HB-1-3555

(03-09-16) SPECIAL PN 6-1

Revised (03-31-23) PN 580

CHAPTER 6: LOAN PURPOSES

7 CFR 3555.101

6.1 INTRODUCTION

SFHGLP loan funds can be used to acquire new or existing housing that will be the 

applicant’s principal residence. This section describes loan purposes, restrictions, and 

refinance opportunities. The lender is responsible to ensure that loan funds are used only 

for eligible purposes.

6.2 ELIGIBLE LOAN PURPOSES

Guaranteed loan funds must be used to acquire a new or existing dwelling to be used 

as a permanent residence and may be used to pay costs associated with such an 

acquisition. Properties must be residential in use, character, and appearance. Loan funds 

may be used for the following purposes:

• Acquiring a site with a new or existing dwelling;

• Repairs and rehabilitation when associated with the purchase of an existing 

dwelling;

• Reasonable and customary expenses associated with purchasing a dwelling; and

• Refinancing under specific situations.

A. Acquiring a Site and Dwelling

Loan funds may be used to acquire a site with a new or existing dwelling that meets 

the Agency’s site, dwelling, and environmental requirements, or will meet the Agency’s 

requirements once planned rehabilitation or repair work is completed. These 

requirements are addressed in Chapter 12 of this Handbook.

B. Repairs and Rehabilitation

The lender may request the loan note guarantee prior to work completion if all 

requirements as outlined in Chapter 12 of this Handbook are met.
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Paragraph 6.2 Eligible Loan Purposes

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C. Reasonable and Customary Expenses Associated with the Purchase of an 

Existing Dwelling or New Construction

Loan funds may be used for expenses associated with purchase of a dwelling if they 

are reasonable and customary for the area. These expenses may include the following 

items:

• Loan Acquisition Expenses. These include legal, architectural, and engineering 

fees, title clearance costs, and insurance costs. The up-front guarantee fee and fees 

for appraisal, environmental inspections, surveying, tax monitoring, expenses for 

homeownership education counseling, and other technical services associated 

with obtaining the loan.

• Reasonable Lender Fees. Reasonable lender fees, when financed, may include 

an origination fee and other fees and charges. Lender fees and charges must meet 

the points and fees limits published by the Consumer Financial Protection Bureau 

(CFPB) in the Federal Register at 12 CFR 1026.43(e)(3) and cannot exceed those 

charged other applicants by the lender for similar transactions such as FHAinsured or VA-guaranteed first mortgage loans. It is the lender’s responsibility to 

ensure CFPB requirements are met. Payment of finder’s fees or placement fees 

for the referral of an applicant to the lender may not be included in the loan 

amount. Discount points to “buydown” or permanently reduce the effective 

interest rate may be financed. Loan discount points and the loan origination fee 

must be itemized separately on the Closing Disclosure. The SFHGLP up-front 

guarantee and annual fee are not included in the lender fees and charges 

calculation.

• Closing Costs. Closing costs that are reasonable and customary for the area can 

be financed with loan funds. Closing costs cannot exceed those charged to other 

applicants by the lender for similar transactions such as FHA-insured or VAguaranteed first mortgage loans. If the lender does not participate in such 

programs, the loan closing costs may not exceed those charged other applicants 

by the lender for a similar program that requires conventional mortgage insurance 

or a guarantee. 

• Interested Party Concessions. Seller contributions (or other interested parties) 

are limited to six percent of the sales price and must represent an eligible loan 

purpose in accordance with this paragraph. Closings costs and/or prepaid items 

paid by the lender through premium pricing are not included in the seller 

contribution limitation. Funds provided by the seller for repairs are not included 

in the interested party contribution limitation. However, seller concessions for 
HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

(03-09-16) SPECIAL PN 6-3

Revised (03-31-23) PN 580

repairs must be held in an escrow account. Refer to Chapter 12 for repair escrow 

guidance. The approved lender is responsible to ensure applicable limitations and 

eligible loan purposes are met. Seller contributions cannot be used to pay an

applicant’s personal debt or as an inducement to purchase by including movable

articles of personal property such as furniture, cars, boats, electronic equipment, 

etc. This does not include household appliances that are typically part of the 

purchase transaction.

