HB-1-3550

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TABLE OF CONTENTS

Page

CHAPTER 1: OVERVIEW ..................................................................................................... 1-1 

SECTION 1: INTRODUCTION TO THE FIELD OFFICE HANDBOOK

1.1 WELCOME TO THE FIELD OFFICE HANDBOOK

1.2 USING THIS HANDBOOK

A. Citations and Text Boxes

B. Attachments and Appendices

C. Terminology

SECTION 2: OVERVIEW OF THE DIRECT SINGLE FAMILY HOUSING PROGRAM.1-5 

1.3 GOALS OF THE DIRECT SINGLE FAMILY HOUSINGPROGRAM

1.4 SECTION 502 -- AN OVERVIEW

A. Program Loans

B. Nonprogram Loans

C. Demonstration Programs

1.5 SECTION 504 -- AN OVERVIEW

A. Section 504 Grants

B. Section 504 Loans

1.6 LOAN SERVICING

1.7 SECTION 306C WATER AND WASTE DISPOSAL (WWD) GRANTSTO 

INDIVIDUALS

SECTION 3: GENERAL PROGRAM REQUIREMENTS .................................................. 1-9 

1.8 CIVIL RIGHTS

A. Nondiscrimination

B. Reasonable Accommodations for Persons with Disabilities

1.9 REVIEW AND APPEALS

A. Adverse Decisions

B.State Director Responsibilities

C.ADR Coordinator Responsibilities

D. Agency Representative Responsibilities

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
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1.10 AGENCY DECISIONS

A. Informal/Administrative Review

B. Appealable Decisions

C. Non-appealable Decisions

1.11 PARTICIPANT RIGHTS

A. Informal Administrative Review

B. Mediation

C. Appeal

1.12 NAD HEARING PREPARATION

A. Pre-hearing Conference

B. Post-hearing Procedure

C. Timing of Issuance of Determination

D. Requests for a Director Review

1.13 CONFLICT OF INTEREST

A. Applicant Disclosure

B. Agency Employee Disclosure

C. Disposition of REO Properties

1.14 OTHER FEDERAL REQUIREMENTS

A. Environmental Requirements [7 CFR 3550.5]

B. Construction Standards

C. Administrative Requirements

1.15 EXCEPTION AUTHORITY [7 CFR 3550.8]

ATTACHMENT 1-A: INFORMAL ADMINISTRATIVE REVIEW 

ATTACHMENT 1-B: AN APPEALABLE ADVERSE DECISION

ATTACHMENT 1-C: AN ADVERSE DECISION THAT CANNOT BE APPEALED 

ATTACHMENT 1-D: NOTIFICATION TO APPLICANTS OR BORROWERS OF

THE ASSIGNMENT OF THEIR CASE TO A MEDIATION 

SERVICE PROVIDER

ATTACHMENT 1-E: REQUEST TO A MEDIATION SERVICE PROVIDER 

ATTACHMENT 1-F: ATTACHMENT FOR NOTIFYING CUSTOMERS OF

EXPIRATION OF THE 10 DAYS TO SELECT A 

MEDIATION SERVICE PROVIDER

RURAL DEVELOPMENT/USDA OF A CUSTOMER 

MEDIATION REQUEST TO A MEDIATION SERVICE 

PROVIDER

ATTACHMENT 1-G: ATTACHMENT FOR CUSTOMER NOTIFICATION OF 

UNRESOLVED RESULT OF THE MEDIATION OF THE 

ADVERSE DECISION
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CHAPTER 2: OVERVIEW OF SECTION 502 ..................................................................... 2-1

2.1 INTRODUCTION. .................................................................................................... 2-1

SECTION 1: TYPES OF LOANS ............................................................................................ 2-1

2.2 OVERVIEW.............................................................................................................. 2-1

2.3 INITIAL LOANS

2.4 ASSUMED LOANS

A. New Rates and Terms Assumption

B. Same Rates and Terms Assumption

2.5 SUBSEQUENT LOANS

2.6 NONPROGRAM LOANS

A. Facilitate Sale By an Existing Agency Borrower

B. Facilitate Sale of Real Estate Owned (REO) Property

SECTION 2: THE DEDICATED LOAN ORIGINATION AND

SERVICING SYSTEM (DLOS) ............................................................................................... 2-5

2.7 DLOS

2.8 UNIFI

2.9 LOANSERV

SECTION 3: OVERVIEW OF LOANORIGINATION PROCESS.................................... 2-7

2.10 APPLICATION PROCESSING

2.11 BORROWER ELIGIBILITY

2.12 PROPERTY REQUIREMENTS

2.13 UNDERWRITING THE LOAN

2.14 TAXES, INSURANCE, AND ESCROW

2.15 LOAN APPROVAL AND CLOSING

CHAPTER 3: APPLICATION PROCESSING ..................................................................... 3-1

3.1 INTRODUCTION. .................................................................................................... 3-1

SECTION 1: PRE-QUALIFICATION.................................................................................... 3-1

3.2 OVERVIEW.............................................................................................................. 3-1

3.3 PROCEDURES FORPRE-QUALIFICATION

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Revised (03-09-22) SPECIAL PN
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SECTION 2: HOMEOWNERSHIP EDUCATION................................................................ 3-3

3.4 HOMEOWNERSHIP EDUCATION REQUIREMENT

A. State Director Assessment of Homeownership Education

B. Providing Homeownership Education Information to the Applicant

C. Exception Provision

SECTION 3: APPLICATIONS ................................................................................................ 3-6

3.5 BEGINNING THE APPLICATIONPROCESS

3.6 APPLICATION RECEIPT AND CASE FILE SETUP

A. Missing Items

B. Case File Setup

3.7 COMPLETE APPLICATION

3.8 COMPLIANCE WITH OTHER FEDERAL REQUIREMENTS

A. Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) 

Integrated Mortgage Disclosures

B. Truth in Lending Act

C. Fair and Accurate Credit Transaction Act

D. Equal Credit Opportunity Act (RegulationB)

3.9 WITHDRAWING AND REJECTING APPLICATIONS

SECTION 4: SELECTION FOR PROCESSING ................................................................. 3-13

3.10 OVERVIEW.......................................................................................................... 3-13

3.11 DETERMINING WHETHER FUNDS ARE AVAILABLE

A. Regular Funding

B. Special Funding

3.12 IF FUNDING IS NOT AVAILABLE

3.13 SELECTING APPLICATIONS FOR PROCESSING

A. Selection Procedures

B. Processing Priorities

C. Veterans’ Preference

D. Notifying Applicants Who Are Selected for Processing

3.14 PURGING THE WAITING LIST

3.15 VERIFICATIONS

A. Types of Verifications

B. Evaluating Verified Information

ATTACHMENT 3-A: LOAN APPLICATION PACKAGERS 

ATTACHMENT 3-B: FOLLOW-UP QUESTIONS FOR FORM RD 410-4,

UNIFORM RESIDENTIAL LOAN APPLICATION 

ATTACHMENT 3-C: CASE STUDY - PROCESSING PRIORITIES 

ATTACHMENT 3-D: APPLICANT INFORMATION SHEET - SINGLE FAMILY

HOUSING

ATTACHMENT 3-E: REQUEST TO REOPEN A REJECTED APPLICATION IN 

LOANSERV
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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

ATTACHMENT 3-F: HOW TO ADDRESS NEGATIVE PRE-QUALIFICATION 

RESULTS

ATTACHMENT 3-G: 502 SINGLE FAMILY HOUSING CHECKLIST 

ATTACHMENT 3-H: CREDIT SCORE DISCLOSURE

ATTACHMENT 3-I: SETTLEMENT SERVICE PROVIDERS AND MORTGAGE 

LOAN APPLICATION RELATED DISCLOSURES

ATTACHMENT 3-J: CHECKLIST OF ITEMS TO ACCOMPANYTHE UNIFORM 

RESIDENTIAL LOAN APPLICATION

CHAPTER 4: BORROWER ELIGIBILITY ......................................................................... 4-1

4.1 OVERVIEW.............................................................................................................. 4-1

SECTION 1: EVALUATING BORROWER INCOME ........................................................ 4-1

4.2 OVERVIEW.............................................................................................................. 4-1

A. Key Concepts for Income Determinations

B. Using UniFi and the Income Worksheet to Compute Income

4.3 SOURCES OF INCOME

A. Income Considered for Annual and Repayment Income

B. Additional Income Considerations for Repayment Income

C. Income Never Considered for Annual and Repayment Income

D. Additional Income Never Considered for Annual Income

E. Verifying Sources and Amounts

4.4 CALCULATING ANNUAL AND ADJUSTED INCOME

A. Calculating AnnualIncome

B. Calculating Deductions from Annual Income

C. Dependent Deduction

D. Child Care Expenses

E. Elderly Household Deduction

F. Deduction for Disability AssistanceExpense

G. Deduction for Medical Expenses (for Elderly HouseholdsOnly)

H. Calculating Repayment Income

SECTION 2: EVALUATING BORROWER ASSETS ....................................................... 4-36

4.5 OVERVIEW OF POLICIES RELATED TO ASSETS........................................... 4-36

A. Reporting Assets

B. Verification of Assets

C. Calculating Market and Cash Value

D. Retirement Assets

4.6 LIMITATIONS ON ASSETS
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4.7 CALCULATING INCOME FROM ASSETS FOR ANNUALINCOME

4.8 CALCULATING INCOME FROM ASSETS FOR REPAYMENT INCOME

SECTION 3: CREDIT HISTORY......................................................................................... 4-40

4.9 OVERVIEW........................................................................................................... 4-40

4.10 CREDIT REQUIREMENTS

4.11 CONDUCTING ADDITIONAL CREDIT CHECKS

A. Do Not Pay Portal

B. Infile Credit Report

4.12 CONDUCTING FULL REVIEW OF CREDIT HISTORY

A. Tri-Merge Credit Report

B. Fair and Accurate Credit Transactions

C. Other Credit Verifications

D. Non-Purchasing Spouse Credit History

4.13 CREDIT HISTORY WORKSHEET

4.14 ASSESSING ADVERSECREDIT

A. Making Exceptions

B. Reviewing SignificantDelinquencies

C. Resolving Collection Accounts

SECTION 4: OTHER ELIGIBILITY REQUIREMENTS................................................. 4-57

4.15 OWNING A DWELLING

4.16 ABILITY TO OBTAIN OTHERCREDIT

4.17 OCCUPYING THE PROPERTY

4.18 LEGAL CAPACITY

4.19 SUSPENSION OR DEBARMENT

4.20 CITIZENSHIP STATUS

4.21 TRUTHFUL APPLICATION

SECTION 5: PROCESSING THE CERTIFICATE OF ELIGIBILITY........................... 4-60

4.22 DETERMINING REPAYMENT ABILITY

A. The PITI Ratio

B. The TD Ratio

C. Determining the Maximum Loan Amount

D. Using Market Data to Interpret UniFiResults

4.23 RESERVED

4.24 OTHER CONSIDERATIONS RELATED TO MAXIMUM LOAN AMOUNTS

A. Using Compensating Factors

B. Adding Additional Parties or Cosigners to the Note

C. Payment Shock

4.25 ISSUING THE CERTIFICATE OF ELIGIBILITY

4.26 APPLICANT ORIENTATION

ATTACHMENT 4-A: WORKSHEET FOR COMPUTING INCOME 

ATTACHMENT 4-B: RESERVED
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Revised (03-09-22) SPECIAL PN

ATTACHMENT 4-C: REVIEWING A SELF-EMPLOYEDAPPLICANT’S INCOME 

AND DEBT LOAD

ATTACHMENT 4-D: REVIEWING DOCUMENTATION FOR CITIZENSHIP

STATUS

CHAPTER 5: PROPERTY REQUIREMENTS .................................................................... 5-1

5.1 INTRODUCTION. .................................................................................................... 5-1

A. Overview of Property Requirements...................................................................... 5-1

B. Key Processing Steps Related to Property Requirements

SECTION 1: SITE REQUIREMENTS.................................................................................... 5-4

5.2 OVERVIEW.............................................................................................................. 5-4

5.3 RURAL AREA DESIGNATION

A. Rural Area Definition

B. Special Considerations

C. Reviewing Rural Area Designations

5.4 MODEST SITES

5.5 ADEQUATE SITE ACCESS, WATER, AND WASTEWATERSYSTEMS

SECTION 2: DWELLING REQUIREMENTS ................................................................... 5-11

5.6 MODEST HOUSING

A. Establishing Area Loan Limits Within A State

B. Notification

C.Square Footage Consideration Standards

D. Prohibited Features

5.7 DECENT, SAFE AND SANITARY DWELLINGS

A. Existing Dwellings

B. New Dwellings

C. Survey Requirements

D. Flood-Related Requirements

SECTION 3: ENVIRONMENTAL REQUIREMENTS...................................................... 5-16

5.8 PROTECTION OF ENVIRONMENTAL RESOURCES

A. Types of Environmental Reviews

B. Flood Hazard Determination

C. Responsibility for Environmental Reviews

D. Noise Abatement

5.9 MANAGEMENT OF HAZARDOUSSUBSTANCES
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SECTION 4: SECURITY REQUIREMENTS ..................................................................... 5-23

5.10 ACCEPTABLE MORTGAGE

5.11 OWNERSHIP REQUIREMENTS

A. Responsibilities

B. Acceptable Forms of Ownership

5.12 EXCEPTIONS TO THE AGENCY’S SECURITY REQUIREMENTS

A. Unsecured (Note Only)Loans

B. Best Mortgage Obtainable

SECTION 5: APPRAISALS .................................................................................................. 5-27

5.13 OVERVIEW.......................................................................................................... 5-27

5.14 REQUIREMENTS FORAPPRAISALS

5.15 TYPES OF VALUE

5.16 APPRAISAL METHODOLOGY

5.17 ORDERING APPRAISALS

A. When Appraisals Are Needed

B. Program Responsibilities

C. Required Information

D. Appraisal Disputes

5.18 APPRAISER RESPONSIBILITIES

5.19 REVIEWING APPRAISALS

A. Administrative Review

B. Technical Review

5.20 PAYING FOR APPRAISALS

5.21 APPRAISALS IN REMOTE RURAL AREAS, ON TRIBAL LANDS, OR 

WHERE THERE IS A LACK OF CONVENTIONAL MARKET ACTIVITY

SECTION 6: MANAGING CONSTRUCTION ................................................................... 5-34

5.22 DESIGN

A. Disseminating the Standards

B. Review and Approve the Drawings and Specifications

5.23 PREPARING FORCONSTRUCTION

A. Selecting the Contractor

B. Pre-Construction Conference
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C. Construction Contract

D. Department of LaborNotification

5.24CONSTRUCTION PERIOD

A. Qualified Inspector

B. Periodic Inspections

C. Partial Payments

D. Changes DuringConstruction

5.25 CONSTRUCTION CLOSEOUT

5.26 SPECIAL SITUATIONS

A. Funds Remaining After Completion

B. Construction Work that Cannot be Completed

C. Deceased Borrowers

D. Compensation for Construction Defects

ATTACHMENT 5-A: STATEMENT OF WORK (SOW) FOR APPRAISAL SERVICES 

AND APPRAISAL INSTRUCTIONS SINGLE FAMILY 

HOUSING RESIDENTIAL PROPERTY

ATTACHMENT 5-B: SINGLE FAMILY HOUSING SITE CHECKLIST 

ATTACHMENT 5-C: AMENDMENTS TO MORTGAGES WITH LEASEHOLD

INTEREST

ATTACHMENT 5-D: TRANSMITTAL COVER SHEET FOR MAPPING SYSTEM 

MODIFICATION

ATTACHMENT 5-E: ELIGIBILITY SYSTEM MODIFICATION REQUEST

PROCESS

ATTACHMENT 5-F: ELIGIBILITY SYSTEM MODIFICATION WORKFLOW

CHAPTER 6: UNDERWRITING THE LOAN...................................................................... 6-1

SECTION 1: OVERVIEW OF THE UNDERWRITING PROCESS.................................. 6-1

6.1 INTRODUCTION. .................................................................................................... 6-1

6.2 WHAT IS UNDERWRITING?

6.3 USING UNIFI TO FACILITATE UNDERWRITING

SECTION 2: LOAN TERMS AND REQUIREMENTS........................................................ 6-4

6.4 ELIGIBLE LOAN PURPOSES ANDUSES

A. Site-Related Costs

B. Dwelling-Related Costs

C. Fees and Related Costs

D. Loan Restrictions

6.5 REFINANCING

A. Refinancing Agency Debt

B. Refinancing Non-Agency Debt

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6.6 MAXIMUM LOAN AMOUNT

A. Granting Exceptions

B. Special Situations

6.7 LOAN-TO-VALUE (LTV) RATIO

A. Loans for Existing Dwellings (100% LTV)

B. Loans for New Dwellings (90-100% LTV)

C. Subsequent Loans for Necessary Repairs

D. Subsequent Loans for Closing CostsOnly

E. Refinanced Loan for Existing Agency Borrower

F. Affordable Housing Products

6.8 REPAYMENT PERIODS

A. Exceptions to the Standard 33-Year Maximum Term

B. Effect of Repayment Period on Payment Subsidy

6.9 INTEREST RATES

A. Note Rates

B. Subsidized Rate

6.10 USE OF ASSETS

A. Asset Limits

B. Eligible Uses of Assets

C. Ineligible Uses of Assets

SECTION 3: PAYMENT SUBSIDIES ................................................................................. 6-17

6.11 AN OVERVIEW OF PAYMENT SUBSIDIES.................................................... 6-17

A. Three Types of Subsidy

B. Applicant Eligibility

C. Loan Requirements

D. Annual and Interim Reviews

E. Recapture Requirement

6.12 CALCULATING PAYMENT ASSISTANCE

A. Payment Assistance Method 2

B. Payment Assistance Method 1

6.13 CALCULATING INTEREST CREDIT

SECTION 4: UNDERWRITING A LOAN FOR ASPECIFIC PROPERTY................... 6-26

6.14 APPROVING A SPECIFIC PROPERTY
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6.15 FUNDS AVAILABLE FOR CLOSING

6.16 CALCULATING THE APPROVABLE LOANAMOUNT

A. Calculating the Approvable Loan at Standard Terms

B. Working with Applicants Who Do Not Qualify Using Standard Terms

6.17 APPROVING CREDIT

ATTACHMENT 6-A: RESERVED

ATTACHMENT 6-B: LOAN QUALITY REVIEW

CHAPTER 7: ESCROW, TAXES, AND INSURANCE.......................................................... 7-1

7.1 INTRODUCTION. .................................................................................................... 7-1

SECTION 1: ESCROW.............................................................................................................. 7-1

7.2 OVERVIEW.............................................................................................................. 7-1

7.3 ESCROW DEPOSITS

A. Monthly Payment

B. Borrower’s Initial Deposit to the Escrow Account

C. Seller’s Tax Liability

7.4 CALCULATING ESCROW AMOUNTS

7.5 CLOSING

7.6 CONSTRUCTION LOANS

7.7 SERVICING ESCROW ACCOUNTS

SECTION 2: TAXES ................................................................................................................ 7-7

7.8 ESTIMATING THE AMOUNT OF TAXES

7.9 TAX SERVICE FEE

7.10 TAX INFORMATION SHEET

SECTION 3: INSURANCE...................................................................................................... 7-8

7.11 OVERVIEW............................................................................................................ 7-8

7.12 TYPES OF INSURANCE

A. Hazard Insurance

B. Flood Insurance

C. Builder’s Risk Policies

7.13 EVIDENCE OF INSURANCE

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7.14 AUTHORIZED INSURANCEPROVIDERS

7.15 REVIEWING INSURANCE POLICIES

ATTACHMENT 7-A: CALCULATION OF ESTIMATED TAXESDUE THROUGH 

CONSTRUCTION PERIOD AND INITIAL ESCROW 

DEPOSIT

ATTACHMENT 7-B: TAX SERVICE FEE

ATTACHMENT 7-C: INSURANCE POLICY REQUIREMENTS

CHAPTER 8: LOAN APPROVAL AND CLOSING ............................................................ 8-1

8.1 INTRODUCTION. .................................................................................................... 8-1

SECTION 1: LOAN APPROVAL AND OBLIGATION. ...................................................... 8-1

8.2 THE LENDING DECISION

A. Rejection

B. Approval

8.3 OBLIGATING FUNDS

A. Initial Obligation

B. Changing the Loan Amount

C. Canceling a Loan

D. Monitoring Obligations

SECTION 2: PREPARING FOR CLOSING .......................................................................... 8-5

8.4 TITLE INSURANCE AND CLOSINGAGENTS

A. Title Insurance

B. Closing Agents

C. Approvals

D. Procedures

8.5 RESPONSIBILITIES OF THE CLOSING AGENT/ATTORNEY

8.6 RESPONSIBILITIES OF THE LOANORIGINATOR

A. Prepare the Applicant

B. Review Title Insurance Binder (or Preliminary Title Opinion) and Other Closing 

Documents

C. Re-verifying Employment and Income

D. Re-verify Eligibility

E. Validate the Interest/Note Rate

F. Prepare Loan Documents

SECTION 3: CLOSING.......................................................................................................... 8-14

8.7 OBTAINING FUNDS FORCLOSING

8.8 ESTABLISHING THE DISBURSEMENT SCHEDULE

A. Permanent Loans

B. Construction Loans

C.Construction Take-Out Loans

8.9 ESTABLISHING A REPAYMENTSCHEDULE

A. Monthly Installments

B. Housing Assistance Program (HAP)
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8.10 ORIGINAL EQUITY

8.11 LOAN CLOSING

A. Loan Closing Document Submission

B. Review Closing Documents

C. Activate the Loan

D. Record Mortgage or Deed ofTrust

E. Secure Title InsurancePolicy

SECTION 4: CONSTRUCTION LOANS ............................................................................. 8-19

8.12 ADMINISTER CONSTRUCTION FUNDS

8.13 CONVERT CONSTRUCTION LOANS

A. Modify Note andLoanServ

B. Update Payment Subsidy

ATTACHMENT 8-A: DOCUMENTS TO BE SIGNED OR SUBMITTED

AT LOAN CLOSING

ATTACHMENT 8-B: UNLIQUIDATED OBLIGATION REVIEW

CHAPTER 9: SPECIAL SITUATIONS ................................................................................. 9-1

9.1 INTRODUCTION. .................................................................................................... 9-1

SECTION 1: CONDITIONAL COMMITMENTS................................................................ 9-1

9.2 OVERVIEW OF CONDITIONAL COMMITMENTS............................................. 9-1

9.3 APPLICATION AND FEE

9.4 EVALUATING THE CONDITIONAL COMMITMENTAPPLICATION

9.5 PRELIMINARY APPROVAL

A. Ordering an Appraisal

B. Site Approval and Responsibility for Environmental Reviews

C. Rejecting the Application for Conditional Commitment

9.6 FINAL APPROVAL

A. Proposed Price Too High

B. Proposed Price Acceptable

9.7 DURATION OF COMMITMENT

9.8 CHANGES IN PLANS, SPECIFICATIONS, OR COMMITMENTPRICE

9.9 PROPERTY INSPECTIONS

9.10 BUILDER’S WARRANTY

9.11 CONDITIONAL COMMITMENTS INVOLVING PACKAGING 

OF APPLICATIONS

SECTION 2: SPECIAL FORMS OF OWNERSHIP.............................................................. 9-8

9.12 OVERVIEW............................................................................................................ 9-8

9.13 LOANS FOR CONDOMINIUM UNITS

A. Definition

B. Financing Approval
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C. Condominium Status

D. Protection of Agency Rights and LienPosition

E. Closing Documents

F. Association Dues

9.14 LOANS FOR UNITS IN A COMMUNITY LANDTRUST

A. Definition

B. Preservation of Agency Rights and Lien Position

C. Restrictions on Resale Price

D. Right of First Refusal

E. Appraisals

9.15 PLANNED UNIT DEVELOPMENTS

A. Definition

B. Preservation of Agency Rights and Lien Position

C. Closing Documents

SECTION 3: MANUFACTURED HOMES......................................................................... 9-18

9.16 AUTHORIZED LOAN PURPOSES

A. Definition

B. Authorized Loan Purposes

C. Loan Restrictions

9.17 DEALER-CONTRACTOR REQUIREMENTS

9.18 PROCESSING PROCEDURES

A. Submission Requirements

B. Appraisal Techniques

C. Loan Rates and Terms

9.19 CONSTRUCTION AND SITEREQUIREMENTS

9.20 LOAN CLOSING

A. Contract Requirements

B. Lien ReleaseRequirements

C. Warranty Requirement

D. Real Estate Tax Requirement

ATTACHMENT 9-A: SAMPLE COMFORT HEATING AND COOLING

CERTIFICATE

ATTACHMENT 9-B: THERMAL REQUIREMENTS FOR MANUFACTURED

HOMES

ATTACHMENT 9-C: CONDOMINIUM QUESTIONNAIRE

CHAPTER 10: LEVERAGED LOANS................................................................................ 10-1

SECTION 1: UNDERSTANDING LEVERAGED LOANS ............................................... 10-1

10.1 OVERVIEW.......................................................................................................... 10-1
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A. Advantages of Leveraged Loans

B. Two Separate Financial Agreements

10.2 SOURCE OF LEVERAGED FUNDS

A. Market Rate Financing

B. Other Subsidized Financing

10.3 KEY DIFFERENCES IN POLICIES ANDPROCEDURES

A. Eligible Loans and Grants

B. Lien Position

C. Payment Subsidy Calculation

D. Availability of Mortgage Credit Certificates(MCC)

E. Section 8 Housing Choice Vouchers (HCV)

F. Origination

G. Servicing

10.4 DEVELOPING STATE-BY-STATE APPROACHES TO LEVERAGING

A. Lender Outreach

B. Borrower Education

C. Streamlined Processing Procedures

SECTION 2: ORIGINATING LEVERAGED LOANS ...................................................... 10-9

10.5 TAKING APPLICATIONS

10.6 REFERRING APPLICANTS TO PARTICIPATING LENDERS

10.7 DETERMINING APPLICANT ELIGIBILITY

10.8 ISSUING THE CERTIFICATE OF ELIGIBILITY

10.9 UNDERWRITING LEVERAGED LOANS

A. Lender vs. Agency Underwriting

B. Property Requirements and Appraisal

C. Loan-to-Value Ratio

D. Loan Terms and Fees

E. Determining Loan Amount

F. Agreements with the Participating Lender RegardingConstruction

10.10 LOAN CLOSING

A. Required Documentation

B. Recording the Lien/LegalDocuments

ATTACHMENT 10-A: SAMPLE TOPICS TO BE ADDRESSED IN

A MEMORANDUM OF UNDERSTANDING
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CHAPTER 11: NONPROGRAM LOANS ........................................................................... 11-1

11.1 INTRODUCTION. ................................................................................................ 11-1

A. Nonprogram Assumptions

B. Nonprogram Loans to Purchase REO Property

11.2 PRE-QUALIFICATION

11.3 APPLICATION PROCESSING

11.4 ELIGIBILITY

11.5 PROPERTY REQUIREMENTS

11.6 UNDERWRITING THE LOAN

A. Down Payment Requirement

B. Amount to be Financed

C. Interest Rate

D. Loan Repayment Period

E. Repayment Ability

11.7 LOAN APPROVAL AND CLOSING

11.8 SERVICING NONPROGRAM LOANS

ATTACHMENT 11-A: SUMMARY OF DIFFERENCES BETWEEN

PROGRAM LOANS AND NONPROGRAM LOANS

CHAPTER 12: SECTION 504 LOANS AND GRANTS..................................................... 12-1

12.1 INTRODUCTION. ................................................................................................ 12-1

12.2 ELIGIBLE PURPOSES FOR 504 FUNDS

A. Restrictions on the Use of 504 Funds

B. Repairs to Mobile or Manufactured Homes

12.3 APPLICATIONS

12.4 APPLICANT ELIGIBILITY

A. Income

B. Credit Requirements

C. Asset Requirements

D. Repayment Ability

E. Age and Income for Section 504 Grants

F. Ownership of Property

12.5 PROPERTY ELIGIBILITY

A. Property Requirements

B. Determining Property Value
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C. Construction Standards

D. Environmental Requirements

12.6 INTEREST RATE AND LOAN TERM

12.7 MAXIMUM LOAN AND GRANT AMOUNTS

A. Maximum Loan Amount

B. Grant Limits

12.8 LOAN APPROVAL AND CLOSING

A. Loan Approval

B. Security Requirements

C. Loan Closing

12.9 GRANT APPROVAL ANDDISBURSEMENT

A. Grant Approval

B. Grant Repayment Agreements

C. Documentation of Grants

12.10 ESCROW, TAXES, AND INSURANCE

12.11 MANAGING REPAIRS AND MINOR REHABILITATION

A. Communicating the Standards

B. Selecting the Contractor

C. Pre-Construction Conference

D. Construction Contract

12.12 COMMENCEMENT OF WORK

A. Inspecting the Work

B. Payment Upon Completion

C. Required Forms

D. Borrower Method

12.13 CLOSEOUT PROCESS

A. Funds Remaining After Completion

B. Disbursement

C. Cancellation of Funds

ATTACHMENT 12-A: SUMMARY OF DIFFERENCES BETWEEN

SECTION 504 LOANS AND GRANTS 

ATTACHMENT 12-B: DIFFERENCES BETWEEN SECTION 502 AND

SECTION 504 LOANS

ATTACHMENT 12-C: 504 SINGLE FAMILY HOUSING LOAN AND 

GRANT CHECKLIST

ATTACHMENT 12-D: CHECKLIST FOR EVALUATION OF EXISTING

DWELLING

ATTACHMENT 12-E: ITEMS TO ACCOMPANY APPLICATION FOR HOME

REPAIR LOAN OR GRANT FUNDS 

ATTACHMENT 12-F PRE-CONSTRUCTIONCONFERENCE
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CHAPTER 13: SERVICING AND LIQUIDATION FUNCTIONS................................... 13-1

13.1 INTRODUCTION. ................................................................................................ 13-1

13.2 TRANSITION TO SERVICING OFFICE

SECTION 1: WORKING WITH SERVICING OFFICE................................................... 13-3

13.3 REGULAR SERVICING

A. Newly-Activated Borrower Account

B. Payments

C. Approval Actions

D. Appraisals

E. Insurance Claims

F. Reamortzations and Other Documents Requiring Borrower Signature

G. Payoffs

H. Final Payments and Satisfactions

I. Recapture Receivable Accounts

13.4 SPECIAL SERVICING ACTIONS

A. Borrower Counseling

B. Protective Advances

C. Refinancing

D. Subsequent Loans

E. Bankruptcies

F. Missing Borrowers

G. Payment Subsidy Renewals

H. Preacceleration Personal Contact

13.5 VOLUNTARY SALE

13.6 DEBT SETTLEMENT

13.7 ADDITIONAL INPUT

SECTION 2: BORROWER ACTIONS REQUIRING APPROVAL............................... 13-18

13.8 OVERVIEW........................................................................................................ 13-18

13.9 GENERAL GUIDELINES

A. Reviewing Requests

B. Obtaining an Appraisal and an Environmental Review

C. Evaluating and Approving the Request

D. Using Proceeds

13.10 SUBORDINATION

A. Criteria for Subordination

B. Amount of Subordination
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13.11 MINERAL LEASES

13.12 PARTIAL RELEASE OF SECURITY

13.13 LEASE OF SECURITY PROPERTY

13.14 ASSUMPTION OF INDEBTEDNESS

A. New Rates and Terms Assumptions

B. Same Rates and Terms Assumptions

C. Agency Approval

D. Procedural Requirements

E. Releasing a Departing Borrower from Liability

13.15 PROTECTIVE ADVANCES

A. Advances for Property Repairs

B. Advances for Other Purposes

SECTION 3: LIQUIDATION.............................................................................................. 13-29

13.16 OVERVIEW...................................................................................................... 13-29

13.17 NET RECOVERY VALUE

A. Establishing Market Value

B. Environmental Considerations

C. Ordering an Appraisal

D. Holding Period

E. Deductions from Market Value

F. Additions to Market Value

13.18 BASIC SECURITY LOSS

13.19 DEED IN LIEU OF FORECLOSURE

13.20 FORECLOSURE

A. Making the Acceleration Decision

B. Acceleration

C. Review of the Acceleration Decision

D. Initiating Legal Proceedings

E. The Foreclosure Sale

ATTACHMENT 13-A: REQUEST FOR PAYOFF STATEMENT 

ATTACHMENT 13-B: ACCOUNT ISSUE AND SUGGESTED RESOLUTION

SHEET

ATTACHMENT 13-C: CURE AND FINANCIAL STATEMENT 

ATTACHMENT 13-D: RUSH FUNDS PROCESSING

CHAPTER 14: (RESERVED)................................................................................................ 14-1
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CHAPTER 15: MANAGING CUSTODIAL AND REO PROPERTY.............................. 15-1

15.1 OVERVIEW.......................................................................................................... 15-1

SECTION 1: PROPERTY MANAGEMENT METHODS AND ACTIVITIES ................ 15-1

15.2 MANAGEMENT METHODS AND CONTRACTS

A. Selecting a Management Contractor

B. Management Contract Requirements

15.3 TAKING POSSESSION

A. Taking Custodial Possession

B. Acquisition of an REOProperty

15.4 INSPECTING AND SECURING CUSTODIAL AND REOPROPERTY

A. Inspecting and Classifying theProperty

B. Securing Custodial and REOProperty

15.5 DISPOSITION OF NONSECURITY PROPERTY

A. Custodial Property

B. REO Property

15.6 TAXES AND INSURANCE

A. Taxes

B. Insurance

15.7 ENVIRONMENTAL REQUIREMENTS

A. Circumstances Necessitating an Environmental Assessment

B. Lease or Management Contract

15.8 MANAGEMENT OF HAZARDOUSSUBSTANCES

15.9 PHYSICAL MAINTENANCE AND REPAIR

A. Vandalism and Theft

B. Off-Site Repairs or Improvements

C. Lead-Based Paint Disclosure

SECTION 2: SPECIAL USES ............................................................................................. 15-15

15.10 LEASING CUSTODIALS AND REO

A. Security Deposits

B. Costs and Income

15.11 SPECIAL USES OF REO

A. Transitional Housing for the Homeless

B. Use by Federal Emergency Management Agency (FEMA)

C. Mineral Leases
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ATTACHMENT 15-A: UNDERGROUND STORAGE TANKS

THAT MUST BE REPORTED

ATTACHMENT 15-B: MEMORANDUM OF UNDERSTANDING BETWEEN

UNITED STATES DEPARTMENT OF AGRICULTURE 

(USDA) AND DEPARTMENT OF HEALTH AND HUMAN 

SERVICES (HHS)

ATTACHMENT 15-C: FACT SHEET -- THE FEDERAL INTERAGENCY

TASK FORCE ON FOOD AND SHELTER FOR THE 

HOMELESS

ATTACHMENT 15-D: LEASE OF SINGLE FAMILY DWELLING 

ATTACHMENT 15-E: MEMORANDUM OF UNDERSTANDING BETWEEN

THE FEDERAL EMERGENCY MANAGEMENT 

AGENCY AND THE FARMERS HOME 

ADMINISTRATION

ATTACHMENT 15-F: FEDERAL EMERGENCY MANAGEMENT AGENCY

AND THE RURAL HOUSING SERVICE 

FEMA-RHS LETTER OF ASSIGNMENT

CHAPTER 16: DISPOSING OF REAL ESTATE OWNED PROPERTY ....................... 16-1

SECTION 1: PRICING AND LISTING PROPERTIES...................................................... 16-1

16.1 OVERVIEW.......................................................................................................... 16-1

A. Sale Methods and Pricing

B. Financing

C. Warranty

D. LoanServ Processing for REO Sales

16.2 CONTRACTING FOR SALES SERVICES

A. Selecting Exclusive Brokers

B. Announcing Open Listing

C. Commissions

D. Broker Purchases of REOProperties

16.3 PRICING AND SALES SCHEDULES

A. Appraisals

B. Sales Schedules and Administrative Price Reductions
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SECTION 2: MARKETING.................................................................................................. 16-8

16.4 MARKETING AND ADVERTISEMENT

A. Fair Housing and Affirmative Fair Housing MarketingPlan

B. Truth in Lending Requirements

C. Advertising and Marketing Methods

D. Review of Marketing for UnsoldProperties

16.5 SPECIAL MARKETING TECHNIQUES

A. Buyer Incentives

B. Broker Incentives

C. Acquisition of Land, Easements, or Rights-of-Way to Effect Sale

16.6 REO PROPERTY NOT MEETING DSS STANDARDS

A. Notice of OccupancyRestriction

B. Quitclaim Deed Restrictive Covenant

C. Release of Restrictive Covenant

SECTION 3: SALE METHODS.......................................................................................... 16-13

16.7 REGULAR SALE METHOD

A. Listing the Property

B. Submission Requirements

C. Receiving and Considering Offers

D. Earnest Money

E. Cancellation of SalesContracts

16.8 DISPOSITION BY SEALED BID OR AUCTION

A. Establishing the Minimum Acceptable Offer

B. Publicizing the Sale

C. Sealed Bid Procedures

D. Auction Procedures

16.9 NEGOTIATED SALE

16.10 DISPOSAL OF PROPERTY FOR SPECIALPURPOSES

A. Multifamily Housing

B. Transitional Housing for the Homeless

C. Affordable Housing

16.11 DISPOSAL AS CHATTEL OR SALVAGE
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SECTION 4: ENVIRONMENTAL REQUIREMENTS ................................................... 16-21

16.12 OVERVIEW...................................................................................................... 16-21

16.13 PROPERTY LOCATED WITHIN A SPECIAL FLOOD OR MUDSLIDE 

HAZARD AREA OR CONTAINS WETLANDS

16.14 COASTAL BARRIER RESOURCES SYSTEMS

16.15 NATIONAL REGISTER OF HISTORICPLACES

16.16 PROTECTIVE COVENANTS ANDEASEMENTS

16.17 REPORTABLE UNDERGROUND STORAGETANKS

16.18 MANAGEMENT OF HAZARDOUS SUBSTANCES AND PETROLEUM 

PRODUCTS

16.19 LEAD-BASED PAINT

SECTION 5: PROCESSING AND CLOSING................................................................... 16-26

16.20 OVERVIEW...................................................................................................... 16-26

16.21 SPECIAL NOTICES AT SALE

A. HUD Insured Financing

B. Disclosure of Lead-Based Paint or Hazards

16.22 INSPECTION

16.23 PRORATING REAL ESTATE TAXES AND/OR ASSESSMENTS

16.24 DOWN PAYMENT

16.25 PAYMENT OF POINTS

16.26 CLOSING EXPENSES

16.27 COMMISSIONS

16.28 TRANSFERRING TITLE

16.29 REPORTING SALE

ATTACHMENT 16-A: SAMPLE SOLICITATION PACKAGE 

ATTACHMENT 16-B: SAMPLE ADVERTISEMENT FOR BROKERS

ATTACHMENT 16-C: NOTIFICATION OF AVAILABLE TRIBAL PROPERTY 

ATTACHMENT 16-D: SAMPLE ADVERTISEMENT OF AVAILABLE

REO PROPERTIES

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GLOSSARY

ACRONYMS USED IN THIS HANDBOOK 

APPENDICES

Appendix 1 7 CFR Part 3550, Direct Single Family Housing Loans and 

Grants

Appendix 2 Forms and Certifications Referenced in this Handbook 

Appendix 3 Handbook Letters Referenced in this Handbook

Appendix 4 Interest Rate

Appendix 5 Rural Housing Demonstration Program

Appendix 6 Section 306C WWD Grants to 

Individuals

Appendix 7 State Supplements

Appendix 8 Verifications 

Appendix 9 Single Family Housing Direct Income Limits

Appendix 10 Single Family Housing Field Guidance on Disaster Declarations

Appendix 11 Single Family Housing Direct Programs Approval Authority 

 Guidelines

Appendix 12 Single Family Housing Direct Programs American Rescue Plan Act 

(ARPA) Guidelines

Appendix 13 Self-Help Housing
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SECTION 1: INTRODUCTION TO THE FIELD OFFICE HANDBOOK

1.1 WELCOME TO THE FIELD OFFICE HANDBOOK

This handbook provides Agency staff with the tools needed to originate loans efficiently 

and effectively. Its goal is to help Loan Originators and Loan Approval Officials in Field 

Offices move applicants through the origination process smoothly, while making sure that basic 

legal and administrative requirements are met. The handbook: 

• Describes loan processing policies and establishes procedures for originating Section 

502 direct loans and Section 504 loans and grants;

• Provides policies and procedures for managing and disposing of Real Estate Owned 

(REO) properties; and

• Describes, in general terms, the role of the Servicing and Asset Management Office 

(Servicing Office) and provides guidance for conducting servicing activities in 

which the Field Office may be involved.

The guidance provided by this handbook is intended to be consistent with all applicable 

laws, Executive Orders, and Departmental regulations, including other Agency regulations. 

Nothing contained in this handbook should be construed to supersede, rescind, or otherwise 

amend such laws, Executive Orders, and regulations. 

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CHAPTER 1: OVERVIEW
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1.2 USING THIS HANDBOOK

The handbook is organized to allow the reader to look up information on specific topics 

easily. New staff may want to read the handbook in its entirety, while more experienced staff 

may use it as a reference book.

A. Citations and Text Boxes

• Regulatory citations. The regulation for the direct single family housing program is 

provided in 7 CFR Part 3550. The text of that regulation is provided in Appendix 1.

• Form references. All forms referenced in this handbook can be found in Appendix 2 

and all letters can be found in Appendix 3. For non-Agency forms, the form numbers 

listed in this handbook are subject to change. Any successor form issued by the 

form’s owner should be used.

• Examples and exhibits. Text boxes labeled as examples or exhibits provide a 

specific illustration of a concept described in the text or provide additional detailed 

information. Exhibits are numbered in sequence, using the chapter number; for 

example, Exhibit 3-1 is the first exhibit in Chapter 3. Examples are used when the 

text box is inserted adjacent to the relevant text and is not referenced. Exhibits are

used when the text refers to the text box.

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Paragraph 1.2 Using This Handbook

B. Attachments andAppendices

• Glossary and acronyms lists. Key words and terms are defined in the glossary. A 

list of acronyms is also provided at the end of the handbook. The glossary and 

acronyms list can be found at the end of the handbook text.

• Attachments. Attachments at the end of each chapter contain technical information 

that is specific to the topics covered in the chapter. Attachments are referenced in 

sequence, using the chapter number and a letter, for example, Attachment 4-A is the 

first attachment in Chapter 4.

