT 4-C 

EVALUATING SELF-EMPLOYMENT

The purpose of this attachment is to provide guidance on how to properly analyze a self- employed 

applicant’s income. 

An applicant who has a 25% or greater ownership interest in a business is considered “selfemployed” and a cash flow analysis of the applicant’s Federal Income Tax Returns for the 

individual and business is required. 

Step 1: Understand the Business Structures

The legal structure of a business determines the way business income or loss is reported to the 

IRS. Loan Originators must understand the applicant’s business structure to effectively document, 

calculate, and analyze annual and repayment income. The following are the most common 

business structures for self-employed applicants. 

a. Sole Proprietorship: The business structure most often encountered is a sole 

proprietorship (be it a business, farming, or profession). A sole proprietor is someone 

who owns an unincorporated business by himself or herself and has unlimited personal 

liability for all debts of the business. Business income or loss is folded into the 

individual owner's tax return. 

b. Partnership: A partnership is an arrangement between two or more individuals who 

have put together their assets and/or skills to operate a business and who will share, as 

stated in the agreement, profit and losses. Each partner reports their share of the 

partnership’s income or loss on their personal tax return. Partners are not employees 

and do not receive a Form W-2. Both general and limited partnerships report income on 

the IRS Form 1065, “US Return of Partnership Income” which must be reviewed to 

assess the viability of the business. A Schedule K-1 (1065) shows the partner’s share of 

income, loss, deductions, credits and other items from the partnership business or rental 

activities. The partner’s share of income is carried over to Schedule E of IRS Form 

1040. 

c. Limited Liability Corporation (LLC): An LLC is a legal business structure which can 

be formed by one or more individuals and is designed to offer its members (owners) the

tax efficiencies of a partnership and the limited liability advantages of a corporation. 

The LLC tax return filing requirements depend on how it is legally structured. 

___________________________________________________________________________________________

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Attachment 4-C 

Page 2 of 8

• If a single-member LLC does not elect to be treated as a corporation, the LLC is 

a “disregarded entity,” and the LLC’s activities will generally be reflected on its 

owner’s federal tax return with applicable Schedule (e.g., Schedule C). 

• An LLC with at least two members is treated as a partnership for federal income tax 

purposes and files the same documents as a Partnership. LLC profits are allocated to each 

of the owners according to the profit-sharing arrangement set up in the LLC operating 

agreement. The LLC prepares and files IRS Form 1065, Partnership Information Return each 

year, and each owner is given a Schedule K-1, which shows each owner’s share of LLC 

income. The partner’s share of income is carried over to Schedule E of their IRS Form 

1040. 

• An LLC can also be treated as either a C or S Corporation with the same tax return filing 

requirements, but this requires the entity to file an IRS Form 8832 “Entity Classification 

Election” checking the corporate income tax treatment box on the form. After making this 

election, profits kept in the business are taxed at the separate income tax rates that apply 

to corporations. If you receive an application from someone whose business income is 

derived from an LLC, determining the business structure is important to know which 

types of business tax returns will be reviewed.

d. S-Corporation: An S Corp is a legal entity that has a limited number of stockholders 

(up to 75) and elects not to be taxed as a regular corporation. An S-Corporation is 

generally a small, start-up business, with gains and losses that are passed onto the 

stockholders in proportion to each stockholder’s percentage of business ownership and 

it is taxed at their individual tax rates. The income for the owners is reflected on a W-2 

and is taxes at the individual rate, but may require adjustments based on any gains or 

losses of the business. This is another commonly encountered type of business.

Step 2: Document Self-Employment Income:

The Loan Originator must obtain the two most recent signed copies of the individual and business 

tax returns filed with the IRS and all supporting schedules, as applicable. If the applicant does not 

have copies of their tax returns, the Loan Originator may obtain IRS transcripts obtained directly 

from the IRS with all supporting schedules. For electronically filed tax returns, it is not necessary 

to require the applicant(s) to manually sign the return for application purposes if there is sufficient

documentation the applicant has signed the return electronically (i.e., use of Self-Select PIN for 

Free File Fillable Forms, Electronic Filing PIN, or authorized E-File Provider). Federal Income 

Tax Returns for the individual and business will be required when ownership is 25 percent or 

greater. The following table provides general guidance regarding the minimum 

documentation required for self-employed applicants for each business structure and

where the profit and loss will be reflected on each tax form. (Please note that the IRS tax

forms can change the numbering or placement of this information). 
HB-1-3550

Attachment 4-C 

Page 3 of 8

Business Structure Individual Tax Forms needed: 

Business Tax Forms 

needed: 

Sole Proprietorship Form 1040: Business Income or (loss)

Schedule C (Form 1040): Profit or Loss from Business

Form 1040, Schedule C: 

Profit or Loss from 

Business

Depreciation or depletion may be added back into repayment income.