• Single Close to Permanent Construction. Lenders have the option to escrow a 

borrower’s regularly scheduled principal, interest, taxes, and insurance (PITI) 

payment established at loan closing to make the loan payments during the 

construction period. The inclusion of all reserve accounts (e.g. contingency and 

payment) are considered an eligible loan purpose. Seller contribution limits do not 

apply to single close construction to permanent loans. 

• Contract for Deed. Loan funds can be used for the conversion of a sellerfinanced mortgage with an existing dwelling. These contracts are also known as a 

conversion of contract for deed or land contract. The Agency considers this a 

“purchase” transaction. The dwelling must meet the requirements for existing 

dwelling outlined in Chapter 12 of this Handbook. 

• Design Features or Equipment for Physical Disabilities. Special design 

features or permanently installed equipment to accommodate a household 

member who has a physical disability is an eligible loan purpose. The purchase of 

personal items for such individuals, such as wheelchairs, is not an eligible loan 

purpose.

• Connection, Assessment, and Installment Fees. Reasonable and customary 

connection fees, assessments, or the pro rata installment costs for utilities such as 

water, sewer, electricity, and gas for which the buyer is liable are eligible costs.

• Taxes and Escrow Accounts. A pro rata share of real estate taxes that are due 

and payable on the property at the time of closing and funds for the establishment 

of escrow accounts for real estate taxes, hazard and flood insurance premiums, 

and related costs are eligible costs.

• Essential Household Equipment. Loan funds can be used to pay for essential 

household equipment such as wall-to-wall carpeting, ovens, ranges, refrigerators, 

washers, dryers, and heating and cooling equipment if the equipment is conveyed 

with the dwelling, and such items are normally sold with dwellings in the area.
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Paragraph 6.2 Eligible Loan Purposes

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• Energy Efficiency Measures. Loan funds can be used for purchase and 

installation of measures to promote energy efficiency, such as insulation, doublepaned glass, and solar panels.

• Broadband. Loan funds may be used to install fixed broadband service to the 

household if the equipment is conveyed with the dwelling.

• Site Preparation. Site preparation activities, including grading, foundation 

plantings, seeding or sod installation, trees, walks, fences, and driveways, are 

eligible costs.

D. Refinance [7 CFR 3555.101(d)]

SFHGLP provides opportunities to refinance an existing loan. Borrowers must meet 

all eligibility requirements outlined in this Handbook, except where noted. 

1. Construction Financing and Sites without a Dwelling

A refinance of a debt for a site without a dwelling, interim construction financing 

to build a new dwelling, or associated with the purchase and improvement of an 

existing dwelling prior to the issuance of a loan note guarantee is allowed. The 

Agency considers this a “purchase” transaction.

• These types of transactions typically utilize two separate loan closings with 

two separate sets of legal documents.

• A modification may not be used to update the original note. A new note will 

be signed by the borrowers.

• The first transaction/closing obtains the interim construction financing. The 

second closing obtains the permanent financing when construction or 

improvements are completed.

• The lender is responsible to ensure all costs involved in both transactions 

represent an eligible loan purpose in accordance with Section 6.2 of this 

Chapter. 

• The construction period is limited to no greater than 12-months. The 12-

month period must have occurred directly prior to permanent financing.

• New construction documentation (certified plans and specifications, 

inspections, and warranty) must be obtained. Refer to Chapter 12 for 
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Paragraph 6.2 Eligible Loan Purposes

(03-09-16) SPECIAL PN 6-5

Revised (03-31-23) PN 580

documentation requirements. 