• Appendices. Appendices at the end of the handbook include forms and other 

reference materials that relate to multiple chapters.

C. Terminology

Because terminology may vary from State to State and change over time, this handbook 

uses certain standard terminology to provide consistency.

• Agency. The term “Agency” is used throughout this handbook to refer to the 

organizational unit within the United States Department of Agriculture (USDA) that 

is responsible for administration of the direct single family housing program.

• Field Office. Because the number of offices and the nature of the work conducted in 

each office may vary from State to State, the term “Field Office” is used throughout 

this handbook to refer to the office that is originating the loan.

• Loan Originator and Loan Approval Official. “Loan Originator” refers to a 

person who is working directly with an applicant and conducting the basic 

underwriting analysis. “Loan Approval Official” is used whenever someone other 

than the Loan Originator must approve an action. Unless otherwise specified, each 

State Director may determine which actions may be approved at the Field Office 

and which must be approved at the State Office.

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Paragraph 1.2 Using This Handbook

 Field Staff and Approval Official. These terms refer to a person who is completing 

tasks for purposes other than originating a loan and is located in the field.

 Servicing Office or Servicing Center. These terms are used to refer to 

individuals in the Servicing Office previously known as the National Financial 

and Accounting Operations Center (NFOAC).

 Applicant. The term “applicant” refers to one or more individuals who have applied 

for Agency assistance.

 Borrower. The term “borrower” refers to one or more individuals who are receiving 

Agency assistance.
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SECTION 2: OVERVIEW OF THE

DIRECT SINGLE FAMILY HOUSING PROGRAM

1.3 GOALS OF THE DIRECT SINGLE FAMILY HOUSINGPROGRAM

The purpose of the direct single family housing program is to provide low- and very 

low- income people the opportunity to own adequate, modest, decent, safe, and sanitary homes 

in rural areas. In providing this service, the Agency strives to meet several goals.

• Customer service. The Agency is committed to providing customer-friendly, 

streamlined service.

• Partnerships. Working with partners, such as private lenders, nonprofit 

organizations, and State and local agencies, can enhance the Agency’s ability to 

serve more borrowers.

• Effective use of resources. As a publicly-funded program, the direct single family 

housing program must use tax dollars efficiently. The Agency aims to minimize 

administrative costs, underwrite loans responsibly, and leverage funding with 

private sources of credit to the extent possible.

1.4 SECTION 502 -- ANOVERVIEW

A. Program Loans

The Section 502 direct loan program is intended to provide very low- and low-income 

people with the opportunity to acquire, build, rehabilitate, improve or relocate dwellings in rural 

areas. The standard term for a Section 502 loan is 33 years. However, loans may be made for a 

shorter term, and in certain cases for 38 years. Each loan is made at a note rate established by 

the Agency under § 501 of the Housing Act of 1949, as amended, and outlined in RD 

Instruction 440.1. Payment subsidies are available to some borrowers to reduce monthly loan

payments. In summary, to be eligible for a Section 502 loan, applicantsmust:

• Have an adjusted income that is at or below the applicable low-income limit

at loan approval, (except for assumed loans or loans to purchase Real Estate Owned 

(REO) property).

• Have an adjusted income that is at or below the applicable moderate-income limit for 

assumed loans or loans to purchase an REO property.

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Paragraph 1.4 Section 502 -- An Overview

• Be unable to obtain sufficient credit from another source;

• Agree to personally occupy thedwelling;

• Meet citizenship or eligible non-citizen requirements;

• Have the legal capacity to incur a loan obligation and not be suspended or debarred 

from participation in Federal programs; and

• Demonstrate both the willingness and ability to repay theloan.

Detailed procedures for processing Section 502 loans are provided in Chapter 2 through 

Chapter 11.

B. Nonprogram Loans

The Agency may provide credit on nonprogram terms to expedite the assumption of an 

existing program loan or purchase of an REO property by a borrower who is not eligible for the 

Section 502 program. Nonprogram loans are originated only when it is in the best interest of the 

Government. Nonprogram loans are discussed in detail in Chapter 11.

C. Demonstration Programs (7 CFR 3550.7)

The Agency may implement Demonstration Programs to meet the overall objectives of 

the Section 502 program which are outside the guidelines of this handbook or published 

regulations. Demonstration Programs may be initiated internally or may be required by 

legislation. The Rural Housing Demonstration Program is discussed in Appendix 5.

1.5 SECTION 504 -- ANOVERVIEW

The Section 504 direct loan and grant program is intended to provide funds to homeowners 

who cannot obtain other credit to repair and rehabilitate their properties or correct health and safety 

hazards. To be eligible, the applicant must have adjusted income that is at or below the applicable 

very low-income limit and meet other eligibility requirements similar to those for Section 502 

loans. Detailed guidance on originating Section 504 loans and grants is provided in Chapter 12.
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Paragraph 1.5 Section 504 -- An Overview

A. Section 504 Grants

Grant funds may be used only to make repairs and improvements that will remove 

identified health and safety hazards or to repair or remodel dwellings to make them accessible 

and useable for household members with disabilities. Grants are available only to eligible 

applicants who are 62 years of age or older who cannot afford a loan. Recipients may receive 

multiple grants, up to a lifetime maximum of $10,000.

B. Section 504Loans

Loan funds may be used to make general repairs and improvements to properties, and to 

remove health and safety hazards. Applicants may obtain multiple Section 504 loans, but the 

sum of the outstanding balance on all Section 504 loans cannot exceed $40,000. The loans have 

a term of 20 years and an interest rate of 1 percent.

1.6 LOAN SERVICING

Once loans are closed and the final disbursement has been made, they are serviced by 

Servicing Office, located in St. Louis, Missouri. Servicing Office handles payments from the 

borrower, maintains escrow accounts for taxes and insurance, and provides counseling to pastdue borrowers. When necessary, Servicing Office initiates action to liquidate borrower accounts. 

Borrowers who are unable to repay their loans may be eligible for a variety of special servicing 

actions such as delinquency workout agreements, payment moratoriums, and refinance 

following a moratorium. Field Offices will be asked to assist with servicing actions when a local 

presence is needed. Field Office servicing functions are described in Chapter 13.

1.7 SECTION 306C WATER AND WASTE DISPOSAL (WWD) GRANTSTO 

INDIVIDUALS

Applicants may also be eligible to receive a Section 306C WWD grant if the applicant is 

a resident of a colonia located in a rural area and meets the other program requirements. The 

objective of this program is to facilitate the use of community and/or waste disposal systems.

Appendix 6 provides information on the Section 306C WWD program.
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SECTION 3: GENERAL PROGRAM REQUIREMENTS

1.8 CIVIL RIGHTS [7 CFR3550.3]

The Agency, leveraged lenders, participating non-profits, appraisers, and agents thereof 

who are assisting applicants, will administer its programs and/or services fairly and in accordance 

with both the letter and the spirit of all equal opportunity and fair housing legislation and 

applicable Executive Orders. The civil rights compliance requirements for the Agency are 

contained in RD Instruction 1901-E Exhibit 1-1 lists the applicable Federal laws and executive 

orders and highlights key aspects of these requirements.

Exhibit 1-1 

Major Civil Rights Laws Affecting the 

Direct Single Family Loan Program

• Equal Credit Opportunity Act (ECOA). Prohibits discrimination in the 

extension of credit on the basis of race, color, religion, national origin, sex, 

marital status, age, income from public assistance and exercise of rights 

under the Consumer Protection Act.

• Title VI of the Civil Rights Act of 1964. Prohibits discrimination in a 

Federally-assisted program on the basis of race, color, and national 

origin.

• Title VIII of the Civil Rights Act of 1968 (also known as the Fair Housing 

Act of 1988, as amended). Prohibits discrimination in the sale, rental or 

financing of housing on the basis of race, color, religion, sex, national origin, 

familial status, or disability.

• Section 504 of the Rehabilitation Act of 1973. Prohibits discrimination in a 

Federally-conducted program on the basis of disability.

• Age Discrimination Act of 1975. Prohibits discrimination in a Federallyassisted program on the basis of age.

• Executive Order 11063 as Amended by 12259. Prohibits discrimination in 

housing or residential property financing to any Federal-assisted activity 

against individuals on the basis of race, color, religion, sex, or national 

origin.

• Executive Order 11246. Nondiscrimination in employment by construction 

contractors (and subcontractors) receiving Federally-assisted construction 

contracts in excess of $10,000. It provides for equal employment 

opportunity without regard to race, color, religion, sex, and national origin.

• Executive Order 13166. Prohibits discrimination on the basis of national 

origin, and ensures programs normally provided in English are accessible to 

persons with Limited English Proficiency (LEP).

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(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
A. Nondiscrimination

The following applies to the Agency, leveraged lenders, participating non-profits, appraisers, 

and agents thereof. The various civil rights laws prohibit the denial of loans, grants, services, and 

benefits provided under the Section 502 and 504 programs to any person based upon race, color, 

national origin, sex, religion, marital status, familial status, age, physical or mental disability, source 

of income, or because the applicant has, in good faith, exercised any right under the Consumer Credit 

Protection Act (15 U.S.C. 1601). Discrimination in employment practices also is prohibited.

Effective management and consistent 

procedures are good business practices that help 

ensure that all applicants are treated fairly. Poor 

program implementation, whether or not 

discrimination is intended, has possible civil 

rights consequences.

In the loan origination process, attention

to consistent procedures is especially important in several key areas, which are listed below.

• Outreach. Information about the availability of the program and how to apply must 

be broadly disseminated and the extent of the information, assistance, and courtesy 

extended to those who make inquiries must be consistent.

• Application-taking procedures. Application-taking procedures must be fair and 

accessible to all potential applicants.

• Determining eligibility. Loan Originators must use equal rigor for all applicants 

when verifying income, conducting credit checks, and allowing applicants to clarify 

information.

• Making exceptions. Standards for offering exceptions must be applied consistently.

• Loan terms and subsidies. Opportunities for subsidies and favorable loan terms 

must be made available consistently.

• Hearings and appeals. Avenues for remedies when problems arise must be 

accessible to all applicants.

Key Civil RightsIssuesfor 

Loan Origination

Access

Consistency and fairness of treatment

Disparate impacts - intended or unintended

Record keeping

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Paragraph 1.8 Civil Rights [7 CFR 3550.3]
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Paragraph 1.8 Civil Rights [7 CFR 3550.3]

B. Reasonable Accommodations for Persons with Disabilities [7 CFR 15e.130]

No individual with a disability shall, on the basis of their disability, be excluded from 

participation in, be denied the benefits of, or otherwise be subjected to discrimination under any 

program or activity conducted by the agency. The Agency must make reasonable

accommodations to permit persons with disabilities equal access to apply for and benefit from 

Agency programs. Reasonable accommodations may include providing facilities that are 

physically accessible so that all people can come to Agency offices, effective communication 

and outreach tools so that all applicants can get good program information (for example, a 

Telecommunications Device for the Deaf (TDD)), or making a modification to an Agency 

process or procedure to enable access.

When a customer with a disability cannot access a program or finds it difficult to meet a 

specific requirement of a program, the Agency must consider if the same result can be reached 

through different means. The Agency does not distinguish between reasonable accommodations 

and reasonable modifications. Instead, both are captured by the term “reasonable 

accommodations.” Under the regulations, the Agency must follow the requirement to make 

reasonable accommodations through changes that may be necessary to provide equal 

opportunity to participate in the federally conducted program or activity.

Customers may request a reasonable accommodation in order to apply or participate in 

the Single Family Housing (SFH) programs. When a customer requests a reasonable 

accommodation, the Loan Originator and/or Loan Approval Official should notify their 

immediate supervisor and coordinate with the Housing Program Director. Through an 

interactive engagement with the customer, the Agency must consider:

• The nature and/or cause of the disability,

• How the disability is interfering with the customer’s ability to meet a requirement of 

the program,

• What specific accommodations are being requested. If known, identify the source 

and potential cost for providing the accommodation(s),

• If the customer is unsure of the needed accommodation, do they have any 

suggestions about what options to consider, and

• If the accommodation would result in a fundamental alteration to the program 

purpose.

The Housing Program Director may approve requests for reasonable accommodations 

when the above information has been fully considered and the outcome of providing the 

accommodation will result in successful customer access without making a fundamental 

alteration to the nature of the program. Costs associated with providing a reasonable 

accommodation are the responsibility of the local office. The Housing Program Director should 

consult the RD Civil Rights Office during the interactive engagement for any needed technical 

assistance. Lastly, the Housing Program Director must coordinate with the RD Civil Rights 

Office before a request for a reasonable accommodation may be denied.
1.9 REVIEW AND APPEALS [7 CFR3550.4]

A. Adverse Decisions

Decisions that are not made in favor of a program participant (applicant or borrower) 

are known as adverse decisions. Adverse decisions include: (1) administrative actions taken 

by Agency officials; and (2) the Agency’s failure to take required actions within time frames 

specified in statutes, regulations, or within a reasonable time if no deadline is specified.

Adverse decisions must be based upon 7 CFR Part 3550 (Appendix 1) and the administrative 

guidance contained in Handbook 1- 3550. If an Agency Official is making an adverse 

decision regarding a borrower that is also under the jurisdiction of Servicing Office, the 

official should first consult with Servicing Office and document the file accordingly.

Handbook Letter 15 (3550), Standardized Adverse Decision Letter, will be used for all 

adverse decisions unless another format is prescribed in this handbook. Exhibit 1- 2 provides 

a sample of an adverse decision letter.

7 CFR Part 11 is the National Appeals Division (NAD) regulation which provides 

procedure that Agency officials and the applicant/borrower must follow when an adverse 

decision is appealed.

B. State Director Responsibilities

State Directors should issue a State Supplement providing guidance for processing appeal 

and mediation requests. The guidance must include an attachment outlining mediation service 

provider(s) specific to their State and identify an Alternative Dispute Resolution (ADR) 

Coordinator.

C. ADR CoordinatorResponsibilities

The ADR Coordinator is responsible for the following duties:

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Paragraph 1.9 Review and Appeals [7 CFR 3550.4]
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Paragraph 1.9 Review and Appeals [7 CFR 3550.4]

• Establishing a source/vendor list of Community-Based Mediation Centers (CBMCs) 

and/or Alternative Mediation Service Providers. If the State does not have a USDAfunded mediation program, use the guidance provided in RD Instruction 1940-E, 

1940.206 (c)(1). The source/vendor list will be maintained annually in alphabetical 

order and the providers are selected in sequential order. States will need to maintain 

documentation to ensure that mediation providers receive an equal number of 

referrals. The source/vendor list will include the name of the provider, contact 

information, and costs associated for the service, if applicable. The Farm Service 

Agency (FSA) may be able to provide the ADR Coordinator with a list of acceptable 

mediation service providers in the State. Additional contacts include the National 

Association of Conflict Resolution or the State Bar Association. When contacting 

these sources, the Agency must request the services of a mediator and not an 

arbitrator. A mediator resolves disputes by negotiating a resolution through mutual 

agreement. However, an arbitrator resolves disputes through hearing both parties and 

renders a binding decision which may not be used.

• Verifying the request for mediation is received within 30 days of receipt of adverse 

decision. If the request was received within the designated timeframe, issue 

Attachment 1-D, Notification to Applicants/Borrowers of The Assignment of Their 

Case to a Mediation Service Provider. When the State does not have a USDA-funded 

mediation program, the applicant/borrower will have 10 days to select a mediation 

service provider.

• Issuing Attachment 1-E, Request a Mediation Service and forward the mediation 

request to the selected service provider. If a service provider is not selected within 10 

days, issue Attachment 1-F, Notification of Expiration for the Selection of a Mediation 

Service Provider.

• Ensuring the meditation hearing is conducted within 45 days of receipt of mediation 

request.

• Issuing Attachment 1-G, Customer Notification of Unresolved Resolution to 

inform the applicant/borrower mediation did not resolve the dispute and provide 

available options.

• Communicating and ensuring copies of Agency related mediation 

correspondence and documentation have been distributed to all parties 

involved.

The ADR Coordinator is not responsible for attending mediation and/or hearings; 

that is the responsibility of the Agency representative.

(01-23-03) SPECIAL PN

Revised (12-10-20) PN 545
HB-1-3550

1-14

Paragraph 1.9 Review and Appeals [7 CFR 3550.4]

D. Agency Representative Responsibilities

The Loan Approval Official/Decision maker is the person who rendered the adverse 

decision and is typically the Agency representative; however, a designated Agency official 

may be elected to represent the Agency. Agency Representative responsibilities include the 

following:

• Furnishing documentation to support the adverse decision. Conducting a complete 

analysis of eligibility requirements for the services requested and determining if any 

alternative options are available to the applicant/borrower. The Loan Approval 

Official needs to ensure the adverse decision letter lists all applicable reasons for the 

denial and contains a brief narrative including programmatic provisions, and pertinent 

facts to support their decision.

o If the application is denied due to lack of repayment ability, the supporting 

documentation should include a detailed analysis of income calculations, all 

relevant income verifications and documentation supporting the consideration 

of compensating factors, per paragraph 4.24 (a).

o If the application is denied due to adverse credit, the supporting documentation 

should include a completed and signed Form RD 1944-61, Credit History 

Worksheet. The analysis must document the consideration of paragraph 

4.14(a) compensating factors and include the applicant’s written explanation 

for derogatory credit.

• Preparing and representing the Agency in mediations and hearings. This may include a 

face-to-face hearing involving a servicing matter, in which the Servicing Office 

Appeals Coordinator requested the State Director to appoint a representative to attend 

the hearing and represent Servicing Office. The Servicing Office Appeals Coordinator 

will provide supporting documentation and contact information to the representative 

selected.

• Implementing the next servicing/processing action within 30 days of the effective date 

from the mediation/appeal’s final determination.
Paragraph 1.9 Civil Rights [7 CFR 3550.4]

1-15

HB-1-3550

Mr. and Mrs.John Doe 

1 Main Street

Anytown, Anywhere 01234

Re: Application for $154,000Direct 

Single Family Housing Loan

Dear Mr. & Mrs. Doe,

Thank you for the opportunity to consider your request for Rural Development assistance. In reviewing your 

request, we considered all information submitted to the Agency and the regulations that govern the assistance for 

which you applied. After careful review, we regret to inform you that we were unable to take favorable action on 

your request. The specific reasons for our decision are as follows:

The applicant(s) must demonstrate the ability and willingness to meet debt obligations. According to 7 CFR 

3550.53(h) the applicant must have an acceptable credit history to obtain program assistance. The specific 

regulation(s) that apply are listed below:

(1)(ii). Payments on any account which was delinquent for more than 30 days on two or more occasions within a 

12-month period.

(1)(vii). Outstanding collections with a record of irregular payment with no satisfactory arrangements for 

repayment, or collection accounts that were paid in full within the last six months.

The following accounts are indicators of unacceptable credit:

Student Account #1234566 collection $300

Walmart Account #1234569 delinquent 3x late 1/2017, 2/2017, 3/2017

Verizon Account #5461313 collection $600

Per our conversation on 1/1/2017, there were no extenuating circumstances relating to the adverse credit history.

If one of the above reasons included an unacceptable credit history, please note that a tri-merge credit report was 

obtained from Equifax Mortgage Solutions, 4300 Westown Parkway, Suite 200, West Des Moines, IA 50266. 

You may obtain a free copy of your credit report from Equifax and dispute the accuracy or completeness of the 

report directly to Equifax. While the report was provided by Equifax, the decision to deny your request for 

assistance was made by this Agency and not Equifax.

If you believe our decision is incorrect, or the facts used in this case are in error, you may pursue your rights to 

challenge our decision. Please see the attached for your rights.

Sincerely, 

Attachment

Exhibit 1-2

Sample Adverse Decision LetterCredit

(01-23-03) SPECIAL PN

Revised (12-10-20) PN 545
HB-1-3550

Paragraph 1.10 Agency Decisions

1-16

1.10 AGENCY DECISIONS

A. Informal Administrative Review

When an Agency representative makes a decision that will adversely affect an 

applicant/borrower, the applicant/borrower is entitled to an opportunity for a separate informal 

administrative review by the decision maker or next level supervisor. The Agency representative

must give the applicant/borrower notice of their right to this review no later than 10 days after

the date of adverse decision. If the informal review does not result in a resolution of the matter, 

Attachment 1-A, Informal Administrative Review, will be sent within 7 days.

B. Appealable Decisions

Attachment 1-B, An Appealable Adverse Decision, will be provided to the 

applicant/borrower no later than 10 days after the adverse decision, which includes rights to seek 

a mediation and/or request a hearing with National Appeals Division (NAD).

In cases where denial of assistance is based upon both appealable and non-appealable 

actions, the denial of assistance is not appealable. Attachment 1-C, Non-Appealable Adverse 

Decision, will be used in these cases and will include all reasons for the adverse decision.

C. Non-Appealable Decisions

Certain decisions made by the Agency cannot be appealed. In these cases, the 

applicant/borrower is offered an opportunity for an informal administrative review; however, 

appeal rights to NAD and mediation are not offered. The applicant/borrower will be informed no 

later than 10 days after the adverse decision using Attachment 1-C, Non-Appealable Adverse 

Decision. The attachment provides an opportunity to request an informal administrative review 

and/or NAD request to review the accuracy of the Agency’s decision. Decisions that cannot be 

appealed include the following:

• Decisions made by parties outside the Agency, even when these decisions are used 

as a basis for Agency decisions (such as when an applicant disagrees with a private 

lender’s decision not to provide credit for a leveraged loan);

• Interest rates set by the Agency's procedures, unless the participant alleges that an 

incorrect interest rate was applied;
Paragraph 1.10 Agency Decisions

1-17

HB-1-3550

• An official's refusal to request an administrative waiver under the provisions of 

Paragraph 1.15 of this handbook, or a waiver authorized by any applicable 

regulation;

• Denials of assistance due to lack of funds;

• Denials of Section 504 grants to applicants under the age of 62;

• Rural area designations; and

• Denials due to income calculations above the applicable adjusted income limit (lowincome at the time of eligibility or moderate-income at the time of loan closing). 

1.11 PARTICIPANT RIGHTS

The applicant/borrower can request applicable appeal and/or mediation options below 

within 30 days of receipt of the adverse decision letter. The requests for an appeal and/or 

mediation can be submitted simultaneously; however, the options below should be performed in 

sequential order. If an applicant chooses to skip any of the options below, doing so will waive 

their right to the previous option.

The applicant/borrower has the right to a face-to-face hearing, or a hearing held 

by teleconference in the applicant/borrower’s State of residence.

A. Informal Administrative Review

The applicant/borrower must make a request for an informal administrative review in 

writing, and the request will be retained in the applicant/borrower’s case file. The 

applicant/borrower must submit a written request within 30 calendar days from when they 

receive an adverse decision letter. If unable to determine when the letter was received, count 7 

calendar days after the date of the adverse decision letter (letter date + 7 days = receipt date of 

letter + 30 days = 37 days when request must be made). The informal administrative review 

can be conducted by the decision maker or next level supervisor. The purpose of the informal

administrative review is to further explain the Agency’s reasons for the adverse decision, listen

to why the applicant/borrower feels the decision may be incorrect, and obtain additional

supporting information from the applicant/borrower if applicable. The review must be 

completed within 45 days of the request. If the adverse decision was not reversed, the 

applicant/borrower will be notified of the outcome in writing using Attachment 1-A, Informal 

Review Determination. The State Director may require the next-level supervisor or other 

designated Agency representative to review the determination prior to notifying the 

applicant/borrower.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595 
HB-1-3550

Paragraph 1.11 Participant Rights

1-18

B. Mediation

Adverse decisions which are appealable to NAD also require the applicant/borrower be 

provided the opportunity to seek mediation prior to conducting a hearing with NAD. The purpose 

of mediation is to resolve disputes through the use of a neutral mediator. The applicant/borrower 

must submit a written request within 30 calendar days from the date of an adverse decision letter. 

Once the request is forwarded to the mediation provider, a mediation decision must be completed 

within 45 days. If the complexity of the case warrants a longer time frame, all parties must agree 

to the specified time frame. A mediator will generally conduct a teleconference between the 

parties prior to accepting the request and to determine if the request can be mediated.

There is generally a cost associated with the participation in a mediation. The cost is 

contingent upon the service provider. When there are costs, they will be shared equally between 

the Agency and the applicant/borrower, if Agency funds are available. When Agency program 

funds are unavailable, the Agency will participate in mediation if requested by the 

applicant/borrower; however, the applicant/borrower will be notified of their estimated cost for 

this service in advance and the portion of the cost the Agency will pay (if any). The State 

Director will ensure that all participants requesting mediation in their State are treated 

consistently and pay the same percentage of the cost toward this service. The State Director may 

also consent to pay a larger percentage (up to 100 percent) of the cost for applicants/borrowers 

with income below the federal poverty level. The State will provide a USDA-funded mediation 

service provider or a list of acceptable mediators to the applicant/borrower and request the 

participant select an acceptable provider within 10 days. The Agency will issue Attachments 1- 

E, Request a Mediation Service to the provider selected. If State funds are unavailable, the State 

will request Program Loan Cost Expense (PLCE) “A” funds from the National Office Budget 

Execution Branch. 

If the applicant/borrower does not select a mediation provider within 10 days, issue 

Attachment 1-F, Notification of Expiration of the Selection of a Mediation Service Provider. 

The attachment is used to notify the applicant/borrower of expiration and withdrawal of their 

mediation request. Withdrawal or cancellation of a mediation does not extinguish the 

applicants/borrower’s right to request an appeal with NAD. There are three types of mediation 

service providers as follows:
Paragraph 1.11 Participant Rights

1-19

1. USDA-funded mediation program

Many states have a mediation program that is annually certified by USDA. These 

programs are funded, in part, by USDA, and were established primarily to mediate cases 

originating from the Farm Service Agency (FSA). In states with a USDA-funded 

mediation program, the applicant/borrower is provided appeal rights and will be 

generally referred to the USDA-funded mediation program. In states where alternative 

mediation sources are readily available at a lower cost, the state will follow the 

guidance using Community-Based Mediation Center or Alternative Mediation Service 

Providers and include a list of acceptable providers.

2. Community-Based Mediation Center

A CBMC is a nonprofit, public entity operating under the guidance of a governing 

board. Its goal is to provide an alternative to the judicial system by the use of trained 

mediators located in the geographical area served. The CBMC provides mediation 

services to clients regardless of their ability to pay. In states without a USDA-funded 

mediation program, the CBMC is an option. Applicants/borrowers with appeal rights 

who request mediation can be referred to the CBMC. 

3. Alternative mediation service providers

In states without a USDA-funded mediation program or access to a CBMC, Agency 

officials will provide a list of alternative mediation service providers. If there is a 

significant variation in cost between service providers, this option will not be used.

C. Appeal

Applicant(s)/Borrower(s) who choose to appeal an adverse decision must submit a 

written or electronic request to NAD within 30 days of receiving notice of an adverse decision. 

If unable to determine when the letter was received, count 7 calendar days after the date on the 

adverse decision letter [date on letter + 7 days = date of receipt of letter + 30 days = 37 days 

when request must be made]. The request must be signed and include: (1) a copy of the adverse

decision to be appealed; and (2) a brief statement describing why the applicant/borrower 

believes the decision is wrong.

Upon receiving a notice from NAD that an appeal has been filed, the Loan Approval 

Official/Agency Representative will promptly provide NAD with a copy of the Agency record, 

specific references in 7 CFR Part 3550 supporting the adverse decision, and any other pertinent 

information. A copy will also be provided to the applicant/borrower. 

HB-1-3550

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Paragraph 1.11 Participant Rights

1-20

NAD will notify the applicant/borrower and the Agency once it has made a final 

determination. If NAD reverses the Agency’s decision, the next processing action must take place 

within 30 days after the effective date of the notice; unless the Agency requests a review of the 

case by the Director of NAD. For further guidance on a Director’s review and/or additional 

information, refer to 7 CFR Part 11, § 11.6 – 11.11. 

1.12 NAD HEARING PREPARATION

Providing Agency record means supplying all materials maintained by an Agency related 

to an adverse decision, including all materials prepared or reviewed by the Agency during its 

consideration. If requested by the applicant/borrower prior to the hearing, a copy of Agency 

record shall be provided to the applicant/borrower (appellant) by the Agency within 10 days of 

receipt of the request.

The Administrative Judge shall set a reasonable deadline for submission of the following 

documents:

By the Appellant:

1. A short statement of why the decision is wrong;

2. A copy of any document which is not in the Agency record that the appellant 

anticipates introducing at the hearing; and 

3. A list of anticipated witnesses and brief descriptions of the evidence such witnesses will 

offer.

By the Agency:

1. A copy of the adverse decision challenged by the appellant;

2. A written explanation of the Agency's position, including the regulatory or statutory 

basis thereof; 

3. A copy of any document which is not in the Agency record that the Agency anticipates 

introducing at the hearing; and

4. A list of anticipated witnesses and brief descriptions of the evidence such witnesses 

will offer.

Not less than 14 days prior to the hearing, the National Appeals Division must provide 

the appellant, the authorized representative, and the Agency a notice of hearing specifying the 

date, time, and place of the hearing. The hearing will be held in the appellant’s state of 

residence, as determined by the Administrative Judge, or at a location that is otherwise 

convenient to the appellant, the Agency, and NAD. A notice will be issued to include 

information informing all parties of the right to obtain an official record of the hearing.
Paragraph 1.12 NAD Hearing Preparation

1-21

HB-1-3550

A. Pre-Hearing Conference

Whenever appropriate, the Administrative Judge shall hold a pre-hearing conference in 

order to attempt to resolve the dispute or to narrow the issues involved. A pre-hearing 

conference shall be held by telephone unless the Administrative Judge and all parties agree to 

hold such conference in person.

B. Post-Hearing Procedure

The Administrative Judge will leave the hearing record open for 10 days after the 

hearing, to allow the submission of information by the appellant or the Agency. The Agency 

representative is responsible to respond to new facts, information, arguments, or evidence 

presented or raised at the hearing. Any new information will be added to the hearing record and 

sent to all parties by the submitter of the information.

C. Timing of Issuance of Determination

The Administrative Judge will issue a notice of the determination of the appeal to the 

appellant, the authorized representative, and the Agency not later than 30 days after a hearing or 

the closing date of the hearing record in cases in which the Administrative Judge receives 

additional evidence from the Agency or appellant after a hearing. In the case of a record review, 

the Administrative Judge will issue a notice of determination within 45 days of receipt of the 

appellant's request for a record review.

D. Requests for a Director Review

The Agency Representative is responsible for filing a request for a Directors review on 

reversed Agency decisions that have merit and are not favorable to the Agency. The SingleFamily Housing Administrator or a person acting in such capacity can submit a written request 

for a Directors review to NAD within 15 business days after receipt of Administrative Judge’s

decision. The request should include specific reasons why the Agency believes the 

determination is inaccurate, including citations of statutes or regulations that the Agency 

believes the determination violates. In consideration of the limited timeframe, the Agency 

Representative should send a request immediately to the ADR Coordinator, which will be 

forwarded to the Single Family Housing Direct Division Headquarters Office for the 

Administrator’s signature.

The appellant can submit a written request for a Director review within 30 days after 

receipt of Administrative Judge’s decision. The Director will review the Administrative Judge’s 

decision to determine if the appellant is entitled. The request should include specific reasons why 

the appellant believes the determination is inaccurate.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

1.12 NAD Hearing Preparation

A copy of a request for a Director review will be provided simultaneously by the 

submitter to all parties involved. The Director will determine whether the decision of the 

Administrative Judge is supported by substantial evidence. Based on such review, the Director 

will issue a final determination notice that upholds, reverses, or modifies the determination of the 

Administrative Judge. The Agency shall implement the final determination no later than 30 days 

after the effective date of the notice of the final determination.

Reconsideration of a determination of the Director may be requested by the appellant 

or the Agency within 10 days of receipt of the determination.

1.13 CONFLICT OF INTEREST [7 CFR3550.9]

All employees must strive to maintain the highest levels of honesty, integrity, and 

impartiality in conducting their activities on behalf of the Agency. The Agency’s requirements 

for handling assistance to employees, relatives and associates are described in RD Instruction 

1900-D. State Office, Servicing Office, and National Office employee relationships are 

reviewed by the State Director who will obtain the Administrator’s written concurrence for 

application processing. To reduce the potential for conflicts of interest, all processing, 

approval, servicing, or review activity must be conducted by Agency employees who:

• Are not the recipient (applicant or borrower), a recipient’s family member, or a close 

known relative and/or associates of the recipient;

• Do not have an immediate working relationship with the recipient, the Agency 

employee related to the recipient, or the Agency employee who would 

normally conduct the activity; and

• Do not have a business or close personal association with the recipient.

A. Applicant Disclosure

Applicants must disclose any known relationship or association with Agency employees 

when they apply for assistance through the Agency.

B. Agency Employee Disclosure

Agency employees must disclose any known relationship or association with a recipient, 

regardless of whether the relationship is known to others. Loan Originators should notify a 

supervisor after the application is accepted but before any eligibility determination is made.

1-22
Paragraph 1.13 Conflict of Interest [7 CFR 3550.9]

C. Disposition of REO Properties

Agency employees and members of their families are precluded from purchasing REO 

property, assumptions from Agency borrowers, or security property sold at a foreclosure sale. 

Closing agents and members of their families are precluded from purchasing properties in which 

they have been professionally involved.

1.14 OTHER FEDERAL REQUIREMENTS

A. Environmental Requirements [7 CFR 3550.5]

The Agency considers environmental quality equally with economic, social and other 

factors in its program development and decision-making processes. Both the Loan Originator 

and the Loan Approval Official are responsible for effectively integrating Agency environmental 

policies and procedures with loan and grant origination and servicing activities. Agency 

environmental policies and procedures and historic preservation requirements can be found in 

RD Instruction 1970 series “Environmental”. Agency-assisted properties also must meet the 

lead-based paint requirements contained in Exhibit H of RD Instruction 1924-A. Resolution of 

conflicts or significant differences between Agency environmental regulations and State or local 

environmental laws requires prior consultation with the appropriate State Environmental 

Coordinator and, if necessary, National Office environmental staff.

For existing housing, a categorical exclusion may be completed if no resources are 

adversely affected; the property is not in a historic district, is not classified as a historic property, 

or is not considered culturally significant; and there is no flood disturbance. For new 

construction, the same level of review is required. In addition, any time ground is being broken, 

there is a potential to uncover historic resources, therefore additional consultation with the State 

Historic Preservation Officer (SHPO) and, as applicable, the Tribal Historic Preservation Officer 

(THPO) may be necessary. In states where a programmatic agreement exists between the SHPO 

and THPO, consultation may only be necessary with one party.

New construction projects must also consider the effect of cumulative impact. This 

occurs when a project may develop over time and impact a larger number of prospective 

applicants or acreage. Many times, Rural Development funds are not used to purchase the land, 

but the scope of the project includes Rural Development financing for the purchase of the 

developed lots. In accordance with 7 CFR Part 1970, §1970.5(a)(4), “The Agency may act as 

either a lead Agency or a cooperating Agency in the preparation of an environmental review 

document. If the Agency acts as a cooperating Agency, the Agency will fulfill the cooperating 

Agency responsibilities outlined in 40 CFR § 1501.6.

As an example, when funding is obtained for a multiple unit project, and the development 

work is provided by another Agency (often HUD), that Agency will take the lead to prepare the 

environmental review, but Rural Development will be a cooperating Agency so that the review for 

both programs’ requirements are satisfied in the initial environmental analysis.

HB-1-3550

(01-23-03) SPECIAL PN

Revised (12-10-20) PN 545

1-23
HB-1-3550

Paragraph 1.14 Other Federal Requirements

In addition, in accordance with RD Instruction 1970-B, Exhibit C, no construction 

activities may begin until the Agency completes its environmental review process.

B. Construction Standards

Sites and dwellings developed or rehabilitated with Section 502 funds must meet the 

construction standards outlined in RD Instructions 1924-A and 1924-C. Existing dwellings must 

be decent, safe, and sanitary and meet all applicable State and local codes.

C. Administrative Requirements

Agency employees must comply with Agency and Departmental administrative 

requirements.

1. Procurement

Goods and services procured to support Agency activities such as appraisals, 

inspections, broker services, and property management services must conform with the 

policies and procedures of RD Instruction 2024-A.

2. File Management

Files and other Agency records must be maintained in accordance with RD 

Instruction 2033-A.

1-24

Example: A Self-Help group is proposing to build 8 homes. They obtain Self Help Opportunity Program 

(SHOP) funds from Housing and Urban Development (HUD) to purchase and develop the site. Prior to 

funding approval, HUD must complete an environmental analysis. Because the scope of the project includes 

future Rural Development (RD) funding, the Self-Help group must notify HUD of Rural Development’s 

involvement, and request that RD be considered a cooperating agency so that the review can be completed and 

accepted by both agencies prior to the start of development activities.
Paragraph 1.14 Other Federal Requirements

3. Handling Funds

Funds received in the Field Office that are not part of a borrower’s regular 

installment, for example, credit report fees or appraisal fees are forwarded to Servicing 

Office using Form RD 3550-17, Funds Transmittal Report. If a borrower did not receive 

a billing statement, Field Staff can submit the payment using Form RD 3550-27, 

Substitute Payment Coupon.

1.15 EXCEPTION AUTHORITY [7 CFR3550.8]

Exceptions to any requirement of this handbook or 7 CFR Part 3550 can be approved in 

individual cases by the Administrator or designee if application of the requirement or failure to 

take action would adversely affect the Government’s interest. Any exception must be consistent 

with the authorizing statute and other applicable laws.

Requests for exceptions are submitted to the Administrator or designee through the 

Deputy Administrator, Single Family Housing and may be initiated by the State Director; the 

Deputy Administrator, Single Family Housing; the Deputy Administrator, Servicing Office; 

or the Director, Single Family Housing Direct Division.

The exception request must provide clear and convincing evidence of the need for the 

exception. At a minimum the request must include:

* A full explanation of the circumstances, including an explanation of the adverse effect on 

the Government’s interest;

* A discussion of proposed alternatives considered; and

* A discussion of how the adverse effect will be eliminated or minimized if the exception is 

granted.

Requests for exceptions regarding architectural and engineering, environmental, or civil 

rights issues must also include the review and comments of the applicable State Office Technical 

Staff. The Deputy Administrator, Single Family Housing will coordinate these exception 

requests with the applicable National Office technical staff prior to submission to the 

Administrator.

HB-1-3550

(01-23-03) SPECIAL PN 1-25

Revised (10-19-23) PN 595
(01-23-03) SPECIAL PN

Revised (12-10-20) PN 545

ATTACHMENT 1-A 

HB-1-3550

Attachment 1-A 

Page 1 of 1 

INFORMAL ADMINISTRATIVE REVIEW DETERMINATION

(DATE)

We appreciated the opportunity to review the facts relative to your [request for assistance, or 

reduction or termination of benefits, or foreclosure]. We regret the outcome did not grant the 

assistance you requested [or will terminate or reduce the assistance you are currently receiving or 

will give you relief from foreclosure].

If you believe that facts used in this case are in error, you may continue to pursue the option(s) 

listed in the attached adverse decision letter. All of the option(s) must be requested within 30 days 

from the receipt of the adverse decision letter. Your requests can be submitted simultaneously; 

however, should be performed in the order listed in the attachment. If an applicant/borrower 

chooses to skip any of the options, doing so will waive their right to the previous option. 

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s 

income derives from any public assistance program; or because the applicant has in good faith 

exercised any right under the Consumer Credit Protection Act. The federal agency that administers 

compliance with this law concerning this creditor is the Federal Trade Commission. If a person 

believes he or she was denied assistance in violation of this law, they should contact the Federal 

Trade Commission, Washington, D.C. 20580. 

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or 

national origin. The federal agency that is responsible for enforcing this law is the U.S. 

Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of Housing 

and Urban Development, Washington, D.C. 20410 or call (800) 669-9777. 

Attachment (adverse decision letter)

Copies for: State and/or National Office Program Director 

Servicing Office for SFH servicing cases
HB-1-3550

ATTACHMENT 1-B 

AN APPEALABLE ADVERSE DECISION

Attachment 1-B 

Page 1 of 2 

(DATE)

The described action in the attached letter [did not grant you the assistance you requested or will 

terminate or reduce the assistance you are currently receiving]. If you believe this decision or 

the facts used in this case are in error, you may pursue any or all of the following three options 

below. All three options may be requested simultaneously and must be requested in writing 

within 30 days from the date adverse decision letter is received. If all options are requested and 

a resolution is reached the next available option can be canceled; however, if an option is 

skipped, you will automatically waive the right to the previous option. 

Option 1 - Request an Informal Administrative Review

You may request an Agency official review of this determination by filing a written request no 

later than 30 calendar days after you receive this notice. If you request a review reconsideration,

you have the right to an informal hearing which you or your representative may attend either

personally or by telephone. If you choose to seek reconsideration, you may later appeal the 

determination to the National Appeals Division. To request reconsideration, write to the 

following address and explain why you believe this determination is erroneous. The address of 

the Field Office: (Insert applicable address.)

Option 2 - Request Mediation (Alternative Dispute Resolution)

Mediation is available as part of Rural Development’s informal appeal process. Mediation may 

enable us to narrow the issues and resolve the matter by mutual agreement. If your state does not 

have a participating USDA-funded mediation program, you may have to pay all or part of the 

cost of mediation. If you request mediation, the continuation of the time frame in which you 

may request an appeal stops. When mediation closes, the clock restarts, and you will have the 

balance of the days remaining in that period to request an appeal. To request mediation, you 

must submit your written request no later than 30 days after you receive this notice. To request 

mediation, write to the RD State Director at the following address:

• (Insert applicable address.) [Rural Development State Director]

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 1-B 

Page 2 of 2

Option 3 - Request an Appeal Hearing to the National Appeals Division (NAD)

You may appeal this determination to NAD by filing a written request no later than 30 days after 

you receive this notice in accordance with the NAD Appeal procedures found at 7 CFR Part 11.

If you appeal to NAD, you have the right to a hearing which you or your representative may 

attend. Once a hearing with NAD begins, you waive any rights you might have to 

reconsideration and mediation. To appeal, you must write to NAD at the following address, 

explain why you believe this determination is erroneous, and provide a copy to RD. You must 

personally sign your written appeal to NAD and include a copy of this letter or file an appeal 

online at the following website: https://www.usda.gov/oha/nad/appeals

[NAD Assistant Director Address] [Rural Development State Director]

If you do not timely exercise one of the preceding options, this shall be the final administrative 

determination with respect to this matter in accordance with the regulations at 7 CFR Part 11. 