Partnerships Form 1040, Schedule 1: Rental real estate, royalties, 

partnerships, S corporations, trusts, etc.

Schedule E (Form 1040): Total rental real estate and 

royalty income or (loss) or Part V Summary, Total 

income or (loss) 

IRS Form 1065, U.S.

Partnership Return of

Income

Schedule K-1 (Form 

1065), Partner’s Share of 

Income,

Deductions, Credits, etc.

Both general and limited partnerships report income on the IRS Form 1065, “US 

Return of Partnership Income” which must be reviewed to assess the viability of the 

business. A Schedule K-1 (1065) shows the partner’s share of income, loss, 

deductions, credits and other items from the partnership business or rental activities. 

The partner’s share of income is carried over to the Schedule E of IRS Form 1040. 

Both depreciation and depletion may be added back to repayment income in 

proportion to the applicant’s share of income. A negative amount (loss) must not be 

used to offset other family income for repayment and/or annual income. 

Limited Liability 

Corporations

Single-member LLC: 

Form 1040: Business Income or (loss)

Schedule C (Form 1040): Profit or Loss from Business

Two-member LLC: 

Form 1040, Schedule 1: Rental real estate, royalties, 

partnerships, S corporations, trusts, etc.

Schedule E (Form 1040): Total rental real estate and 

royalty income or (loss) or Part V Summary, Total 

income or (loss)

Single-member LLC: 

Form 1040, Schedule C: 

Profit or Loss from 

Business

Two-member LLC: 

IRS Form 1065, U.S.

Partnership Return of

Income

Schedule K-1 (Form 

1065), Partner’s Share of 

Income, Deductions,

Credits, etc. 

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Revised (06-02-23) PN 583
HB-1-3550

Attachment 4-C 

Page 4 of 8

Limited Liability 

Corporations 

(continued)

If the business is a single-member LLC, the IRS treats the LLC as a sole 

proprietorship and profits are reported on Schedule C of the individual 1040 tax 

return. 

If the business has at least two members, the LLC prepares and files IRS Form 

1065, Partnership Return of Income each year, which must be reviewed to assess the 

viability of the business. 

LLC profits are allocated to each of the owners according to the profit-sharing 

arrangement set up in the LLC operating agreement. Each owner is given a Schedule 

K-1, which shows each owner’s share of LLC income, loss, deductions, credits and 

other items from the LLC business. The owner’s share of income is carried over to 

the Schedule E of IRS Form 1040. Both depreciation and depletion may be added 

back to repayment income in proportion to the applicant’s share of income. A 

negative amount (loss) must not be used to offset other family income for repayment 

and/or annual income. 

See S-Corporations for tax return filing requirements if the LLC has an IRS 

Form 88325 “Entity Classification Election” which reflects an S or C 

Corporation.

S Corporations Form 1040, Schedule 1: Rental real estate, royalties, 

partnerships, S corporations, trusts, etc.

Schedule E (Form 1040): Total rental real estate and 

royalty income or (loss) or Part V Summary, Total 

income or (loss)

IRS Form 1120S, U.S.

Income Tax Return for an

“S” Corporation (IRS 

Form 1120S)

 

Schedule K-1 (Form 

1120S), Shareholder’s 

Share of Income,

Deductions, Credits, etc.