• In the case of a site without a dwelling, the debt to be refinanced was incurred 

for the sole purpose of purchasing the site with the intent to build. 

For combination construction to permanent financing, also known as single-close

loan transactions, refer to Section 6 of Chapter 12.

2. Existing Section 502 Direct and Guaranteed Loans

Existing mortgage loans for existing guaranteed and direct borrowers may be

refinanced. SFHGLP cannot refinance mortgage debt that is not financed or 

guaranteed by USDA. Three refinance options are available:

a. Non-streamlined refinance.

• A new appraisal is required.

• The maximum loan may include the principal and interest balance of the 

existing loan, reasonable and customary closing costs up to the new 

appraised value. The appraised value may only be exceeded by the amount 

of the financed up-front guarantee fee. 

• Direct loan borrowers can refinance or defer the amount of subsidy 

recapture due. Borrowers choosing to refinance subsidy recapture may be 

eligible for a discount on the amount that is due. Borrowers that do not 

refinance subsidy recapture will be required to enter into a second lien 

securing that amount and are not eligible for a discount. 

• Additional borrowers may be added to the new guaranteed loan. Existing 

borrowers on the current mortgage note may be removed when one of the 

original borrowers remains on the refinanced loan.

• The existing loan must have closed 12 months prior to the Agency’s 

receipt of a Conditional Commitment request and have a mortgage 

payment history which must not reflect a delinquency equal to or greater 

than 30 days within the previous 180-day period. 

• The borrower must meet credit requirements as outlined in Chapter 10 of 

this Handbook.
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Paragraph 6.2 Eligible Loan Purposes

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• Lenders may request a debt ratio waiver when strong compensating factors 

in accordance with Chapter 11 are documented. 

• The Guaranteed Underwriting System (GUS) may be utilized to 

underwrite the non-streamlined refinance. 

b. Streamlined refinance.

• A new appraisal is not required to refinance an existing guaranteed loan. A 

direct loan borrower will be required to obtain a new appraisal if they have 

received payment subsidy to determine the amount of subsidy recapture 

due. If subsidy recapture is due, the amount cannot be included in the new 

refinance loan. Subsidy recapture must be paid with other funds or 

subordinated to the new guaranteed loan.

• The maximum loan amount may include the principal and interest balance 

of the existing loan, and reasonable and customary closing costs, including 

any financed portion of the up-front guarantee fee.

• Additional borrowers may be added to the new guaranteed loan. Existing 

borrowers on the current mortgage note may be removed, when one of the 

original borrowers remains on the refinance loan.

• The existing loan must have closed 12 months prior to the Agency’s 

receipt of a Conditional Commitment and have a mortgage payment 

history which must not reflect a delinquency equal to or greater than 30 

days within the previous 180-day period.

• Lenders may request a debt ratio waiver when strong compensating factors 

are documented in accordance with Chapter 11 of this Handbook. 

• GUS may be utilized to underwrite the streamlined refinance loan.

c. Streamlined-assist refinance

• A new appraisal is not required for existing guaranteed loan borrowers. A 

direct loan borrower will be required to obtain a new appraisal if they have 

received payment subsidy to determine the amount of subsidy recapture 

due. If subsidy recapture is due, the amount cannot be included in the 

newly refinanced loan. Subsidy recapture must be paid with other funds or 

subordinated to the new guaranteed loan. If an applicant elects to finance 
HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

(03-09-16) SPECIAL PN 6-7

Revised (03-31-23) PN 580

the subsidy recapture into the new refinance loan, refer to the nonstreamlined refinance guidance.

• The maximum loan amount may include the principal and interest balance 

of the existing loan, and reasonable and customary closing costs, including 

any financed portion of the up-front guarantee fee.

• The borrower must receive a tangible benefit to refinance under this 

option. A tangible benefit is defined as a $50 or greater reduction in their 

principal, interest, and annual fee monthly payment compared to the 

existing principal, interest and annual fee monthly payment. 