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided 

the applicant has the capacity to enter into a binding contract); because all or part of the 

applicant’s income derives from any public assistance program; or because the applicant has in 

good faith exercised any right under the Consumer Credit Protection Act. The federal agency 

that administers compliance with this law concerning this creditor is the Federal Trade 

Commission. If a person believes he or she was denied assistance in violation of this law, they 

should contact the Federal Trade Commission, Washington, D.C. 20580. 

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

or conditions of such a transaction, because of race, color, religion, sex, disability, familial 

status, or national origin. The federal agency that is responsible for enforcing this law is the U.

S. Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777. 

Attachment (adverse decision letter)

Copies for: State and/or National Office Program Director 

Servicing Office for SFH servicing cases
HB-1-3550

Attachment 1-C

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

ATTACHMENT 1-C 

Page 1 of 2 

AN ADVERSE DECISION THAT CANNOT BE APPEALED

The decision described in the attached letter did not grant you the assistance you requested or 

will terminate or reduce the assistance you are currently receiving. If you believe that this 

decision is erroneous, you have the following options. 

Option 1 - Request an Informal Administrative Review

You may request an Agency official review this determination by filing a written request no later 

than 30 days after you receive this notice. If you request reconsideration, you have the right to an 

informal hearing which you or your representative may attend either personally or by telephone. 

If you choose to seek reconsideration, you may later appeal the determination to the National 

Appeals Division. To request reconsideration, submit a written request at the following address 

and explain why you believe this determination is erroneous. The address of the Field Office: 

(Insert applicable address.) 

Option 2 - Request a Review by the National Appeals Division (NAD)

Applicants and borrowers generally have the right to appeal adverse decisions, but decisions 

based on certain reasons cannot be appealed. We have determined that reasons for this decision 

cannot be appealed under our regulations. You may request a review of the accuracy of our 

findings that the decision cannot be appealed to NAD by filing a written request no later than 30 

days after you receive this notice in accordance with the NAD Appeal procedures found at 7 

CFR Part 11. 

[NAD Assistant Director Address] [Rural Development State Director]

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided 

the applicant has the capacity to enter into a binding contract); because all or part of the 

applicant’s income derives from any public assistance program; or because the applicant has in 

good faith exercised any right under the Consumer Credit Protection Act. The federal agency 

that administers compliance with this law concerning this creditor is the Federal Trade
HB-1-3550

Attachment 1-C 

Page 2 of 2

Commission. If a person believes he or she was denied assistance in violation of this law, they 

should contact the Federal Trade Commission, Washington, D.C. 20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

or conditions of such a transaction, because of race, color, religion, sex, disability, familial 

status, or national origin. The federal agency that is responsible for enforcing this law is the

U.S. Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777.

Attachment (adverse decision letter)

Copies for: State and/or National Office ProgramDirector 

Servicing Office for SFH servicing cases
HB-1-3550

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

ATTACHMENT 1-D 

Attachment 1- D 

Page 1 of 2 

NOTIFICATION TO APPLICANTS OR BORROWERS OF THE 

ASSIGNMENT OF THEIR CASE TO A MEDIATION SERVICE

PROVIDER

DATE:

TO: [Applicant/Borrower]

FROM: Rural Development State Director 

SUBJECT: Request for Mediation Services

This replies to your request for the mediation of your adverse decision. Your request has been 

referred to a [USDA-funded State mediation program] [Community-Based Mediation Center] or 

[you must select from the attached list of certified mediation providers].

As indicated in our adverse decision letter, there may be a cost for the mediation. The following 

is an estimate, but you will be advised by the mediation service provider if there will be a cost. 

Rural Development policy is to pay 50 percent of the reasonable cost for mediation. 

$ USDA-funded State mediation program [and address]

$ Community-Based Mediation Center or Other Mediation Service Provider 

[and address] 

Attached is an alphabetical list of certified mediators to select a mediator, or subject to our 

concurrence you may request the use of another mediator. 

Within 10 days of the date of this letter, you must provide this office, in writing, with the 

concurrence/selection of the mediator. If you do not, you will waive your right to mediation. 

Rural Development will then contact the mediator, who in turn will contact you to determine if 

they can mediate the issues in your case. You will then have 45 days to complete the mediation.

When the mediation is concluded, you may file an appeal of the original adverse decision by 

immediately contacting the National Appeals Division (NAD):

[NAD Assistant Director Address]
HB-1-3550

Attachment D 

Page 2 of 2

Once you have been contacted by the mediation provider and if you decide not to pursue 

mediation, you must immediately contact this office (address at the top of this letter). You are 

responsible for all costs incurred by the mediation provider from the time of selection until your 

cancellation.

Mediation, or the cancellation of mediation, does not affect your rights to seek an appeal with 

NAD.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided 

the applicant has the capacity to enter into a binding contract); because all or part of the 

applicant’s income derives from any public assistance program; or because the applicant has in

good faith exercised any right under the Consumer Credit Protection Act. The federal agency 

that administers compliance with this law concerning this creditor is the Federal Trade 

Commission. If a person believes he or she was denied assistance in violation of this law, they 

should contact the Federal Trade Commission, Washington, D.C. 20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

or conditions of such a transaction, because of race, color, religion, sex, disability, familial 

status, or national origin. The federal agency that is responsible for enforcing this law is the U.

S. Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777.

Copies for: State and/or National Office ProgramDirector 

Servicing Office for SFH servicing cases 

State ADR Coordinator
HB-1-3550

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

ATTACHMENT 1-E 

Attachment 1-E 

Page 1 of 2 

REQUEST A MEDIATION SERVICE PROVIDER

DATE:

TO: [Mediation Service Provider] 

FROM: Rural Development State Director

SUBJECT: Request for Mediation

CUSTOMER: [Name of the Rural Development customer requestingmediation] 

[Customer contact information]

The above Rural Development customer has received an adverse decision from our Agency and 

has requested mediation. Attached is a copy of the adverse decision letter and the customer’s 

request for mediation.

Informal Administrative Review

The Customer was provided with the opportunity for an informal administrative 

review with the Agency; however, the customer chose not to exercise this 

option. 

 An informal administrative review was conducted; however, the Agency did 

not reverse its decision.

Jurisdiction of the Case

The adverse decision in this case was made by the following office. You should contact this 

office for further information on the case:

[Agency contact: program, individual, address phone and email]
HB-1-3550

Attachment 1-E 

Page 2 of 2

Payment for Service

The Rural Development policy is to pay 50 percent of the reasonable cost of the mediation 

service and the customer will pay 50 percent. In addition, we encourage the mediation service to 

consider the customer’s ability to pay. The customer is solely responsible for their portion of the 

cost of this service and should be billed directly. The bill for the Agency’s portion should be 

submitted to this Rural Development State Office:

[State ADR Coordinator Name and Address] Jurisdiction of case:

Mediation must be completed within 45 days from the date of this letter, unless both parties 

agree to an extension. We also request a teleconference prior to your acceptance of this case to 

determine whether the adverse decision lends itself to mediation by your service.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided 

the applicant has the capacity to enter into a binding contract); because all or part of the 

applicant’s income derives from any public assistance program; or because the applicant has in 

good faith exercised any right under the Consumer Credit Protection Act. The federal agency 

that administers compliance with this law concerning this creditor is the Federal Trade 

Commission. If a person believes he or she was denied assistance in violation of this law, they 

should contact the Federal Trade Commission, Washington, D.C. 20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

or conditions of such a transaction, because of race, color, religion, sex, disability, familial 

status, or national origin. The federal agency that is responsible for enforcing this law is the U.

S. Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777.

Attachments (2): Adverse decision letter

Customer’s request for mediation

Copies for: State and/or National Office ProgramDirector 

Servicing Office for SFH servicing cases 

State ADR Coordinator
HB-1-3550

(01-23-03) SPECIAL PN

Revised (12-10-20) PN 545

ATTACHMENT 1-F 

Attachment 1-F 

Page 1 of 2 

NOTIFICATION OF EXPIRATION FOR THE SELECTION OF A 

MEDIATION SERVICE PROVIDER

DATE:

TO: [CUSTOMER]

FROM: [State Director]

SUBJECT: Expiration of Selection of Mediation Service Provider

On [date], you requested mediation of the adverse decision as outlined in the attached letter 

which did not [grant the assistance you requested or will terminate or reduce the assistance you 

are currently receiving or will give you relief from foreclosure]. You were also informed that 

you had 10 days from [date] to either concur in the mediation service assigned by Rural 

Development to your case or name another mediation service for our consideration. 

The 10 days to acknowledge the selection of the mediation service provider has expired. Your 

request for mediation therefore has expired, and Rural Development will begin to process the 

initial adverse decision as outlined in the attached letter.

Request an Appeal Hearing

Your request for mediation did not take the place of or limit your right to request an appeal to the 

National Appeals Division (NAD). You may request an appeal hearing by NAD as long as there 

are days remaining from the original 30 days to request an appeal as outlined in the original 

adverse decision letter. You must immediately contact the NAD Assistant Director for your 

region (at the following address) to determine if you can file for an appeal hearing. 

[NAD Assistant Director Address]

There is no cost for an appeal hearing. Your request must state the reasons why you believe the 

decision is wrong, be personally signed by you, and include a copy of the attached original 

decision letter. A copy of your request must also be sent to the Rural Development State 

Director:

[Rural Development State Director Address]
HB-1-3550

Attachment 1-F 

Page 2 of 2

You, or your representative or counsel, may contact this office at anytime during regular office 

hours to examine or copy the Agency's record relative to the adverse decision. Photocopies will 

be provided to you. Your representative or counsel must have your written authorization to 

represent you and review your file. The NAD Administrative Judge will contact you regarding a 

time and place for the hearing.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided 

the applicant has the capacity to enter into a binding contract); because all or part of the 

applicant’s income derives from any public assistance program; or because the applicant has in 

good faith exercised any right under the Consumer Credit Protection Act. The federal agency 

that administers compliance with this law concerning this creditor is the Federal Trade 

Commission. If a person believes he or she was denied assistance in violation of this law, they 

should contact the Federal Trade Commission, Washington, D.C. 20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms 

or conditions of such a transaction, because of race, color, religion, sex, disability, familial 

status, or national origin. The federal agency that is responsible for enforcing this law is the U.

S. Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of 

Housing and Urban Development, Washington, D.C. 20410 or call (800) 669-9777.

Attachments (2)

Copies for: State and/or National Office ProgramDirector 

Servicing Office for SFH servicing cases 

State ADR Coordinator
HB-1-3550

(01-23-03) SPECIAL PN

Revised (12-10-20) PN 545

ATTACHMENT 1-G 

Attachment 1-G 

Page 1 of 2 

CUSTOMER NOTIFICATION OF UNRESOLVED RESOLUTION 

DATE:

TO: [CUSTOMER]

FROM: [State Director]

SUBJECT: Unresolved Result of the RequestedMediation

Your request for mediation has been completed. We regret that mediation did not result in 

resolution of the issues. [We are unable to grant the assistance you requested, or will terminate, 

or will reduce the assistance you requested].

If you believe the decision or facts used in the case are in error, you may continue to pursue your 

right to an appeal by the National Appeals Division (NAD). There is no cost for an appeal. 

Please follow the guidance in the paragraph indicated with an "X."

You requested an appeal hearing to NAD prior to entering into mediation. You must 

immediately write to the Assistant Director of NAD at the address below to determine the 

number of days remaining, if any, to schedule the appeal hearing. 

[NAD Regional Assistant Director Address]

You did not request an appeal hearing to NAD prior to entering into mediation. If you 

wish to schedule an appeal hearing, you must immediately write to the Assistant Director 

of NAD at the address below to determine the number of days remaining, if any, to 

schedule the appeal hearing. Your appeal request must be received within the remaining 

days, as determined by NAD, from the date when you requested mediation. 

[NAD Regional Assistant Director Address]
HB-1-3550

Attachment 1-G 

Page 2 of 2

Information Regarding Appeals

If NAD determines that you have appeal rights and you want to exercise those appeal rights, you, or 

your representative or counsel, may contact this office at any time during regular office hours to 

examine or to have copied the Agency's record relating to the original adverse decision.

Photocopies will be provided. Your representative or counsel must have your written authorization to 

represent you and review your file.

The NAD Administrative Judge will contact you regarding a time and place for the hearing. You may 

also request a teleconference hearing in lieu of the face-to-face hearing. At any time before the 

scheduled hearing, you may also request that the Administrative Judge make a decision without a 

hearing.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s 

income derives from any public assistance program; or because the applicant has in good faith 

exercised any right under the Consumer Credit Protection Act. The federal agency that administers 

compliance with this law concerning this creditor is the Federal Trade Commission. If a person 

believes he or she was denied assistance in violation of this law, they should contact the Federal 

Trade Commission, Washington, D.C. 20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or 

national origin. The federal agency that is responsible for enforcing this law is the U.

S. Department of Housing and Urban Development. If a person believes that they have been 

discriminated against in violation of this law, they should contact the U. S. Department of Housing 

and Urban Development, Washington, D.C. 20410 or call (800) 669-9777.

Copies for: State and/or National Office ProgramDirector 

Servicing Office for SFH servicing cases 

State ADR Coordinator
HB-1-3550

2.1 INTRODUCTION

This chapter provides an overview of key aspects of the Section 502 program. Section 1 

identifies the various types of loans available and details the circumstances in which each kind of 

loan can be made. Section 2 describes the Agency’s Dedicated Loan Origination and Servicing 

(DLOS) System. The chapter concludes with Section 3, a broad-brush overview of the steps 

involved in processing Section 502 loans.

SECTION 1: TYPES OF LOANS

2.2 OVERVIEW

The rules governing Section 502 loan origination differ slightly, depending upon the type 

of loan being made. The types of loans available under Section 502 include:

• Initial loans;

• Assumed loans;

• Subsequent loans; and

• Nonprogram loans.

This section describes the four types of loans and how they differ. The interest 

rate for SFH loans can be found in Exhibit B of RD Instruction 440.1.

2.3 INITIAL LOANS

Initial loans are made when neither the applicant nor the seller has an existing Agency 

loan. Generally, they are made for the maximum loan term for which the applicant qualifies, and 

at the Rural Housing (RH) 502 very low or low interest rate. If no prior Agency loans are 

involved in the transaction and the loan is to be made on program terms, this is the type of loan 

used. An initial loan can be made to an existing homeowner, who is not an Agency borrower, 

for essential repairs to their home provided any senior lien secures an affordable non-Agency 

loan.

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN 

CHAPTER 2: OVERVIEW OF SECTION 502
HB-1-3550

2.4 ASSUMED LOANS

Section 502 loans may be assumed. The terms and conditions of the assumption depend 

upon the eligibility of the new purchaser.

A. New Rates and Terms Assumption

When purchasing a property currently financed by a Section 502 loan, the new borrower 

will typically receive new loan funds. However, new rates and terms assumptions must be used 

when funding is limited (e.g. in September as a fiscal year is coming to a close and in October 

when a new fiscal year begins).

With a new rates and terms assumption, the purchaser assumes the outstanding debt

(including principal and recapture amounts), which is reamortized at new rates and terms. If the 

new purchaser and the property are eligible for the Section 502 program, the loan can be 

assumed on program terms. In addition, eligible new purchasers may receive subsequent loans 

to make up the difference between the amount of debt assumed and the purchase price, or may 

be able to obtain a leveraged loan. If the property does not meet Agency standards or will not 

be brought to Agency standards with the use of loan funds, or the new purchaser is not eligible, 

the loan can be assumed on nonprogram terms. Purchasers who assume the loan under 

nonprogram terms are not eligible for a loan to cover amounts above the amount assumed.

B. Same Rates and Terms Assumption

In certain limited cases -- generally those involving transfers of title between family 

members -- a same rates and terms assumption, is permitted. Under this type of assumption, the 

existing note terms, including the interest rate and the remaining repayment period, do not 

change.

The new owner is not reviewed for income-eligibility, creditworthiness, or repayment 

ability; and the property is not reviewed or appraised. The new owner may receive payment 

subsidy if eligible based on their household’s adjusted income.

Same rates and terms assumptions are permitted for the following types of transfers:

• A transfer from the borrower to a spouse or children not resulting from the death of 

the borrower;

• A transfer to a relative, joint tenant, or tenant by the entirety resulting from the death 

of the borrower;

• A transfer to a spouse or ex-spouse resulting from a divorce decree, legal separation 

agreement, or property settlement agreement;

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HB-1-3550

Paragraph 2.4 Assumed Loans

• A transfer to a person, other than a deceased borrower’s spouse, who wishes to 

assume the loan for the benefit of persons who were dependent on the borrower at the 

time of death, if the dwelling will be occupied by one or more persons who were 

dependent on the borrower at the time of death, and there is a reasonable prospect of 

repayment; or

• A transfer into an inter vivos trust in which the borrower does not transfer rights of 

occupancy in the property.

A party interested in a same rates and terms assumption must provide the Agency with 

evidence that they meet one of the permitted types of transfers listed above and a copy of the 

recorded deed conveying ownership to them.

2.5 SUBSEQUENT LOANS

Subsequent loans can be issued as part of the original purchase of a property in

combination with an assumption, or during the term of an Agency loan to help an existing 

borrower pay for repairs or improvements to the property. The key processing differences 

between subsequent and initial loans are described in Exhibit 2-1 and in later chapters.

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Exhibit 2-1

Key Processing Differences for Subsequent Loans

• An appraisal is not required for a subsequent loan: Less than $7,500 and for minimal essentialrepairs;

$7,500 or more where the Agency obtained an appraisal within the last two years; or to protect the 

Government’s interest (see Paragraph 5.17 A.).

• Subsequent loans may be made in areas that changed from rural to non-rural to make necessary 

repairs, to pay equity in connection with an assumption of a program loan, or to pay equity of a 

departing co-borrower (see Paragraph 5.3 C.6.).

• The Agency may reamortize the initial loan when the subsequent loan is made if the borrower cannot 

reasonably be expected to meet the payments without the reamortization (see Paragraph 6.16B.2.).

• Full title clearance is not needed for subsequent loans to existing borrowers for minimal essential 

repairs to protect the Government’s interest (see Paragraph 5.12 B.).

• Applicants have a legal right to cancel a subsequent loan within 3 business days from whichever of 

the following activities occurs last: (1) execution of the mortgage or deed of trust; (2) receipt of the 

Closing Disclosure at least three business days prior to consummation; or (3) receipt of Form RD 

1940-43, Notice of Right to Cancel. Loan funds cannot be disbursed until the three business days 

have passed, unless a hardship exists and the applicant waives their right to cancel the loan in writing, 

as mentioned in Paragraph 8.6 F.2. Form RD 1940-43 is not used for subsequent loans made in 

conjunction with an assumption since the applicant does not have title to the property.
HB-1-3550

2.6 NONPROGRAM LOANS

Nonprogram loans are loans made on nonprogram terms to borrowers who are not 

program-eligible, and/or for properties that do not meet Agency standards and will not be 

brought to Agency standards with the use of loan funds. The interest rate offered is somewhat 

higher than for program-eligible borrowers, but is competitive in the marketplace. Borrowers 

with nonprogram loans are not eligible for program benefits, such as payment subsidy, or for 

servicing actions, such as moratoriums. They also are exempt from occupancy restrictions and 

the requirement to refinance with private credit. Nonprogram loans are discussed in detail in 

Chapter 11. The circumstances in which the Field Office can originate nonprogram loans are 

discussed below.

A. Facilitate Sale By an Existing Agency Borrower

When an existing Agency borrower wishes to sell a security property, the Agency will 

assist the borrower by providing assistance to an eligible purchaser. If the purchaser does not 

qualify for assistance under the Section 502 program, the loan may be assumed on nonprogram 

terms. Nonprogram purchasers acquiring a property from an Agency borrower are only 

permitted to assume existing debt; new credit cannot be extended to them through a subsequent 

loan.

B. Facilitate Sale of Real Estate Owned (REO) Property

The Agency may offer credit for the purchase of REO property on nonprogram terms to 

borrowers who are not program-eligible, and/or for properties that are not program-eligible.

2-4
HB-1-3550

SECTION 2: THE DEDICATED LOAN ORIGINATION 

AND SERVICING SYSTEM (DLOS)

2.7 DLOS

DLOS is designed to expedite loan-making, standardize information collection and 

record keeping, and facilitate communication between Field Offices and the Servicing and 

Asset Management Office (Servicing Office). DLOS tracks loans from application through

servicing using two interconnected systems: UniFi and LoanServ.

2.8 UNIFI

UniFi is a web-based application used for loan origination. It retains applicant 

information, makes complex computations, and maintains a central record of all activities 

associated with an individual application from the time of pre-qualification through loan closing. 

UniFi’s many data screens are linked so that once a piece of information is entered, UniFi will 

automatically transfer it to all pertinent data screens.

A few of UniFi’s most important features include:

• Its ability to create a waiting list to help the Loan Originator select applications for 

processing in the proper order;

• Screens that automatically calculate maximum loan amount and payment subsidy; 

and

• The ability to print out many loan approval and closing forms with borrower 

information inserted.

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

2.9 LOANSERV

LoanServ is a mainframe-based application that is used to service Agency loans and 

monitor loan performance. It is linked to UniFi so that information from UniFi can be uploaded 

into LoanServ each night.

Field Staff can access certain areas of LoanServ to gather information on a borrower’s 

account, such as determining the amortized loan amount on construction loans. The Loan 

Originator uses LoanServ to obligate funds and order checks.

LoanServ is also a communications device to help the Servicing Office and Field Staff 

keep abreast of each other’s’ activities. If the Servicing Office needs on-site assistance for a 

servicing action, LoanServ can be used to communicate with Field Staff. For example, a 

Servicer involved in working out an insurance claim with a borrower might use the LoanServ

work queue to ask Field Staff to visit the property to assess the repair work that has been done to 

date. Similarly, if a Loan Originator obtains information about a change in a borrower’s 

employment status that has not been reported, LoanServ can be used to pass on that information 

to the Servicing Office.

2-6
HB-1-3550

SECTION 3: OVERVIEW OF LOAN ORIGINATION PROCESS

2.10 APPLICATION PROCESSING (Chapter3)

When potential applicants 

express interest in the Section 502 

program, the standard pre-qualification 

method is the potential applicant’s selfassessment using the Single Family 

Housing Direct Self-Assessment tool. 

Agency staff should refer potential 

applicants to the tool in their marketing 

materials, while speaking to them, etc. 

Pre-qualifications completed by the Agency staff are limited. The potential applicant may

submit an application regardless of the outcome of the pre-qualification.

When an applicant submits a complete application, the application should be reviewed for 

eligibility within 30 days, using guidance outlined in Chapter 4. The Loan Originator must 

select applications for processing based on each applicant’s priority and the date the application 

was determined complete. If the applicant is not eligible, the Loan Approval Official will deny 

the application. If the applicant is determined eligible, the Loan Originator will determine if 

funding is available, using guidance outlined in Chapter 4, prior to issuing a Certificate of 

Eligibility. If funding is not available, eligible applicants will be placed on the waiting list. As 

funds become available, applicants on the waiting list must be processed in the appropriate 

order, based on priority status and application date.

2.11 BORROWER ELIGIBILITY (Chapter 4)

Once the application has been selected for processing, the Loan Originator must

determine the applicant’s eligibility. This involves verifying the household’s income, checking 

the credit history of all parties to the note, and reviewing all other eligibility requirements. Once 

the applicant’s eligibility has been verified, the Loan Originator uses verified income 

information to determine the amount of payment subsidy the household is entitled to, and the 

maximum loan amount the applicant will be able to receive.

Based on this information, the Loan Originator counsels the applicant about the level of 

mortgage debt the household can afford, and issues a Certificate of Eligibility, which is signed 

by the Loan Approval Official. The household then attempts to locate a home. In cases where 

the applicant has already submitted a contract for a property, no Certificate of Eligibility is 

needed.

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Processing Steps

This section outlines the steps involved in processing a 

Section 502 loan. It is intended to provide a conceptual 

overview of the process. The detail needed to fully 

understand each step follows in later chapters of this 

handbook.
HB-1-3550

2.12 PROPERTY REQUIREMENTS (Chapter 5)

Once the household has located a home or decided on the design of a dwelling to be 

constructed, they must provide key information to allow the Loan Originator to determine 

whether the property is modest and meets the Agency’s underwriting guidelines. This includes 

the information needed to conduct an appraisal, to conduct an environmental review, and to 

verify that the site and dwelling meet, or will be constructed to meet, all applicable requirements.

2.13 UNDERWRITING THE LOAN (Chapter 6)

If the applicant and the property meet the Agency’s standards, the Loan Originator must 

determine the loan amount needed and whether it can be supported by the household’s 

repayment ability. In order to determine repayment ability the Loan Originator must have a 

good estimate of the impact that escrow payments for taxes, flood insurance, and hazard 

insurance will have on the household. Repayment ability also is affected by the payment subsidy 

the household is entitled to, which is based on the household’s adjusted income

2.14 TAXES, INSURANCE, AND ESCROW (Chapter7)

To ensure that funds are available to pay for the cost of real estate taxes, insurance 

premiums, and other assessments, the Loan Originator must have a good understanding of how 

to set up a good escrow account. Before closing the loan, the Loan Originator must work closely 

with the closing agent to get accurate figures to use in establishing escrow payments.

2.15 LOAN APPROVAL AND CLOSING (Chapter8)

The Loan Approval Official reviews the case file and determines whether the loan can be 

approved. If the loan is approved, the Loan Originator notifies the applicant and obligates the 

funds.

The applicant then selects a closing agent. The closing agent is responsible for 

conducting the preliminary title clearance and for ensuring that the property conforms to the 

Agency’s security requirements. The Loan Originator and closing agent work together to ensure 

that all required closing documents are prepared for signature at closing and that Agency funds 

arrive before the date of closing. The Loan Originator activates the loan in LoanServ after loan 

closing and prepares a loan docket to send to the Servicing Office for servicing.

When a new home is to be built or rehabilitation on an existing dwelling is involved, the 

Loan Originator also oversees the progress of construction. This involves ensuring that 

inspections are performed at appropriate points in the process, that mitigation measures 

established as part of any environmental review are properly implemented, and that funds are 

disbursed appropriately to pay for the work.

2-8
HB-1-3550

3.1 INTRODUCTION

This chapter describes the process of accepting and managing applications, up to the 

point that an applicant is selected for processing. This includes pre-qualifications (largely 

through the Single Family Housing Direct Self-Assessment tool), taking and reviewing 

applications, and selecting applications for processing.

SECTION 1: PRE-QUALIFICATION

3.2 OVERVIEW

Pre-qualification involves using unverified information to evaluate the likelihood that a 

potential applicant, someone who is interested in the program but has not yet applied, would be 

program eligible. The results of pre-qualification are not binding and will not hinder the 

submission of an application. A potential applicant with possible obstacles to program eligibility 

may apply and a potential applicant who appears program eligible is not guaranteed that a loan 

will be made.

The standard pre-qualification method is the potential applicant’s self-assessment 

using the Single Family Housing Direct Self-Assessment tool. Agency staff should refer 

potential applicants to the tool in their marketing materials, while speaking to them, etc. Prequalifications completed by the Agency staff are limited. To access the Self-Assessment tool, 

visit: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do and click on the Single 

Family Housing Direct tab.

3.3 PROCEDURES FOR PRE-QUALIFICATION

On those limited occasions where the Agency staff completes a pre-qualification, 

the Loan Originator should follow the procedures below. 

• Obtain information from the potential applicant about household members, income, 

deductions, debt, and the county where they want to purchase a home. 

• Order an in-file credit report if the potential applicant has signed Form RD 3550-1, 

Authorization to Release Information, and if it would aid in the review.

• Check the Department of the Treasury’s Do Not Pay (DNP) portal and check the 

applicant’s social security number against Agency records by using LoanServ’s “SSN 

CROSS REFERENCE” softlink key. Staff should refer to the DNP SharePoint site

for the most current guidance about using the portal, sources to be checked, 

appropriate action, etc. If the “SSN CROSS REFERENCE” reveals a current loan or 

active application, follow the appropriate action below. 

3-1 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

CHAPTER 3: APPLICATION PROCESSING
HB-1-3550

Paragraph 3.3 Procedures for Pre-Qualification

o If the pre-qualification is for a subsequent loan, the Loan Originator should 

continue processing.

o If the pre-qualification is for purchase, the Loan Originator should contact 

the applicant for additional information in order to determine the appropriate 

action. For example, if the applicant is also a borrower on an existing 

Agency loan but is divorced, and the divorce decree did not make them 

responsible for loan payments, the applicant should contact the Servicing 

Office to apply to be released from liability on the existing loan before 

applying for a new loan.

o If the applicant has an active loan application in another Field Office, the 

applicant must decide to either transfer the existing application to the new 

servicing area or continue processing with the existing servicing area, as 

they may not have two applications in process at the same time.

• Enter the information in UniFi, register the pre-qualification following the instructions in 

the DLOS Training Manual, and generate the Eligibility Summary using standard terms 

(unless the potential applicant appears to qualify for adjustments to the standard terms). 

If the potential applicant is working with a leveraged partner, consider the possible 

leveraging funds.

• Discuss the results with the potential applicant and emphasize that the results are 

informal and unbinding. As applicable, consider the below when discussing the results 

and refer to Attachment 3-F for guidance on addressing negative results.

o Moderate-Income Applicant: Discuss the possibility of obtaining a nonprogram 

loan or obtaining a Guaranteed Rural Housing (GRH) loan.

o Insufficient Repayment Ability: Discuss the possibility of obtaining subsidized 

funds from other sources, reducing debt, and adding additional parties or a cosigner to the note. See Paragraph 4.24 for a detailed discussion of other 

considerations related to maximum loan amounts.

o Potential Ability to Obtain Other Credit: If a potential applicant’s credit 

history, income (i.e., they appear to be above the very low-income limit), 

assets, and lack of apparent need for payment assistance indicate that they 

should be able to qualify for a GRH loan or private financing, the potential 

applicant should be informed that they should attempt to obtain other credit.

• If the pre-qualification was not conducted face-to-face or over the telephone, use 

Handbook Letter 19 (3550), Pre-qualification Review, to prompt the opportunity to 

counsel the potential applicant.

• Retain all pre-qualification records in accordance with RD Instruction 2033-A and 

Electronic Customer File (ECF) guidance.

• As applicable, encourage the potential applicant to seek credit counseling or take a 

homeownership education course. NEVER discourage the potential applicant from 

applying.

3-2
HB-1-3550

SECTION 2: HOMEOWNERSHIP EDUCATION

3.4 HOMEOWNERSHIP EDUCATION REQUIREMENT [7 CFR 3550.53(i)]

The Agency requires applicants who are first-time homebuyers to complete 

homeownership education training as early in the application process as possible since the 

training will prepare them for shopping, buying, financing, and owning a home. While the 

training should be completed by the applicant prior to them entering into a contract to purchase 

or construct a home, the applicant should be encouraged to take the training as soon as they 

express an interest in homeownership (e.g., when they call inquiring about the program or apply 

for a loan) for maximum benefit.

A. State Director Assessment of Homeownership Education [7CFR 3550.11]

The State Director will assess the availability of certified homeownership 

education in their respective states on an as-needed basis, but no less frequently than every

three years and maintain an updated listing of providers and their reasonable costs.

The accepted homeownership education formats are as follows:

• Online counseling.

• Classroom, one-on-one counseling, or interactive video conference.

• Interactive home study or interactive telephone counseling of at least four hours 

duration.

To be included on the list, the provider must have a certificate of completion 

process and homeownership education counselors that are certified by any of the following:

• The Department of Housing and Urban Development (HUD);

• NeighborWorks America (NWA);

• The National Federation of Housing Counselors(NFHC);

• National American Indian Housing Council (NAIHC); or

• The State Housing Finance Agency or other qualified organization approved by the 

State Director.

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(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
HB-1-3550

Paragraph 3.4 Homeownership Education Requirement

In addition, the State Director may include homeownership education provided by 

USDA Cooperative Extension System staff.

Online homeownership education courses offered and accessible on a national, non-state 

specific basis, will be reviewed and approved by the National Office. This is not intended to endorse 

a particular online course but to have a process by which these types of online courses will be 

evaluated in a uniform manner for usage by all states. A State Director may assess a state specific 

online course for inclusion in their list of providers.

Where there is a fee charged to the applicant for homeownership education, the state will 

also assess commonly used resources of funding for the applicant to pay for their homeownership 

education. In addition, organizations that provide free homeownership education will be identified 

ensuring applicants are aware of free training options available within their state.

The provider will issue a letter or certificate of completion to document that the applicant 

has satisfactory knowledge of these minimum topics:

• Preparing for homeownership (evaluate readiness to go from rental to 

homeownership)

• Budgeting (pre- and post-purchase)

• Credit counseling

• Shopping for a home

• Lender differences (predatory lending)

• Obtaining a mortgage (mortgage process, different types of mortgages)

• Loan closing (closing process, documentation, closing costs)

• Post-occupancy counseling (delinquency and foreclosureprevention)

• Life as a homeowner (homeowner warranties, maintenance, and repairs)

Generally, a valid letter or certificate of completion of homeownership education that is less 

than two years old at date of loan closing will be considered acceptable. When appropriate, 

the provider may tailor the homeownership education training to the needs of the applicants, 

while ensuring satisfactory knowledge of the minimum required homeownership education 

topics. For example, if an applicant has already executed a purchase and sale agreement on 

a house, the provider may decide after conference with the applicant, to condense or omit 

the homeownership education section on “shopping for a home”.

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HB-1-3550

Paragraph 3.4 Homeownership Education Requirement

B. Providing Homeownership Education Information to the Applicant

The Loan Originator must ensure that applicants who are first-time homebuyers complete 

homeownership education training as early in the application process as possible. Applicants 

should be instructed to complete the training prior to entering into a contract to purchase or 

construct a home for maximum benefit. In addition, the Loan Originator must assist the applicant 

by providing the list of approved local homeownership education providers to the applicant 

along with the standardized application package. 

The list of approved local providers will also include eHome America, Framework, and 

Utah State University Extension which are nationally approved online homeownership education 

providers. Registration information includes: eHome America - https://ehomeamerica.org/usda,

cost is $75; Framework - https://www.frameworkhomeownership.org/, cost is $75; and Utah 

State University - https://extension.learn.usu.edu (select Home Buyer Education), cost is $60 for 

the applicant and $5 for a co-applicant.

The applicant must be informed that should 

there be a fee for the homeownership education 

course selected and there are no other sources for 

payment, the fee may be added to the loan amount 

at loan closing (see Paragraph 6.4 Fees and 

Related Costs). The applicant should be advised 

that if they do not close on their loan, they will still be responsible for the homeownership 

education fee. 

C. Exception Provision

The State Director may grant an exception to the homeownership education requirement 

for individuals in geographic areas where certified homeownership education is not reasonably 

available in the local area. However, a conservative approach to the exception provision is 

recommended, as generally, all efforts are encouraged to have applicants undertake 

homeownership education early in the homeownership process to gain maximum benefit.

Whether such homeownership education is “reasonably available” will be determined based on 

an assessment of factors including, but not limited to: distance, travel time, geographic 

obstacles, and cost. On a case-by-case basis, the State Director may grant an exception to the 

homeownership education requirement, provided the applicant documents a special need such as 

a disability that would impede completing a homeownership course in the above mentioned 

formats listed in Paragraph 3.4 A. 

3-5 

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571

Consistency Is Key

Be sure to use consistent procedures 

when providing information to ALL 

applicants.
HB-1-3550

SECTION 3: APPLICATIONS [7 CFR 3550.55]

3.5 BEGINNING THE APPLICATIONPROCESS

An interested party can begin the application process by:

• Requesting that the Agency mail or email them an application or they can obtain one 

in person at any Field Office. The Field Office will provide the standardized 

application package (which can be found in the SFH Direct SharePoint site under 

General Info > Useful Documents). The standardized application package is 

maintained by the National Office and can only be altered with a State Supplement 

approved by the National Office.

• Applying online. To apply online, an interested party must first register to obtain a 

USDA eAuthentication identification and password. The user must complete the 

steps to verify their identity for the eAuthentication account in order to obtain 

access to submit an application package via eForms. Additional guidance on 

submitting applications via eForms is provided in the standardized application 

package. https://forms.sc.egov.usda.gov/eForms/welcomeAction.do?Home

• Engaging the service of a loan application packager. Loan application packagers, 

who are separate and independent from the Agency, provide an optional service to 

parties seeking a housing loan by helping them navigate the loan application 

process. Packagers may include Section 523 self-help grantees, certified packagers, 

and other packaging types as specified in Attachment 3-A.

The Agency supports partnerships with loan application packagers since packagers can 

provide outreach and presence in counties where a Field Office is not located; assist the Agency 

in reaching very low-income applicants; promote the program in underserved areas; prescreen 

potential applicants; counsel potential applicants on how to improve their ability to qualify for a 

home; ensure that applications are complete and accompanied by the supporting documentation 

needed for the Agency’s decision; and give applicants insight into the Agency’s application 

process and regulations. Attachment 3-A provides processing guidance for Field Offices and 

packagers.

3.6 APPLICATION RECEIPT AND CASE FILESETUP

The “Date Application Received” field in UniFi must be completed promptly but no 

later than 3 business days after receipt of an application; and applications (including application 

received via eForms) must be reviewed within 3 business days after receipt to determine if the 

Loan Estimate disclosure requirement was triggered (see Paragraph 3.8) and to determine if 

items are missing.

A. Missing Items

The Loan Originator should contact the applicant after reviewing the application to obtain 

any missing items. Handbook Letter 11 (3550), Request Information, should be sent to the 

applicant requesting the missing items and stating that their application will be withdrawn if the 

missing information is not received within 15 days. 

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HB-1-3550

Paragraph 3.6 Application Receipt and Case File Setup

If an application submitted by a loan application packager is determined to be 

incomplete, the following statement must be sent to the packager in writing within eForms or 

email: “No action can be taken until all the noted items have been received in this office. The 

loan application package is missing the following items: [list of missing items]. Please complete 

the package and resubmit the package in its entirety within [enter 15 days from the date of 

written notice] .”

After the Agency accepts a package as complete, if additional information is needed and 

Handbook Letter 11 is sent to the applicant, a copy must be provided to the packager and 

intermediary (if present).

B. Collections

Collection of payment for credit report fees must be processed daily in accordance with 

RD Instruction 1951-B. An application must be entered into UniFi promptly but no later than 3 

business days after receipt to obtain the account number needed for remittance of the credit 

report fee. The credit report is not required to be ordered at the time of remittance of the credit 

report fee. The credit report will be ordered at the time the application is selected for processing. 

Remittance will be through the electronic fee service in LoanServ for a check or savings account 

deposit slip, or Form RD 3550-17, Funds Transmittal Report for a cashier’s check or money 

order. A daily collection log must be maintained in accordance with RD Instruction 1951-B. A 

print screen from LoanServ, or Form RD 3550-17, Funds Transmittal Report with copy of check, 

deposit slip, cashier’s check or money order, should be filed in the office’s collection log and in 

the applicant’s ECF. Field Offices must comply with the internal control procedures prescribed 

in RD Instruction 1951-B and Form RD 1951-44, Management Control and Review of Field 

Office Collection Activities.

C. Case File Setup

The Loan Originator should promptly setup the case file by:

• Entering data. Information from the application should be entered in UniFi.

• Establishing the electronic file. The applicant’s file should be established 

according to the standardized document types and classifications available in 

ECF, and RD Instruction 2033-A, Management of Rural Development 

Records. For subsequent loans, the new documentation should be added to 

ECF with the subsequent loan number.

• Beginning the required Single Family Housing Checklist. Use Attachment 3-G, 

502 Single Family Housing Checklist, for Section 502 loan applications and 

Attachment 12-C, 504 Single Family Housing Loan & Grant Checklist, for Section 

504 loan/grant applications. States may add additional page(s), subject to prior 

approval from the National Office, to reflect required processes related to state 

laws. The checklists are required and intended as a processing aid for Agency 

staff.

(01-23-03) SPECIAL PN 3-7

Revised (11-18-22) PN 571
HB-1-3550

The application is a working document. Whenever revised or verified information is 

received, the appropriate UniFi field should be updated. At loan closing, a final application will 

be generated to reflect the updated information gathered during the loan approval process.

3.7 COMPLETE APPLICATION

An application is considered complete when an applicant, loan application packager, or 

Agency-approved intermediary submits a fully completed and signed uniform residential loan 

application and all the applicable items listed in Attachment 3-J. When the loan application 

package is submitted via eForms, a signature is not required on Form RD 410-4 since the eForms 

submission serves as proof of signature.

Upon receipt of these items, the Loan Originator should perform the necessary 

verifications and make an eligibility determination recommendation. If the application package 

does not contain a written explanation of derogatory credit, assume its absence is acceptable (at 

least initially). If derogatory credit appears on the tri- merge credit report and an explanation was 

not provided with the application, then an explanation may be requested.

In place of Form RD 410-4, a current industry standard application form may be accepted 

when accompanied by the Agency’s supplemental pages (6-10) of Form RD 410-4. Once 

complete, the date must be entered in the “Application Complete Date” field in UniFi. It is 

important that this date be correct because it is used to track priority for processing.

Once a complete application is received, the application should be reviewed for 

eligibility within 30 days. If the applicant is not eligible, the Loan Approval Official will deny 

the application. If the applicant is determined eligible, the Loan Originator will determine if 

funding is available, using guidance outlined in Section 4 of this chapter, prior to issuing a 

Certificate of Eligibility (COE). Only eligible applicants will be placed on the waiting list in the 

event funding is not available. If an eligibility determination cannot be made within 30 days of 

complete application, Handbook Letter 3-B (3550), Waiting Period (Extended Processing 

Timeframe), will be sent to the applicant with the approximate waiting period until an eligibility 

determination can be made.

If an applicant wants their application to be transferred to a different servicing area, the 

steps outlined in Chapter 5 of the DLOS Training Manual must be followed by the original and 

receiving areas; and the receiving area will perform their own eligibility and underwriting 

analyses.