The owner’s income will be reflected on the ‘compensation of officers’ line on the IRS 

Form 1120-S or if the owner pays themself through W-2’s, this income will be reflected 

on the ‘salaries and wages’ line on the IRS Form 1120-S. The ‘compensation of officers’ 

and ‘salaries and wages’ is transferred to the applicant’s IRS Form 1040; both 

depreciation and depletion may be added back to repayment income in proportion to the 

applicant’s share income. A negative amount (loss) must not be used to offset other 

family income for repayment and/or annual income
HB-1-3550

Attachment 4-C

Page 5 of 8

If the applicant reports a significant increase or decrease in their self-employment income or 

does not have two full years of filed tax returns, the applicant must submit the most recent yearto-date profit and loss and balance statement. The Verification of Business Expenses, located in

Appendix 8, provides a sample format for recording business expenses. The profit and loss and 

balance statement or Verification of Business Expenses must be signed by the owner of the 

business or a tax professional (not required to be audited). The year-to-date profit and loss 

statement and Verification of Business Expenses is only used to analyze the income trend of the 

business when calculating annual income if there is a significant increase or decrease in selfemployment income. Repayment income should only be based on the reported earnings of the 

previous two years of filed tax returns, unless the Loan Originator documents that the applicant 

has two years of previous successful employment in a similar line of work. The applicant’s

individual tax returns must reflect a history of receiving income at the same (or greater) level in a 

field that provides the same products or services as the current business.

The income for an applicant that has been self-employed for less than one year is not to be 

considered stable for repayment purposes.

Step 3: Calculate Self-Employment Income:

Individuals and businesses complete tax forms to calculate taxable income or loss. Tax forms by 

themselves do not wholly reflect the amount of income the Loan Originator may use toward 

repayment. To calculate self-employment income, it is necessary to make a cash flow analysis of

the applicant’s income. 

The Loan Originator needs to make certain adjustments to the income (or loss) reported in IRS 

Form 1040 in order to have an accurate picture of the applicant’s cash flow. The IRS allows 

self-employed applicants and business owners to make non-cash deductions to reduce taxable 

income. There are some non-cash deductions that can be added back into repayment income but

are not added back to the annual income calculation. Depreciation and depletion are classic 

examples of non-cash deductions that reduce taxable income but increase the applicant’s 

income for loan qualification purposes. 

The Loan Originator must carefully review all tax forms to identify non-cash deductions 

(increasing income) and/or additional expenses (reducing income). The following are the most 

common adjustments to the net profit/income reported in the applicable tax forms/schedules:

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Attachment 4-C 

Page 6 of 8 

Add Back into Repayment Not Added Back

Depreciation Employee Business Expenses

Depletion Meals and Entertainment Exclusion

Nonrecurring Losses Nonrecurring income 

(generally reported as “Other Income”) 

Amortization / Casualty Loss 

(if non-recurring) Nonrecurring Capital Loss

Recurring Capital Gains

Business losses are considered “0” in determining annual income; however, Loan Originators 

should analyze federal tax returns and review if there are any non-cash deductions that should 

be added back into repayment income, which could result in a positive repayment income 

figure. A negative amount (loss) must not be used to offset other family income for repayment 

and/or annual income. 

Step 4: Analyze the Self-Employment Income:

When analyzing self-employment income the Loan Originator must perform a detailed review of 

the applicant’s individual and business tax returns to confirm that the income is stable and 

dependable (likely to continue).

In general, income from self-employment is considered stable if the applicant has been selfemployed for two or more years. Because self-employment income may change each year, the 

Loan Originator should always develop an average annual income by using at least two full 

years of the applicant’s self-employment income. An average takes in consideration typical 

market fluctuations, thus better predicting the applicant’s long-term earning ability.

Dependable income refers to the likelihood of continuity of the income. Making this 

determination requires the Loan Originator to predict future income. The Loan Originator 

should look at income trends and the stability of the income source. Any specific indication of 

an upcoming event that might change the applicant’s employment or income should be addressed 

in the loan file and considered in the underwriting decision. For example, if the most recent tax 

return shows an income considerable higher than reported in the previous tax year, the Loan 

Originator should investigate further to determine whether the higher income is due to business 

expansion or a onetime event unlikely to reoccur and continue. Income from a nonrecurring 

transaction should be excluded from the income calculations. Similarly, a nonrecurring loss 

should not be deducted from the income calculation. 
HB-1-3550

Attachment 4-C 

Page 7 of 8

Example – Using the 4-A Income Worksheet for Self-Employment calculation

Phil Johnson owns a construction company (ABC Builders), as a Sole Proprietor. He has provided the last two years 

of his tax returns (IRS Form 1040 and his Schedule C). 