• The borrower is not required to meet the repayment ratio provisions as 

outlined in Chapter 11 of this Handbook.

• The existing loan must have closed 12 months prior to the Agency’s 

receipt of a Conditional Commitment request.

• The borrower is not required to meet all the credit requirements as 

outlined in Chapter 10 of this Handbook. Prior to the request for a 

Conditional Commitment, the existing mortgage payment history must not 

reflect a delinquency equal to or greater than 30 days within the previous 

12 months. Lenders may verify mortgage payment history through a 

verification of mortgage obtained directly from the servicing lender or a 

credit report. When a credit report is ordered to determine timely mortgage 

payments, other credit accounts are not to be considered.

• Additional borrowers may be added to the new guaranteed loan. Existing

borrowers on the current mortgage note must remain on the refinanced 

loan; however, deceased borrowers may be removed from the loan.

• Lenders are required to document their annual income calculations on the 

FNMA 1008/FHLMC 1077, Attachment 9-B, or similar form in order to 

support the household income does not exceed the allowable maximum 

income limits.

• GUS is unavailable for this product and these loans must be manually 

submitted and underwritten; however, the documents can be submitted 

through GUS. A job aid for this type of submission is available in the

https://www.rd.usda.gov/page/usda-linc-training-resource-library in the 

“Loan Origination” tab.
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Paragraph 6.2 Eligible Loan Purposes

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The following terms and conditions are applicable to non-streamlined, streamlined 

and streamlined-assist refinance transactions:

• Loan terms must be fixed for 30 years.

• The interest rate of the new loan must be fixed and not exceed the interest rate of 

the loan refinanced.

• The loan security must include the same property as the original loan and owned 

and occupied by the applicants as their principal residence.

• Properties located in areas since determined by the Agency to benon-rural 

(ineligible) remain eligible for a refinance. Lenders may continue to submit loan 

requests in the Guaranteed Loan System (GUS) with an ineligible property 

determination. USDA will correct the property determination during loan review 

and processing.

• Property inspections as outlined in Chapter 12 of this Handbook are not required. 

If the lender requires repairs as a condition of loan approval, the expenses related 

to property inspections and repairs may not be financed into the new loan amount.

• Secondary financing such as leveraged loans, down payment assist loans or home 

equity lines of credit cannot be included in a new guarantee refinance loan. These 

types of financing must be subordinated to the new guaranteed loan or be paid in 

full. 

• Cash out is not permitted. Borrowers may receive reimbursement from loan 

funds at settlement for eligible closing costs paid from the borrower’s personal 

funds for the refinance transaction. Borrower may also receive a refund at 

settlement that represents prepaid interest or overage from the borrower’s escrow 

account. 

• Unpaid fees, past-due interest, and late fees/penalties due the servicer cannot be 

included in the new loan amount. Borrowers who are facing repayment hardships 

should be considered for loss mitigation under Chapter 18 of this Handbook.

• The lender may establish charges and fees for the refinance loan, provided they 

are the same as those as charged to other applicants for similar transactions. 

Lenders and the Agency should make every effort to ensure that applicants are not 

charged excessive fees.
HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

(03-09-16) SPECIAL PN 6-9

Revised (03-31-23) PN 580

• The entire up-front guarantee fee may be financed into the new refinance loan. 

The amount of the up-front fee will be published in Exhibit K of RD Instruction 

440.1, available in any Rural Development office or by selecting “Part 1800: 

General” on the Rural Development Instructions website located at: 

https://www.rd.usda.gov/resources/directives/instructions.

• An annual fee will be charged by the Agency for refinance transactions. The 

amount of annual fee will be published in Exhibit K of RD Instruction 440.1, 

available in any Rural Development Office or by selecting “Part 1800: General” 

on the Rural Development Instructions website located at: 

https://www.rd.usda.gov/resources/directives/instructions.