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Paragraph 3.6 Application Receipt and Case File Setup
HB-1-3550

Paragraph 3.8 Compliance With Other Federal Requirements

3.8 COMPLIANCE WITH OTHER FEDERALREQUIREMENTS

A. Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) 

Integrated Mortgage Disclosures

The Truth in Lending Act and Real Estate Settlement Procedures Act Integrated 

Mortgage Disclosures (TRID) rule, issued by the Consumer Financial Protection Bureau 

(CFPB), integrates the disclosure requirements associated with the individual TILA and RESPA 

regulations. This regulation is intended to simplify the disclosures associated with a mortgage 

loan transaction and assist consumers understand the cost of credit and the difference of such 

cost among creditors. TRID requires lenders to provide applicants with pertinent and timely 

disclosures of the nature and costs of the real estate settlement process, these disclosures are the 

Loan Estimate and the Closing Disclosure. Any loan, including a Section 504 loan, is subject to 

TRID if a security interest will be taken on the property.

1. Initial Disclosures: Loan Estimate, Written List of Service Providers andSpecial 

Information Booklet 

A loan application for TRID purposes is the submission of the following information: (1) 

applicant’s name, (2) applicant’s monthly income, (3) applicant’s social security number to 

obtain a credit report, (4) property address, (5) an estimate of the value of the property, and (6) 

mortgage loan amount sought. 

When an application as defined by TRID is received, the following initial disclosures 

must be provided to the applicant within 3 business days of receiving the application but no later 

than 7 business days before loan closing: 

• Handbook Letter 5 (3550), Cover Letter for Initial Disclosures Package;

• CFPB’s standard Loan Estimate (all construction loans require a Loan Estimate be issued to the 

consumer for both the construction and purchase loans); 

• Attachment 3-I, Settlement Service Providers List and Mortgage Loan Application 

Related Disclosures; and

• CFPB’s “Your home loan toolkit: A step-by-step guide”.

Business days for Loan Estimate purposes are Monday-Friday. If the initial disclosures 

are not provided to the applicant in person, the applicant is considered to have received the 

disclosures 3 business days after they are delivered or placed in the mail. The terms of the Loan 

Estimate are binding for at least ten (10) business days from when it is issued, subject to 

tolerances and changed circumstances, unless a revised Loan Estimate is issued before settlement 

or the Loan Estimate expires.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

3-9 
HB-1-3550

Paragraph 3.8 Compliance With Other Federal Requirements

TRID establishes variation limitations between the charges disclosed in the Loan 

Estimate and the final charges listed in the Closing Disclosure. All lender charges, including 

fees paid to a packager or qualified intermediary, which are imposed on a consumer must 

be disclosed whether financed, paid by the buyer, paid by the seller, or paid by a third 

party. Closing costs are divided into charges that cannot increase (Zero Tolerance), charges that 

in total cannot increase more than ten percent (10% Tolerance), and charges that can change (Not 

Subject to Tolerance). When the charges in the Closing Disclosure exceed the tolerance 

thresholds, the Loan Estimate is not considered to have been provided in good faith and the 

Agency is required to reimburse to the borrower the amount by which the tolerance was 

exceeded. The Loan Originator is responsible for issuing accurate and timely TRID disclosures.

The Loan Estimate cannot be revised and reissued unless changed circumstances occur. 

“Changed Circumstances” is defined by regulation as: (1) An extraordinary event beyond the 

control of any interested party or other unexpected event specific to the consumer or transaction; 

(2) Information specific to the consumer or transaction that the creditor relied upon when 

providing the required disclosures and that was inaccurate or changed after the disclosures were 

provided; or (3) New information specific to the consumer or transaction that the creditor did not 

rely on when providing the original disclosures. In the event changed circumstances occur, the

Loan Originator must send the revised Loan Estimate within 3 business days of receiving 

the information that established the change but no later than 7 business days before closing. 

Only those fees impacted by the changed circumstance may change and supporting 

documentation must be retained in the case file for no less than three years after settlement. A 

revised Loan Estimate cannot be provided on or after the date of the Closing Disclosure. The 

Closing Disclosure can be issued instead of a revised Loan Estimate if a closing date has been 

determined, final fees calculated, and it is sent at least 7 business days prior to loan 

consummation. Either the revised Loan Estimate or Closing Disclosure can be used to reset 

tolerance and terms.

The Loan Estimate, which gives a preliminary indication of the amount of escrow 

required, does not explain the concept of escrow. During the applicant orientation, escrow will 

be explained and the Agency’s requirements will be outlined.

2. Final Disclosure: Closing Disclosure

Under the TRID regulation, creditors must ensure the consumer receives the Closing 

Disclosure at least 3 business days before loan consummation (all construction loans require a 

Closing Disclosure be issued to the consumer for both the construction and purchase loans). 

The mailbox rule states that if a disclosure is not provided to the consumer in person, the 

consumer is considered to have received the disclosure 3 business days after it was delivered or 

placed in the mail. Business days for Closing Disclosure delivery are all calendar days except 

Sundays and legal public holidays.

“Consummation” occurs when the consumer becomes contractually obligated to the creditor. 

Although consummation may commonly occur at the same time as closing or settlement, it is a 

legally distinct event that is not the same thing as closing or settlement.

3-10
HB-1-3550

Paragraph 3.8 Compliance With Other Federal Requirements

While the closing agent/attorney will complete the Closing Disclosure, the Agency is 

ultimately responsible for meeting the accuracy and delivery requirements of this form. The 

appropriate Agency staff will review the Closing Disclosure prepared by the closing agent and, if

correct, will proceed (or authorize the closing agent/attorney) to provide the disclosure to the 

applicant within the timeframe provided by the law. 

If there is more than one applicant involved in a transaction, the Closing Disclosure may 

be provided to any applicant with primary liability on the obligation for purchase transactions. 

However, for transactions with a rescission period, the Closing Disclosure must be given 

separately to each applicant who has the right to rescind under the regulation.

The Agency must redisclose the terms and costs on the Closing Disclosure if certain 

changes occur to the transaction after the Closing Disclosure was first provided to the applicant 

and that cause the disclosures to become inaccurate. Revising the Closing Disclosure after it has 

been provided to the applicant may require an additional 3 business day waiting period prior to 

consummation.

B. Truth in Lending Act

The Truth in Lending Act (TILA) is intended to assist consumers understand the cost of 

credit and the difference of such cost among creditors. The Agency is required to issue a Truth 

in Lending Statement disclosing specific information about the terms and costs of the loan for all 

unsecured Section 502 or 504 loan transactions. The Annual Percentage Rate (APR) is one of 

the key components of the truth in lending statement and it represents the cost of the credit 

expressed as a percentage. For loans where a security interest will not be taken on the property, 

Form RD 1940-41, Truth in Lending Statement, must be issued within 3 business days of 

receiving a complete application as defined above. If the APR varies by more than one-eighth of 

a one percent at the loan closing, the Truth in Lending Statement must be re-issued using the 

actual terms of the transaction.

C. Fair and Accurate Credit Transaction Act

In accordance with the Fair and Accurate Credit Transactions 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, the Agency is required to disclose the key 

factors affecting the applicant’s credit scores. Therefore, Attachment 3-H, Credit Score 

Disclosure, will be provided to the applicant with the standardized application package. It must 

be explained to the applicant that the credit score will not be used to determine loan approval but 

only to presume acceptable credit in lieu of other credit underwriting practices.

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(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
HB-1-3550

Paragraph 3.8 Compliance With Other Federal Requirements

D. Equal Credit Opportunity Act (Regulation B)

The Equal Credit Opportunity Act (ECOA) of 1974 prohibits creditors from 

discriminating against credit applicants who are members of a protected class (as discussed in 

Chapter 1).

Regulation B, which implements the provisions of the ECOA, outlines the rules lenders 

must adhere to before, during, and after an application for credit is received and evaluated.

Agency activities covered under Regulation B include but are not limited to: information and 

documentation requirements, verification procedures, how standards to determine 

creditworthiness are used, actions taken on the application, modification of credit terms, and 

collection procedures. The application processing procedures prescribed in this handbook take 

into consideration the various provisions and requirements outlined in Regulation B, including 

the notification requirements. Following these procedures and using consistency when 

processing Section 502 and 504 loan applications ensures compliance with this regulation.

Under Regulation B, lenders are required to provide loan applicants a written notification 

of their right to receive a copy of the appraisal report and deliver such appraisal in a prompt 

manner but no later than 3 business days before closing.

To comply with this requirement, the Loan Originator must provide the following:

• Notification of Right to Receive a Copy of the Appraisal: The Agency is required 

to provide to the applicant a written notification of the applicant’s right to receive a 

copy of all written appraisals, or any other acceptable valuation, developed in 

connection with a mortgage application to be secured by a first lien on a dwelling. 

The appraisal notification, which is included in Attachment 3-I, must be issued within 

3 business days of receiving a loan application with a specific property to be 

financed. Providing Attachment 3-I along with pertinent TRID disclosures meets the 

appraisal notification requirement.

• A Copy of the Appraisal: In accordance with Regulation B, and as stated in the 

appraisal notification, the Agency must provide to the applicant a copy of the 

appraisal, or any other written valuation, promptly upon completion but not later than 

3 business days prior to closing, whichever is earlier. For the Agency’s purposes, 

upon completion occurs when the Loan Approval Official has reviewed the appraisal 

and made the lending decision. If the loan application is approved without using the 

subject to appraisal allowance, the Loan Originator should provide a copy of the 

appraisal along with Form RD 3550-7, Funding Commitment and Notification of 

Loan Closing; if the application is rejected, it should be sent along with Handbook 

Letter 15 (3550), Standardized Adverse Decision Letter, or Handbook Letter 17 

(3550), Adverse Decision Involving an Appraisal, whichever is applicable. If the 

loan application is approved using the subject to appraisal allowance (which is 

permitted throughout the fiscal year), the applicable box on Form RD 3550-7 must 

be checked and a copy of the appraisal must be promptly provided to the applicant 

once it is received, reviewed, and accepted by the Agency. Applicants do not have to 

request a copy of the appraisal to receive one. If there is more than one applicant, the 

Loan Originator may send a copy of the appraisal to only one applicant.

3-12
HB-1-3550

Paragraph 3.9 Withdrawing And Rejecting Applications

3.9 WITHDRAWING AND REJECTINGAPPLICATIONS

An applicant can withdraw an application at any time by writing or calling the Field 

Office. The Agency may withdraw the application if the applicant fails to respond to the 

Agency’s written request for information in a timely fashion. In most cases, as specified in this 

handbook, the response time is 15 days. However, in some situations such as obtaining bids for 

repair work, a longer timeframe may be warranted. In these limited situations, the response time 

will be up to 30 days. All letters to applicants requesting information must clearly indicate that 

the application will be withdrawn if the appropriate information is not provided within the 

specified time frame.

When an applicant is rejected, they must be informed, in writing, of the adverse decision 

and their review and appeal rights. All reasons for the rejection must be clearly documented.

Applicants who are over the low-income but within the moderate-income limit should be issued 

Handbook Letter 1 (3550), Moderate Income Options with Attachment 1-C, which is signed by 

the Loan Approval Official, if the only reason for the adverse decision is that the applicant is 

over the low-income but within the moderate-income limit. However, if the applicant is 

determined to be over the low-income but within the moderate-income limit and there are other 

adverse factors, then Handbook Letter 15 (3550), Standardized Adverse Decision Letter with 

Attachment 1-C should be issued. 

Once an application has been withdrawn or rejected, an applicant who wishes to reapply 

must complete a new application form. The Loan Originator must record in UniFi that the 

application has been withdrawn or rejected. Only in the following situations can an application 

be reopened: 

• If the National Appeals Division has overturned the rejection of an application; 

or

• The Loan Approval Official has reviewed and reconsidered the rejection of an 

application.

In these situations, Attachment 3-E must be completed and forwarded to the 

Servicing and Asset Management Office (Servicing Office), SFH Assistance Section, for 

processing.

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(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

SECTION 4: SELECTION FOR PROCESSING

3.10 OVERVIEW

In general, applications are selected for processing based on the priorities described in 

Paragraph 3.13. If available funding is not sufficient for all eligible applications on the waiting 

list, the priorities described in Paragraph 3.13 will be used to determine the selection of 

applications for available funds. This section discusses the appropriate actions to take to notify 

applicants of their status and select applications for processing in the proper order.

3.11 DETERMINING WHETHER FUNDS ARE AVAILABLE

The Loan Originator must determine whether funds are available before proceeding 

with further processing. Loan Originators will review the number of applications on hand in 

UniFi at least quarterly. A sufficient number of applications will be reviewed, and Certificates 

of Eligibility will be issued, as appropriate, based on expected state and national funding 

availability by income category over the next 90 days. The Loan Approval Official may use 

historical data, but generally the number of outstanding Certificates of Eligibility will not 

exceed 150 percent of the expected funding. State Directors will issue State Supplements to 

provide guidance about how many applications should be processed based on available 

funding levels.

A. Regular Funding

Nationwide, at least 40 percent of Section 502 loan funds must be allocated to very lowincome households. Since each state meets this goal in different ways, Loan Originators also 

may have to consider the guidance provided through State Supplements in determining whether 

funds are available for the applicant’s income category.

In rare situations, the funds available may be less than the amount for which the applicant 

is eligible. If this occurs, it is important to follow consistent procedures. An example of a 

possible procedure is provided in Exhibit 3-1.

3-14
HB-1-3550

Paragraph 3.11 Determining Whether Funds Are Available

Special Funding

Each year the National Office may designate funds to address special high-priority needs 

identified by the Agency. If an applicant falls into one of those high priority needs areas and 

funds are available, the application can be processed immediately. For example, in a year in 

which funds have been set aside to target a particular geographic area, an application from a 

household willing to seek a property in that area could be processed ahead of other applications.

Information about funds available for high-priority needs are distributed to Field Offices 

through State Supplements, based on guidance from the National Office through RD Instruction 

1940-L.

3.12 IF FUNDING IS NOTAVAILABLE

If funds are insufficient to proceed processing an application from an applicant who has 

been determined eligible, the applicant should be notified using Handbook Letter 2 (3550), 

Funds Not Available that they have been determined eligible, but funding is not currently 

available. The letter should indicate the expected waiting time before funding will become 

available to the applicant, given the applicant’s priority status.

When funds are not readily available to obligate a loan request from an eligible applicant 

who has already been issued a Certificate of Eligibility and/or who has identified a property, 

Field Offices should issue Handbook Letter 4 (3550), Funds Not Available – Certificate of 

Eligibility/Identified Property.

3-15

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571

Exhibit 3-1

Procedures if Funds are Inadequate for the

Next Applicant on the WaitingList

Applicant A is next on the waiting list and qualifies for a

$175,000 loan. Applicant B is eligible for a $140,000 loan. The funds 

available are $145,000.

• Call State Office to ask for more funds.

• Document the results of this conversation. If no more money is

available, offer Applicant A $145,000.

• If Applicant A accepts, proceed.

• If Applicant A does not accept, go to Applicant B and keep 

Applicant A at the top of the waiting list for the next 

available funds.
HB-1-3550

3.13 SELECTING APPLICATIONS FOR PROCESSING

Applications will be selected for processing using the priorities specified in this 

paragraph.

A. Selection Procedures

Within the respective priority categories, completed applications will be processed in the 

order received. In the case of applications with equivalent priority status that are received on the 

same day, veterans’ preference will first be extended to those qualifying applicants.

When funds are limited and eligible applicants will be placed on the waiting list, the 

priorities specified in this paragraph will be used to determine the selection of applications for 

available funds. If a Field Office has a backlog of unprocessed applications, a list of unprocessed 

applications should be generated from UniFi. The Loan Originator must select applications for 

processing based on each applicant’s priority and the date the application was determined 

complete as outlined in Paragraph 3.7. The number of applications selected will be determined 

based on guidance from the State Director.

Whenever applicants are selected for processing, a copy of the waiting list should be 

maintained and placed in an operational file to document that the applications were processed in 

the correct order. This is important because the electronic files will be overwritten, leaving no 

documentation to verify that proper procedures were followed.

B. Processing Priorities

A priority system is used to ensure that applicants who meet the priorities established for 

the program are selected for processing first. The priority system is used only to determine the 

order in which applications will be processed. A priority will be established once an application 

has been determined complete; the priority should be marked on Attachment 3-G and 

completed in the Registration Screen in UniFi. Once applicants are selected for processing, the 

order in which they actually receive funding will depend on how long it takes to conduct all 

required verifications and how long it takes the household to locate a property. Attachment 3-C 

provides a case study that illustrates the use of priorities in selecting applicants for processing.

The Agency gives processing priority to applicants who have an especially serious need 

for immediate assistance and for loans that are to the Agency’s benefit. Applicants with higher 

priorities must be processed before those with lower priorities. Applicants who do not qualify 

for any priority should be processed only when no applications with a priority remain 

unprocessed. Within each priority category, applications should be processed in the order they 

are considered complete. The types of priorities are described below.

1. First Priority: Subsequent Loans to Correct Health and Safety Hazards

Current Agency borrowers who request subsequent loans to correct health and safety 

hazards will be selected for processing first.

3-16
HB-1-3550

Paragraph 3.13 Select Applications For Processing

2. Second Priority: REO Property or Transfer/Purchase of Agency-Financed Property

Applicants interested in obtaining loans for purposes that are in the Agency’s interest, 

but that do not directly involve removing hazards in a security property, will receive 

second priority for processing. These are loans related to the sale of Real Estate Owned 

(REO) property and loans related to the transfer and assumption (or purchase with new 

loan proceeds) of property owned by a program borrower.

3. Third Priority: Hardships

Applicants facing housing-related hardships will receive third priority for processing.

Hardship circumstances include living in deficient housing for more than 6 months. 

Deficient housing is defined as a dwelling that lacks complete plumbing, lacks adequate 

heating, is dilapidated or structurally unsound, has an overcrowding situation that will be 

corrected with loan funds, or is otherwise uninhabitable, unsafe, or poses a health or

environmental threat to the occupant or others. To retain the hardship designation, the

resulting loan must eliminate the deficient housing issue which existed at the time of the 

application. Other hardship circumstances include current homeowners in danger of 

losing a property through foreclosure due to circumstances beyond their control, and 

other circumstances determined appropriate by the State Director on a case-by-case 

basis.

3-17

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

Example - Deficient Housing Scenario

The Smiths are an 8-person household currently living in a 2-bedroom apartment. They 

qualify for hardship processing because they are overcrowded with more than 2 people 

per bedroom. In order to retain the hardship priority, they would need to purchase a 

property (4 or more bedrooms) which corrects the overcrowding condition.

If the Smiths selected a 3-bedroom property, they would no longer qualify for the 

hardship processing/funding priority. However, assuming the dwelling meets the 

property requirements, a loan could be made on the dwelling when funds become 

available under the fifth/general priority, as the Agency has no minimum number of 

bedroom requirement based on household size.
HB-1-3550

Paragraph 3.13 Selecting Applications for Processing

4. Fourth Priority: Loans that Bring in Additional Resources

Applicants seeking loans for the construction of dwellings in an RHS approved 

Mutual Self-Help project, loan application packages funneled through an Agencyapproved intermediary under the certified loan application packaging process, and loans 

that will leverage funding or financing from other sources as outlined in Paragraph 10.1. 

A., will receive fourth priority for processing. 

5. Fifth Priority: Applicants who do not qualify for priority consideration in the 

above listed priorities will be selected for processing after all applications with priority 

status have been processed.

C. Veterans’ Preference

If applicants with equivalent priority status apply for assistance on the same day, 

applicants qualifying for a veterans’ preference will receive priority processing. Applicants are 

eligible for a veterans’ preference if they served in the military forces of the United States, or 

are the family of deceased servicemen who died in service, during any war between the United 

States and any other nation (see 42 U.S.C. 1477).

D. Notifying Applicants Who Are Selected for Processing

When funds are available, applicants selected for processing will be sent Handbook 

Letter 11 (3550), Request Information, if updated and/or additional information is needed 

which may have expired since the eligibility determination. 

Paragraph 4.3 E. describes the required verifications in detail. If an applicant fails to 

provide the needed information within 15 days, the application will be withdrawn. 

Applicants who provide the required information, but cannot be funded that quarter, 

should be notified that they will be selected again when the next quarterly allotment becomes 

available. When funds become available in the subsequent quarter, the Loan Originator should 

contact the applicant to determine whether the household has experienced any changes in 

circumstances that might require new verifications before processing.

3-18
HB-1-3550

HB-1-3550

Paragraph 3.14 Purging the Waiting List and Waiting Period Updates

3.14 PURGING THE WAITINGLIST AND WAITING PERIOD UPDATES

The waiting list should be purged periodically to ensure that the Agency’s records are not 

burdened with applications (which have previously been determined eligible) from households 

that are no longer interested in the program. Once every 6 months, the Loan Originator must 

determine how soon funding will be available to process applications, and generate Handbook 

Letter 3-A (3550), Waiting Period (Funds Not Available), for each application on the waiting list. 

This letter notifies applicants that in order to keep their application active, they must return the 

response form attached to the letter or the application will be withdrawn. If an applicant does not 

respond within 15 days of the date of the letter, the application should be withdrawn. 

Applications which were unable to have an eligibility determination made within 30 days 

of complete application and were sent Handbook Letter 3-B (see Paragraph 3.7), should be sent 

another Handbook Letter 3-B to update the applicant on the estimated wait time. At a minimum, 

Handbook Letter 3-B should be sent within 30 days, and again at 6 months of complete 

application if an eligibility determination has not yet been made. When sending Handbook Letter 

3-B after 6 months from the date of completed application, applicants should be notified that to 

keep their application active, they must return the response form attached to the letter or the 

application will be withdrawn. If an applicant does not respond within 15 days of the date of the 

letter, the application should be withdrawn.

Exhibit 3-2

Application Status

HB Letter 3-A, 

Waiting Period (Funds Not 

Available)

HB Letter 3-B, 

Waiting Period (Extended 

Processing Timeframe)

Determined Eligible, Funds 

Not Available

(HB Letter 2 already sent) 

Send 6 months from date of HB 

Letter 2 if funds are still not 

available. Applicant must notify 

Agency if still interested in

assistance; withdraw application if 

not notified within 15 days. 

Continue to send every 6 months if 

funds are not available, but 

applicant remains interested. 

N/A

Not Yet Determined Eligible 

(e.g., due to application 

backlog)

N/A

Send within 30 days of complete 

application, and at 6 months if still 

unable to make eligibility 

determination. Upon the 6-month 

notification, applicant must notify 

Agency if still interested in

assistance; withdraw application if 

applicant does not respond within 

15 days. 

3-19 (01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

3.15 VERIFICATIONS

Once an applicant is selected for processing, the Loan Originator should update any items 

which may have expired since the eligibility determination was made. The Loan Originator 

should collect and verify items required for the Agency’s decision (e.g., do not collect birth 

certificates to verify age/name of a dependent, require verification of a prior address, etc.).

Generally, the Loan Originator should consider copies of pay stubs and other available 

documentation before using 3rd party verification forms that must be initiated by the Agency. 

When verification forms are sent to a respondent to verify an applicant’s information, they 

should be accompanied by Form RD 3550-1, Authorization to Release Information, and a preaddressed, pre-stamped envelope. If the respondent does not return the verification form within 

14 days, the Loan Originator must place a reminder telephone call. If a respondent returns an 

incomplete verification form or if additional information is needed, the Loan Originator should 

contact the respondent.

An applicant should not be penalized if a respondent refuses to provide the requested 

information. If the respondent does not respond to the verification form after 14 days and does 

not respond to a follow up call, the Loan Originator should move to the use of alternative methods 

of verifying the information. All conversations and follow up actions for obtaining verifications 

should be documented carefully. Detailed procedures for assessing the results of these 

verifications are provided in Paragraph 4.3 E. 

A. Types of Verifications

1. Third-Party Generated Documents

The preferred form of verification are those documents which are readily accessible 

to the applicant and generated by a third-party to officially record their financial dealings 

or involvement with the applicant. Examples of third-party generated documents include 

paycheck stubs, bank statements, and benefit award letters.

3-20
HB-1-3550

Paragraph 3.15 Verifications

2. Written Third-Party Verifications

Written third-party verifications tend to be used as an alternative form of verification.

Correspondence should take place directly between the third party and the Agency (or 

loan application packager) using Agency forms. Transmission of the completed 

verification via fax or secured email is acceptable.

3. Oral Third-Party Verifications

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. Oral 

verifications should be carefully documented in the running record.

B. Evaluating Verified Information

All verifications should be checked for completeness and for discrepancies from 

information provided by the applicant. Any discrepancies should be discussed with the applicant 

and clarifications should be documented carefully. Verification sources may be contacted 

directly, if necessary, to clarify information.

3-21

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 3-A 

Page 1 of 29 

ATTACHMENT 3-A 

LOAN APPLICATION PACKAGERS

The Agency supports partnerships with loan application packagers since packagers can 

provide outreach and presence in counties where a Field Office is not located; assist the 

Agency in reaching very low-income applicants; promote the program in underserved areas; 

prescreen potential applicants; counsel potential applicants on how to improve their ability to 

qualify for a home; ensure that applications are complete and accompanied by the supporting 

documentation needed for the Agency’s decision. 

The packaging types that undergo an Agency approval process (either directly by the Agency 

or through intermediary involvement) are noted below. 

• Section 502 Direct Loan Program:

o Certified packaging which includes an entity eligibility component as 

well as a packager’s experience/training/testing component.

o Approved non-certified packaging which includes an entity eligibility 

component but no packager’s experience/training/testing component. 

• Section 504 Loan/Grant Program:

o Public and private nonprofit packaging which includes an entity 

eligibility component but no packager’s experience/training/testing 

component.

• Section 523 self-help grantee packagers may package Section 502 loan and 

504 loan and/or grant applications under this attachment’s guidance provided 

the applicant is not participating in a mutual self-help project.

Packagers that do not fit the types above are considered “other” and have no entity or packager 

eligibility component. As such, use of “other” packagers is discouraged if they charge a packaging 

fee and any fee they do charge is not an eligible loan purpose. 

This attachment provides packaging fee tables, outlines general requirements which must be met by 

all packaging types, and details how to become a certified packager or how to become an 

intermediary. A Section 502 loan application package (certified or non-certified) that does not meet 

the requirements of this attachment, including all applicable items listed in the cover letters for both 

Phase 1 and Phase 2, will be considered a referral only and the packager or intermediary may not 

charge a packaging fee. In addition, intermediaries (if present) must conduct a quality assurance 

review for both Phase 1 and Phase 2. 

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
HB-1-3550

Attachment 3-A 

Page 2 of 29

Section 502 Direct Packaging Type, Permissible Packaging Fee, and Eligible Loan Purpose:

The Section 502 direct packaging type and who is involved impacts the permissible packaging 

fee amount and whether the fee is an eligible loan purpose. Duplicate fees for packaging services 

are not permitted.

502 Direct Packaging 

Type

Permissible 

Packaging Fee

Regulated by 7

CFR Part 3550 Eligible Loan Purpose?

Certified packaging 

body with an 

intermediary

Up to $2,000 split 

between certified 

packaging body and 

intermediary

Yes 

3550.52 (d)(6)

and 3550.75

Yes

Certified packaging 

body without an 

intermediary (occurs 

when the State Director 

approves an opt-out 

request or when a state is 

not served by an 

intermediary)

Up to $1,750

Yes 

3550.52 (d)(6)

and 3550.75 Yes

Intermediary acting

as a certified packaging 

body Up to $1,750

Yes 

3550.52 (d)(6)

and 3550.75

Yes

Approved non-certified Up to $750 Yes 

3550.52 (d)(6) Yes

Other non-certified 

packaging arrangements 

(packaging activities 

outside of the Agency’s 

regulatory controls such 

as packaging by for-profit 

entities)

Not regulated and 

discouraged when 

a fee is charged

No

No.

In addition, the 

Agency will review 

the impact of the fee 

to the applicant and 

will make the 

determination if it 

adversely affectstheir 

qualification.
HB-1-3550

Attachment 3-A 

Page 3 of 29

Section 523 Grantees Who Package Section 502 Direct Non-Self-Help Loan Applications: 

Applications submitted under the Section 523 Mutual Self-Help program are excluded from 

the certified loan application packaging process; and may not include a packaging fee as an

eligible loan purpose since grantees receive grant funds to package (among other things) and

are provided technical and management assistance. However, a grantee and its staff may 

package Section 502 or Section 504 non-self-help loan applications in accordance with the 

guidance in this attachment. Regardless of which type of loan is being packaged, Section 523 

grantees will follow the packaging guidance in this attachment related to pre-eligibility 

counseling, applicant disclosures, application submissions, and the use of eForms.

Additionally, when grantees also serve as packaging bodies for Section 502 non-self-help loan 

applications there exists the possibility that an applicant originally interested in pursuing a 

self-help loan through Rural Development may ultimately decide to pursue a non-self-help 

loan through Rural Development. This change could occur early in the packaging process or 

after the loan application package is submitted to the Agency. The table below outlines what 

fee is permissible depending on the loan type and/or when such a switch occurs.

Grantee’s packaging 

type:

Applicantselects 

mutual self-help 

before the 

application 

package is 

submitted to the 

Agency.

Switch occurs after the 

package is submitted 

to the Agency but 

before the Agency 

determines the 

applicant’s eligibility 

(which is generally a 

small window of time).

Switch occurs after the 

Agency determines the 

applicant’s eligibility.

Section 523 

Technical 

Assistance (TA) 

grantee packaging 

for a self-help 

applicant

Grantee cannot attempt to collect a packaging fee. The services provided are 

considered part of the TA services charged to the grant.

Certified packaging 

body with an 

intermediary

Grantee must funnel 

the package through 

an intermediary to 

share a packaging 

fee of up to $2,000 

with the 

intermediary.

Grantee cannot attempt 

to collect a packaging 

fee. The services 

provided are considered 

part of the TA services 

charged to the grant.

Grantee cannot attempt to 

collect a packaging fee. 

The services provided 

would be considered part 

of the TA services 

charged to the grant.

Certified packaging 

body without an 

intermediary (i.e.

State Director 

approved opt-out 

or state does not 

have an 

intermediary)

Grantee can charge a packaging fee of up to

$1,750.

Approved non-certified 

packager

Grantee can charge a packaging fee of up to

$750.

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
HB-1-3550

Attachment 3-A 

Page 4 of 29

To reduce the possibility of such a switch occurring and to account for disclosure requirements, 

grantees must make it clear to potential applicants upfront that they have the option of applying 

through the self-help program or non-self-help route to purchase a contractor built or existing 

home and explain what will occur should they switch from self-help to non-self-help (e.g., a 

packaging fee may be charged).

Section 504 Loan and/or Grant Packaging Type, Permissible Packaging Fee, and Eligible Loan 

Purpose:

The Section 504 loan and/or grant packaging type and who is involved impacts the permissible 

packaging fee amount and whether the fee is an eligible loan purpose. The Section 504 program 

is not a part of the certified packaging process (e.g. intermediaries are not involved in reviewing 

Section 504 applications). The Agency and the packaging body will execute a Memorandum of 

Understanding (MOU) using the standardized format, which can be found in SharePoint. Other 

than inserting the entity’s name, states served, the contact persons, and the name/title of the 

authorized representative signing on behalf of the organization, no other changes to the MOU can

be made. Duplicate fees for packaging services are not permitted. Section 523 TA grantees 

submitting an application involved in a rehabilitation project which uses Section 504 loan funding 

are also subject to this guidance.

504

Packaging Type

Permissible 

Packaging Fee

Regulated by 7

CFR Part 3550 Eligible Loan and/or 

Grant Purpose?

Public and private 

nonprofit 

organizations that 

are tax exempt under

the Internal Revenue 

Code

Up to $750 Yes 

3550.102 (d)(5)

Yes

Other packaging 

arrangements

Not regulated and 

discouraged when 

a fee is charged

No

No.

In addition, the Agency 

will review the impact of 

the fee to the applicant 

and will make the 

determination if it 

adversely affects their 

qualification.
HB-1-3550

Attachment 3-A 

Page 5 of 29 

General Packaging Processing Guidance:

All packagers are expected to comply with this general packaging processing guidance regardless of 

their packaging type (certified, approved non-certified, self-help grantee, public/private nonprofit, or 

other). The packager will gather and submit the information needed for the Agency to determine if 

the applicant is eligible along with a fully completed and signed uniform residential loan application. 

For the Section 502 loan program, this review will be completed using the borrower eligibility 

requirements found in Chapter 4 and the Worksheet for Computing Income and Maximum Loan 

Amount Calculator available on the SFH Direct Loan Application Packagers resource page 

(https://www.rd.usda.gov/programs-services/services/direct-loan-application-packagers). For the 

Section 504 program, this review will be completed using the borrower eligibility requirements in 

Chapter 12 and the 504 Automated Worksheet available on the SFH Repair Loan & Grants webpage 

(https://www.rd.usda.gov/programs-services/single-family-housing-repair-loans-grants).

If the potential applicant appears to be ineligible for the program (at any time in the packaging 

process), the packager should counsel them on ways to improve their situation. Packagers 

should not submit loan application packages to the Agency (or to an intermediary if present) 

that are unlikely to be determined eligible by the Agency staff. If the program does not appear 

to be a good fit for the potential applicant, the packager should advise the potential applicant 

that the program does not appear to be a good fit, notify them that they will not continue 

packaging the application as a result but that the potential applicant is welcome to apply 

directly to the Agency. Potential applicants who were considering building via the self-help 

program but who do not appear to qualify for a loan should be counseled that applying directly 

to the Agency would exclude participation in the self-help program.

If the potential applicant appears to be eligible for the program, the packager will:

• Provide the potential applicant with the required disclosure letter. The letter must follow 

the format provided in this attachment and must be signed by the potential applicant. 

• For applicants who are not participating in the self-help program, strongly discourage 

the potential Section 502 direct program applicant from locating a property until the 

Agency receives their application package and issues Form RD 1944- 59, Certificate of 

Eligibility (COE).

• Applicants for the self-help program may be advised of potential property locations and 

house plan options in order to package an application with an appropriate loan amount 

for the project.

• Collect all the items that the Agency will need to consider the package complete. The 

Application Submittal Cover Letter (as provided in this attachment) must be completed 

and included in the submitted loan application package. 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 3-A 

Page 6 of 29

• Applications submitted by all packaging types will be submitted via eForms.

• For the certified process: If an intermediary is present, the packager will send the 

items to the intermediary for a quality assurance review. Once the package is 

accepted by the intermediary, the package will be sent to the Agency via eForms.

• For Section 523 TA grantees submitting applications for a self-help build or 

rehabilitation project, the grantee packager will submit the application directly to 

the Agency via eForms.

• The packager will need to obtain the potential applicant’s credit report to conduct 

a preliminary credit analysis. Any cost for the credit report is considered part of 

the packaging fee and should not be charged to the applicant. The Agency will 

not furnish a credit report for packaging purposes.

• When gathering verifications, the packager should use the preferred sources 

outlined in Chapter 4. Preferred sources generally do not involve asking thirdparties to complete an Agency form and can be obtained with information readily 

available to the applicant (such as pay stubs, award letters, etc.). If a third-party 

verification must be obtained because the preferred source involves a fee, the 

packager may request and receive the form directly. Packagers typically should 

not obtain Form RD 1910-5, Verification of Employment (VOE), nor should 

Agency staff request VOEs for all applications. VOEs should only be obtained if 

the applicant does not have access to paystubs or the information can only be 

obtained through a source which charges a fee.

• Packagers should only gather documents needed for the specific application. For 

example, do not obtain a Landlord’s Verification (Form RD 1944-60) when the 

applicant(s) seemingly qualify for a streamlined credit history analysis. Only 

collect and remit items needed for the Agency’s decision.

• The Agency will accept appraisals ordered by self-help grantees, certified packagers, 

and Agency-approved intermediaries (‘authorized third-party’) provided that:

• Rural Development (RD) is notified of the intent to order the appraisal and 

the cost of the appraisal prior to any contractual commitment. Once 

notified, Rural Development will:

• Within three business days of receiving this notification, issue the 

applicant a third-party appraisal Loan Estimate (LE) and 

accompanying tailored Handbook Letter 5.

• List the cost of the appraisal as provided by the authorized third 

party, which may exceed the Agency’s prevailing appraisal fee in 

Paragraph 5.20 of this handbook.
HB-1-3550

Attachment 3-A 

Page 7 of 29 

• Authorized third-party orders the appraisal only after:

• Receiving notification from RD to proceed with the order. 

• Explaining to the applicant that they are ordering the appraisal on 

the applicant’s behalf and that the applicant will have to cover the 

fee, out-of-pocket, if the loan does not close. 

• The authorized third-party may choose to collect the 

appraisal fee from the applicant prior to ordering. The 

appraisal fee, even though paid to the third party, is an 

allowable excess cost and is eligible to be reimbursed to 

the borrower from their loan proceeds at loan closing. A 

paid receipt must be forwarded to the Field Office to 

ensure proper credit and disclosure on the settlement 

statement. The appraisal fee must be paid prior to closing 

by the self-help grantee, certified packager, intermediary, 

or applicant. The appraisal fee can be reimbursed at 

closing but cannot be invoiced by the appraiser at closing. 

If the authorized third-party or applicant cannot pay for 

the appraisal and wait for reimbursement, then the 

appraisal must be ordered by the Agency. 

• Authorized third-party provides a copy of the paid invoice for the appraisal 

along with a copy of the appraisal that: 

• Meets the Uniform Standards of Professional Appraisal Practice and 

Agency appraisal standards, as described in Chapter 5, Paragraph 

5.14 of this Handbook, and 7 CFR 3550, § 3550.62 Appraisals. 

• Lists Rural Development as an “intended user”.

• The appraisal is reviewed for acceptability by Rural Development. 

• RD must complete Form RD 1922-15, “Administrative Appraisal 

Review for Single Family Housing.” 

• At a minimum, the first five appraisals obtained by an authorized 

third-party will receive a pre-closing technical review.

• All appraisals which are subject to a technical pre-closing review, 

must be entered into the Appraisal Hub on SharePoint to assist with 

the monitoring of performance and compliance. 

• RD staff appraisers should complete their review within three 

business days. At the discretion of the appraisal staff, additional 

revisions or reviews may be required. 

• When additional revisions are needed, they will be addressed by RD 

staff appraisers, in coordination with the Field Staff and the 

authorized third-party. 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 3-A 

Page 8 of 29

• Once the Administrative Appraisal Review (and any applicable technical pre-closing 

review) determines the appraisal is acceptable, the RD processing office must ensure 

the applicant is promptly provided a copy of the appraisal, which must be at least three 

business days prior to closing.

• Loan funds may be used to reimburse the payor of the appraisal fee at loan closing. The 

amount of reimbursement for the appraisal may exceed the Agency’s standard appraisal 

fee (HB-1-3550, Chapter 5, Paragraph 5.20). The paid invoice for the appraisal and 

instructions for “paid outside of closing” reimbursement will be sent to the closing 

agent for proper disclosure and settlement. The Agency will not pay the appraiser 

directly.

If the applicant indicates they wish to withdraw their application which has already been 

submitted to the Agency, the packager must obtain written confirmation from the applicant 

requesting the Agency withdraw their application, or have the applicant contact the Agency 

directly to request withdrawal.
HB-1-3550

Attachment 3-A 

Page 9 of 29 

Required Disclosure Letter: All packagers, regardless of packaging type, must give potential applicants 

this letter after inserting the appropriate letterhead and information where indicated with brackets. Once 

signed by the potential applicant, the packager may assemble the application and submit to the Agency in 

accordance with the guidance in this attachment.

Page 1 of 3

[Insert applicable letterhead: If under the certified packaging process, this required 

disclosure letter must be on the qualified employer’s letterhead. If outside the certified

packaging process or for self-help applications, the packager’s letterhead can be used.]

Dear Potential Applicant:

After talking with you, we think that a direct Section [insert 502 or 504, whichever is

applicable] single family housing loan through the Rural Housing Service (known as the 

“Agency”) is a good loan for you. The Rural Housing Service is an Agency of the United 

States Department of Agriculture.

We do not work for the Agency; we are an outside loan application packager. [Insert name

of organization] will assist you in applying for a loan through the Agency. We do not 

guarantee that your loan application will be approved or funded by the Agency. 

For our services, you will pay a loan application packaging fee of [insert applicable fee 

amount based on the packaging fee tables in Attachment 3-A. For self-help 

applications, enter $0]. The fee is due only if the Agency approves you for a loan and the 

loan closes. We will assist you in finding means to cover the fee from various sources. To

the extent other sources are unavailable, we may waive the fee. [If the organization meets 

the regulatory requirements of 7 CFR 3550 insert, “Under certain circumstances, part 

or all of this fee may be included in your loan.”] 

You are not required to work with a loan application packager to receive assistance from 

the Agency [if self-help, enter “unless you are applying to participate in a mutual selfhelp program”]. You may work directly with the Agency and avoid the loan application

packaging fee. Working with our organization provides you with the following benefits: 

• We will act as a go-between for you and the Agency.

• We will make sure that your paperwork is in order, which should shorten the time it takes 

for the Agency to make an eligibility decision. All information collected will be maintained 

with the highest degree of confidentiality.

• [Insert the following statement if and only if the loan application package will be 

funneled through an Agency-approved intermediary, includes minimum leveraged 

funds, or is a mutual self-help application: “Your application will be considered a 

fourth funding priority when funds are insufficient to serve all program eligible 

applicants.”]

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
Page 2 of 3

[Insert the following if a Section 502 non-self-help loan is being requested: “You are strongly 

discouraged from identifying a property or entering into a purchase agreement until such time as the

Agency issues a Certificate of Eligibility (COE). If and when a COE is issued by the Agency, we 

will help you gather and submit the property information needed by the Agency.”]

We are required to disclose to you and the Agency if we have a financial interest in the property, 

once a property is identified (i.e., developer, builder, seller of, real estate agent, or have any other 

such financial interest). You are not required to purchase a property in which we have a financial 

interest nor are you required to use our services to locate a property. We will still help you gather 

and submit the property information to the Agency. As a loan application packager, we may only 

provide you information on Agency policy and may not influence you to purchase a specific 

property.

[Insert the following if an organization’s employee/board member or packager have a real 

estate agent license: We receive a financial interest when you purchase a home with the services 

of [insert name of real estate agent and/or company] who is a real estate agent and is also 

associated with our organization. You are not required to work with [insert name of real estate 

agent and/or company] as your real estate agent for us to package your loan. If you desire to use 

the service of a real estate agent or company, you may engage the service of any real estate agent or 

company or you may locate a property on your own.]

[Insert the following if the application is part of a mutual self-help project: As a Section 523 

technical assistance grantee, we will assist you with assembling or identifying property 

information for submittal to the Agency.]

We look forward to working with you in preparing an application for an Agency direct loan. 

Respectfully,

[Insert name of organization]

Please complete, sign/date, and return this letter to us so that we can serve as your loan application 

packager.