2022 Schedule C reflects the following: 

Gross Income (line 7) - $39,930.00

Total Expenses (line 28) - $7,930.00

Depreciation (line 13) - $3,800

Rent of vehicle/equipment (line 20a) - $1,580 

Deductible meals (line 24b) - $,2550

Net Profit (line 31) - $32,000.00

2023 Schedule C reflects the following:

Gross Income (line 7) - $38,884.00

Total Expenses (line 28) - $6,994.00

Depreciation (line 13) - $2,650

Rent of vehicle/equipment (line 20a) - $2,755

Deductible meals (line 24b) - $1,589

Net Profit (line 31) - $31,890.00

(Note: line numbers listed above are from Schedule C, but numbers on forms are subject to be changed by the IRS)

Below is an example of how you would complete Attachment 4-A, Income Worksheet.

The average net income will be considered as both (B) annual and repayment income.

The depreciation is being added back but will only be considered as repayment income (R).

Other Types of Income Needing a Cash Flow Analysis:

Special Attention to Commission / Contract Income and Other Business Expenses

An applicant that receives 25% or more of the annual income in commission, bonuses or tips 

most likely engages in business activities needing a cash flow analysis. This income may be 

reported in the IRS Form W-2 or IRS Form 1099 (e.g., real estate agents/contract employees). 

Non-reimbursed business expenses reported in IRS Form 2106, Employee Business Expenses, 

should be deducted from the income reported on the applicant’s tax return. 

Commission, bonuses, and tips income may be considered stable if the applicant has received 

this income for the past two years. After making the cash flow analysis, the Loan Originator 

should develop a two-year average to make an income determination. 

. 

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Attachment 4-C

Page 8 of 8

Summary

Income from self-employment may be unpredictable, subject to market/economic fluctuations. 

Due to the inherent risk of self-employment income, the Loan Originator must consider internal

and external economic factors when analyzing self-employment income

When an applicant is self-employed, or has income needing a cash flow analysis, do not use the 

total income reported on IRS Form 1040, IRS Form W-2, or IRS Form 1099. Instead, analyze 

each income line item individually and make the necessary adjustments to the total 

income/profit. If the Loan Originator fails to perform a detailed review and analysis of the 

borrower’s tax return both annual and repayment incomes will be miscalculated.

 ____________________________________________________________________________________________
ATTACHMENT 4-D

HB-1-3550

Attachment 4-D 

Page 1 of 6 

REVIEWING DOCUMENTATION FOR CITIZENSHIP STATUS 

The purpose of this attachment is to provide guidance on acceptable evidence that a non-U.S. 

citizen is a qualified alien and to provide guidance on the use of the Systematic Alien 

Verification for Entitlements (SAVE) database maintained by the Department of Homeland 

Security (DHS).

A “qualified alien” is defined under the Personal Responsibility and Work Opportunity 

Reconciliation Act (PRWORA) (8 U.S.C. Section 1641) as: 

1) An alien who is lawfully admitted for permanent residence under the Immigration and 

Nationality Act;

2) An alien who is granted asylum under Section 208 of suchAct;

3) A refugee who is admitted to the United States under Section 207 of such Act;

4) An alien who is paroled into the United States under Section 212(d)(5) of such Act for a 

period of at least 1 year;

5) An alien whose deportation is being withheld under Section 243(h) of such Act; or

6) An alien who is granted conditional entry pursuant to Section 203(a)(7) of such Act as in 

effect prior to April 1, 1980; 

7) An alien who is a Cuban/Haitian Entrant as defined by Section 501(e) of the Refugee 

Education Assistance Act of 1980; or 

8) An alien who has been battered or subjected to extreme cruelty under Section 431 of the 

Immigration and Nationality Act (INA).

Native Americans covered by the Jay Treaty of 1794 and born in Canada may also be eligible as 

lawfully admitted for permanent residence if they meet the requirements of 8 U.S.C. Section 

1359. Since the Agency might not be able to verify their status through SAVE, the Native 

American should provide all of the documentation listed below. 

 A letter from their Native American tribe stating that the alien has at least 50 

percent Native American or Aboriginal blood (also referred to as the blood 

quantum);

 Their Canadian “Certificate of Indian Status Card” with a red stripe along the top;

 Their birth certificate;

 If a Haudenosaunee, their Red I.D.Card;

 If an Inuit, an Inuit enrollment card from one of the regional Inuit lands claim 

agreements;

 Their Social Security Card issued by the U.S. Social Security Administration; and

 Their Canadian or U.S. driver license.