• Lenders should submit the complete application package in accordance with 

Chapter 15 and Attachment 15-A, Loan Origination Checklist, of this Handbook.

The lender will follow the same procedures as provided in Chapter 16 of this 

Handbook for closing the loan. The Agency will review loan closings for SFHGLP 

refinance loans using the same procedures for SFHGLP purchase loans prior to issuance 

of the Loan Note Guarantee.

E. Supplemental Loans

When an existing SFHGLP loan is assumed, a supplemental loan can be provided if 

funds are needed for seller equity, closing costs, or essential repairs. Refer to Chapter 17 

of this Handbook for a detailed discussion of transfers and assumptions in the SFHGLP.

6.3 PROHIBITED LOAN PURPOSES

SFHGLP loan funds cannot be used for any of the following purposes:

• Cash Back to Borrower. Borrowers may be reimbursed out of loan funds for 

eligible loan costs incurred prior to closing. Excess loan funds that cannot be 

applied towards eligible closings as outlined in paragraph 6.2, or that do not 

represent a reimbursement to the borrower for eligible pre-paid fees from their 

out-of-pocket expenses, must be applied as a principal reduction.

• Select Loan Discount Points. Loan discount points such as to compensate for a

low credit score or low loan amount are ineligible.

• Income Producing Property. Purchase or improvement of income-producing 

land or buildings that will be used principally/specifically for income producing 
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Paragraph 6.3 Prohibited Loan Purposes

6-10

purposes is not allowed. Vacant land or properties used primarily for agricultural, 

farming, or commercial enterprise are ineligible. A minimal income-producing 

activity, such as maintaining a garden that generates a small amount of additional 

income, does not violate this requirement. A qualified property must be

predominantly residential in use, character and appearance. Refer to Chapter 12 of 

this Handbook for additional information on qualifying a property.

• Existing Manufactured Homes. Purchase of an existing manufactured home is 

not permitted, unless it is a purchase of an existing Rural Development Section 

502 direct loan or guarantee, as provided in Section 2 of Chapter 13 of this 

Handbook.

• Lease Payments. Payment on any lease agreement associated with the proposed 

real estate transaction is prohibited.

• Closing Costs in Excess of Three Percent. Closing costs, including lender fees, 

that exceed three percent of the total loan amount are prohibited, unless flexibility 

is provided through guidance published by the CFPB’s Ability to Repay and 

Qualified Mortgage (ATR/QM) standards.

6.4 AGENCY REVIEW OF LOAN PURPOSES

The Agency will determine if the purposes for the loan guarantee are acceptable 

before issuing a Conditional Commitment for loan guarantee. If the Agency determines 

loan funds will be used for an ineligible purpose, the Agency will contact the lender and 

attempt to resolve the situation prior to issuance of the Loan Note Guarantee. Loan 

purposes will also be reviewed during the Agency’s Quality Assurance (QA) internal 

monitoring process and Lender Oversight (LO) compliance reviews to ensure that the 

lender has an accurate understanding of eligible and prohibited loan purposes. Refer to 

Chapter 19 of this Handbook for a detailed discussion of how the Agency handles loss 

claims for loan funds that were used for an ineligible purpose.
HB-1-3555

Attachment 6-A

Page 1 of 2

(03-09-16) SPECIAL PN

Revised (03-31-23) PN 580

REQUIREMENTS FOR ALL REFINANCE OPTIONS

• Only loans financed or guaranteed by USDA are eligible.

• Existing loan must have closed 12 months prior to the request for Conditional Commitment.

• Fixed interest rate and 30-year term.

• Borrower must meet applicable adjusted annual household income.

• No cash out from collateral equity. Only reimbursement of borrower prepaid eligible closing costs and/or 

refund from escrow overage.

• Borrowers must occupy the property.

• Properties located in areas now deemed ineligible remain eligible for refinance.

• Existing leveraged loans or subordinate liens must be paid in full or be subordinated.