HB-1-3550

Attachment 3-A 

Page 10 of 29
HB-1-3550

Attachment 3-A 

Page 11 of 29 

Page 3 of 3

WAIVER OF PROVISIONS TO THE PRIVACY ACT OF 1974

To serve as your advocate with the Agency, we need to be kept informed of the Agency’s 

processing of your application and we may need access to items directly obtained by the Agency. 

By signing below, you authorize the Agency to release to and discuss with [insert name of 

organization and the name of the intermediary if present] any information we may seek or 

request from the Agency’s records concerning your application for Agency assistance.

I/we acknowledge these facts and confirm my/our desire to work with [insert name of 

organization]. I/we received this letter on the of 20 . 

_______________________________________________________________________________________

Potential Applicant’s Name/Signature/Date (spell out full name and then sign)

_______________________________________________________________________________________

Potential Co-Applicant’s Name/Signature/Date (spell out full name and then sign)

_______________________________________________________________________________________

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
Packaging Phase 1: Application Submittal Cover Letter

This cover letter must be used to submit all packaged loan applications to the Agency. Insert the 

appropriate letterhead and information where indicated with brackets; and for each item listed in the 

letter, either checkmark and include the item in the package or mark it as not applicable (N/A).

Completion and submission of this cover letter along with all the checkmark items constitutes a 

complete loan application package; and is phase 1 of the loan application packaging process. 

All packaging types must submit the application package via eForms.

Page 1 of 2 

[Insert applicable letterhead: If under the certified packaging process, use the qualified 

employer’s letterhead. If outside the certified packaging process, or for mutual self-help 

applications, the packager’s letterhead can be used.] 

[Insert date of submission]

Dear [insert “Rural Development” if working without an intermediary or insert the name of 

intermediary if working with one]:

The following documents are submitted via eForms to your office for review of the loan 

application package for [insert applicant(s) name]:

□ A copy of [insert “Attachment 3-J” if Section 502 or “Attachment 12-E” if Section 504] 

with all the items applicable for the applicant(s) marked and included in the package.

□ Completed [insert “Worksheet for Computing Income and Maximum Loan

Amount Calculator” if Section 502 or “504 Automated Worksheet” if Section 504] 

□ Copy of the credit report and preliminary credit analysis.

□ Applicant(s) has a valid credit score(s) of (640 or higher if Section 502 or 620 or 

higher if Section 504 loan) and no significant delinquency. 

□ Applicant(s) credit score(s) is not valid or less than the threshold.

□ Form RD 1944-60, Landlord’s Verification, if applicable and score is less than the 

threshold. 

□ Applicant(s) explanation of derogatory credit (if applicable).

□ A loan application narrative which includes an eligibility analysis (income, 

creditworthiness, repayment ability, and payment shock (if applicable)), support of any 

exceptions being requested, and an overall recommendation on the loan application request.

□ A signed copy of the required disclosure letter found in Attachment 3-A.

HB-1-3550

Attachment 3-A 

Page 12 of 29
(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

Page 2 of 2

Please cc: the following contacts as information is shared with the applicant and when critical 

processing activities occur:

Packager contact and email address:

[insert the contact and email address for the application]

Intermediary contact and email address:

[insert the contact and email address for the application]

Sincerely,

[insert packager’s name and qualified employer if applicable]

HB-1-3550

Attachment 3-A

Page 13 of 29
Certified packagers routing through an intermediary will submit the application to the intermediary 

who will conduct a quality assurance review prior to transmitting the loan application package to 

the Agency via eForms. All other packaging types will submit the application directly to the

Agency by eForms.

Upon receipt of a packaged loan application, the Agency will:

• Process the application in accordance with program guidance. As a nationwide program 

with guidance set at the national level, Agency staff will not modify the definition of a 

complete package or ask packagers to perform functions or provide materials over and 

above what is detailed in program guidance. The Agency will accept the electronic Form 

RD 410-4 submitted through eForms; a signature is not required on the RD 410-4 for the 

application to be considered complete. Certified application packagers and intermediaries 

who choose to accept electronic signatures for other application documents must meet the 

standards and requirements set forth in the E-Sign Act, as well as all other applicable 

federal and state regulations and guidelines; and are charged with the same responsibility 

of due diligence with electronically signed documents as they are with paper documents. 

(However, a borrower’s original, handwritten signature must always be obtained on the 

following legal documents obtained at closing: Form RD 1940-16, Promissory Note; 

Form RD 3550-14, Real Estate Mortgage or Deed of Trust (State Specific); Form RD 

3550-12, Subsidy Repayment Agreement; Form RD 3550-24, Grant Agreement; Form 

RD 1955-49, Quitclaim Deed or Warranty Deed; RD 3550-22, Assumption Agreement 

Single Family Housing; Form RD 3550-10, Condominium Rider; and Form RD 3550-11, 

Planned Unit Development Rider.) 

• Order a tri-merge credit report through UniFi (regardless of the type of credit report 

obtained by the packager). 

• Share processing information and updates with the loan application packager (including 

self-help grantees serving as packagers) and intermediary (if present) as information is

shared with the applicant and when critical processing activities have occurred. Critical 

processing activities include but are not limited to: receipt of the loan application 

package, information requests, changes to income calculations or a requested loan 

amount, the eligibility determination, receipt of an appraisal, the underwriting decision, 

and preparation for closing. After the loan application package is accepted, the Agency 

will communicate directly with the applicant(s) if additional information is required. 

When correspondence is sent to the applicant, the packager and intermediary (if 

present) will be copied. 

If and when the Agency has issued a COE, the packager will assist the applicant with phase two 

of the loan application packaging process which is assembling and submitting the property 

information.

HB-1-3550

Attachment 3-A 

Page 14 of 29
HB 1 3550

Packaging Phase 2: Property Submittal Cover Letter

This cover letter must be used to submit property information for packaged loan application 

previously submitted to the Agency under phase 1. Insert the appropriate letterhead and information 

where indicated with brackets; and for each item listed in the letter, either checkmark and include the 

item in the package or mark it as N/A. Completion and submission of this cover letter along with all 

the checkmark items constitutes a complete property submission; and is phase 2 of the loan 

application packaging process. In the event the property is already identified at the time phase 1 or 

the packaged loan application is for repairs, the property submission should be submitted 

simultaneously with the phase 1 submission. 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-A 

Page 15-29
HB-1-3550

Attachment 3-A

Page 16-29

Page 1 of 2

[Insert applicable letterhead: If under the certified packaging process, use the

qualified employer’s letterhead. If outside the certified packaging process, or for selfhelp applications, the packager’s letterhead can be used.]

[Insert date of submission]

Dear [insert the name of intermediary if present since they will do a quality

assurance review on the property submission before sending it to Rural 

Development or insert “Rural Development” if an intermediary is not present]:

The following documents are submitted via encrypted email to your office for

review of the loan application package for [insert applicant(s) name]:

□ A fully executed purchase agreement with applicable addendums

□ A copy of current appraisal, if applicable (see HB-1-3550, Attachment 3-A, “General 

Packaging Processing Guidance” section)

□ A copy of the property eligibility website determination that confirms

the property is in an eligible rural area

□ For existing properties:

□ Copy of a whole house inspection

□ Identification of proposed repairs

□ Proposal for completing repairs (e.g., amended purchase agreement indicating

seller will repair prior to closing, buyer is providing funds, applicant is 

requesting loan funds, etc.)

□ Copy of deed or legal description

□ Copy of existing survey or plot plan drawn to scale (if available)

□ Property tax history and/or assessment information sheet (online sources acceptable)

□ For new construction or significantrepairs:

□ Certified plans

□ Specifications

□ Cost estimates

□ Other applicable items:

□ Packaging fee invoice (for the certified packaging process, invoice

must identify how the fee will be shared between the certified 

packaging body and the intermediary – for instance: $500 to the 

certified packaging body and $1,500 to the intermediary)

□ Updated income, debt, and asset verification documentation (i.e.,

paystubs, award letters, bank statements, confirmation of new debt 

payments, etc.) for any items which have expired since the Phase 1 

submission, or will expire within the next 30 days

□ Updated Worksheet for Computing Income and Maximum Loan Amount Calculator

(updated income, household composition, or other eligibility details if changes have 

occurred since the Certificate of Eligibility, and requested loan amount and property 

details based on selected property)
Page 2 of 2

□ Updated loan application narrative which addresses any changes from the

Phase 1 submission

If you have any questions regarding this submittal, please contact packager with copy to 

intermediary contact:

Packager contact and email address:

[insert the contact and email address for the application]

Intermediary contact and email address:

[insert the contact and email address for the application]

Sincerely,

[insert packager’s name and qualified employer if applicable]

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-A

17 of 29
Upon receipt of the property information, the Agency will:

• Issue the Loan Estimate; the packaging fee must be shown on the Loan Estimate 

under “Origination Charges” for regulated packaging activity 

• Order the flood hazard determination and complete an environmental analysis on the 

property

• Review/accept plans/specs or repair proposals

• As applicable, order an appraisal, review/accept the appraisal upon receipt (see “General Packaging 

Processing Guidance” section of Attachment 3-A for guidance on third-party appraisals)

• Determine property eligibility

• As it relates to the packaging fee:

• Confirm the fee amount listed on the invoice matches the disclosure letter issued by 

the packager/intermediary and signed by the applicant 

• Confirm the fee amount is within the permissible limit

• Determine how the packaging fee will be paid, considering that:

• The fee as stated on the invoice cannot be altered by the 

Agency even if it cannot be fully covered by loan funds 

• The fee may be paid with any combination of loan proceeds 

(assuming adequate loan to value ratios), affordable housing 

products, gift funds, seller contributions, and/or buyer funds 

• Any reduction or waiver to the fee can only be authorized by the 

packager and intermediary (if present) and should be reflected in an 

updated invoice 

• Complete loan underwriting and

• Approve the loan and obligate loan funds using the applicable packaging program type 

code; issue Form RD 3550-7, Funding Commitment and Notification of Loan Closing, 

to the applicant; and prepare for loan closing; or

• Deny the loan request and provide the applicant with the applicable rights

Packagers should be well acclimated with 7 CFR Part 3550 and Handbook-1-3550, both of 

which can be found at https://www.rd.usda.gov/resources/directives/handbooks. Packagers 

are required to:

• Comply with the Equal Credit Opportunity Act and the civil rights requirements contained 

in RD Instruction 1901-E.

• Prepare an Affirmative Fair Housing Marketing plan (AFHMP), if they intend on 

submitting five or more loan application packages to purchase and/or construct dwellings in 

the same subdivision. The completed AFHMP must be submitted to the local Rural 

Development office for review and approval. 

• Understand and (if applicable) comply with the SAFE Act. The SAFE Act, which is a 

Federal regulation with state-level enforcement and possible requirements over and above 

the federal minimum standards, addresses those engaged in loan originator activities. Rural 

Development does not enforce or monitor SAFE Act compliance.

HB-1-3550

Attachment 3-A 

18 of 29
• Provide the Agency with complete, accurate, and timely information needed to comply 

with the disclosure requirements under the Truth in Lending and Real Estate Settlement 

Procedures Act Integrated Mortgage Disclosures. Packagers are not authorized to issue the 

Loan Estimate or Closing Disclosure on behalf of the Agency. 

• Be in good standing with the Government (e.g., not suspended or debarred from 

participating in Federal programs).

Please note that the packager’s performance will be monitored by the Agency. If the packager 

submits a significant number of packages that are incomplete and/or ineligible, the State 

Director may determine their services to be unacceptable.

Items specific to the Certified Loan Application Packaging Process:

The certified loan application packaging process involves three distinct parties:

• Agency-certified loan application packager. 

o An individual certified by the Rural Housing Service (RHS) to package section 

502 loan applications. Certification is verified by the intermediary through whom 

application packages are routed. 

o Must be employed (employee or independent contractor) by a qualified employer.

• Qualified employer. 

o An affordable housing nonprofit organization, public agency, tribal housing 

authority, or State Housing Finance Agency that meets the requirements of 

§ 3550.75 (b)(2).

o Involved in the 502 direct program certified loan application packaging process.

• Agency-approved intermediary. 

o An affordable housing nonprofit, public agency, or State Housing Finance 

Agency approved by RHS to perform quality assurance reviews on packages 

prepared by Agency-certified loan application packagers through their qualified 

employers.

o National Office reviews/approves applications and will update the Agency’s 

website as new intermediaries are approved.

Becoming a Certified Packager:

An individual interested in becoming a certified packager should take the following steps:

1. Ensure that you are employed by a qualified employer who meets the requirements 

stated above. Employment can be in various forms such as: a contract basis, parttime or full-time employee.

2. Become familiar with the SFH Direct Loan Application Packagers resource page at 

https://www.rd.usda.gov/programs-services/services/direct-loan-applicationpackagers. This page contains notices of upcoming certified loan application 

packaging trainings, training webinars, the intermediary coverage map, and other 

resources related to packaging Section 502 direct loan applications. 

(1-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-A 

Page 19 of 29
3. Contact the intermediary(ies) in the state(s) in which you wish to package loans. 

Each intermediary will have an agreement for you to review/sign in order to package 

loan applications through them. You may work with multiple intermediaries 

depending on the service area you wish to cover. 

4. Once you have identified with an intermediary as being part of the certified 

packaging process, you have 12 months to take the loan application packaging 

course and pass the corresponding test. It is your responsibility to provide evidence 

to the intermediary that you have completed this requirement. During the 12-month 

period, you may package loans and funnel them via the intermediary who will 

conduct the quality assurance review and provide technical assistance.

Loan Application Packaging Course:

Under the certified packaging process, the course requirements outlined in 7 CFR

3550.75(b) (1)(iii),(b)(3)(vii) and (c) can be fulfilled by the Agency approved packaging course 

offered by NeighborWorks, the Housing Assistance Council, and Rural Community Assistance 

Corporation. Please note that:

• Upcoming trainings are listed under the SFH Direct Loan Application Packagers 

resource page at https://www.rd.usda.gov/programs-services/services/directloan-application-packagers

• Due to limited training availability, the Agency may approve parties to participate 

in the certified packaging process even if the training has not been completed and 

provided all other requirements are met upfront; however, the participation in the 

certified packaging process is contingent upon the party’s successful completion of 

the course requirements within a reasonable timeframe. Parties will have one year 

from the date of being added to the certified packaging process to complete the 

course requirements and provide evidence to the appropriate party (intermediary or 

Agency depending on the situation) that the requirements have been fulfilled. 

Failure to provide the necessary evidence within the allotted time will result in 

immediate removal from the certified packaging process. For certified packagers 

funneling through an intermediary, the intermediary is responsible for monitoring 

compliance with the course requirements and notifying the certified packager of 

their removal from the process if not met. For certified packagers with an approved 

opt-out, the State Office is responsible. Once removed, the party won’t be able to 

participate in the process until the course requirements have been met (and all other 

requirements continue to be met).

HB-1-3550

Attachment 3-A 

Page 20 of 29
HB-1-3550

Attachment 3-A 

Page 21 of 29

• Course participants should take the corresponding test within 30 days of completing 

the course. A score of 70 percent or higher is needed to pass. If the participant 

does not pass the initial test, they can retry up to two more times within 90 days 

from taking the course. Failure to pass the test after three attempts will result in the 

need to retake the Agency-approved training. 

• A recent, now former, Rural Development employee with five or more years of 

residential loan experience acquired while working in the Agency’s singlefamily 

housing programs is exempt from the course requirements.

• After having taken the course and passing the test, the Agency may require a 

certified packager to retake the course/test in order to continue participating in the 

certified packaging process. This requirement may be triggered by an extended 

period of packaging inactivity, unacceptable packaging performance, a 

recommendation from the intermediary, or other justifiable reason.

Intermediary Approval:

Entities interested in becoming an Agency-approved intermediary are encouraged to view the training 

webinars “Role of the Intermediary” and “How to Become an Intermediary” before beginning the

application process. Both webinars can be found on the SFH Direct Loan Application Packagers 

resource page at https://www.rd.usda.gov/programs-services/services/direct-loan-applicationpackagers.

To apply to be an Agency-approved intermediary under the certified packaging process, an interested 

party must furnish sufficient documentation to demonstrate to the Agency’s satisfaction that they 

meet each of the conditions specified in 7 CFR 3550.75(b)(3) and as further detailed below. This 

documentation constitutes the application. Applications to be an Agency- approved intermediary are 

welcomed at any time and emailed to SFHDIRECTPROGRAM@usda.gov. The application will be 

reviewed by National Office with input from the applicable State Office(s). Decisions by the Agency

on intermediary applications are not appealable to the National Appeals Division. 

Once approved, the Agency will execute a Memorandum of Understanding (MOU) with the 

intermediary. A copy of the MOU and a list of approved intermediaries can be found on the SFH 

Direct Loan Application Packagers resource page at https://www.rd.usda.gov/programsservices/services/direct- loan-application-packagers. 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
Instructions: For each eligibility requirement, complete the cover sheet to identify the information

being provided and enter the date of the document being submitted. If an item is not applicable, 

enter “N/A”. 

COVER SHEET FOR SUBMITTAL OF INTERMEDIARY APPLICATION

Based on our submittal of the information below, [insert name of the entity submitting 

an application] seeks to become an approved intermediary for the certified loan 

application packaging process in [insert the state(s) in which you are applying to be an 

intermediary]:

Eligibility Requirement Identify the documentation 

being submitted as evidence 

thisrequirement has been met

Document 

Date

*Be a public agency or a Section 501 (c)(3) nonprofit IRS nonprofit

organization as evidenced by the organization’s determination letter for 501

Internal Revenue Service (IRS) nonprofit (c) (3) status

determination letter for 501 (c) (3) status. A public

agency may include:

(a) Any state board, commission, committee, State statute

department, educational institution, or other state

agency which is created by or pursuant to state statute,

other than courts and the legislature;

(b) Any county, city, school district, special purpose Ordinance

district, or other municipal corporation or political

subdivision of the state;

(c) Any subagency of a public agency which is created

by or pursuant to statute, ordinance, or other 

legislative act, including but not limited to planning

Other legislative act 

(identify act below):

commissions, library or park boards, commissions,

and agencies; and

(d) Any policy group whose membership includes

representatives of publicly owned utilities formed by 

or pursuant to the laws of this state when meeting

Formation of publicly 

owned utilities 

together as or on behalf of participants who have

contracted for the output of generating plants being

planned or built by an operating agency.

*Be in good standing in the state(s) of its operation as Certificate of Good

evidenced by a Certificate of Good Standing or Standing from the Secretary

equivalent documentation from the applicable of State

Recent State filings

HB-1-3550

Attachment 3-A 

Page 22 of 29
Eligibility Requirement Identify the documentation 

being submitted as evidence 

thisrequirement has been met

Document 

Date

*Have the capacity to serve multiple qualified Narrative describing

employers and their Agency-certified loan application current processing

packagers throughout an entire state or entire states volumes/staffing and

and have the capacity to perform quality assurance projected processing

reviews on a large volume of packaged loan volumes/staffing; and indicate

applications within five business days of how volumes will be

receipt. addressed within timeframes

Identify what state or states the interested party 

proposes to serve and provide details on their capacity 

to serve the identified state(s).

Narrative identifying 

states to be served and 

capacity

*Be engaged in affordable housing in accordance with Copy of articles of

their regulations, articles of incorporation, or bylaws. incorporation

 Copy of bylaws

 Copy of regulations

*Be financially viable and demonstrate positive 

operating performance as evidenced by an 

independent audit paid for by the applicant seeking to 

be an intermediary.

Copy of most recent 

independent audit for [insert 

year]

*Have at least five years of verifiable experience with 

the Agency’s direct single family housing programs 

(specifically the Section 502 direct program, the 

Section 504 repair programs, and/or the Section 523 

mutual self-help housing technical assistance 

program). Verifiable experiences would include, but 

are not exclusive to, routinely leveraging resources for 

individual transactions (e.g. providing affordable 

housing products to Agency borrowers), packaging 

loan applications, and/or being a self-help grantee or 

technical and management assistance contractor. To 

the greatest extent possible, the submission should 

detail collaborations and dollars leveraged.

Narrative detailing 

how/what experience 

requirements have been met

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571

HB-1-3550

Attachment 3-A 

Page 23 of 29
Eligibility Requirement Identify which documentation 

submitted as evidence this 

requirement has been met

Document 

Date

*For certified packagers, a letter of recommendation 

from the intermediary that completed the quality 

assurance reviews on packages, which should include 

the number of closed loans, and complete and 

incomplete applications in the last 12 months (as 

applicable). The overall success rate will be

calculated using the same method described in the 

“Request to Work Without An Intermediary” section 

of Attachment 3-A.

Copy of letter/email 

from [insert the applicable 

state(s)]

*Demonstrate that its quality assurance staff has 

experience with packaging, originating, or 

underwriting affordable housing loans. Provide a 

resume for each quality assurance staff member. The 

breadth and depth of their combined skills and 

qualifications will be considered during the Agency’s 

application review process.

Resume provided for 

[insert name(s) of quality 

assurance staff]

Provide a quality control plan that is customized to the Copy of quality

applicant’s organization. The quality control plan must assurance plan which

show there are controls in place to process application addresses:

packages that will likely result in an eligibility

determination by the Agency. The plan should include Item 1

at a minimum, but not limited to: (1) procedures for

obtaining and evaluating loan application documents Item 2

(e.g. credit checks and income verification); (2)

measures the applicant will take to prevent the Item 3

submission of incomplete or ineligible application

packages to the Agency; (3) the standard operating Item 4

procedures for employees who will be involved with

or affected by the quality control process; and, (4)

procedures for ensuring accurate information is

submitted to the Agency.

Ensure that their quality assurance staff completes an Evidence of course

Agency-approved loan application packaging course attendance by staff

reasonable amount of time if selected. Evidence of passing

test successfully

OR

Certification that this

requirement will be

completed within a reasonable

timeframe as specified by the

Agency should the application

be approved

HB-1-3550

Attachment 3-A 

Page 24 of 29
Eligibility Requirement Identify which documentation 

submitted as evidence this 

requirement has been met

Document 

Date

Provide a letter jointly signed by the organization’s 

Executive Director and Board President affirming the 

organization will not be the developer, builder, seller 

of, or have any other such financial interest in the 

properties for which the application packages are 

submitted by the organization as an intermediary 

pursuant to this notice. NOTE: An intermediary that 

is also a Community Development Financial 

Institution (CDFI) will not be considered 

noncompliant when CDFI funds are tied to the 

transaction.

Copy of signedletter

Provide a training and support plan that focuses on the 

measures the applicant will take to provide 

supplemental training, technical assistance, and 

support to certified loan application packagers and 

qualified employers to promote quality standards and 

accountability. (Note that the Agency may require 

implementation of Agency developed and/or approved 

training and support plan once accepted as an 

intermediary pursuant to this notice.)

Copy of training and 

support plan 

Letter of recommendation from the Rural 

Development Housing Program Director for each state 

you are proposing to serve.

Copy of letter/email from 

[insert the applicable 

state(s)]

Have the authorized representative for your 

organization sign the standard Memorandum of 

Understanding (MOU) between the intermediary and 

the Agency, which can be found at: 

https://www.rd.usda.gov/programsservices/services/direct-loan-application-packagers.

Other than inserting the entity’s name, the 

intermediary’s contact person, and the name/title of 

the authorized representative signing on behalf of the 

organization, no other changes to the MOU can be 

made. If unauthorized changes are made, the MOU 

will be nullified. If approved, the Agency will sign 

and fully execute the MOU.

MOU signed/dated

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571

HB-1-3550

Attachment 3-A 

Page 25 of 29
Identify main point of contact for intermediary. This Name:

is the person who may be contacted by the Agency, Title:

potential packagers, and potential applicants for Address:

information. Phone:

Email:

Fax:

Intermediary website:

Identify the person who is authorized to sign a MOU Name:

on behalf of the entity. Title:

Address:

Phone:

Email:

Fax:

*A State Housing Finance Agency (HFA) need not demonstrate meeting these items, given the 

State’s HFA purpose, vision and structure.

Signature of authorized representative Date

HB-1-3550

Attachment 3-A

Page 26 of 29
Intermediary Involvement:

If a state is served by multiple intermediaries, a certified packaging body may choose which 

intermediary through which to funnel their packaged loan applications. 

State Directors will require all certified packaging bodies to funnel packaged loan applications 

through an intermediary (if present in the state) unless the certified packaging body requests and 

meets the requirements for an opt-out as outlined below. If a certified packaging body serves 

multiple states, the request must be made on a per state basis. These opt-out requirements will 

help ensure that opt-out requests are handled in a consistent manner nationwide. 

Requests To Work Without An Intermediary: 

State Directors may approve an opt-out request from a certified packaging body when the request 

is supported by the intermediary based on the quality and quantity of loan application packages 

submitted by the certified packaging body through the intermediary. At a minimum, the certified 

packaging body must have funneled at least 20 loan application packages through the same 

intermediary and have funneled packages through the same intermediary for a period of at least 

12 months before an opt-out can be considered. With these minimums in mind, the intermediary 

will support the request if the certified packaging body has a 90% or higher overall success rate.

The overall success rate is based on 1) the number of 

applications submitted which are complete and 2) the 

number of loans closed vs. applications submitted. 

To calculate the overall success rate for an opt-out 

request, the rate for complete applications received and 

applications closed will be averaged.

Cases where an applicant chose to withdraw their 

application despite being eligible based on a welldocumented loan application package will not be counted 

against the packager (i.e. the application will be counted 

as a complete application).

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-A 

Page 27 of 29

Sample calculations 

Complete application rate calculation:

Applications submitted: 10

Applications complete: 7 

7 divided by 10 = 70% success rate 

Overall success rate calculation: 

Applications complete: 70%

Applications closed: 95%

Total: 165%

165% divided by 2 = 82.5% overall
The intermediary will apply the following conditions when the request cannot be initially supported; 

these conditions specify when a subsequent opt-out request will be supported.

• Overall success rate of 85% - 89.99% at the time of the original opt-out request: Requires 

an additional three months of oversight and support by the intermediary and five or more 

complete application packages with a 90% or higher success rate.

• Overall success rate of 80% - 84.99% at the time of the original opt-out request: Requires 

an additional six months of oversight and support by the intermediary and ten or more 

complete application packages with a 90% or higher successrate.

• Overall success rate of less than 80% at the time of the original opt-out request: Requires 

an additional 12 months of oversight and support by the intermediary and 20 or more 

complete application packages with a 90% of higher successrate.

A statement of support from an intermediary is not required when a State Housing Finance 

Agency requests an opt-out through the State Director.

When an intermediary is not involved because an opt-out request from a certified packaging 

body was approved by the State Director or because an intermediary doesn’t cover a particular

state, it will fall upon the State Office to:

• Ensure that a certified packaging body meets and continues to meet the conditions 

outlined in 7 CFR 3550.75(b)(1), (b)(2), (d), and (e).

• Enter into a MOU with the certified packaging body using the standardized format 

(which can be found in SharePoint).

• Update the Agency’s state-level website using a standardized template to identify 

certified packaging bodies with an approved opt-out.

When an intermediary is not involved because a non-certified packaging body was approved by 

the State Director, it is the State Office responsibility to:

• Ensure that a non-certified packaging body meets and continues to meet the

conditions outlined in 7 CFR 3550.52 (d)(6).

• Enter into a MOU with the non-certified packaging body using the standardized

format (which can be found in SharePoint).

• Update the Agency’s state-level website using a standardized template to identify 

non-certified packaging bodies.

HB-1-3550

Attachment 3-A

Page 28 of 29
An Intermediary’s Performance Elements

Intermediaries enter into a MOU which details performance elements. While the MOU contains 

other requirements, which are also considered when assessing performance, the minimum 

performance elements and their rating structure are defined below:

1. The intermediary will outreach to parties that could potentially serve as a certified 

packaging body.

2. It is expected that packaged loan applications funneled through the intermediary will 

receive a high rate of Agency approval (with minimal need for the Agency to request 

additional information). The following measures (applied to both applications received 

and closed) will be used, on a per state basis, for timeframes to be determined by the 

Agency. These rates will be calculated using the same method as identified earlier in this 

attachment:

a. Success rate of 90% or higher: Excellent.

b. Success rate of 85% - 89.99%: Meets.

c. Success rate of 80% - 84.99%: Needs to improve in the following quarter or face 

possible revocation.

d. Success rate of under 80%: Subject to immediate revocation of intermediary 

status.

3. On a per state basis and for timeframes to be determined by the Agency, at least 30 

percent of the applications submitted under this MOU must be from eligible very lowincome applicants, with the balance from eligible low-income applicants.

Based on these criteria, a scoring system will be used to rate overall performance during a 12 

month period:

# Minimum Performance 

Elements Met

Status of MOU Action Required By 

The Intermediary

Improvement Timeframe

3 out of 3 Excellent None N/A

2 out of 3 Acceptable Emphasis on 

improving deficient 

area

Within the next quarter

1 out of 3 Unacceptable Immediate action to 

improve in deficient 

areas

If no improvement within 

the next quarter, MOU is 

revoked

0 out of 3 Immediate 

revocation

N/A N/A

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-A

Page 29 of 29
ATTACHMENT 3-B 

FOLLOW-UP QUESTIONS FOR

HB-1-3550

Attachment 3-B 

Page 1 of 4 

FORM RD 410-4, UNIFORM RESIDENTIAL LOAN APPLICATION 

Form RD 410-4, Uniform Residential Loan Application is designed to obtain a broad 

range of applicant information. To accurately process an Agency loan, however, the Loan 

Originator must review the application carefully and ask follow-up questions to ensure that all 

relevant information has been obtained. This attachment provides a list of questions that may be 

useful for each section of the application. Not all questions will be needed for all applicants, and 

additional information may be needed in some cases. 

I. Type of Mortgage and Terms of Loan

• None.

II. Property Information and Purpose of Loan

• Determine whether the applicant intends to purchase a Real Estate Owned (REO) 

property or assume a loan from a program borrower and explain how this may 

affect their processing priority.

• Determine whether the applicant is interested in a leveraged loan or if the 

application was submitted by a packager, including an explanation of 

how this affects their processing priority. 

• If the applicant wishes to refinance, obtain details about why and also inquire about 

the type and condition of their home. The Agency will refinance loans only in 

limited circumstances.

• If the applicant will not reside in the property, confirm that the applicant wishes to 

obtain a nonprogram loan. 

• If the applicant is requesting a subsequent loan to improve the property, determine 

whether the repairs are necessary to maintain the security, or to meet the family’s 

housing needs and explain how the processing priorities would be applied. 

III. Borrower Information (as well as Additional Information Required for RHS Assistance)

• Name, age, and relationship of all household members.

• Confirm number and ages of dependents.

• Any foster children or foster adults?

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 3-B 

Page 2 of 4

• Any full-time students?

• Any household members with disabilities?

• Any elderly household members?

• If the household qualifies as an elderly household, does the household have 

extensive medical expenses?

IV. Employment Information (as well as Additional Information Required for RHS 

Assistance)

• If there is an adult household member who has recently changed jobs, determine the 

reason for the job change.

• If there is an adult household member for whom no employer information has been 

provided, determine whether the person is employed.

• If any adult household member is unemployed, determine for how long.

• Discuss employment gaps in excess of 30 days with the applicant.

V. Monthly Income and Combined Housing Expense Information (as wellas 

Additional Information Required for RHS Assistance)

• Verify that income listed is comprised of all sources of income, including income 

from applicants, spouses of applicants (even if the spouse is a minor), and any other 

adult household members.

• If the income history reveals significant fluctuations, discuss the income trends with 

the applicant.

VI. Assets andLiabilities

• If the household reports owning real estate, discuss the type of property owned to 

verify that the reported market value is reasonable.

VII. Details of Transaction

• If completed by applicant, review information to confirmaccuracy.

• If the applicant reports any judgments, bankruptcies, lawsuits, foreclosures or deeds 

in lieu of foreclosure, or delinquencies on a Federal debt or any other obligations, 

determine the particular circumstances.
HB-1-3550

Attachment 3-B 

Page 3 of 4

VIII. Declarations

• If the applicant reports any alimony, child support, or separate maintenance 

obligations, verify that it is included as a liability in Section VI of Form RD410-4.

• If the applicant has applied for a nonprogram loan, determine whether any part of a 

proposed down payment will be borrowed, since other debt will affect repayment 

ability.

• If the applicant is not a U.S. citizen, verify that he or she is a qualified alien.

• If the applicant does not intend to occupy the property, verify that the applicant 

intends to obtain a nonprogram loan.

• If the applicant has had ownership interest in a property, determine how that interest 

was disposed of to ensure that it was not disposed of at below market value.

IX. Acknowledgment and Agreement

• None.

X. Information For Government MonitoringPurposes

• None.

(01-23-03) SPECIAL PN

Revised (01-06-17) PN 492
HB-1-3550

Attachment 3-B 

Page 4 of 4

Additional Information Required for Agency Assistance

• If the applicant has received prior assistance, determine whether there were any 

repayment problems, and in the case of a Section 504 loan or grant, whether the 

assistance limit has been reached.

• If the applicant is a veteran, or family of a deceased service person, determine the 

dates of service, the type of discharge received, and the date of death, if deceased.

• If the applicant lists a household member as disabled, determine whether the 

household may be entitled to a deduction for the costs of dependent care to allow a 

household member to further their education or to work, and whether any 

reasonable accommodations may be required.

• If the applicant lists childcare costs, determine whether child care is needed to 

allow a household member to further their education or to work (if it is to allow the 

applicant to work, determine whether the salary the applicant receives is equal to or 

greater than the cost of child care and the age of the child for which care is being 

provided).

• If the applicant indicates that the present dwelling has physical problems or is 

overcrowded, obtain details about the nature and duration of the problem.

• If the applicant did not include alimony, child support, or separate maintenance 

information in Section V of Form RD 410-4, make sure the information is provided.
HB-1-3550

Attachment 3-C 

Page 1 of 4

ATTACHMENT 3-C 

CASE STUDY - PROCESSINGPRIORITIES

Applications will be selected for processing using the priorities specified in Paragraph 3.13. The 

Field Office currently has a backlog of applications in Big Gap County which has been designated 

as a high priority needs area for which the Agency has a special set-aside. The Loan Originator 

must review the following applications to process any that can take advantage of the set-aside 

funds and to select applications for processing in anticipation of additional funding not designated 

for set-asides that will be available soon. Part I provides information on the applicants, their current 

situations, and the dates of the applications. Part II illustrates the analysis and ranks the 

applications in the order of selection.

Part I. Applicants

Application 

Complete 

Date

Applicant Description

9/5 De Moura Ms. De Moura has owned her home, which was financed by a local 

lender for 3 years. Last year, she was laid off from her job but has 

found a new position that pays only half the salary. As a result, she is 

behind in her loan payments and the lender has accelerated her loan. 

Ms. De Moura would like to refinance with Agency funds.

9/6 Sapienza The Sapienzas used a Section 502 loan to purchase an existing home. 

They are requesting a subsequent 502 loan to install a retaining wall 

because of erosion in the backyard.

9/7 Yao The Yaos wish to purchase a newly built house. They would like to 

obtain a Section 502 loan and their loan application package was 

submitted via an Agency-approved intermediary.

9/8 Jones The Joneses moved into the area 4 months ago and would like to 

purchase an existing house using Section 502 funds because the rental 

unit the family occupies is too small for the family and has an 

inadequate heating system.

9/9 Garcia The Garcias would like to purchase a home from Greenes who have 

been paying regularly on their Section 502 loan but are now 

transferring out of state.

9/9 Olsen The Olsens wish to purchase a Real Estate Owned (REO) property 

using Section 502 funds. In addition, Mr. Olsen served in active 

military duty during the Vietnam war. 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 3-C 

Page 2 of 4

Application 

Complete 

Date

Applicant Description

9/14 Brown The Browns used a Section 502 loan to purchase an existing home. 

Their septic system no longer works properly and needs significant 

repairs, and they are requesting a subsequent 502 loan to repair it. 

They are 2 payments behind on their initial loan.

9/15 Johnson The Johnsons would like to purchase a home from a current Agency 

borrower but have income well above the low-income limit.

9/16 Smith The Smiths would like to build a home on a site in Big Gap County.

9/21 Pawlikowski The Pawlikowskis have been without adequate plumbing for 8 months. 

They would like to purchase a newly built house using Section 502 

funds.

9/21 Deitrich The Deitrichs would like to build a new house because they feel their 

current 3-bedroom home is too small to accommodate Mr. and Mrs. 

Deitrich, their 3 children, and his Aunt Greta, who has recently moved 

in. They wish to fund the construction through a Section 502 loan.

9/23 Whitfield The Whitfields wish to purchase a home from an Agency borrower 

who has an accelerated account.

Part II. Establishing Priorities

Selection 

Order Applicant

Application 

Complete 

Date

Priority Priority Status

N/A Johnson 9/15 N/A Although the Johnsons are not program-eligible, 

they may purchase the home under nonprogram 

terms. No additional funds are required because 

a nonprogram borrower can only assume the 

outstanding balance at new rates and terms.

Processing need not be delayed until additional 

funds are available.

N/A Smith 9/16 N/A The Smithsreceive funding immediately from 

the set-aside.

1 Brown 9/14 1 The Browns receive first-priority processing for 

new funds because they are requesting a 

subsequent loan to remove health and safety 

hazards. The Loan Originatorshould counsel the 

Browns to contact the Servicing Office to 

resolve the delinquency. The Loan Originator 

may need to coordinate with the Servicing 

Office about whether a loan or protective 

advance is most appropriate.
HB-1-3550

Attachment 3-C 

Page 3 of 4

Selection 

Order Applicant

Application 

Complete 

Date

Priority Priority Status

2 Olsen 9/9 2 Since the Olsens are purchasing an REO property, 

the Agency gives second-priority processing to 

their request.

3 Garcia 9/9 2 The Garcias receive second-priority processing 

because they are assuming a home from an 

Agency borrower. Although their application was 

completed on the same day as the Olsens’, the 

Olsens receive priority because Mr. Olsen 

qualifies for a veterans’ preference.

4 Whitfield 9/23 2 The Whitfields receive second-priority processing 

because they are assuming a loan from an existing 

Agency borrower. Purchasing a home from a 

borrower who has an accelerated account does not 

give the Whitfields processing priority over the 

Garcias who also are assuming a loan from a 

current borrower. Within priority categories 

applications are selected by application date.

5 De Moura 9/5 3 Ms. De Moura receives third-priority processing 

because she is in danger of losing her home 

through foreclosure due to circumstances beyond 

her control.

6 Pawlikowski 9/21 3 Since the Pawlikowskis have been living in 

deficient housing for at least 6 months, they 

receive third-priority processing.

7 Yao 9/7 4 The Yaos receive fourth-priority processing 

because their loan application package was 

submitted via an Agency-approved intermediary

8 Sapienza 9/6 5 The Sapienzasreceive fifth-priority processing; they 

are requesting a subsequent loan to make needed 

repairs for a condition that, at this time, does not 

constitute a health and safety hazard.

The Sapienzas application will be processed after 

all applicants with priorities have been processed.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 3-C 

Page 4 of 4

Selection 

Order Applicant

Application 

Complete 

Date

Priority Priority Status

9 Jones 9/8 5 The Joneses receive fifth-priority processing. 

Although they have been living in deficient 

housing for 4 months, they are currently 2 

months short of receiving second-priority 

processing. If within 2 months funding is still 

not available, the Joneses would receive secondpriority processing, and would be processed 

before the Olsens.

10 Deitrich 9/21 5 The Deitrichs receive fifth-priority processing. The 

application will be processed after all applicants 

with priorities have been processed. Although the 

family believes the house is too small, it is not 

sufficiently overcrowded to be considered 

deficient, because there are no more than 2 people 

per bedroom.
ATTACHMENT 3-D 

RURAL DEVELOPMENT

RURAL HOUSING SERVICE

“Applicant Information Sheet” - Single Family Housing

The Rural Housing Service (RHS) provides loans in rural areas to eligible low- and very 

low-income applicants. The loan may be to purchase existing housing, purchase and repair 

existing housing, purchase a building site and construct a dwelling, or purchase new housing. 

Rural areas typically include open country and places with a population of 10,000 or less and, 

under certain conditions, towns and cities between 10,000 and 20,000 population. 

For detailed information on income limits and eligible areas, visit: 

https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do.

The property must be in good repair or placed in good repair with loan funds. For an 

existing property, a whole house inspection performed by a qualified inspector is needed. The 

buyer and seller should discuss who will cover the cost of the whole house inspection and 

address this item in the purchase agreement.

All who apply get equal consideration without regard to race, color, national origin, 

religion, sex, gender identity, sexual orientation, disability, age, marital status, family/parental 

status, income derived from a public assistance program, political beliefs, or reprisal or 

retaliation for prior civil rights activity.

To apply, complete all the applicable items in the attached checklist of items to 

accompany the uniform residential loan application and submit the package using one of the 

options below: 

• Through a loan application packager. To locate an application packager, please visit 

https://www.rd.usda.gov/sites/default/files/RD-SFH-IntermediaryMap.pdf.

• Apply online after registering to obtain a USDA eAuthentication identification and 

password. https://forms.sc.egov.usda.gov/eForms/welcomeAction.do?Home

• Return to the Rural Development office using the address(es) below. If an email 

address is listed below, password protect the email to protect personal identifiable 

information.

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571

HB-1-3550

Attachment 3-D 

Page 1 of 5
A loan application packager provides an optional service to an applicant seeking a housing loan by 

helping to navigate the loan application process. A packager can help determine if the Section 502 

Direct Loan Program is a good fit and, if so, help to assemble a complete loan application package. 

Loan application packaging fees can generally be included in the Rural Development loan or can be 

paid by the seller, builder, or third party. Packagers do not work for or represent Rural Development.

Eligible loan application packagers can either work with or without an approved intermediary. An 

intermediary is an affordable housing nonprofit, public agency, or State Housing Finance Agency 

approved by Rural Development to perform quality assurance reviews on loan application packages. 

Loan application packages funneled through an approved intermediary receive priority processing. 

Priority status may also include applications for: 

• Agency borrowers requesting subsequent loans to correct health and safety hazards

• Applicants interested in obtaining loans for Real Estate Owned property or related to the 

transfer and assumption of property owned by a program borrower 

• Applicants facing housing-related hardships (please identify any housing-related hardships you may be 

experiencing on the Attachment 3-J, which is completed as part of the standardized application package). 

Loan applications which do not qualify for priority consideration will be selected for processing after 

all applications with priority status have been processed. 