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Attachment 4-D 

Page 2 of 6

Go to SAVE: https://save.uscis.gov/web/vislogin.aspx

Enter: User ID and Password. 

SAVE System Access:

Rural Development has entered into an “Interagency Agreement” with DHS’s United States 

Citizenship and Immigration Service (USCIS) to allow access to the SAVE database. This 

database enables staff to obtain immigration status information to assist in determining a noncitizen applicant’s program eligibility. In most cases, SAVE will provide an immediate response 

concerning the immigration status of an applicant. 

The Loan Originator must secure proof of identity and evidence that non-citizens who apply for 

program assistance are qualified aliens. In all cases, non-citizens legally admitted into the 

United States will have an Alien Identification Number. In cases where a number is not 

available or known, the applicant should contact the USCIS. (There are cases where an alien has 

been legally in the U.S. for a period of time and DHS has supplied them with a number, but the 

alien did not receive or has misplaced the number.) The Loan Originator should obtain the noncitizen’s Alien Identification Number and submit it to SAVE to obtain the applicant’s eligibility 

status based on the alien’s Class of Admission (COA).

To request SAVE access, email sfhdirectprogram@usda.gov the following information for the 

person that needs access to SAVE: 

• First and Last Name

• Email Address

• Phone Number 

National Office will grant access then email your username and temporary password. Please 

login and change the temporary password as soon as possible. 

Prior to submitting request through the SAVE System, a new user should review the SAVE 

Program Guide, SAVE User Reference Guide and SAVE FAQ. 

 

 

Click on ‘Create New Case’ 
HB-1-3550

Attachment 4-D

Page 3 of 6

The Loan Originator will at a minimum enter the applicant’s First Name, Last Name, and Date of 

Birth and enter as many enumerators as are available. At least one enumerator is required. 

Enter the Alien Identification Number or USCIS # (9 digits) into the “Alien Number” field. Do 

not enter dashes, only the 9-digits.

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
HB-1-3550

Attachment 4-D 

Page 4 of 6

Select the benefits the applicant is requesting: “USDA Housing Loans” and click ‘Continue’

You will get a case creation for you to review the Case Details. If the case information is accurate, click ‘Initiate 

Verification’ 
HB-1-3550

Attachment 4-D 

Page 5 of 6 

The applicant is eligible for program assistance if the response is “LAWFUL PERMANENT 

RESIDENT – EMPLOYMENT AUTHORIZED”. Other acceptable responses include but are not 

limited to “ASYLEE”, “PAROLEE”, “REFUGEE”, and “USC” (UNITED STATES CITIZEN).

Qualified Alien is defined under the Personal Responsibility and Work Opportunity Reconciliation 

Act (PRWORA) (8 U.S.C. Section 1641). See Guide to understanding SAVE Verification 

Responses. 

The applicant is not eligible for program assistance if the response is “TEMPORARY RESIDENT 

– TEMPORARY EMPLOYMENT AUTHORIZED”.

All applicants who are denied benefits based solely or in part on the SAVE response must be notified by 

the Loan Approval Official in writing using Handbook Letter 15, Standardized Adverse Decision Letter. 

Handbook Letter 15 should include the information necessary to contact DHS so that they may correct 

their records in a timely manner and attached the appropriate SAVE Fact Sheet. SAVE Fact Sheets can be 

found on the SAVE website under the Help drop-down menu in Resources. _____________________________________________________________________________________________________

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

If you receive this system response, your applicant is a qualified alien. 
HB-1-3550

Attachment 4-D 

Page 6 of 6

SAVE is asking the Agency user to supply additional information for a second level verification 

process. Agency staff should enter special comments or upload additional documents, then click 

the “Initiate Additional Verification” button. Within 3-5 federal working days, SAVE will 

respond with the applicant’s status or a request to “Resubmit Doc.” If the applicant’s 

immigration status is confirmed, the verification process is complete, and the case is closed. 

If the response from SAVE is “other” and the Loan Originator has concerns about any 

information provided by SAVE on the second level response, the Loan Originator may request a 

third level verification or contact SAVE at 877-469-2563. 

If you receive this response, the system was unable to verify, and 

additional information is required.