REFINANCE OPTIONS FOR SECTION 502 DIRECT AND 

GUARANTEED LOANS

REQUIREMENT NONSTREAMLINEDSTREAMLINED STREAMLINEDASSIST

New Appraisal Yes Only for Direct 502 with 

recapture subsidy due

Only for Direct 502 with 

recapture subsidy due

Maximum Loan Amount Up to the new appraised 

value plus the amount of 

the financed up-front 

guarantee fee and 

include:

• Principal & interest 

balance

• Eligible closing 

costs

• Subsidy recapture

May include:

• Principal & interest 

balance

• Eligible closing costs

• Up-front guarantee 

fee

May include:

• Principal & interest 

balance

• Eligible closing 

costs

• Up-front guarantee 

fee

Net Tangible Benefit No No Yes

$50 or greater reduction 

of the total principal, 

interest and monthly 

annual fee payment

Include Subsidy Recapture Yes

Up to the new appraised 

value

No No

Add/Remove Borrowers 

(one original borrower 

must remain)

Yes Yes • Add borrowers

• Remove only 

deceased borrowers 

Credit • No defaults in 

previous 180 days 

prior to Agency 

request 

• Meet Chapter 10 

requirements 

• No defaults in 

previous 180 days 

prior to Agency 

request

• Meet Chapter 10 

requirements

• No defaults in 

previous 12 months 

prior to Agency 

request

Ratio waivers GUS Refers only

Must meet Chapter 11 

requirements 

GUS Refers only

Must meet Chapter 11 

requirements

No ratio calculations 

required

Utilize GUS Yes Yes No

Soft seconds and/or 

subsidy recapture may be 

subordinated 

Yes Yes Yes
HB-1-3555

Attachment 6-A

Page 2 of 2

Guidance for Refinancing Section 502 Direct Loans

The Section 502 Direct Loan Program provides loans to low and very-low income borrowers 

that may include payment assistance, or payment subsidy that reduces the mortgage payments 

determined by the borrower’s adjusted household income. 

Subsidy Recapture

Arrangements must be made to either pay off or defer repayment of any subsidy recapture 

due when a Section 502 loan is refinanced. Any recapture amount owed as part of the 502 direct 

loan pay off may be included into the amount being financed with the SFHGLP non-streamline 

refinance loan subject to the maximum loan amount. A discount on recapture may be offered if 

the customer does not defer recapture (pays amount due in full) or includes the recapture amount 

due into a non-streamlined refinance loan. Alternatively, any 502 direct recapture amount that is 

owed at the time of refinance may be deferred if the recapture amount takes a subordinate lien 

position to the new SFHGLP loan.

Obtaining a “Statement of Loan Balance” Letter for Direct Loan Borrowers

Lenders may determine an applicant has a direct loan when the credit report reflects “USDA” 

or “Farmers Home Administration” as the mortgage creditor or the applicant informs the lender 

they applied and received their mortgage loan through a USDA Service Center. Direct loans are 

serviced by the Servicing and Asset Management Office (Servicing Office). Obtaining a 

“Statement of Loan Balances” letter will assist lenders to determine if subsidy recapture is due. 

The “Statement of Loan Balances” will also include instructions for the lender to follow 

regardless of information submitted at the time of payoff request. 

To obtain a “Statement of Loan Balance”, submit a request on lender letterhead which 

includes the borrower’s name, account number and address along with a signed authorization 

from the customer to release the information. The “Statement of Loan Balance” will reflect the 

maximum amount of subsidy recapture that may be due. It is not a payoff statement. Requests 

can be faxed to 314-457-4433.

The Servicing Office will not provide payoff quotes verbally or over the phone. The 

Servicing Office also assists lenders with subordination agreements when direct loan borrowers 

elect to subordinate the subsidy recapture due. Lenders and direct loan borrowers that have 

questions regarding a direct loan account may contact the Servicing Office at (800) 414-1226.