Please contact a loan application packager or the above Rural Development office if you have 

questions regarding what needs to be in your application package or if would like assistance in 

completing a form. To determine if you qualify, review these frequently asked questions: 

“CAN I ASSESS MY ELIGIBILITY PRIOR TO APPLYING?”

Using the Single Family Housing Direct Self-Assessment tool, potential applicants may enter 

information online to determine if the Section 502 Direct Loan Program is a good fit for them prior 

to applying. The tool will provide a preliminary review after a potential applicant enters information

on their general household composition, monthly income, monthly debts, property location, estimated 

property taxes, and estimated hazard insurance.

To access the tool, visit https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do and click 

on the Single Family Housing Direct tab. 

Potential applicants are welcome to submit a complete application for an official determination by 

Rural Development regardless of the self-assessment results. Upon receipt of a complete application, 

Rural Development will determine the applicant’s eligibility using verified information and the 

applicant’s maximum loan amount based on their repayment ability and the area loan limit for the 

county in which the property is located. 

HB-1-3550

Attachment 3-D 

Page 2 of 5
“DOES IT MATTER HOW MANY OTHER BILLS I HAVE TO PAY?”

RHS will look at your monthly obligations and how much you currently owe to others. We’ll want to

know if paying back the proposed loan on top of your other payments will be difficult for you.

“WHAT IF I THINK MY INCOME IS TOO LOW?”

Having enough income to repay your loan is an important part of getting a loan; however, the RHS 

loan may be subsidized. A subsidized loan is based on the applicant repaying a percentage of their 

income toward the housing payment, taxes, and insurance. The percentage is generally 24 percent of 

the applicant’s household income. 

“WHAT CAN I DO IF MY INCOME IS TOO LOW?”

Consider applying with a co-applicant if there is another member of your household willing and able 

to be a note signer. RHS will then look at your combined income and credit when determining 

repayment ability. You may also consider a cosigner. A cosigner is an individual who will not reside 

in the dwelling, but who is willing to be responsible for the debt. You may also consider applying for 

down payment assistance programs in your area which provide affordable housing products. Many

areas have Housing Finance Agencies, Housing Authorities, or Nonprofit Agencies which administer 

these programs. Funding from these sources can be combined with Rural Development loan funds. 

“HOW CAN I DETERMINE IF MY INCOME IS ADEQUATE TO REPAY A LOAN?”

The amount of your proposed monthly house payment, real estate taxes, insurance, and other credit 

debts cannot exceed 41 percent of your gross monthly income. If you have questions regarding how

this determination is made, you may contact the local Rural Development Office shown on the front 

cover. 

“CAN I GET A LOAN IF I’M UNEMPLOYED?”

A steady source of income is very important to getting a loan. An applicant must show sufficient 

resources to repay the housing loan. Not having a job or a stable source of income may have an 

impact on the Agency’s decision. Experience has shown that applicants with stable jobs and income 

sources are more likely to repay the loan. 

“WILL YOU FIND OUT ABOUT OTHER CREDIT I’VE HAD?”

Yes. Your credit report provides information on your payment history including any difficulty you 

have had repaying other loans or credit cards. That information will be used to determine if you can

repay the loan. If you are unsure what your credit history contains, you 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. 

This free report cannot replace the credit report that the Agency will obtain to determine eligibility.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-D 

Page 3 of 5
“HOW LONG WILL IT BE BEFORE I CAN MOVE INTO MY NEW HOME?”

Typically, applicant eligibility, loan approval, and loan closing may be accomplished within 

approximately 120 days of filing a complete application. However, depending on the availability 

of Government funding, this timeframe may be extended. The applicant is periodically advised 

regarding the status of their application when there is lack of funding.

Applications will be processed based on the following priorities: 1) subsequent loans to correct 

health and safety hazards, 2) loans to purchase homes owned by RHS and loans to transfer and 

assume (or purchase with new loan funds) properties owned by RHS borrowers, 3) hardships as 

defined by RHS, 4) loans that bring in additional resources as defined by RHS, including loan 

application packages funneled through an approved intermediary, and 5) applications that do 

not qualify for priorities 1 - 4. Within each priority category, veterans’ preference will be given 

to applicants who were discharged or released (except for a dishonorable discharge) from the

U.S. active forces (regardless of the position held – administrative support, combat, mechanics, 

medical, transportation, etc.) and who actively served during eligible periods.

“HOW MUCH MONEY WILL I NEED FOR A DOWN PAYMENT?”

A down payment is generally not required. Loans may be made for up to 100 percent of the 

market (appraised) value. Simply put, this means if the sales price of the property is equal to or 

less than the appraised value, no down payment is needed.

“DOES THIS MEAN I WON’T NEED ANY CASH TO GET A LOAN?”

Generally, the applicant will need some cash available. There are costs associated with the credit 

report, appraisal report, escrow, and other related closing costs. The credit report fee is always 

paid by the applicant upfront. The first year’s hazard insurance premium and whole house 

inspection report fee are paid prior to closing unless included in the loan amount. Costs pertaining 

to the appraisal, escrow, and loan closing may be included in the loan amount. You may also 

negotiate with the seller to contribute a percentage toward closing costs. Any agreement with the 

seller should be entered into prior to signing and documented in the purchase agreement or sales 

contract.

“DOES THE APPLICANT HAVE OTHER RESPONSIBILITIES?”

Yes. Rural Development staff are available to assist the applicant from the application to loan 

closing. The applicant is responsible for providing requested information timely. The 

information may be requested by Rural Development staff, a loan application packager, a real 

estate agent, or a closing agent. Failure to provide information timely results in delayed 

decisions and other actions.

HB-1-3550

Attachment 3-D

Page 4 of 5
Yes. The applicant must:

1. Be without decent, safe, and sanitary housing.

2. Be unable to obtain a loan from other resources on terms and conditions that they can 

reasonably be expected to meet.

3. Possess the legal capacity to incur the loan obligation.

4. Be a U.S. citizen, a U.S. noncitizen national, or a qualified alien and provide 

acceptable evidence of qualified alien status.

“WHAT ARE THE TERMS OF THE LOAN?”

The maximum repayment period is 33 years and, under certain conditions, 38 years if the 

applicant is income eligible and the longer term is necessary to show repayment ability. Rural 

Development staff can work with you if you are determined eligible, to determine whether a 

38-year term is appropriate. The maximum repayment period for manufactured homes is 30 

years.

“WHERE MAY HOUSES BE LOCATED?”

Houses must be located in a rural area, on desirable sites with an adequate supply of safe 

drinking water and suitable arrangements for sewage disposal. Streets must have an all-weather 

surface and be maintained by a public body or a homeowner’s association. 

“WHAT ABOUT THE FEATURES OF THE HOME AND SITE?”

While cost and features vary in different areas of the country, the home and site must be 

modest. A modest site generally cannot be subdivided under local zoning laws, does not 

include land or structures that will be used principally for income-producing purposes, and 

complies with local zoning requirements. An existing home with an in-ground swimming 

pool may be considered modest; however, in-ground swimming pools with new construction 

or with properties that are purchased new are prohibited. Under certain conditions, an 

exception to these standards may be granted on a case-by-case basis. The value of a dwelling 

may not exceed the area loan limit for the area in which the applicant is requesting financing.

WHO IS RESPONSIBLE FOR INSPECTING THE HOME?

The applicant/borrower is responsible for hiring a qualified inspector to conduct a whole house 

inspection on an existing property and for making inspections necessary to protect their interests. 

While a Rural Development staff member or designee may inspect a property during and/or 

following construction or repair, these inspections do not create or imply a warranty or guarantee 

on the condition of the property. 

“WHERE MAY I APPLY?”

Applications are made at the local Rural Development office or through an application packager 

serving the area where the house will be located. To locate your nearest Rural Development 

office, please visit: https://offices.sc.egov.usda.gov/locator/app?state=us&agency=rd. To locate 

an application packager, please visit https://www.rd.usda.gov/sites/default/files/RD-SFHIntermediaryMap.pdf. 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-D 

Page 5 of 5
HB-1-3550

Attachment 3-E 

Page 1of 1 

ATTACHMENT 3-E 

REQUEST TO REOPEN A REJECTED APPLICATION IN LOANSERV

Application Number: 

Name of Applicant: Name of Co-Applicant: 

Reason for Request (check only one):

National Appeals Division (NAD) overturned the rejection of the application.

The Loan Approval Official reviewed and reconsidered the rejection and 

recommends reinstatement.

Please PRINT name of requesting official: 

Signature of requesting official: Date: 

Title of requesting official: 

FOR STATE OFFICE USE ONLY:

*Request Approved: **Request Denied: 

PRINT the Housing Program Director’s name:

Housing Program Director’s signature: Date: 

*If approved, the State Office should fax form to SFH Assistance Section at 314-457-4441 and 

notify the Field Office of the approval. 

**If denied, fax form back to originating office to place in applicant’s case file.

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

Attachment 3-F 

Page 1 of 3

ATTACHMENT 3-F 

HOW TO ADDRESS NEGATIVE PRE-QUALIFICATION RESULTS 

The purpose of this attachment is to instruct the RHS staff on how to handle discussions 

concerning negative pre-qualification results. Since pre-qualifications are based on unverified 

information and infile credit reports, the results are not binding. To avoid implying that the 

results are official, the following scripts are to be used in each given situation: 

Situation 1: The potential applicant has credit blemishes (be it bankruptcy, collections, etc.)

on their infile credit report.

Proper Response: 

Let the potential applicant know that their credit record does not have to be perfect to be eligible 

for a loan. Inform the potential applicant that past credit blemishes can be acceptable if their 

overall credit record demonstrates an ability and willingness to repay obligations or if their credit 

blemishes occurred as a result of circumstances beyond their control. Counsel the potential 

applicant on how to correct the credit blemishes and share with the potential applicant the credit 

standards as outlined in HB-1-3550, Chapter 4. Be sure to explain to the potential applicant that 

fulfilling suggestions provided by the RHS staff will improve their chances of qualifying for a 

loan, but not guarantee loan approval. 

Unacceptable Response: 

Informing the potential applicant that based on the results of the infile credit report, they do not 

meet our credit standards and would not qualify for a Section 502 direct loan. 

(01-23-03) SPECIAL PN

Revised (07-08-09) PN 430
HB-1-3550

Attachment 3-F 

Page 2 of 3

Situation 2: The potential applicant does not appear to qualify for an amount sufficient to

purchase a decent, safe, and sanitary dwelling.

Proper Response

Counsel the potential applicant on ways to improve their financial status (i.e. paying off small 

debts, debt consolidation, increasing their income, etc.) and inform the potential applicant that a 

qualifying co-signer may be added to an application to compensate for a lack of adequate 

repayment ability. Also refer the potential applicant to state and nonprofit agencies that might 

be willing to extend forgivable loans and/or grants. 

Unacceptable Response: 

Telling the potential applicant that they do not qualify for a loan due to a lack of repayment 

ability.

Situation 3: The potential applicant presently owns a home.

Proper Response:

Let the potential applicant know that if their dwelling is structurally unsound, functionally 

inadequate, or too small to accommodate the needs of the household, RHS may be able to 

provide financing to improve the existing dwelling or to purchase a new one. In addition, let the 

potential applicant know that RHS may be able to refinance the property under certain 

circumstances (refer to HB-1-3550, Chapter 6.5). 

Unacceptable Response:

Informing the potential applicant that the Section 502 direct loan program is designed for firsttime homebuyers only. 
HB-1-3550

Attachment 3-F 

Page 3 of 3

Situation 4: The household’s adjusted annual income appears to be over the income limit.

Proper Response:

Inform the potential applicant that to qualify for a Section 502 direct loan, their household’s 

adjusted annual income must be within our established income limit based on household size and 

location. Also let the potential applicant know that if they should exceed the income limit for the 

direct loan program other options are available (assumed loan, purchase of a REO property, a 

Guaranteed Rural Housing loan, and other credit). 

Unacceptable Response:

Informing the potential applicant that they do not qualify for a Section 502 direct loan because it 

appears as though they are over income based on the unverified income information. 

(01-23-03) SPECIAL PN

Revised (07-08-09) PN 430
Attachment 3-G

502 Single Family Housing Checklist

THIS CHECKLIST DOES NOT REPLACE THE RUNNING RECORD!

This document should be filed under Folder A for an Electronic Customer File (ECF)

Once clear, readable copies are uploaded and confirmed in ECF the originals can be destroyed following 

the requirements of RD Instruction 2033-A (e.g., PII must be cross-cut shredded) except for the 

documents identified on the Index of Essential Records which are maintained in locking-type fire proof 

filing cabinets/safes in accordance with RD Instruction 2033-A, 2033.(b)(1)(iii).

Borrower Name: Co-Borrower Name:

Borrower Phone: Co-Borrower Phone:

Borrower Email: Co-Borrower Email:

Processing Priority: 1 2 3 4 5

ECF RP Date

Application Processing

Review application for completeness within 3 business days of receipt. Promptly contact the applicant to request 

any missing information. Follow up with a letter advising applicant of a 15-day deadline for submission or the 

application will be withdrawn. Mark the file as inactive until complete. (HB-1, 3.6)

A LO Attachment 3-J

J LO Packaging Phase 1: Application Submittal Cover Letter (if applicable)

C LO RD 410-4, Uniform Residential Loan Application, (or current industry standard “Uniform 

Residential Loan Application” along with pages 6-10 of RD 410-4)

When the 410-4 is submitted using eForms, a signature on the 410-4 is not needed (HB- 1, 3.5)

C LO RD 3550-1, Authorization to Release Information (for each adult household member) (HB- 1, 3.5)

LO If an application includesthe information required by TRID, forward to the applicant within 3

business days of receipt of the application (HB-1, 3.8):

C HB Letter 5 (3550), Cover Letter for Initial Disclosures Package

C CFPB’s “Your home loan toolkit: A step-by-step guide”

C CFPB’s LoanEstimate Attachment 3-I, Settlement Service Providers List & Mortgage 

App. Related Disclosures

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

ECF – Electronic Customer File (refer to the ECF Classifications – Quick Reference Guide in SharePoint) 

RP - Responsible Party

LO – Loan Originator

LAO – Loan Approval Official

HB-1-3550

Attachment 3-G 

Page 1 of 9
HB-1-3550

Attachment 3-G 

Page 2 of 9

C LO For an unsecured loan,send RD 1940-41, Truth in Lending Statement.

Date returned

C LO Check the Department of the Treasury’s DNP Portal for each applicant, retain copy in ECF (if

not completed at Pre-qual) (HB-1, 3.3, 4.11) (https://fiscal.treasury.gov/DNP/)

C LO Check LoanServ’s “SSN CROSS REFERENCE” softlink key (if not completed at pre-qual) (HB1, 3.3, 4.11)

D5 LO If not a citizen, check S.A.V.E Database. See Attachment 4-D for additional guidance (HB-1,4.20)

https://save.uscis.gov/web/vislogin.aspx

C LO Identification (HB-1, 4.21)

Evidence of age

Taxpayer’s ID number

Photo ID

C LO Funds Available; send HB Letter 11 (3550), Request Information (HB-1, 3.14)

C LAO Funds Not Available; send HB Letter 2 (3550), Funds Not Available (HB-1,3.13)

D5 LAO Send HB Letter 3-A (3550) Waiting Period (Funds Not Available) if funds are not available 6 

months after sending HB Letter 2 (Signed by LAO) (HB-1, 3.14)

D5 LAO Send HB Letter 3-B (3550) Waiting Period (Extended Processing Timeframe) if eligibility 

determination is not made within 30 days of receipt of complete application (Signed by LAO) (HB-1, 

3.7)

Send subsequent HB Letter 3-B (3550) if eligibility determination is not made within 6 months of 

complete application (Signed by LAO) (HB-1, 3.14)

LO Underwriting – enter ‘pre-qual’ and ‘application complete’ dates on Stage Updating Screen – Be sure 

to enter actual purchase price, if known.

Income

D1 LO Paycheck stubs (4 most recent & consecutive weeks, i.e., no more than 60 days old as of date of 

application) – only for employment which is not seasonal in nature. Seasonal employment is verified

using the last two years of complete tax returns with W- 2s and applicable schedules. (HB-1, 4.3)

D1 LO Oral Verification of Employment – if applicable (HB-1, 3.15 A.3.)

D1 LO RD 1910-5, Request for Verification of Employment – if paystubs are not available

(HB-1, 4.3)

If no response in 14 days, call employer to follow up and document the discussion.

D1 LO Other Income documentation (HB-1, 4.3, 4.5):

Public Assistance Self-employment income

Child Support/Alimony Social Security/VA Bene

Unemployment Benefits Pensions/Annuities

Other

Last two Federal Income Taxes including all applicable W-2s, Wage and Tax Statement, 

IRS Form 1099-MISC Miscellaneous Income and schedules.

Tax transcripts directly requested and obtained by applicant using IRS Form 4506-T, 

Request for Transcript of Tax Return, if additional income validation was needed.

D1 LO RD 3550-4, Employment and Asset Certification

D1 LO Separation/Divorce/Paternity/Property Settlement Agreement, if applicable

Deductions

D2 LO Deduction documentation (HB-1, 4.4):

Child Care Full-time Student status

Elderly/Disabled (RD 1944-4,if 

applicable) Minor Dependent

Medical Expenses Other

Disability Assistance Expenses
HB-1-3550

Attachment 3-G 

Page 3 of 9

Assets

D3 LO Most recent bank account statements covering at least two-month period- statements must include

the transaction history, review any recurring deposits or debits and obtain explanation for large 

deposits (HB-1, 4.5)

D3 LO 1944-62, Request for Verification of Deposit – if statements are not available or the accuracy of 

the applicant’s self-certification or statements are questioned (HB-1, 4.3)

D3 LO 3550-2, Request for Verification of Gift/Gift Letter, if applicable (HB-1, 4.3)

D3 LO Land and Other Real Estate, if applicable (HB-1, 4.5, Exhibit 4-3)

D3 LO Most recent retirement fund statements covering at least a two-month period (HB-1, 4.6, 4.7)

D3 LO Other Assets(HB-1, 4.5, Exhibit 4-3)

Credit

D4 LO Tri-Merge Credit Report (TMCR) documentation (HB-1,4.12):

(Credit Score Disclosure provided in the standardized application package. Do not upload into ECF.)

Fee Received. Enter date in UniFi (Stage Updating screen).

Process the credit report fee using the Electronic Fee Service (DLOS, Ch 5) or 3550-17, Funds 

Transmittal report (if cashier’s check or money order)

Report Ordered (upon selection for processing)

Report Received

Credit score: Applicant Co-applicant

D4 LO Creditscore islessthan 640 or applicant haslessthantwo creditscores(HB-1, 4.12 & 4.13):

Nontraditional credit verifications (HB-1,4.12.C)

RD 410-8, Applicant Reference Letter– if applicable

RD 1944-60, Landlord’s Verification

Credit Letter of Explanation, if applicable (HB-1, 3.7, 4.12)

RD 1944-61, Credit History Worksheet (completed by LO,signed by LAO) LAO is 

responsible for reviewing/approving any credit exceptions.

D4 LO Community property states non-purchasing spouse’s credit report containing Equifax, 

Experian, and TransUnion information. Include obligations in total debt ratio.

NP SPOUSE’S CREDIT IS NEVER CONSIDERED A REASON TO DENY A LOAN 

APPLICATION (HB-1, 4.12D)

 D4 LO Student loan / Income Based Repayment (IBR) documentation (HB-1, 4.22)

ELIGIBILITY PROCESSING

D5 LO Attachment 4-A, Worksheet for Computing Income (HB-1,4.2)

D5 LO RD-3550-30, Verification of Debt Proposed for Refinancing, for non-Agency debt (HB-1, 6.5)

D5 LO Document Applicant has adequate funds for closing cost/down payment- if applicable

D5 LAO Loan eligibility narrative completed/signed by Loan Approval Official (LAO) (including but not 

limited to income, creditworthiness (including DNP), repayment ability, and payment shock (if 

applicable))

D5 LAO RD 1944-59, Certificate of Eligibility (COE) if a property has not been selected.Valid for time 

period(s) specified in HB-1, 4.25. (Prepared by LO, Signed by LAO)

LO Withdraw the application if no property isidentified after applicable time period

C LO Verify completion of a Homeownership Education Course (Cert of Completion) (HB-1, 3.4)

F LAO If applicant is not eligible,send HB Letter 15 (3550), StandardizedAdverse Decision Letter

with review and appeal rights (Must be signed by LAO) (HB-1, 1.9)

C LAO Document eligibility on originally submitted RD 410-4, item 17.

D5 LO Update UniFi/Stage Updating, save and digitally sign Eligibility Summary

D5 LO Form RD 3550-23, Applicant Orientation Guide (HB-1,4.26).

C LO If circumstances occur, issue revised Loan Estimate or Closing Disclosure within 3 business 

days of receiving new information, but no later than 7 days prior to loan consummation.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 3-G 

Page 4 of 9

D5 LAO HB Letter 1 (3550) Moderate Income Options

D5 LAO HB Letter 3 (3550) WaitingPeriod (Issued by LO, signed by LAO)

D5 LAO HB Letter 4 (3550) Funds Not Available – Certificate of Eligibility and/or Property Identified

D5 LAO HB Letter 16 (3550) Eligibility of Self Help Applicants

PROPERTY ELIGIBILITY

County:

Maximum Loan Limit: $

J LO/LAO Packaging Phase 2: Property Submittal Cover Letter (if applicable) 

E LO Within 3 business days of receipt of a sales contract, send the following documents if they 

were not previously sent under the Application Processing section of this checklist. (HB-1,3.7)

HB Letter 5 (3550), Cover Letter for Initial Disclosures Package

CFPB’s “Your home loan toolkit: A step-by-step guide”

CFPB’s LoanEstimate

Attachment 3-I, Settlement Service Providers List & MortgageApp. Related

Disclosures

E LO Sales Contract or Form RD 3550-34, Option to Purchase RealProperty, (HB-1, 5.1) Review 

all pages of and attachments to Purchase Agreement:

Legal Description:

E LAO HB Letter 10 (3550) Status of Offer to Buy Single Family Housing REO Property

LO Discuss closing date - with seller, buyer, and real estate agent if it appears RD is unable to close 

loan by Purchase Agreement possession date

E LO Verify eligibility of subject property (identified for purchase) (HB-1, 5.1)

https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

E LAO Attachment 9-C, Condominium Questionnaire, as applicable

E LO Verify the subject property’s address using the USDA address verification site and print to 

PDF to upload to ECF. Result code must be 1 or 2; or researched, verified, and documented 

if not. Enter verified address in UniFi. (HB-1, 5.1)

https://eligibility.sc.egov.usda.gov/eligibility/addressVerification

E LO Recalculate Eligibility Summary with actual loan amounts, if different from original, save 

and digitally sign, upload to ECF.

E LO Appraisal or document Statement of Value if appraisal is not required (HB-1,5.16)

E LAO RD 1922-15, Administrative Appraisal Review for Single Family Housing -within 7 days of 

appraisal (HB-1, 5.19);

Reviewed and Accepted (initial and date)

E LO Notify Applicant of appraisal results and provide a copy of the appraisal. If making an adverse 

decision on the appraisal, send either HB Letter 17 or HB Letter 18, as applicable, along with a 

copy of the appraisal.

E LO Lead Based Paint (LBP) Compliance Key and Print Out (houses built prior to 1978)

https://leadpaint.sc.egov.usda.gov/LBPWeb/lbpQuestionaire

LO Lead pamphlet provided to applicant.

E LO/LAO RD Instruction 1970-B, Exhibit D “Categorical Exclusion” (must be completed prior to 

obligation of funds or Issuance of a Conditional Commitment, as applicable) or

RD Instruction 1970-C, Exhibit E “Guide for Reviewing Environmental Assessments” as 

applicable (RD Instruction 1970 series “Environmental” & HB-1, 5.8)

LO determines the level of environmental review and LAO final determination of impact.
HB-1-3550

Attachment 3-G 

Page 5 of 9

E LO FEMA’s Standard Flood Hazard Determination (https://www.floodcert.com/)

(HB-1, 5.7 and 5.8)

E LO RD 3550-6, Notice of Special Flood Hazards, Flood Insurance Purchase Requirements (HB1, 5.8) and Availability of Federal Disaster Relief Assistance, as applicable (HB-1, 5.8 D and 

7.12 B)

E LO/LAO FEMA Elevation Certificate or other forms of documentation (HB-1, 5.8 and 1970-F)

E LAO Eightstep decision making process has been completed (HB-1 5.7 and 1970-F)

E LO Dwelling served by public utilities or meets on-site water and waste systems(HB-1, 5.7 D and 

5.8 B)

E LO Whole House Inspection for an existing property which certifiesthe following items(7CFR 

3550.57 & HB-1, 5.7)

Septic Well Heating/Cooling

Plumbing Electrical

Other – StructuralSoundness

Termite/Other Wood Destroying Pests

E LO Documentation for repairs completed prior to closing

E LO Bids & Cost Estimate including Contractor’s License (if appliable) for repairs completed after 

closing

E LO Survey (if applicable) (HB-1, 5.7)

NEW CONSTRUCTION

E1 LO RD 1924-2, Description of Materials (must be approved by RD, Buyer&Builder)

E1 LO RD 1924-25, Plan Certification

E1 LO House Plans/Drawings and Plot Plans (must be approved by RD, Buyer &Builder)

Manufactured Home built to HUD code - verify dealer/contractor has been approved

E2 LAO Proof of construction quality for a new dwelling (new construction or dwelling less than one 

year old that has never been occupied) to determine permitted loan-to- value (HB-1, 6.7 B.)

E1 LAO RD 1944-36, Application for Conditional Commitment with fee. Refundfee if Conditional

Commitment cannot be issued, order appraisal (now fee cannot be refunded), return fee to 

Contractor at closing. (HB-1, 9.2)

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
HB-1-3550

Attachment 3-G 

Page 6 of 9

UNDERWRITING/LOAN APPROVAL

D1 LO Reverify income - if expected to be over 120 days old by closing date (unless the type of income only 

requires an annual verification source) (HB-1, 4.3)

F LO Update Eligibility Summary with correct information,save, digitally sign, and date – must be 

in file at rejection/approval (HB-1, 6.17)

F LAO Executed Form RD 1940-10 partial or full deobligation (if applicable)

F LO Direct-US Findings Report

D5 LAO Loan eligibility narrative updated to include underwriting details/signed by LAO (including but 

not limited to income, creditworthiness (including DNP), repayment ability, and payment shock (if 

applicable))

LO Verify UniFi Program Type Code (must match income type)

C LO Check Department of the Treasury’s DNP Portal for each applicant within 5 business days prior 

to obligation/approval, retain copy in ECF (label as ‘Obligation/approval’ in ECF Title field)

(https://fiscal.treasury.gov/DNP/)

F LO Validate the interest rate and obligate through LoanServ (HB-1,8.6 E, 8.7)

F LO Update LoanServ screens before uploading file; check Display History Screen for correct loan 

amount.

F LAO If denying property, send HB Letter 15, Standardized Adverse Decision Letter with review 

and appeal rights (HB-1, 1.9 & 8.2) and

D5 LAO Reissue Certificate of Eligibility for applicant to select another property.

LO If other funding isinvolved, review lender terms and feesto determine if acceptable (HB-1, 

10.9)

F LAO RD 3550-7, Funding Commitment and Notification of Loan Closing- issuedday of 

approval/obligation in LoanServ (if not signed and returned in 15 days, must de- obligate) (HB-1,

8.2) along with a copy of the appraisal, unless obligated subject to an appraisal.

F LO RD 1940-41, Truth in Lending Statement – if applicable for an unsecured loan (HB- 1, 3.8B)

F LO If changed circumstances occur, issue revised Loan Estimate or Closing Disclosure within 3

business days of receiving new information, but no later than 7 days prior to loan 

consummation.

 Loan should be approved/rejected within 30 days after completed docket(HB-1,8.2)

 Make sure loan does not exceed applicable area loan limits (HB-1,6.6)

 Verify loan-to-value ratio for existing dwellings does not exceed 100% (HB-1, 6.7)

 Loan terms cannot exceed maximum allowed (HB-1, 6.8) or approval authorities(1901-A)

 Attachment 8-B, Unliquidated Obligation Review (HB-1, 8.3 D)

CLOSING

Closing Date:

Consummation Date:

IMPORTANT NOTE: Loan consummation may not occur until 3 business days after the Closing Disclosure is received by the

applicant. With the mailbox rule, this means there is generally a 7 business day waiting period before closing if the Closing 

Disclosure was not provided in person.

LO Reverify Employment,Income and Eligibility (HB-1, 4.3 & 8.6.C)

D1 LO Date of income verification source: (must not be more than 120 days by the closingdate 

unless the type of income only requires an annual verification source)

D1 LO Date of Oral VOE: (if applicable complete 10 days before closing)

D4 LO Date of TMCR: (if more than nine months old at time of approval or closing, Loan 

Originator must obtain an updated TMCR at no cost to the applicant)

G LO Update UniFi with correct information and save the Eligibility Summary, digitallysign and 

date-must be in file at loan closing (HB-1, 8.6.D)

D5 LAO Loan eligibility narrative updated to include final closing details/signed by LAO (including but 

not limited to income, creditworthiness (including DNP), repayment ability, and payment shock (if 

applicable))

F LO Interest Rate: ______ (note rate used for the promissory note must be the lower of the 

applicable interest rate in effect at loan approval or loan closing)
HB-1-3550

Attachment 3-G 

Page 7 of 9

G LO/LAO RD 1927-4, Transmittal of Title Information (HB-1, 8.4)

G LO RD 1927-9, Preliminary Title Opinion (if using attorney)(HB-1,8.4)

G LO Title Insurance Binder/Preliminary Title Opinion -Review and verify legal description is 

correct (if exceptions noted affect the security value, loan cannot be closed).

G LO Closing Disclosure provided to applicant (after it was reviewed for compliance with tolerance 

limits) (HB-1, 8.5)

Provided in person

Provided by mail

G LO/LAO RD 3550-25, Loan Closing Instructions and Loan Closing Statement (HB-1,8.11 & 1927-B)

LO Re-verify closing agent’s account numbers

G LO RHCDS/MISC/CLOSING SELECT/ADD AGENT screen

G LO/LAO Check Department of the Treasury’s DNP Portal for each applicant within 5 business days 

prior to disbursement of funds. (Label as ‘Applicant’ using ECF Title field)

(https://fiscal.treasury.gov/DNP/)

G LO/LAO Check Department of the Treasury’s DNP Portal for the closing agent within 5 business days 

prior to the disbursement of funds. (Label as ‘Closing Agency’ using ECF Title field)

(https://fiscal.treasury.gov/DNP/)

G LO Hazard/Flood Insurance Binder & Receipt for 1styear premium (HB-1, Att 7-C)

G LAO RD 3550-15, Tax Information (HB-1, 7.10), Calculate RE taxes that should be paid at 

closing (60 days of due date); instruct Title Agent to collect prorated taxes from Seller (refer

to Purchase Agreement) (HB-1,7.4)

G LO RD 3550-9, Initial Escrow Account Disclosure Statement (HB-1, 7.5)

G LO RD 3550-17, Funds Transmittal Report for tax service & appraisal fees, escrow funds, etc. 

(copy in Collections Operational File) (1951-B, if applicable)

G LO RD 3550-19, Transmittal-Closing Documents & Attachments – as applicable (HB-1, 8.11)

G LO RD 410-4, Uniform Residential Loan Application PRINTED FROM UniFi

E2 LO Check Department of the Treasury’s DNP Portal for each contractor with a total contract 

greater than or equal to $25,000 within 5 business days prior to disbursement of funds. (RD 

Instruction 1940.602(b), specifically 2 CFR §180.220(b)(1)) – (Label as Contractor using ECF

Title field) ( https://fiscal.treasury.gov/DNP/ )

G LO RD 1927-5, Affidavit Regarding Work of Improvement (if required by State Supplement) send 

blank to closing (1927-B, 1927.58)

G LO RD 1940-16, Promissory Note (original in safe) (HB-1, 8.9 andFMI)

G LO RD 1940-43, Notice of Right to Cancel - ifsecured and non-purchase (HB-1, 8.6)

G LO RD 1944-14, Payment Assistance/Deferred Mortgage Assistance Agreement or RD 1944-6, 

Interest Credit Agreement (as applicable)

G LO RD 1955-49, Quitclaim Deed or Warranty Deed (as applicable)

G LO RD 3550-10, Condominium Rider (if applicable)

G LO RD 3550-11, Planned Unit Development Rider (ifapplicable)

G LO Attachment 5-C and lease approval for tribal trust and other lease agreements (if applicable)

G LO RD 3550-12, Subsidy Repayment Agreement (original in safe attached to note)

(HB- 1, Att. 8-A)

G LO RD 3550-14, Real Estate Mortgage or Deed of Trust for (State) - sendblank

G LO RD 1927-8, Agreement with Prior Lienholder - if leveraged loan (HB-1, 8.6)

G LO/LAO RD 3550-22, Assumption Agreement Single Family Housing - if applicable (LO or LAO prepare, 

LAO signs to execute; Original attached to original note in safe) (HB-1, 8.6)

G LO/LAO RD 3550-16, Release from Personal Liability - if applicable (HB-1, 8.6)

G LO RD 3550-29, Document Errors and Omissions Agreement (HB-1. Attachment. 8-A)

G LO Lease Approval (Tribal Trust & Other Lease Agreements)

G LAO Obtain copies of all other funding sources including: promissory notes, grant agreements 

and/or security instruments (HB-1, 10.10)

LO First Payment Coupon

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Attachment 3-G 

Page 8 of 9

POST CLOSING

LO Verify closing documents uploaded to ECF (using New Loans classification) or emailed to the 

Servicing Office in required time frame (HB-1, 8.11)

Verify proper lienposition.

G LO Post 1-month follow-up for recorded Real Estate Mortgage.

H LO Post follow-up for Title Insurance Policy (60 days) or Final Title Opinion (14 days). (If not 

received, contact closing agent by mail with a copy of the letter to the insurance company.)

H LO Activate loan/payment assistance in LoanServ WITHIN 2 BUSINESS DAYS OF CLOSING

(OR 4 BUSINESS DAYS IF THE BORROWER HAS RESCISSION RIGHTS.

LO Review final Loan estimate & Closing Disclosure for tolerance violations. Cure violation

within 60 days of closing.

H LO Send Compensation for Construction Defects letter, if new construction (Guide Letter 1924-1)

G LAO RD 3550-25 – Loan Approval Official approves after all forms are returned, reviewed, and 

correct (HB-1, 8.11)

H LO Delinquent/Lienholder Screen – complete LoanServ screen for each leveraged partner

CONSTRUCTION CONTRACT

E2 LO RD 1924-6, Construction Contract (HB-1, 5.23)

E2 LO “400 Series” (400-1, 400-3, 400-6, and posters), as applicable (HB-1, 5.23)

E2 LO Send Exhibit C, RD Instruction 1901-E within 10 days(HB-1, 5.23)

DOL web site (https://www.dol.gov/agencies/ofccp/contact/regional-offices)

(ECF “400 Series” Label using ECF Title field)

E2 LO RD 1924-16, Record of Pre-Construction Conference or other documentation

(HB-1, 5.23)

E2 LO Builder’s Risk Insurance policy

E2 LO RD 1924-1, DevelopmentPlan

E2 LO RD 402-1, Deposit Agreement & RD 402-2, Statement of Deposits and Withdrawals

E2 LAO RD 1924-7, Contract Change Order and updated RD 1924-25, Plan Certification, if applicable

E2 LO Process partial contractor payment draws (based on 60% of work in place) (HB-1, 5.24 C)

E2 LO Check Department of the Treasury’s DNP Portal for each contractor with a total contract >

$25,000 within 5 business days prior to disbursement of funds when using multiple draws in 

LoanServ (Label as Contractor (Date of Draw) using ECF Title field) (RD Instruction 

1940.602(b), specifically 2 CFR §180.220(b)(1)) (Note: Checks for SBA draws only required 

for first disbursement to each contractor)(https://fiscal.treasury.gov/DNP/)

E2 LO Check Department of the Treasury’s DNP Portal for each borrower within 5 business days 

prior to disbursement of funds when using multiple draws in LoanServ (Label as ‘Borrower

(Date of Draw)’ using ECF Title field) (https://fiscal.treasury.gov/DNP/)

E2 LO RD 1924-12, Inspection Report or Third Party Inspection, Minimum of:

Footer

Rough-in

Final

E2 LO RD 1924-9, Certificate of Contractor’s Release & RD 1924-10, Release by Claimants, if 

applicable

E2 LO RD 1924-19, Builder’s Warranty or 10-year warranty per RD Instruction 1924-A HB-1, 6.7 B.

(NOTE: If 10-year warranty, must have policy or binder before final payment to builder)
HB-1-3550

Attachment 3-G 

Page 9 of 9

POST CONSTRUCTION COMPLETION

D1 / 

D3

LO 60 days prior to anticipated final inspection, notify borrower to update income and asset 

information in order to calculate payment assistance (HB-1, 8.13 B)

G LO Check Department of the Treasury’s DNP Portal for each contractor with a total contract >

$25,000 within 5 business days prior to final disbursement of funds. (RD Instruction 

1940.602(b), specifically 2 CFR §180.220(b)(1)) (Note: Checks for SBA draws only required 

for first disbursement to each contractor) (https://fiscal.treasury.gov/DNP/)

E2 LO Order final draw for contractor final payment (HB-1, 5.25)

G LO Check Department of the Treasury’s DNP Portal for each borrower within 5 business days 

prior to final disbursement of funds. (https://fiscal.treasury.gov/DNP/)

E2 Advance any remaining funds from loan (HB-1, 5.25)

• Deposit final draw in SBA (to be used for authorized loan purpose) or make check

payable to RD and Borrower and submit to Servicing Office to apply as a principal 

reduction. (DO NOT PROCESS A PARTIAL DEOBLIGATION)

• For self-help transaction – deposit final draw in custodial account or supervised 

bank account (as applicable)

G LO Escrow Deposit: Order check (if included in loan) OR collect from borrower and submit to 

Servicing Office (HB, 7.6 & Att 7-A)

H LO Verify correct address of subject property is listed in LoanServ for new construction –

address must receive a code 1 or 2 to be valid or must research and document discrepancy 

(HB-1, 5.1) (https://eligibility.sc.egov.usda.gov/eligibility/addressVerification)

H LO Convert and activate loan on the first of the month following the final inspection

H LO Post Conversion of new loan closing in LoanServ (print screen) and Warranty Follow-ups

G LO Modify Promissory Note and have borrower(s) initial changes(or mail copy with revisions) 

(HB-1, 8.13 A)

LO Submit copies to the Servicing Office

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
ATTACHMENT 3-H 

CREDIT SCOREDISCLOSURE

In accordance with the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) and in 

connection with your application for a Rural Development Single Family Housing (hereafter 

referred to as “the Agency”) home loan, the Agency, upon request, must disclose to you the 

score that a credit bureau distributes to users and will be used by the Agency in connection with 

your home loan as well as the key factors affecting your credit scores.

While the Agency does not consider credit scores in determining adverse credit decisions, we

may use them to presume acceptable credit in lieu of other credit underwriting practices.

Credit scores assist lenders in evaluating your credit history in a more expedient and objective 

manner. Your credit scores are found on your tri-merge credit report, a copy of which will be 

provided to you upon request. The range of possible scores is from 300 to 850. The Agency 

may also obtain and consider other credit scores in making its decision on your application.

In addition to the credit scores, your credit report lists the key factors related to why your 

scores were less than the maximum possible score. Please keep in mind that the factors are only 

indicators of why you received less than the maximum score possible. The listing of these 

factors does not by itself indicate that you would not be approved for the loan you have 

requested. Rural Development considers many factors in addition to your credit scores in 

making a decision on your application. If your application is not approved, you will receive a 

separate notice stating the specific reason(s) for that action which may or may not relate to 

your credit scores.

The Agency did not calculate your credit scores or develop the scoring models. If you have any 

questions about your credit scores or the information in the tri-merge credit report from which 

the scores were computed, you can contact the credit bureau at the address listed below.

Equifax Mortgage Solutions

4300 Westown Parkway, Suite 200 

West Des Moines, IA 50266 

(800) 333-0037

(01-23-03) SPECIAL PN

Revised (12-12-19) PN 532

HB-1-3550

Attachment 3-H 

Page 1 of 2
NOTICE TO HOME LOAN APPLICANT

Pursuant to FACT Act, Section 212.

In connection with your application for a home loan, Rural Development must disclose to you 

the score that a credit bureau distributed to the Agency and was used in connection with your 

home loan, as well as key factors affecting your tri-merge credit score.

The credit score is a computer-generated summary calculated at the time of the request and 

based on the information a credit bureau has on file. The scores are based on data about your 

credit history and payment patterns. Credit scores are important because they are used to 

assist the Agency in determining whether you will obtain a loan. Credit scores can change over 

time, depending on your conduct, how your credit history and payment patterns change, and 

how credit scoring technologies change.

Because the score is based on information in your tri-merge credit history, it is very important 

that you review the credit-related information to make sure it is accurate. Credit records may 

vary from one company to another.

If you have any questions, about your score or the credit information that is furnished to you, 

contact the credit bureau at the address and telephone number provided with this notice. The 

credit bureaus play no part in the decision to take any action on the loan application and are 

unable to provide you with specific reasons for the decision on the loan application.

If you have any questions concerning the terms of the loan, contact Rural Development.

THIS DISCLOSURE HAS BEEN PROVIDED TO THE APPLICANT(S) PURSUANT TO SECTION 212 OF 

THE FAIR AND ACCURATE CREDIT TRANSACTIONS ACT OF 2003. I UNDERSTAND THAT I MAY 

RECEIVE A COPY OF MY TRI-MERGE CREDIT REPORT BY MAKING A WRITTEN REQUEST TO THE 

RURAL DEVELOPMENT OFFICE HANDLING MY LOAN APPLICATION.

HB-1-3550

Attachment 3-H

Page 2 of 2
ATTACHMENT 3-I 

SETTLEMENT SERVICE PROVIDERS AND MORTGAGE LOAN

APPLICATION RELATED DISCLOSURES

Applicant(s) Name: 

Subject Property Address: 

Account Number: 

List of Settlement Service Providers

Date: 

The “Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act and the 

Truth In Lending Act” (TRID) rule requires that if a lender permits an applicant to shop for third 

party settlement services, the lender must provide to the applicant with a written list of settlement 

services providers at the time the Loan Estimate is issued. Settlement service provider (also referred 

to as “service provider”) means any individual or business providing services in connection with a 

prospective or actual settlement of a mortgage loan. The lender’s list of settlement service providers 

is only required for settlement services listed on the Loan Estimate, page 2, Subheading C - “Services 

You Can Shop For”, and may include, but are not limited to, the following fees:

• Pest inspection fee

• Home inspection fee

• Survey fee

• Title services

In accordance with the TRID regulation, Rural Development (also referred to as “the Agency”) 

hereby provides you with a list of settlement service providers that have recently provided services to 

Agency’s customers. This list should assist you in identifying settlement service providers for 

services covered under the “Services You Can Shop For” section of the Loan Estimate. Rural 

Development does not require that you select the settlement service providers from this list; 

furthermore, you may choose a qualified provider that is not listed on this document. Please note that 

the settlement service providers on this list are not endorsed by or affiliated with Rural Development 

and selecting a settlement service provider from this list does not affect the final credit decision on 

your loan application. Settlement services may take days or weeks to complete, therefore we strongly 

recommend that you select your settlement services providers as soon as possible or your settlement 

may be delayed. Once you have selected your service providers, you must contact your local Rural 

Development office to inform them about your selections.

(01-23-03) SPECIAL PN

Revised (4-27-16) PN 485

HB-1-3550

Attachment 3-I 

Page 1 of 2
If you select a service provider that is not on the Agency’s list, you must provide our staff with the 

service provider’s name, address and phone number. Settlement service providers and Rural 

Development staff work closely together to ensure that loan requirements are met in a timely manner 

before the closing date.

New Construction Homes / Construction Loans Disclosure

If you are buying a new construction home and settlement of your loan is expected to occur more 

than 60 calendar days from the time the initial Loan Estimate is issued, the Agency has the right to 

issue a revised Loan Estimate at any time up until 60 calendar days prior to loan 

closing/consummation.

Notification of Right To Receive a Copy of the Appraisal

In accordance with the Equal Credit Opportunity Act (ECOA) of 1974 (Regulation B) and in 

connection with your loan application, Rural Development must inform you of your right to receive a 

copy of the appraisal of the property you wish to purchase. Unless otherwise noted in the program’s 

regulation, Rural Development will order an appraisal to determine the value of the property you are 

interested in purchasing and charge you a fee for the appraisal. The Agency will promptly give you a 

copy of the appraisal received regardless of the Agency’s loan decision. You should expect to 

receive a copy of the appraisal after your loan has been evaluated by the Loan Approval Official but 

no later than three business days before loan closing.

If you have any questions concerning the terms of the loan, contact Rural Development.

THIS DISCLOSURE HAS BEEN PROVIDED TO THE APPLICANT(S) ALONG WITH THE LOAN 

ESTIMATE AND PURSUANT TO THE INTEGRATED MORTGAGE DISCLOSURES UNDER THE REAL 

ESTATE SETTLEMENT PROCEDURES ACT AND THE TRUTH IN LENDING ACT RULE. THE AGENCY 

MAY ISSUE A LOAN ESTIMATE IF APPLICABLE CHANGED CIRCUMSTANCES OCCUR. THIS IS NOT 

A LOAN / FUNDING COMMITMENT.

HB-1-3550

Attachment 3-I

Page 2 of 2
ATTACHMENT 3-J 

CHECKLIST OF ITEMS TO ACCOMPANY THE

UNIFORM RESIDENTIAL LOANAPPLICATION

You, as the applicant, need to simultaneously submit the applicable items below when 

applying for a loan. Copies of the verification documents should be submitted. If any item, 

information, and/or signature is missing, you will be contacted and asked to provide the missing 

pieces. If the missing pieces are not provided within 15 days of the request, your 

incomplete application will be withdrawn from consideration. To avoid any delay or 

withdrawal, verify that your loan application is fully complete prior to submission.

□ This checklist with the applicable and included items checked.

□ Form RD 410-4, Uniform Residential Loan Application: You must complete all sections (be 

sure to provide all applicable information, details, and data) and sign/date pages 5 and 8. 

https://forms.sc.egov.usda.gov//efcommon/eFileServices/eForms/RD410-4.PDF

□ Verification of identity: You must provide a copy of your Government-issued picture 

identification (ID) along with evidence of age. Standard verifications are a driver’s license or a 

passport. Contact us if you do not have these standard verifications to discuss possible 

alternatives.

□ Verification of taxpayer ID number: You must provide verification of your full taxpayer ID 

number (i.e. no numbers are hidden or suppressed) using evidence such as your pay stubs or tax 

returns. A copy of your social security card is only needed if you do not have any other evidence 

of your full taxpayer ID number. 

□ $30 credit report fee (non-refundable): If the applicant and co-applicant currently reside at separate 

addresses, the fee is $30 for each applicant. Remove any credit freeze at the time of application 

submission and keep it lifted until such time as the Agency pulls a credit report. Indicate an option for 

payment of the credit report fee:

□ Option 1: I hereby authorize a $ withdrawal from my bank account for the credit report 

fee. Enclose a copy of a voided check, savings account deposit slip, or other document from an 

American Bankers Association (ABA) bank (we cannot process withdrawals from a foreign bank). 

The document provided must be an official ABA bank validated record and clearly identify 

the ABA routing number and account number. The Agency will use the ABA routing number 

and account number to collect payment through the Automated Clearing Housing System (ACH). 

By indicating an amount above and providing a copy of a voided check, deposit slip, or other bank 

document with the ABA routing number and account number, you are authorizing the deduction 

from the account by electronic means. Option one is the preferred method as it provides faster 

processing.

□ Option 2: Mail a check, cashier’s check or money order that is signed, dated, and made payable to 

USDA Rural Development. 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-J 

Page 1 of 4
□ If you have late payments, collections, judgments, or other derogatory items in your credit 

history, provide a written explanation for each credit blemish. If you are unsure what your credit 

history looks like, obtain a free credit report by calling 1-877-322-8228 or logging into 

https://www.annualcreditreport.com. By law, you 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. This free report cannot replace the credit report that the 

Agency will obtain to determine eligibility.

□ Form RD 3550-1, Authorization to Release Information: Each adult member of the household 

must sign/date a separate release form. 

https://forms.sc.egov.usda.gov/efcommon/eFileServices/eForms/RD3550-1.PDF

□ Form RD 3550-4, Employment and Asset Certification: You must check the appropriate blocks, 

account for the household members’ employment and nonretirement assets as instructed, and 

sign/date the certification. 

https://forms.sc.egov.usda.gov/efcommon/eFileServices/eForms/RD3550-4.PDF

□ Your last two signed Federal Income Tax Returns with all applicable tax return schedules. Also 

provide:

□ All W-2s, 1099s, and other forms attached to the returns.

□ If filed electronically, include a copy of the signature page with the Self-Select PIN, 

confirmation that the return was accepted, or evidence that it was filed by an authorized 

E-File provider.

□ Last four consecutive weeks of pay stubs for all employed adult household members. 

□ If you have an employment history of less than two years or employment gaps in excess 

of 30 days within the last two years, you should provide a letter of explanation. 

Notice to Customers: If applicants send the Agency a check, it will be converted into an Electronic 

Funds Transfer (EFT). This means the Agency will copy the check and use the account information 

on it to electronically debit the applicant’s account for the amount of the check. The debit from the 

applicant’s account will usually occur within 24 hours and will be shown on the applicant’s regular 

account statement. Applicants will not receive their original check back.

The Agency will destroy the original check but will keep an image of it. If the EFT cannot be 

processed for technical reasons, applicants authorize the Agency to process a paper copy of the 

image in place of the original check.

If the withdrawal cannot be completed because of insufficient funds, the Agency may try to make 

the transfer up to two additional times and the Agency will charge a one-time fee of $15, which 

will also be collected by EFT or ACH.

HB-1-3550

Attachment 3-J 

Page 2 of 4
□ Recent benefit statements for regular unearned income for all household members who 

receive:

□ Social Security/Supplemental Security Income

□ Public assistance

□ Retirement income

□ Other

□ Last 12-month payment history of alimony and/or child support received by all adult 

household members as provided by the court appointed entity responsible for handling 

payments. If this is not available, provide a copy of the separation agreement or divorce decree. 

While you can choose to have this income excluded from your repayment income, it must be 

reported to determine if your household’s adjusted income is within the program’s income limit.

□ Two most recent brokerage or bank statements for all household members (excluding 

tax advantaged plans for education, health/medical, and retirement). If you are obtaining 

this information online, provide the statements as opposed to providing the online 

transaction histories.

□ For a household member who is a full-time student and 18 years of age or older, a copy of 

their school transcript.

□ Written evidence of childcare expenses for dependents 12 years of age or younger.

□ If you are 62 years of age or older, are disabled, or have a disabled household member, provide 

evidence of unreimbursed annual medical expenses if you wish to be considered for a deduction 

to household income.

□ List your personal email address(es) below if you authorize the Agency to contact you via 

email. The Agency password protects emails containing personal identifiable information.

□ While you are strongly discouraged from identifying a property or entering into a purchase 

agreement until you receive a Certificate of Eligibility from Rural Development, enter the 

county you are interested in purchasing a home in below.

□ If you have already entered into a purchase agreement (which again is strongly discouraged), 

provide a copy of the agreement.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

HB-1-3550

Attachment 3-J

Page 3 of 4
HB-1-3550

Attachment 3-J 

Page 4 of 4

□ If you are experiencing any of the following housing-related hardships, please check all that apply and 

provide a brief explanation below:

□ Current dwelling lacks complete plumbing and/or adequate heating, is dilapidated or 

structurally unsound, has an overcrowding situation, or is otherwise uninhabitable, unsafe, or poses a 

health or environmental threat to the occupant or others. 

□ Current homeowner in danger of losing a property through foreclosure due to 

circumstances beyond your control.

□ Other housing-related hardship.

_________________________________________________________________________________________

_________________________________________________________________________________________

Applicants who are first-time homebuyers are strongly encouraged to complete a 

homeownership education training as early in the application process as possible since the 

training covers the following important topics: preparing for homeownership (readiness to go 

from rental to homeownership), budgeting (pre- and post-purchase), credit counseling, 

shopping for a home, obtaining a mortgage, loan closing, and life as a homeowner. There is 

generally an out-of- pocket fee for the training, which can be reimbursed should the loan 

request be approved and closed. Attached is a list of Agency-approved education providers. 

You will be expected to successfully complete this training prior to entering into a contract to 

purchase or construct a home for maximum benefit.
HB-1-3550

CHAPTER 4: BORROWER ELIGIBILITY

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. 

4-1 

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
4-2

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

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.

Exhibit 4-1 

INCOME TO BE COUNTED

Members Employment Other Income

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

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.
4-4

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. 
4-5

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

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.

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.

HB-1-3550

• 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. 

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.

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. 

____________________________________________________________________________________________

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

Revised (06-02-23) PN 583
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. 

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.

____________________________________________________________________________________________

4-8 
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.

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.

____________________________________________________________________________________________

4-9 

(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]

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 following circumstances:

• 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.

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.

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. ____________________________________________________________________________________________

4-10
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. 

____________________________________________________________________________________________

4-11

(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.

____________________________________________________________________________________________

4-12
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.

__________________________________________________________________________________________

4-13

(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.

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.

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. and D.

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
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). 

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.

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
HB-1-3550

Paragraph 4.3 Source of Income

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

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 

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.

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
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
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 stubs for

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). 
HB-1-3550

Paragraph 4.3 Source of Income

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.

____________________________________________________________________________________________

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, and costs;

• 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
HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

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.

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.

4-34
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
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. 

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.

4-36 
HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

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.)

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
HB-1-3550

Paragraph 4.4 Calculating Annual and Adjusted Income

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) 

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

___________________________________________________________________________________________

4-38
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.

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 – 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.

 ____________________________________________________________________________________________

4-39

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
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). 

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:

$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 assets including: 

• 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
HB-1-3550

Paragraph 4.5 Overview of Policies Related to Assets

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).

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.

____________________________________________________________________________________________

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(01-23-03) SPECIAL PN

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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. ____________________________________________________________________________________________

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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.

____________________________________________________________________________________________

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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. 

____________________________________________________________________________________________

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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. 

____________________________________________________________________________________________

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(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. 

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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 ____________________________________________________________________________________________

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(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. 

 ____________________________________________________________________________________________

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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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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
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. ____________________________________________________________________________________________

4-58 
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 13 Bankruptcy

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 is the 

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. ____________________________________________________________________________________________

4-59 

(01-23-03) SPECIAL PN

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

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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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583
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.

____________________________________________________________________________________________

4-62 
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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Revised (06-02-23) PN 583
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. 

4-64 
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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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

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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(01-23-03) SPECIAL PN

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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(01-23-03) SPECIAL PN

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.

4-70

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 ) ____________________________________________________________________________________________

4-71

(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.

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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.

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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.
CHAPTER 5: PROPERTY REQUIREMENTS

HB-1-3550

5.1 INTRODUCTION

Ensuring that the quality and the value of the property meet certain minimum thresholds is 

as important as ensuring that the applicant is willing and able to repay a loan. The Agency 

imposes quality and value requirements to protect the borrower’s interest and, in the event of 

liquidation, the Agency’s interest. 

A. Overview of Property Requirements

1. EnsuringQuality

Four sections of this chapter deal with quality assurance. Section 1 describes the 

requirements for approving a site -- its location, its size and amenities, and the adequacy of 

available utility systems. Section 2 describes requirements for the dwelling itself, which

must be modest, but also decent, safe, and sanitary. The standards that apply differ somewhat 

depending upon whether the dwelling will be newly constructed or is an existing home.

Section 3 describes the Agency’s requirements for the protection of environmental resources 

and the due diligence required with regard to hazardous substances. Section 6 provides 

guidance for monitoring construction activities to ensure that any construction or repair work 

is appropriately conducted and completed. 

2. Ensuring Adequate Value

Before the Agency makes a loan, the Loan Originator must ensure that the applicant 

will have an appropriate form of ownership and that the Agency’s interest in the property is 

adequately secured by the value of the real estate and the Agency’s lien position.

Section 4 specifies Agency security requirements and Section 5 provides guidance on 

conducting appraisals of the property’s value. 

B. Key Processing Steps Related to Property Requirements

When applicants locate properties, they must provide the Loan Originator with the basic 

information needed to initiate the Agency’s review of the property. Applicants who do not 

currently own the property must submit an option or sales contract. Applicants who already own 

the property must submit evidence of ownership, a legal description, and a property survey showing 

all structures on the site. Within 3 business days of the applicant identifying the property, the Loan 

Originator must send the applicant the items listed in Paragraph 3.8 A. 

The Loan Originator will use the USDA Address Verification website 

(https://eligibility.sc.egov.usda.gov/eligibility/addressVerification) to verify the property address. If 

the resulting code is 1 or 2, the Loan Originator should enter the address as indicated into UniFi. If 

5-1 

(01-23-03) SPECIAL PN

Revised (04-15-21) PN 549
HB-1-3550

Paragraph 5.1 Introduction

the resulting code is not 1 or 2, the Loan Originator must verify the address with the appropriate 

local entities (such as the local post office or the local tax/property recording office), document 

how a reliable address for the property was established in the running record, enter that address 

into UniFi, re-verify the address using the address website prior to closing and update the address 

in UniFi if appropriate.

1. Appraisal

In general, appraisals are ordered under the nationwide contract with Appraisal 

Management Companies (AMCs). Field Staff request an appraisal through the Procurement 

Management Office’s (PMO) Procurement Requests SharePoint site using the current SFH 

Appraisal Request form (which can be found in the Direct Training Hub in SharePoint along 

with other appraisal training materials) and uploads all applicable supporting documents. 

The AMC Administration Team (consisting of PMO and National Office staff) then orders 

the appraisal through the applicable AMC portal. 

Under the nationwide contract, the AMCs are generally required to follow Attachment 

5-A (though contract terms may differ). The AMC Administration Team monitors the 

AMCs’ contract performance, reconciles invoices, handles payments, and handles all 

communications with the AMCs. Field Staff are not to communicate with the AMCs or 

their subcontracted appraisers; Field Staff must direct their general appraisal 

communications to rd.appraisals@usda.gov or to the Regional Appraisal Services

SharePoint site for requesting a technical review. If the communication is time sensitive (e.g. 

request for a correction or revision), use “Urgent” in the subject line. 

2. Review of Property and Site for Compliance with Agency Standards

Before loan approval, the Loan Originator must confirm that the property meets, or will 

meet with any planned constructions or repairs, all applicable Agency requirements. This is 

accomplished through a review of opinions or determinations made by qualified third parties 

(such as appraisers, local building officials, architectural and engineering professionals, and

trades professionals).

3. Identification and Correction of Deficiencies

If at any point during the review process, deficiencies are identified that jeopardize the 

Agency’s ability to approve a loan, the Loan Originator must notify the applicant and give 

the applicant at least 15 days to resolve the deficiency. For example, if an inspection 

reveals a structural deficiency that can be corrected, the applicant could negotiate with the 

seller to reduce the sales price so that funds to correct the deficiency could be included in 

the loan, or to correct the deficiency before the property is transferred.

If a deficiency cannot be satisfactorily corrected, the Loan Originator notifies the 

applicant and provides a new Form RD 1944-59, Certificate of Eligibility, which is 

signed by the Loan Approval Official. 

5-2 
HB-1-3550

Paragraph 5.1 Introduction

4. Documenting the Acceptability of Seller Completed Repairs

As part of the contract negotiations, a seller often agrees to complete repairs 

identified by the buyer at the time of signing the sales contract or later identified by the 

buyer’s inspectors (refer to Paragraph 5.7 A.) and agreed to through an addendum to the 

contract. The Field Office should ensure that the repair conditions in the contract or 

addendum provide the specifics necessary for the seller to properly address the repair.

Ideally, the contract or addendum will detail the existing problem, how the repair will be 

completed, who will perform the work (a licensed contractor should perform work that 

demands technical expertise), and how the repairs will be verified. If the repair 

conditions are vague or ambiguous, the Field Office should encourage the buyer to seek 

an addendum that better defines the repair conditions.

Before loan closing can occur, receipts for the repair work and any associated 

permit/contract documents must be obtained from the seller and reviewed by the Field 

Office. Documentation on all agreed to repairs must be provided. In addition, the buyer 

must be instructed to inspect the completed work and provide the Field Office with a 

written statement of acceptance or a written statement outlining deficiencies in the seller 

completed repairs. If deficiencies are noted, the buyer and seller must work to address the 

deficiencies before loan closing can occur.

Special care should be given if completion of repair work cannot take place until after 

the loan closing to ensure there are adequate funds. Closing agents should be instructed

to release the funds to the contractor only after receiving written instructions from the 

Loan Approval Official. The Loan Approval Official may authorize the release of funds 

once the work, as indicated in the contract, is completed. The case file should be 

documented with invoices and the borrower’s acceptance that the work has been 

completed to their satisfaction.

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Revised (03-19-20) PN 534
HB-1-3550

SECTION 1: SITE REQUIREMENTS [7 CFR 3550.56]

5.2 OVERVIEW

Once the applicant has found a property, the Agency needs to ensure that it fits program 

guidelines regarding sites. The site must be developed according to the development standards 

imposed by State or local government. These standards are often contained in zoning ordinances, 

building codes, subdivision regulations, and/or construction standards. In addition, the site must be 

located in a rural area; be modest; meet minimum standards regarding water and wastewater 

systems; and meet the Agency’s street and access requirements of being on an all-weather road that 

is maintained by a public body or homeowner’s association. This section addresses these site 

requirements.

5.3 RURAL AREA DESIGNATION

A. Rural Area Definition

Rural areas are defined as:

• Open country or any town, village, city, or place, including the immediate adjacent 

densely settled area, which is not part of or associated with an urban area and 

which:

o Has a population not in excess of 2,500 inhabitants; or

o Has a population in excess of 2,500 but not in excess of 10,000 if it is rural in 

character; or

o Has a population in excess of 10,000 but not in excess of 20,000,and-

 Is not contained within a Metropolitan Statistical Area (MSA); and

 Has a serious lack of mortgage credit for lower and moderate-income families as 

determined by the Secretary of Agriculture and the Secretary of Housing and 

Urban Development.

• Any area classified as ‘‘rural’’ or a ‘‘rural area’’ prior to October 1, 1990, and 

determined not to be ‘‘rural’’ or a ‘‘rural area’’ as a result of data received from or after 

the 1990, 2000, 2010, or 2020 decennial census, and any area deemed to be a ‘‘rural 

area’’ at any time during the period beginning January 1, 2000, and ending December 

31, 2020, shall continue to be so classified until the receipt of data from the decennial 

census in the year 2030, if such area has a population in excess of 10,000 but not in 

excess of 35,000, is rural in character, and has a serious lack of mortgage credit for 

lower and moderate- income families.

5-4
HB-1-3550

Paragraph 5.3 Rural Area Designation

1. Assessing “Open Country”

A site that is in “open country not part of or associated with an urban area” is one that is 

separated by open space from any adjacent densely populated urban area. Open space 

includes undeveloped land, agricultural land, or sparsely settled areas. Open space does not 

include physical barriers (such as rivers or canals), public parks, commercial and industrial 

developments, small areas reserved for recreational purposes, and open space set aside for 

future development.

In order to determine if a property is in open country, the Loan Originator should review 

recent maps, aerial photographs, and/or conduct a site visit. In particular, the Loan Originator 

should look for significant new development in parts of rural areas that adjoin non-rural 

areas, and investigate the likelihood that local authorities may re-designate the area’s 

corporate limits.

2. Assessing “Population”

In order to find the population figures for a locality, the Loan Originator should use 

the decennial U.S. Census of Population, or population updates published by the U.S. 

Bureau of the Census. In calculating population figures for a locality, any incarcerated 

prison population must be excluded from the total area population.

3. Assessing “Serious Lack of Mortgage Credit”

This determination is made jointly by the Secretary of Agriculture and the 

Secretary of Housing and Urban Development (HUD).

4. Assessing “Rural in Character”

A rural in character (RIC) analysis must be completed for areas meeting “Special 

Considerations” as outlined in Paragraph 5.3 B. 1. and 2.

However, an area is automatically considered to be RIC when the population density is 

less than or equal to 1,000 persons per square mile. When the population density is greater 

than 1,000 persons per square mile, a RIC analysis must be completed. When conducting a 

RIC analysis, the State Director should also account for other factors affecting population 

density that include, but are not limited to the following:

• Economic Vitality: The local economy may be adversely affected by industry 

or market conditions such as high unemployment, recent loss of a large 

employer, or similar factors. If so, the area may be currently or imminently 

subject to out-migration that affects the RIC analysis.

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Revised (03-19-20) PN 534
HB-1-3550

Paragraph 5.3 Rural Area Designation

• Colleges and Universities: In contrast to prison populations, college populations 

cannot be excluded from the total area population. However, the college 

population may be considered when determining the population density as part 

of the RIC determination. However, only the portion of the college population 

living on campus may be excluded from population densitycalculations.

B. Special Considerations

1. Exception for Rural Areas Designated Prior to October 1990

If an area was classified as rural prior to October 1, 1990, even if it is within an MSA, it 

may be still considered rural as long as it: (1) has a population between 10,000 and 35,000,

(2) is rural in character, and (3) has a serious lack of mortgage credit. This designation can 

remain effective through receipt of census data for the year 2030. Or;

2. Exception for Rural Areas Designated Between January 1, 2000 and 

December 31, 2020.

If an area was classified as rural or deemed eligible any time between January 1, 2000 

and December 31, 2020, even if it is within an MSA, it may be still considered rural as long 

as it: (1) has a population between 10,000 and 35,000, (2) is rural in character and

(3) has a serious lack of mortgage credit. This designation can remain effective through 

receipt of census data for the year 2030.

3. Contiguous Areas

Two or more towns, villages, cities, or places that are contiguous may be considered 

separately for a rural designation if they are not otherwise associated with each other, and 

their densely settled areas are not contiguous.

When determining the population count for an area, the Loan Originator also should 

consider developed areas in contiguous counties or states. In cases involving contiguous 

counties, the appropriate population figure to be used for the area in question should be 

determined after consultation with the State Director. In an area involving contiguous states, 

the applicable population figure should be determined through an agreement between the 

two State Directors. The Loan Approval Official should contact both State Directors to help 

make this determination.

C. Reviewing Rural Area Designations

An area’s rural designation may be changed as a result of a periodic review or after 

the decennial census of population. Both types of review are discussed below. In all 

cases, the local office should maintain a perpetual master file to document all rural area 

decisions and include documentation of all public notification actions taken.

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HB-1-3550

Paragraph 5.3 Rural Area Designation

1. Periodic Reviews

Each Field Office must review all areas under its jurisdiction every 5 years to identify 

areas that no longer qualify as rural. In areas experiencing rapid growth and in eligible 

communities within MSAs, the review should take place every 3 years. Field Office files 

must contain documentation that local planning boards, where available, were contacted at 

the time of each review to verify that areas considered open spaces are not scheduled for 

development in the next 5 years.

Field Staff must prepare a rural area review report that includes a recommendation on 

those areas that should be re-designated. An acceptable form for this report is a map 

showing an outline of the area recommended to be re-designated, and a cover letter 

explaining the reasons for the recommendation. The review report must be signed by the 

Loan Approval Official, and submitted to the State Director on or before February 28 of the 

review year.

2. Census Reviews

In addition to periodic reviews, the State Director is responsible for implementing redesignations based on the decennial U.S. Census of Population and any biannual updates. 

Immediately after receiving the population information from the Census Bureau, the 

State Director must make appropriate changes in designation for areas with populations 

under 10,000. 

3. Public Notice

90-Day Public Notice: State or Field Office must publish a 90-day notice 

informing the public that analysis is being conducted to determine the area’s eligibility 

designation. The 90-day public notice must specify the area that is being studied and invite 

comments from the public. The notice should be publicized and targeted to partners, 

groups, and organizations that are engaged in community and/or housing activities. 

The notice may be published via the State Office ListServ notice or GovDelivery 

email service (if available), RD State Office Home page, or in a newspaper of general 

circulation within the area to be studied. When publishing via newspaper, the notice must 

be in easily readable type in the non-legal section of the newspaper(s) and must be 

bilingual if the affected area is largely non-English speaking or bilingual. The notice 

should appear for at least three consecutive days if published in a daily newspaper, or in 

two consecutive publications if published in a weekly newspaper. 

30-Day Public Inspection Period: Prior to making the final rural area decision, 

the State Director must provide the public an opportunity to review any comments that 

were received in response to the 90-day public notice. The notice must describe the 

proposed revisions to the boundary lines and provide a link to the map eligibility site that 

will reflect the proposed revisions.

(01-23-03) SPECIAL PN 

Revised (07-22-19) SPECIAL PN

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Paragraph 5.3 Rural Area Designation

30-Day Final Notice: If the State Director determines that the rural area 

designation will change from rural to non-rural, a one-time 30-day notice must be 

published. The notice must describe the revised boundary lines, the effective date of the redesignation, and provide a link to the map eligibility site that will reflect the change. The 

notice must be disseminated using the methods described above.

4. Final Determination

The State Director will make a final determination on designations based on the 

review report and public comments and notify the Field Office of the final decision.

5. Designation of Eligible and Ineligible Area BoundaryLines

By September 30th of each review year, or after the census review is complete, the State 

Director will develop, clear and distribute a State Supplement that updates, establishes, lists, 

and maps all ineligible areas in accordance with RD Instruction 2006-B. The State 

Supplement will include county maps showing all ineligible areas in each county. 

Designation of eligible and ineligible areas will be updated to the public website: 

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do.

Once the state has completed the review, a visual presentation of those areas designated 

as ineligible will be documented through the RD GIS Portal.

Boundary lines must meet the following criteria: 

• If the boundary line is a road, the boundary between eligible area and ineligible area 

will be represented as the middle of the road. With this type of boundary line, one 

side of a road may be eligible, while the remaining side is ineligible. 

• Artificial buffer zones, such as an imaginary line 100 feet from a road will not be 

used.

• Boundary lines that are defined as city or town limits must be defined and labeled as of 

a specific date. Example – Ineligible area is the Claremore, Oklahoma limits as of 

January 1, 2009. Changes to the city limits such as annexation subsequent to the defined 

date will require review, public notification, preparation of a revised State Supplement, 

and update to the public eligibility website prior to implementation of the revised city 

limit boundary. 

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Paragraph 5.3 Rural Area Designation

In this example, the re-designated area becomes ineligible when the process for the 

change is complete. The update of the State Supplement and the website should be 

implemented at the same time to the extent feasible.

Submitting Ineligible Area changes: 

Requests for re-designation of ineligible area on the public website will be forwarded by 

the State Director together with the required State Supplement, in accordance with the 

instructions in Attachment 5-D. Please see Attachment 5-E, Eligibility System Modification 

Request Process, for detailed instructions and Attachment 5-F, Eligibility System 

Modification Workflow, is provided for visual purposes. 

6. Making Loans in Areas Changed to Non-Rural

If an area’s designation changes from rural to non-rural, the Loan Approval Official 

may approve loans in that area only under the circumstances listed below.

• If an application is received before an area’s designation changed and the applicant 

selects a property in the newly designated non-rural area, a loan may be made for that 

property if it meets all other eligibility requirements.

• New conditional commitments may be issued in non-rural areas if a purchaser is 

found whose loan application was complete before the area’s designation 

changed.

• Existing conditional commitments will be honored.

• Real Estate Owned (REO) property sales and transfers with assumption may be 

processed in areas that have changed to non-rural.

• Section 504 Loan and Grant assistance may be provided on a property that already 

has an Agency loan. 

• Subsequent loans may be made on a property that already has an Agency loan to: (1) 

make necessary repairs; (2) pay equity in connection with an assumption of the Agency 

loan; or (3) to pay equity to a departing co-borrower or (4) refinance a direct or 

guaranteed borrower's loan with a new direct or guaranteed loan if it meets all other 

eligibility requirements.

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

5.4 MODESTSITES

A qualified property must be predominately residential in use, character, and design (as 

opposed to commercial, industrial, or agricultural). Modest sites are defined by their size, 

income production use, and the presence of prohibited outbuildings outlined in Paragraph

5.6. The Loan Originator must verify that the requirements listed below are met.

• Size. There is no specific limitation to the size/acreage of the site, provided it is 

not large enough to be subdivided under local subdivision regulations.

• Income-Producing Land. The site must not have income-producing land that will be 

used principally for income producing purposes. Vacant land or properties used 

primarily for agricultural, farming, or commercial enterprise are ineligible.

• Zoning. The property must comply with applicable zoning and restrictions. If

an existing property does not comply with all current zoning ordinances, but it is 

accepted by the local zoning authority, the appraiser must report the property as 

legal non-conforming. The appraisal must reflect any adverse effect of the legal 

non-conforming use on the value and marketability of the property.

5.5 ADEQUATE SITE ACCESS, WATER, AND WASTEWATER SYSTEMS

The site must be accessible from an all-weather road maintained by either a public body or 

a homeowner’s association. When the road is privately maintained by an association, there must

be a legally enforceable arrangement for the ongoing maintenance needs of the roads.

The site must also have water and wastewater disposal systems, whether individual, central, 

or privately-owned and operated, that meet the applicable water and wastewater disposal system 

requirements of RD Instruction 1924-C. There must be assurance of continuous service at 

reasonable rates for central water and wastewater disposal systems. A system owned or operated by 

a private party must have a legally irrevocable agreement which allows interested third parties to 

enforce the obligation.

Private companies usually inspect individual wells and septic system and provide written 

results of the inspection. In addition, the responsible local or State regulatory agency must 

verify, in writing, that the privately-owned water and wastewater disposal systems, that serve 

multiple households, comply with the Safe Drinking Water Act (42 U.S.C. 300h) and the Clean 

Water Act (33 U.S.C. 1341), respectively. Inspections are not required on public water and 

wastewater disposal systems.

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SECTION 2: DWELLING REQUIREMENTS [7 CFR 3550.63(a)]

5.6 MODESTHOUSING

To be considered “modest”, the property must be one that is considered modest

for the area, must not have a market value in excess of the applicable area loan limit, meet the 

standard square footage consideration, and must not have certain prohibited features. 

A. Establishing Area Loan Limits Within a State

The minimum standard area loan limit is 80% of the local HUD 203(b) limit in effect 

unless a higher percentage is approved by the Deputy Administrator, Single Family Housing. The 

review process occurs once annually, typically at the end of each calendar year, shortly after the 

annual updates to HUD’s 203(b) limits are published. 

State Directors who have counties they believe merit loan limits exceeding the standard, 

may submit a request (upon notification of the annual review process) to the National Office by 

completing Form RD 2006-3, “Instruction and Form Justification.” The request should be 

accompanied by a narrative and supporting data. The analysis should include local values for both 

existing homes in program-acceptable condition and the total costs to acquire or construct new 

dwellings. Exceptions to set area loan limits below 80% of the local HUD 203(b) limit will not be 

permitted.

The Agency website will be updated after processing exception requests for higher limits, 

validating all limits, and revising the various data tables supporting UniFi, LoanServ, the Direct 

Self-Assessment tool, etc. It is recommended that states seek input from stakeholders at the 

beginning of each fiscal year, regarding the adequacy of the area loan limits and whether they are 

sufficiently meeting the needs of applicants, particularly in higher cost areas. 

States are not authorized to alter their limits throughout the year; however, the National Office 

may allow for an interim review/update period if widespread extraordinary market conditions occur 

after the annual review/update. 

1. Exceptions for Individuals An exception to an established area loan limit may be granted 

to accommodate the specific needs of an applicant, for example, to serve an exceptionally 

large household or to provide reasonable accommodation for a household member with a 

disability. Requests for exceptions may be approved by the State Director if the cost of the 

property will exceed the limit by $5,000 or less. To request an exception, the Loan 

Originator must fully document the need for the exception. 

• For accommodations for household members with disabilities, the Loan Originator 

must provide the cost of accommodations that demonstrates that these costs cannot 

be accommodated within the area’s modest housing limit; and 

• If exceptions are granted, the Loan Originator will follow UniFi procedures for 

overriding the maximum loan limits.

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(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
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Paragraph 5.6 Modest Housing

B. Notification

States should encourage stakeholders; such as certified loan packagers, intermediaries, real 

estate agents, brokers, building contractors, lenders, partners, etc. to sign up for GovDelivery to 

ensure they are informed of updates to the area loan limits as they occur.

C. Square Footage Consideration Standards

1. Maximum

Agency financed properties do not have limitations on maximum square footage.

2. Minimum

Agency financed dwellings are generally not less than 400 square feet to ensure they are 

designed and constructed for permanent occupancy and contain permanent areas for 

cooking, eating, sleeping and sanitary needs. Water and wastewater systems must be 

permanently connected. This square footage consideration may be waived by the Loan 

Approval Official’s next-level supervisor when the Field Office determines a smaller 

dwelling, or “tiny home”, otherwise meets the same property standards as other Agency 

financed dwellings (e.g., tiny homes which are built on a trailer chassis, or not 

permanently affixed to real property, are not eligible dwelling types).

D. Prohibited Features

1. Swimming Pools

Existing properties that include in-ground pools may be financed, provided the home 

meets the other modest dwelling requirements and the pool has been inspected by a 

qualified inspector. However, in-ground pools with new construction or with 

properties which are purchased new are prohibited. 

2. Farm Service Buildings and Income-Producing Structures

The property must not include buildings principally used for incomeproducing purposes. 

• Farm service buildings such as barns, silos, commercial greenhouses, 

or livestock facilities used primarily for the production of 

agricultural, farming or commercial enterprises are ineligible. 

However, barns, silos, livestock facilities or greenhouses no longer 

in use for a commercial operation, which will be used for storage, do 

not render the property ineligible.

• Outbuildings such as storage sheds and non-commercial workshops 

are permitted if they are not used primarily for an income 

producing agricultural, farming or commercial enterprise.

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HB-1-3550

Paragraph 5.6 Modest Housing

•A minimal income-producing activity, such as maintaining a garden that 

generates a small amount of additional income does not violate this 

requirement. Home-based operations such as childcare, product 

sales, or craft production that do not require specific commercial real 

estate features are not restricted.

•Accessory Dwelling Units (ADUs) that include kitchen and bath areas 

and function as independent structures, commonly marketed as 

‘guesthouses’ or ‘backyard cottages’, are ineligible. However, 

design features such as converted portions of existing homes that 

include a kitchenette or additional attached living area (e.g., 

bedroom and/or bathroom) without independent utilities (e.g., water, 

gas, electricity) are not restricted, provided they function in support 

of the household members only.

5.7 DECENT, SAFE AND SANITARY DWELLINGS

To help ensure that dwellings are decent, safe, and sanitary (DSS) the Agency has 

established minimum standards for existing and new dwellings.

A. Existing Dwellings

Existing dwellings must be structurally sound and functionally adequate and be in good 

repair or be placed in good repair with loan funds.

For an initial Section 502 direct loan to purchase or refinance a non-Agency loan on an 

existing dwelling, the applicant must engage the services of a State-licensed inspector to perform a 

whole house inspection and provide a statement that the dwelling appears to meet the Agency’s DSS 

standards with respect to: (1) termites and other pests (this may be separate from the whole house 

inspection); (2) plumbing, water and sewage; (3) heating and cooling; (4) electrical systems; and (5) 

structural soundness. The inspection report must be a comprehensive document that meets the 

minimum standards of the professional home inspector associations. When a state does not license 

inspectors, a qualified, independent, third-party inspector may perform the inspection and provide 

the necessary certifications.

The Loan Originator should inform the applicant that if their loan application request 

falls through for whatever reason, they will remain responsible for paying their inspectors 

(unless the seller agreed to cover the inspection fees).

Once a report(s) covering all five items noted above is received by the Agency, the Loan 

Originator must identify any noted deficiencies that may make the home not decent, safe, and 

sanitary. If these deficiencies are not already addressed in the option or sales contract, the Loan 

Originator must inform the applicant that they must be addressed either through the seller 

assuming responsibility for the repair prior to closing or the repairs being required post-closing.

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(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
HB-1-3550

Paragraph 5.7 Decent, Safe and Sanitary Dwellings

Special Considerations:

Low risk of termite infestation: A State Director may issue a state supplement waiving the 

termite inspection requirement provided: (a) the state’s probability of termite infestation is ‘none to 

slight’ or ‘slight to moderate’ as identified on the Termite Infestation Probability (TIP) map noted 

below, (b) state and/or local codes do not require one, and (c) the home inspection or appraisal have 

no indications of active infestation. A TIP map can be found at: 

https://basc.pnnl.gov/images/termite-infestation-probability-map-adapted-2021-internationalresidential-code-irc-figure. The supplement must receive prior approval through the National Office.

Section 502 loan balance less than $7,500 and the repayment schedule does not 

exceed 10 years: If the Section 502 loan balance is less than $7,500 and the repayment schedule 

does not exceed 10 years, a whole house inspection is not needed and the dwelling may lack some 

equipment or features after repairs such as a complete bath, kitchen cabinets, closets, or 

completed finished interior in some rooms. These dwellings must otherwise meet the housing 

needs of the applicant and provide decent, safe, and sanitary living conditions when the 

improvements financed with the loan are completed.

Initial Section 502 loans for necessary repairs-only: An initial Section 502 loan can 

be made to an existing homeowner for necessary repairs provided any existing loan against the 

property is an affordable non-RHS loan. While a whole house inspection is not needed, the 

dwelling must otherwise meet the housing needs of the applicant and provide decent, safe, and 

sanitary living conditions when the improvements financed with the loan are completed. 

B. New Dwellings

All construction must meet the standards contained in RD Instruction 1924-A. New 

dwellings include homes to be built, currently under construction, or those that are less than 12 

months old and never occupied. When applicants enter into a contract to purchase a new 

dwelling, the Loan Approval Official must consider how the construction quality will be 

documented. The process for ensuring that the Agency’s construction standards are met is 

described in Section 6 of this chapter and in Paragraph 6.7. 

C. Survey Requirements

A survey is not required for any financed property unless the title insurance commitment 

specifically excludes coverage for the property and improvements in the loan policy. The 

currently adopted American Land Title Association (ALTA) loan policy (also referred to as 

“extended” or “ALTA extended”) provides explicit extended coverages, including “survey” (or 

boundary and encroachment) coverage without issuance of a special endorsement. A survey may 

be required by the title insurance company to remove the exclusions from coverage related to 

boundaries, encroachments, easements and other matters when issuing an owner’s title policy, 

but this is not common for the lender’s policy. Although an owner’s policy is not required by the 

Agency, the borrower may choose to have this coverage and use loan funds to pay for it provided 

the loan does not exceed the appraised value. 

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HB-1-3550

Paragraph 5.7 Decent, Safe and Sanitary Dwellings

When a new survey is needed, it must contain boundary lines, any improvements, 

encroachments on the subject or adjacent property, above-ground easements, set-backs imposedby 

either restrictive covenant or zoning, and any additional requirements necessary to obtain title 

insurance. For new construction, the boundary corners must be clearly marked. An existing survey 

may be used if it meets the requirements of the title insurance.

D. Flood-Related Requirements

Flood insurance is required for all dwellings located within the 100-year flood plain, unless 

FEMA has granted an exception, and flood insurance is available as part of the community’s flood 

plain management regulations.

For all new construction, substantial improvements, and existing dwellings the lowest 

floor (including basement) must be elevated to or above the 100-year flood level.

In addition, for newly constructed and substantially rehabilitated dwellings, the 

construction materials and methods used must be for the purpose of making the structure resistant 

to flood damage, and minimizing any damage that may occur. RD Instruction 426.2 contains 

further guidance on the National Flood Insurance Program and flood-related requirements.

All dwellings within the 100-year floodplain must be served by public utilities that are 

located and constructed to minimize or eliminate flood damage or have an on-site water supply 

and waste disposal system located and constructed to avoid contamination of the water supply by 

the septic system due to flooding.

For all new construction, substantial improvements, and existing dwellings in a floodplain, 

the Agency must perform the eight-step decision making process for alternative consideration in 

order to determine if a reasonable alternative to committing federal funding to a property in a 

floodplain exists. This process is outlined in detail in RD Instruction 1970-F, section 1970.256.

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(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
HB-1-3550

Environmental Library

At a minimum, each Field Office should 

maintain the following information in order to 

facilitate completion of environmental reviews. 

The State Environmental Coordinator can provide 

assistance in obtaining or understanding this 

information.

• The Environmental Resource Directory;

•

•

Federal Emergency Management Agency 

(FEMA) floodplain maps;

Natural Resources Conservation Service (NRCS) 

Soil Surveys and Important Farmland Soils; and

• U.S. Fish and Wildlife Service (USFWS) 

Coastal Barrier Resource System maps (as 

applicable).

SECTION 3: ENVIRONMENTAL REQUIREMENTS

[7 CFR 3550.5]

5.8 PROTECTION OFENVIRONMENTAL RESOURCES

The Agency considers environmental 

quality equally with economic, social, and other 

factors in its program development and decisionmaking processes. The environmental review 

process is intended to help Agency officials make 

decisions that are based on an understanding of the 

environmental consequences of a proposed action, 

and to take those actions that protect, restore, and 

enhance the environment.

This paragraph contains a general 

discussion of basic environmental requirements. 

Detailed environmental policies and procedures 

can be found in 7 CFR Part 1970 and the 

corresponding staff instructions in RD 

Instruction 1970 series, which contains compliance 

requirements for the National Environmental Policy Act 

(NEPA), as well as numerous other laws, Executive Orders, 

and Departmental Regulations on a variety of other 

environmental issues.

In accordance with 7 CFR 1970.11, the environmental review must be concluded before 

the obligation of funds, therefore in no case will loan or grant funds be obligated without the 

completion of the environmental review. In addition, in accordance with 7 CFR 1970.5 (a) (5), 

mitigation measures described in the environmental review and decision documents must be 

included as conditions in Agency financial commitment documents, such as a conditional 

commitment letter or funding commitment.

While funds may be obligated subject to an appraisal, if the appraiser determines that there 

are environmental hazards on site, further environmental due diligence investigations may be 

required to determine the nature and extent of the contamination, and to determine the estimated 

cost of remediation. This information should be used by the Agency to make a decision related to 

property eligibility.

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Paragraph 5.8 Protection of Environmental Resources

A. Types of Environmental Reviews

NEPA requires that Agency actions be classified into 3 basic categories of actions: those that are 

categorically excluded from NEPA review; those for which more information is needed to determine 

if the project will significantly impact the environment, and therefore preparation of an 

Environmental Assessment (EA) will be required; and those that have been determined to 

significantly impact the environment, and therefore require preparation of an Environmental Impact 

Statement (EIS). The Agency has been allowed to establish 2 categories of Categorical Exclusions: 

those that involve no or minimal alterations in the physical environment and typically occur on 

previously disturbed land, and therefore require no or limited environmental documentation to be 

submitted by the applicant (RD Instruction 1970-B, section 1970.53), and those that will cause more 

alteration of the environment and therefore require the submission of an Environmental Report (a 

brief report on the current environment of the project area and the expected environmental impacts 

of the proposed project) (RD Instruction 1970-B, section 1970.54). This classification of actions 

provides the Agency with a starting point for beginning its environmental review process. Most 

single family housing activities do not adversely affect environmental resources and have no 

cumulative effect, and therefore will qualify as a Categorical Exclusion without an Environmental 

Report; those which affect resources or have a cumulative effect may require an Environmental 

Review or an Environmental Assessment. For a complete list of housing actions and their 

classifications, refer to RD Instruction 1970-B, sections 1970.53 and 1970.54.

1. Categorical Exclusions

In accordance with RD Instruction 1970-A, a Categorical Exclusion is an action that 

does not individually or cumulatively have a significant impact on the quality of the human 

environment.

The following are routine financial actions related to single family housing 

transactions that are classified as Categorical Exclusions without an Environmental Report:

• Financial assistance for the purchase, transfer, lease, or other acquisition of real 

property when no or minimal change in use is reasonably foreseeable.

• Financial assistance for the purchase, transfer, or lease of personal property or 

fixtures where no or minimal change in operations is reasonably foreseeable.

• Sale or lease of Agency-owned real property, if the sale or lease will have no or 

minimal construction or change in current operations in the foreseeable future.

• The provision of additional financial assistance for cost overruns where the 

purpose, operation, location and design of the proposal as originally approved has 

not been substantially changed.

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Revised (03-19-20) PN 534
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Paragraph 5.8 Protection of Environmental Resource

• Minor construction proposals such as:

o Minor amendments or revisions to previously approved projects provided 

such activities do not alter the purpose, operation, geographic scope, or 

design of the project as originally approved;

o Repair, upgrade, or replacement of equipment in existing structures for such 

purposes as improving habitability, energy efficiency (including heat rate 

efficiency), replacement or conversion to enable use of renewable fuels, 

pollution prevention, or pollution control;

o Any internal modification or minimal external modification, restoration, 

renovation, maintenance, and replacement in-kind to an existing facility or 

structure;

o Construction of or substantial improvement to a single-family dwelling, or a 

Rural Housing Site Loan project serving up to four families and affecting less 

than 10 acres of land;

o Siting, construction, and operation of new or additional water supply wells for 

residential, farm, or livestock use;

o Replacement of existing water and sewer lines within the existing right-of-way and 

as long as the size of pipe is either no larger than the inner diameter of the existing 

pipe or is an increased diameter as required by Federal or state requirements. If a 

larger pipe size is required, applicants must provide a copy of written administrative 

requirements mandating a minimum pipe diameter from the regulatory agency with 

jurisdiction; and

o New utility service connections to individual users or construction of utility lines or 

associated components where the applicant has no control over the placement of the 

utility facilities.

For each proposed action, RD Instruction 1970-B, Exhibit D, “Environmental Checklist for 

Categorical Exclusions,” is prepared by the Agency to ensure that the specific proposal under 

consideration qualifies as a Categorical Exclusion, and that there are no extraordinary

circumstances (RD Instruction 1970-B, section 1970.52) or cumulative impacts related to the 

proposal, that the proposal is not connected to other actions with potentially significant impacts (see 

40 CFR 1508.25(a)(1)), and that it is not considered a cumulative action (see 40 CFR 

1508.25(a)(2)).

In general, extraordinary circumstances (RD Instruction 1970-B, section 1970.52) are 

unique situations presented by specific proposals, such as characteristics of the geographic area 

affected by the proposal, scientific controversy about the environmental effects of the proposal, 

uncertain effects or effects involving unique or unknown risks, and unresolved conflicts 

concerning alternate uses of available resources within the meaning of section 102(2) (E) of 

NEPA. Exhibit 5-2 provides a listing of the most common extraordinary circumstances.

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Paragraph 5.8 Protection of Environmental Resource

Exhibit 5-2

Extraordinary Circumstances

• Any violation of applicable Federal,state, or local statutory, regulatory, or permit requirementsfor 

environment, safety, and health.

• Any proposal that is likely to cause uncontrolled or unpermitted releases of hazardous substances, pollutants, 

contaminants, or petroleum and natural gas products.

• An adverse effect on the following environmentalresources:

o Historic properties;

o Federally listed threatened or endangered species, critical habitat, Federally proposed or candidate species;

o Wetlands;

o Floodplains;

o Areas having formal Federal or state designations such as wilderness areas, parks, or wildlife refuges; wild and scenic rivers; or marine sanctuaries;

o Special sources of water (such as sole source aquifers, wellhead protection areas, and other water sources 

that are vital in a region);

o Coastal barrier resources or, unless exempt, coastal zone management areas; and

o Coral reefs.

• The existence of controversy based on effects to the human environment brought to the Agency’s attention 

by a Federal, tribal, state, or local government agency.

RD Instruction 1970-B contains detailed information on the proper implementation of 

requirements affecting Categorical Exclusions.

It is important to note that development on tribal land or dependent Indian communities may 

require additional coordination with the tribe to determine if the proposal has an adverse impact on 

environmental or cultural resources. In accordance with RD Instruction 1970-H, Exhibit B, “When 

an applicant’s proposal is located on tribal lands, defined in 36 CFR § 800.16(x) as all lands within 

the exterior boundary of any Indian reservation and all dependent Indian communities, and that tribe 

has designated a Tribal Historic Preservation Officer (THPO) in accordance with Section 101(d)(2) 

of [National Historic Preservation Act (NHPA)], the SHPO participates only under the conditions 

specified in 36 CFR § 800.2(c)(1)(ii). If the Indian tribe has not designated a THPO, then the SHPO 

participates in Section 106 review pursuant to 36 CFR § 800.2(c)(2)(i)(B).” Exhibit D of RD 

Instruction 1970-H provides guidance on working with Indian tribes in the NHPA Section 106 

review.

2. Environmental Reports and Environmental Assessments

If it appears that extraordinary circumstances and/or cumulative impacts may be 

involved, an Environmental Report (ER) or an Environmental Assessment (EA) may be 

required in accordance with RD Instruction 1970-B, section 1970.54 and RD Instruction 

1970-C. Through these review processes, the Agency will acquire the necessary 

documentation to: (1) demonstrate compliance with requirements for protection of 

environmental resources, including the development of practical alternatives to either

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Paragraph 5.8 Protection of Environmental Resource

avoid or lessen any adverse environmental impacts; and (2) demonstrate why the 

potential impact on resources is not considered to be significant and, therefore, an EIS is 

not required. 

B. Flood Hazard Determination

FEMA’s Standard Flood Hazard Determination Form (SFHDF) determines if the home is 

located in a Special Flood Hazard Area (SFHA) and states the availability of flood insurance 

based on if the community participates in the National Flood Insurance Program (NFIP). Flood 

insurance is required when any form of federal financial assistance is intended in whole or in part 

for acquisition, construction, reconstruction, or substantial improvement of any building located 

in a SFHA. The flood insurance can be through NFIP or under NFIP’s “write your own” program 

where the policy is through private insurance that meets the requirements of 42 USC 4012a 

(b)(1)(A). Flood insurance must be obtained and maintained throughout the life of the loan when 

any portion of the home is located in a SFHA, including attached garages, decks and carports, etc. 

Flood insurance is not required for any additional structure that is located on the property but is 

detached from the home (such as detached shed, garage, or other ancillary structure). Flood 

insurance is also not required if the financial assistance is less than the substantial improvement 

threshold discussed in HB-1-3550, Chapter 7. 

The information on the SFHDF will assist in the preparation of the environmental review 

documentation, which must examine whether there is a reasonable alternative to a proposed 

purchase or construction in a floodplain. The Loan Originator will be responsible for acquiring 

the SFHDF from CoreLogic Flood Services at: https://www.floodcert.com/. CoreLogic provides 

“Life of Loan Determination” in which the Agency will be notified should the site’s floodplain 

designation change. The SFHDF must be acquired prior to the completion of the environmental 

review.

If the dwelling is located within a SFHA, the lowest floor (including basements) must be 

elevated above the base flood elevation (BFE). Proof that this requirement has been met is usually 

in the form of a FEMA Elevation Certificate, however other forms of documentation may be 

accepted (see RD Instruction 1970-F).

Additionally, for applications to purchase, construct, or substantially rehabilitate a dwelling 

in a floodplain, utilities should be flood-proofed or located above the BFE. If the dwelling does not 

use public utilities, the domestic well must be a minimum of 50 feet from the septic drain field (or 

more, depending on local or state codes). For minor repairs, these requirements are not applicable 

if the dwelling existed prior to the publication of the first FEMA flood map for that location. In 

accordance with RD Instruction 1970-F, section 1970.256 (b) and 1970.261(b), if the property is 

within a floodplain, the Agency approval official is responsible for notifying the applicant about 

the hazards associated with occupancy of locations within a floodplain at the earliest possible point 

in the Agency’s decision-making process. A template notice can be found in RD Instruction 1970- 

F, Exhibit B, Attachment 2. 

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HB-1-3550

Paragraph 5.8 Protection of Environmental Resource

C. Responsibility for Environmental Reviews

The Loan Originator is responsible for ensuring that the appropriate level of environmental review has 

been completed prior to the commitment of federal funds. This includes the assembly and analysis of 

relevant material, the development and analysis of practical alternatives and mitigation measures (as 

appropriate), and the development of recommendations regarding environmental impacts and 

environmental compliance. Applicants may be requested to provide information needed for the 

analysis.

Prior to the appraisal, the Agency will begin the appropriate level of environmental 

review using submitted documents and available online resources. If the appraiser marked “No” 

to the question, “Are there any adverse site conditions or external factors (easements, 

encroachments, environmental conditions, land uses, etc.)?” under the site portion of the Uniform 

Residential Appraisal Report, then the Field Office is not required to conduct a site inspection in 

order to complete the environment review. However, if the appraiser answers in the affirmative, a 

qualified Rural Development official must conduct a site inspection to determine if the initial 

environmental review decision is accurate based on observations of Agency staff during the site 

visit.

The Loan Approval Official will use the environmental review documents and, as 

appropriate, the recommendations of the State Environmental Coordinator (SEC), to make the 

Agency’s final decision regarding an environmental impact determination and compliance with 

environmental requirements, as well as flood insurance requirements. For Categorical Exclusions 

without an ER, this decision is evidenced by the completion of RD Instruction 1970- B, Exhibit 

D, which will be signed by the form’s preparer and the Loan Approval Official (if these are the 

same person, both applicable signatory lines should be signed). For Categorical Exclusions with 

an ER, the SEC must review the environmental documentation and sign the Exhibit D in addition 

to the preparer and Loan Approval Official. The Agency’s decision for EAs is documented by

the signing of the Finding of No Significant Impact (FONSI) by the Loan Approval Official; 

after reviewing the EA, the SEC will assist with the FONSI’s preparation.

SECs are available to provide technical assistance and guidance. They also are available 

to assist in problem resolution on environmental issues. Environmental questions or problems 

should be referred promptly to the SEC. Furthermore, SECs will review and sign off on all 

Categorical Exclusions with an ER and EAs.

D. NoiseAbatement

If a site is located near a major source of noise, the appraiser should consider this in their 

appraisal report. The information should be made available to the applicant, who may not be 

aware of the problem. The applicant, once informed, may wish to look for a different site or to 

consider some method of noise reduction. The Loan Approval Official should consult with the 

State Architect and the SEC on any proposals for noise reduction.

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01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
HB-1-3550

Paragraph 5.9 Management of Hazardous Substance

5.9 MANAGEMENT OF HAZARDOUSSUBSTANCES

The Agency must consider the management of hazardous substances, including hazardous 

wastes and petroleum products, from two perspectives: liability under hazardous substance and 

hazardous waste laws, and the economic risks posed by the presence of hazardous substances.

Both of these issues are addressed through due diligence. Due diligence is the process of inquiring 

into the environmental condition of real estate, in the context of a, real estate transaction, to 

determine the presence of contamination from hazardous substances including hazardous wastes 

and petroleum products, and to determine what impact such contamination may have on the 

market value of the property.

Appraisers are required to notify the Agency if they observe contamination from hazardous 

substances, or if information from research or interviews with individuals knowledgeable about the 

property indicates that the property might contain hazardous substances.

If an appraiser notices that a property may contain hazardous substances, or if the Agency 

has any other reason to suspect that a property is contaminated, the Loan Approval Official must 

initiate a due diligence review by completing Attachment 5-B, Single Family Housing Site 

Checklist. If the completed Attachment 5-B raises any concerns, it must be sent to the SEC for 

further evaluation and guidance. The SEC will contact a National Office Program Support Staff 

Environmental Protection Specialist to determine what further steps will need to be taken.

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HB-1-3550

SECTION 4: SECURITY REQUIREMENTS

5.10 ACCEPTABLE MORTGAGE

Generally, there should be no non-Agency liens on the property at the time of or 

immediately after closing, unless they are part of a formal leveraging strategy, or the Agency 

loan is for essential repairs and a senior lien secures an affordable non-Agency loan. However, 

the Loan Originator may accept prior or junior liens as long as: (1) the lien will not interfere with 

the purpose or repayment of the Agency loan; (2) the total value of all liens on the property is 

less than or equal to the property’s market value (except in cases where a junior lien is soft, 

silent, or a forgivable subordinate affordable housing product as noted in Paragraph 6.7 F.); and 

(3) the prior lien does not contain provisions that may jeopardize the Agency’s security position 

or the applicant’s ability to repay the loan.

5.11 OWNERSHIP REQUIREMENTS [7 CFR3550.58]

If the applicant defaults on the loan, the Agency must be able to foreclose on the property 

to settle the debt. Therefore, after the loan is closed, the applicant must have an ownership 

interest in the property that is acceptable to the Agency.

A. Responsibilities

In preparation for closing, the closing agent selected by the applicant must review the 

ownership interest the applicant will have to ensure that it meets the requirements established by 

the Agency in RD Instruction 1927-B. The closing agent must also ensure that the form of 

ownership conforms with the requirements of relevant state laws. After closing, the Loan 

Originator should compare the deed of trust or mortgage with the title opinion to assess lien 

priority, to verify recordation of the date and time, and to ensure that the loan closing instructions 

have been followed. 

B. Acceptable Forms of Ownership

Several forms of ownership are acceptable to the Agency, but in all cases the 

applicant’s ownership interest must be carefully documented.

1. Fee-Simple Ownership

The most common form of ownership 

is fee-simple ownership, under which the 

borrower holds a fully marketable title to 

the property. This title is evidenced by a 

deed that vests full interest in the property 

to the borrower.

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(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572

Land Purchase Contracts

When the ownership interest is by virtue of a land 

purchase contract, the ownership interest must be 

converted to a deed/mortgage interest prior to 

closing the loan.
HB-1-3550

Paragraph 5.11 Ownership Requirements [7 CFR 3550.58]

2. 2. Secure Leasehold Interest

Although fee-simple ownership is preferable, the borrower may have a secure leasehold 

interest in the property. Leasehold interests are acceptable only when all of the following 

conditions apply. 

• The applicant must be unable to obtain fee-simple title to the property, and the rent 

charged for the lease must not exceed the rate being paid for comparable leases.

• The lessor must own the fee-simple title (this provision does not apply to a lessor who 

is an American Indian possessing a leasehold interest on tribal allotted or trust land).

• Neither the leasehold nor the fee-simple title may be subject to a prior lien unless the 

Agency authorizes acceptance of the prior lien before loan approval. The amount of 

the Agency’s loan, plus any prior liens, must not exceed the market value of the 

property including the value of the leasehold. 

• The lease must be in writing, and must contain all of the followingprovisions:

◊ The lessor’s consent to allow the Agency’s mortgage;

◊ The right of the Agency to foreclose and sell the property without restrictions that 

adversely affect the market value of the property; 

◊ The right of the Agency to bid at a foreclosure sale or to accept voluntary 

conveyance of the property in lieu of foreclosure; 

◊ The right of the Agency to occupy, sublet, or sell the property should the 

leasehold be acquired through foreclosure, voluntary conveyance, or 

abandonment;

◊ The right of the applicant to transfer the leasehold and Agency mortgage to an 

eligible transferee who will assume the Agency’s debt, if the borrower defaults or is 

unable to continue with the lease;

◊ Advance written notice of at least 90 days to the Agency of the lessor’s intention to 

cancel or terminate the lease;

◊ Provisions are negotiated with the lessor before the leasehold interest is approved 

regarding the Agency’s obligation to satisfy unpaid rent or other charges accrued 

before or during the time the Agency has possession of or title to the leasehold. 

During negotiations, the Loan Originator should consider the length of time it will 

take to foreclose, how much the Agency would be responsible for, and when the 

Agency would have to pay; 

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HB-1-3550

Paragraph 5.11 Ownership Requirements [7 CFR 3550.58]

◊ Provisions to ensure fair compensation to the borrower for any part of the 

property taken by condemnation; and

◊ The unexpired term of the lease must be at least 150 percent of the term of the 

mortgage, unless the loan is guaranteed by a public authority, Indian Tribe, or 

Indian Housing Authority. For guaranteed loans, the unexpired term of the lease 

must be at least 2 years longer than the mortgage term. In no case may the 

unexpired term of the lease be less than 25 years.

• The language, specified in Attachment 5-C, must be inserted in themortgage.

3. Life Estate Interest

The applicant may hold a life estate interest with the rights of present possession, 

control, and beneficial use of the property. All persons with any remainder interests in the 

property must be signatories to the mortgage, except as described in Paragraph 5.11 B. 4.

4. UndividedInterest

To be eligible for a loan if an applicant only has an undivided interest in the land, coowners must also be unable to provide or obtain the financing for the improvements, either 

individually or jointly with the applicant. Generally, all legally competent co-owners must 

sign the mortgage. However, when one or more of the co-owners cannot be located, are not 

legally competent (and there is no legal representative who can sign the mortgage), or if the 

ownership interests are divided among so many co-owners that it is not practical to 

mortgage all of their interests, their interests may be excluded from the security 

requirements, as long as their interests do not exceed 50 percent of the property’s value.

The loan amount shall be limited based on the percentage of the market value that is 

proportional to the percentage of the property interest owned by all persons signing the 

mortgage. The determination of market value should take into account any adverse effects 

that might result from selling mortgaged interests separately from nonmortgaged interests.

Only the State Director may approve the exclusion of co-owners’ interests. The Loan 

Originator or the Loan Approval Official should prepare a recommendation for the State 

Director’s review. The memo should include a full statement of ownership and the reasons 

for the proposed exclusion.

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(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
HB-1-3550

Paragraph 5.11 Ownership Requirements [7 CFR 3550.58]

5. Possessory Rights

Possessory rights on an American Indian reservation or state-owned land, and the 

interest of an American Indian in land held in trust or deeds containing restrictions 

against alienation are acceptable forms of interest as long as the trust or restricted land 

will remain in trust or restricted status.

Tribal allotted or trust land must remain in trust or restricted status. In these cases, 

the mortgage, deed of trust, leasehold interest or other security interest must be 

approved by the Secretary of the Interior. Each state should issue a supplement to give 

guidance about making loans under these circumstances.

5.12 EXCEPTIONSTO THE AGENCY’S SECURITY REQUIREMENTS

Exceptions may be made under the circumstances described below.

A. Unsecured (Note Only) Section 502Loans

A loan of less than $7,500 that is scheduled for repayment within 10 years from the date 

of the loan may be secured by a promissory note alone as long as the applicant:

• Has a credit history that indicates an ability and willingness to pay the debt when due;

and,

• Has principal, interest, taxes, and insurance (PITI) and total debt (TD) ratios that 

indicate that the applicant will have sufficient income to meet all obligations.

In order to verify the above conditions, the Loan Originator should review the applicant’s 

credit history as described in Section 3 of Chapter 4. The applicant cannot receive payment 

subsidy on an unsecured loan.

B. Best Mortgage Obtainable

Except for unsecured loans described in Paragraph 5.12 A., loans must be secured by a 

mortgage. In addition, title clearance and the use of legal services as required by RD Instruction 

1927-B are necessary, unless the total RHS indebtedness is less than $7,500 or the loan is a 

subsequent loan made for minimal essential repairs necessary to protect the Government’s 

interest.

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HB-1-3550

SECTION 5: APPRAISALS [7 CFR 3550.62]

5.13 OVERVIEW

High-quality appraisals are key to ensuring that the Agency obtains adequate security for its 

loans. This section provides guidance about the types of appraisals that may be needed, when 

appraisals are required, how they are ordered, and how they must be reviewed. 

5.14 REQUIREMENTS FOR APPRAISALS

Appraisals must meet the following requirements:

• Qualified Appraiser: In nearly all cases, Direct Single Family Housing appraisal 

assignments will be completed by a state–certified or licensed appraiser using nationwide 

contracts with Appraisal Management Companies (AMCs). Contract appraisers must be 

certified or licensed (or hold a “Temporary Practice Permit” issued by the respective

state for a specific period of time and for a specific property), in the state in which the 

subject property is located. When using a contract appraiser, the Agency will contract 

with qualified appraisers that are active on the Appraisal Subcommittee website 

(www.asc.gov). However, when a contract appraiser is not available at an acceptable cost 

or is unable to complete an appraisal timely, a qualified Agency appraiser may conduct 

the appraisal. For credit transactions that are $100,000 or greater, Agency appraiser must 

possess the same qualifications as those required for contract appraisers, except that an 

Agency appraiser is only required to be certified in one state or territory to perform real 

property appraisal duties as a Federal employee in all states and territories.

• Standards: All appraisals must be consistent with the current edition of the Uniform 

Standards of Professional Appraisal Practice (USPAP) available at 

www.appraisalfoundation.org and comply with Agency appraisal requirements, as 

described in this chapter and in 7 CFR3550.62(a). 

• Timelines: In general, appraisals are ordered under the nationwide contracts with 

Appraisal Management Companies (AMCs) and are generally completed within 15 

business days. In-house appraisals are to be completed within 7 calendar days of 

receiving the appraisal order.

• Nondiscrimination: The appraiser may not use factors that are discriminatory on the 

basis of race, color, religion, sex, disability, familial status, or national origin in 

conducting the appraisal and valuing the property.

• Use of a Third Party Appraisal: The Agency may only use an appraisal for which it did 

not contract for when the appraisal was obtained from a leveraged lender involved in the 

transaction and that lender is financing at least 20 percent of the transaction with loan funds 

or 15 percent if entirely a grant, forgivable loan or deferred loan except when the lender is 

also a party to the transaction such as seller, builder, developer, or contractor. 

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(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
HB-1-3550

Paragraph 5.14 Requirements for Appraisals

The Agency reviewer should be especially diligent in reviewing these appraisals to ensure 

they meet USPAP and Agency appraisal requirements and the expected intended use is 

the same as the intended use reported in the appraisal. The Agency is not required to use 

any appraisal that it did not contract for directly.

5.15 TYPES OF VALUES

Depending on the type and purpose of the appraisal needed, an appraiser will be asked to 

provide an estimated value of the property based on one of the following:

• As Is. For existing dwellings that require no repairs/alterations or require 

repairs/alterations that typically add no value (e.g., general maintenance to the 

home’s infrastructure and machinery); newly constructed dwellings; and to support

a loan servicing action or to determine a disposition plan for a REOproperty.

• Cost Approach Only. See Paragraph 5.16 for a description.

• Subject to Completion of Plans & Specs. For newly constructed dwellings to be built.

• Subject to Repairs/Alterations. For existing dwellings that require repairs/alterations 

that typically add value (e.g., window replacement, siding replacement, and bathroom 

remodel).

5.16 APPRAISAL METHODOLOGY

Real estate appraisers make judgments about a property’s value based on many factors, 

including location, market conditions, construction quality, and amenities. Single Family 

Housing Appraisals require one, two, or three approaches to value, as described below, 

depending on the specific assignment.

• Sales comparison approach. Under this method, the appraiser uses the recent sales data of 

properties that are comparable in location and characteristics to the security property in 

order to estimate a market value for the property.

• Cost approach. Under this method, the appraiser derives an estimate of value using 

replacement cost estimates for the improvements, less depreciation and an estimate of the 

site value. If applicable, the appraiser will identify the source of cost estimates, such as 

Marshall and Swift, used in the cost approach.

The methodology used to estimate depreciation and an analysis may be stated in the report. 

This method is required for a dwelling to be constructed, or a dwelling that is less than one 

year old. The remaining economic life must be stated for all properties.

• Income Approach. Under this method the appraiser derives a value indication for an 

income-producing property by converting its anticipated benefits (cash flows and 

reversion) into property value. This conversion can be accomplished in two ways, direct 

capitalization or yield capitalization. This method may only be used for Agency nonprogram REO properties.

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HB-1-3550

Paragraph 5.16 Appraisal Methodology

The appraisal must be completed using Fannie Mae Form 1004/Freddie Mac Form 70, 

“Uniform Residential Appraisal Report,” for all one-unit, single family dwellings; Fannie Mae 

Form 1004C/Freddie Mac Form 70B, “Manufactured Home Appraisal Report,” for all 

manufactured homes; or Fannie Mae Form 1073/Freddie Mac Form 465, “Individual 

Condominium Unit Appraisal Report” for all individual condominium units.

5.17 ORDERING APPRAISALS

A. When Appraisals Are Needed

An appraisal is always required if the RHS loan is $7,500 or more and the Agency’s debt 

plus prior liens against the property will exceed $15,000. (Another lender’s appraisal is acceptable 

when the loan is part of a leveraging strategy under certain circumstances as described in Chapter

10.) If the total indebtedness against the property is less than or equal to $15,000, an appraisal is 

not required if the Loan Originator is confident that the property has sufficient value to serve as 

adequate security. Total indebtedness includes any prior liens on the property. The Loan Originator 

should include a statement of the property’s value in the case file whenever an appraisal is not 

completed.

For subsequent loans, no appraisal is required if the loan is less than $7,500 and is for 

minimal essential repairs needed to ensure that the dwelling is decent, safe, and sanitary. An 

appraisal is not required when a subsequent loan is made to protect the Government’s interest, 

regardless of the amount. The Loan Originator must include a statement of the estimated 

property value in the case file. If the subsequent loan is for $7,500 or more, no appraisal is 

needed unless the property will be taken as security and at least 1 of the following conditions 

exists:

• The latest appraisal report of the real estate is over 2 years old;

• The physical characteristics of the property have changed significantly;

• The economic characteristics of the market have changed significantly;

• The Loan Originator is uncertain of the adequacy of the security;or

• The subsequent loan is in connection with a transfer of an existing loan.

B. Program Responsibilities

In accordance with RD Instruction 2024-A, contract services shall not involve decision 

making or other inherently governmental functions. Accordingly, prior to ordering an appraisal on 

the subject property, the Field Office will ensure that the property is located in an eligible area 

(which should be accomplished by entering the property’s address in the Agency’s property 

eligibility website); and review the sales contract and related materials (such as the property’s 

Multiple Listing Service sheet, tax bills, etc.) to confirm that the dwelling and/or site appear to 

comply with the Agency’s regulations and guidance. 

(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572

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HB-1-3550

Paragraph 5.17 Ordering Appraisals

If appropriate, the Field Office will also prepare a list of detailed repairs with estimated costs, 

or provide copies of bids from the applicant’s contractor needed to ensure the property meets the 

Agency’s regulations and guidance. This list of repairs, which is based upon the inspection reports 

prepared by State-licensed inspectors or qualified, third party inspectors hired by the applicant (refer 

to Paragraph 5.7 A.), will be provided to the appraiser for the purpose of obtaining a subject to 

repairs/alterations value provided those repairs/alterations typically add value and are not routine 

maintenance items (e.g. check smoke detectors, pest or septic inspection, add GFCI protection to 

exterior, kitchen, or bathroom electrical outlets, etc.).

C. RequiredInformation

When the Loan Originator or Staff Appraiser requests an appraisal through the PMO’s

Procurement Requests SharePoint site using the current SFH Appraisal Request form (which can 

be found in the Direct Training Hub in SharePoint along with other appraisal training materials), 

the following information will be uploaded (as applicable): Cost Breakdown, Legal 

Description/Deed, Plan & Specs (New Construction), Plat of Property, Prior Appraisal (1004D 

only), Property Inspection Report, Proposed Repairs – Est. Cost $, Purchase Agreement & 

Amendments, and Survey (if available). 

The applicant has until the expiration of their Certificate of Eligibility, as described in 

Paragraph 4.25, to present this information to the Loan Originator. Originals of this information 

should be kept in the case file, with copies provided to the appraiser. 

D. Appraisal Disputes

In situations where the market value of the security is inadequate to support the loan 

request, the Loan Originator will send Handbook Letter 17 (3550), Adverse Decision Involving an 

Appraisal. Handbook Letter 17 informs the applicant of their right to request a meeting with the 

Local Office to review the appraisal report and present new, objective information or evidence for 

the Agency’s consideration. The Loan Approval Official will then request a technical review by an 

RD staff appraiser, and must attach the additional data provided by the applicant. New information 

or evidence may include, but is not limited to, incorrect number of bedrooms, bathrooms, garage 

bays, finished percentage of basement, repaired or renovated conditions not captured in the report, 

etc. However, consideration of additional (or alternate) comparable sales are not part of the 

Agency’s technical appraisal review process. If the applicant believes they have experienced racial 

discrimination, the Loan Approval Official shall document the allegations, initiate a technical 

review by an Agency appraiser with the documented allegations, and provide the applicant with 

contact information for the Interagency Task Force on Property Appraisal and Valuation Equity 

(PAVE) at www.pave.hud.gov/gethelp or call (800) 669-9777) to file a complaint.

If the RD staff appraiser’s technical review concurs with the original appraisal, or if after 

revisions are coordinated and the market value still does not support the loan amount, then 

the Loan Originator will send the applicant Handbook Letter 18 (3550), Unfavorable 

Decision after Technical Review of an Appraisal, with appeal rights (Attachment 1-B). The 

appeal will consider the Agency’s underwriting decision regarding inadequate security 

(market value) to support the loan request. Once an appraisal has been accepted by the 

Agency the market value reported within the appraisal is not appealable.

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HB-1-3550

5.18 APPRAISER RESPONSIBILITIES

The appraiser must provide the required estimates of value on the appropriate form. The 

appraiser may also be asked to provide a list of repairs deemed essential for the property to be made 

decent, safe, and sanitary.

If an appraiser observes potential contamination from hazardous substances, hazardous 

wastes, or petroleum products on the property, or obtains other information about such 

contamination, that information should be provided to the Agency together with an indication of 

its potential impact on the value of the property. The Loan Originator must initiate the due 

diligence process by completing Attachment 5-B. The completed Attachment 5-B must be sent 

promptly to the SEC for further evaluation and guidance.

5.19 REVIEWING APPRAISALS

Appraisals will be reviewed through a combination of administrative reviews and technical 

reviews. Administrative reviews can be completed by Agency staff trained to do so while technical 

reviews must be completed by certified Agency appraisers. A technical review for loan origination 

is an inherently governmental function and must be completed by an Agency appraiser. If an 

appraisal is found to be unacceptable by any review, other than a post review, the original AMC 

can make corrections or a new appraisal can be requested. The appraisal report must be acceptable 

before the loan-making process can continue.

A. Administrative Review

Administrative reviews are performed by the Loan Approval Official using Form RD 

1922- 15, Administrative Appraisal Review for Single Family Housing, and should be completed

as soon as possible (but not later than 7 days from receipt of the appraisal). Reviews are performed 

on all contract appraisals and the contract appraiser’s invoice cannot be paid until the appraisal 

review is complete. This review determines if there are inconsistencies in the appraisal report that 

warrant a secondary review of the property and the sales contract prior to loan approval, or if a 

technical review should be conducted by the staff appraiser prior to paying the appraiser’s invoice.

Indicators that a technical review may be required consist of the following: (1) Photos and 

maps are not consistent with the information provided in the appraisal; (2) Large variances in 

actual and effective age are not supported; (3) Comparables are located outside of the subject’s 

market area or they are superior/inferior to the subject warranting excessive adjustments that are 

not supported; (4) Sales and Financing concessions are not reported or comparables are not 

properly adjusted when they are reported; (5) History of the subject property was omitted or not 

analyzed; and (6) Inconsistent information in the appraisal.

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Revised (04-15-21) PN 549
HB-1-3550

Paragraph 5.19 Reviewing Appraisals

If the appraisal is acceptable, Field Staff must promptly forward (within 7 days) the email 

received from the appraiser or AMC to rd.appraisals@usda.gov with “Appraisal Reviewed & 

Accepted” in the subject line. If the appraisal is not acceptable, Field Staff must forward the 

appraisal and Form RD 1922-15 to the Agency’s Regional Appraisal Services for a technical 

review. The request for the technical review must be through the Regional Appraisal Services

SharePoint site.

B. Technical Review

A technical review can be either a field review or a desk review and is performed to 

determine whether the appraisal is credible within the intended use, was clearly reasoned, 

followed accepted appraisal techniques and RD requirements and had adequate support for the 

conclusion of value. Technical reviews are an inherently governmental function and must be 

performed by Agency certified appraisers. Technical reviews completed by Agency appraisers 

should be consistent with current USPAP requirements which can be found at 

www.appraisalfoundation.org.

Field reviews involve on-site visits to the subject property and the comparables while desk 

reviews are performed in the office. Technical reviews must be completed for the first appraisal 

conducted by any contract appraiser and for each appraiser that does multiple appraisals in a 12- 

month period. Additionally, each contract appraiser must be reviewed at least once in a three-year 

period. At the discretion of the Regional Appraisal Staff, additional technical reviews may be 

ordered if concerns were encountered on the first technical review. In addition to the initial review, 

technical desk or field reviews will be done in a random, spot- check method established by the 

State Director for contract appraisals but should be completed on a minimum of 5 percent of the 

contract appraisals received.

A technical review also may be requested by the Loan Approval Official when concerns are 

detected by the administrative review. The concerns will be documented on Form RD 1922-15. 

The Regional Appraisal Staff must determine if the concerns merit a technical review before the 

vendor’s invoice can be paid or the loan closed. 

5.20 PAYING FOR APPRAISALS

The Agency will charge a standard fee for each loan application that requires an appraisal. 

This fee is updated periodically, along with TRID related implementation instructions, through

an Unnumbered Letter (UL) posted to the Agency’s Directives website. The UL will generally be 

posted 30 days prior to the effective date of the fee change. Within 3 business days of receiving a 

completed application, the Loan Originator will provide the applicant with CFPB’s standard

Loan Estimate, which includes the amount of the appraisal fee listed in the current UL.

The Agency may waive the fee for appraisals done for subsequent loans needed to make 

minimal, essential repairs necessary to protect the Government’s interest, or for leveraged loans 

if a participating lender is obtaining an appraisal that is acceptable to the Agency.

If there is a conditional commitment, the appraisal fee should be paid to the contractor at 

closing as reimbursement for the cost of the appraisal that was included in the conditional 

commitment fee.

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HB-1-3550

5.21 APPRAISALS IN REMOTE RURAL AREAS, ON TRIBAL LANDS, OR WHERE 

THERE IS A LACK OF CONVENTIONAL MARKET ACTIVITY

In remote rural areas, on Tribal lands, or areas with a lack of conventional lending market 

activity it may be difficult to obtain adequate comparable sales to appraise a property. In these 

areas, the sales comparison approach is not required. Instead, Form 1007, Marshall and Swift 

Square Foot Appraisal Form must be used. These appraisals may be conducted by Agency staff 

appraisers or by contract appraisers.

Remote rural areas are identified by the State Director and are defined as areas with these 

types of characteristics:

• Scattered population;

• Low density of residences;

• Lack of basic shopping facilities;

• Lack of community and public services and facilities;and

• Lack of comparable sales data.

The results of the cost analysis completed using Form 1007 should be documented on the 

Uniform Residential Appraisal Report and efforts to obtain comparable market data must be 

documented in lieu of the sales comparison approach. External depreciation based on the 

remoteness of the site must not be considered; however, factors that impact the site such as 

immediate proximity to a feedlot, factory, or other similar considerations should be included.

When a market is established in these areas, the Agency will again require complete appraisals.

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Revised (12-08-22) PN 572

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SECTION 6: MANAGING CONSTRUCTION

This section generally refers to when the Agency is advancing funds through draws for new 

construction or substantial rehabilitation to a dwelling and when the funds are secured by a deed of 

trust or mortgage. Typically, this work will involve a general contractor who is responsible for 

supervising and directly paying their subcontractors. Work described in this section is more 

complex and would commonly take more than 30 days to complete.

When applicants enter into contracts with builders who own the site and are self-funding 

the construction process, the Loan Originator will enter the dwelling type in LoanServ as 

“Purchase New” rather than “Build”. The Loan Approval Official should communicate with the 

applicant and builder on how acceptable construction quality will be documented in accordance 

with Paragraph 6.7 B. and the standards in RD Instruction 1924-A.

5.22 DESIGN

A. Disseminating the Standards

The applicant needs to know the standards the dwelling must meet before the design process 

begins. The Loan Originator should advise the applicant of the Agency’s rehabilitation or 

construction standards.

The applicant and/or designer should also be provided with Form RD 1924-2, Description of 

Materials, prior to loan approval. This form may be used by the designer as a basis for preparing 

specifications. When other suitable specifications are available which will adequately describe the 

materials, equipment, and fixtures to be used on the job, this form need not be used.

B. Review and Approve the Drawings andSpecifications

Once the drawings and specifications are finished, the Loan Originator should review them 

to ensure that they have been certified as meeting the Agency’s minimum standards contained in RD 

Instruction 1924-A. The plans, specifications, calculations, and any modifications should be

certified by the design professional on Form RD 1924-25, Plan Certification, to ensure that the 

appropriate codes and standards are met. If all applicable requirements are met, the Loan Originator 

may accept the documents. If they do not meet the applicable requirements, the Loan Originator 

should inform the applicant and designer, in writing, of the deficiencies or discrepancies. Once 

these issues are resolved, the Loan Originator should review the drawings and specifications again.

5.23 PREPARING FOR CONSTRUCTION

A. Selecting the Contractor

The applicant should select the contractor who will build or rehabilitate the dwelling. The 

contractor must have a valid state contractor’s license if required in the state, and such license must 

be documented by the Loan Originator. The Loan Originator must also verify the validity of the 

license with the appropriate state entity and document the applicant’s file. For new construction,

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Paragraph 5.23 Preparing for Construction

the applicant will usually have a contractor in mind. For rehabilitation, the applicant will provide an 

adequate number of bid(s) from a qualified contractor(s).

The local office must review the bid(s) obtained to ensure costs are reasonable for the area 

serviced, the number of bid(s) are sufficient, and clearly identify the work and materials to be 

furnished. Bids should be solicited based on the developed set of specifications. Detailed 

specifications must include a complete breakdown on materials and labor and describe the 

quantity, quality, grades, styles, model numbers, etc.

The development budget may include an amount for contingencies not to exceed five 

percent of the construction cost for unusual and unforeseen circumstances beyond the contractor’s 

or borrower’s control (e.g. a major disaster in the region that causes an increase in materials and 

subcontracted labor costs). The contractor and borrower must submit a signed change order to the 

Loan Approval Official for concurrence to use the contingency funds. Contingency funds may 

also be used for other eligible loan purposes when approved by the Loan Approval Official. If 

not used, contingency funds will be deobligated or applied as a principal curtailment before or 

after the construction loan is converted to a permanent loan. 

With the exception of approved manufactured dealer-contractors, the Agency should not 

maintain a list of approved contractors and an in-depth investigation of a contractor by the Agency 

is not required unless the surety requirements are triggered and an exception by the State Director is 

being considered. The need for an in-depth investigation should be rare; refer to RD Instruction 

1924-A for further guidance. While a list of approved contractors should not be maintained, the 

Agency should give the applicant general advice on selecting a contractor (e.g. the benefits of 

“shopping around”, ask for and check references, check the contractor’s record with the Better 

Business Bureau, etc.).

B. Pre-Construction Conference

Once the contractor has been selected and the funds have been obligated, the Agency, the 

applicant, the designer (if applicable), and the contractor should hold a pre-construction conference. 

The purpose of the conference is to ensure that each party understands their respective roles and 

responsibilities. The parties should review the drawings and specifications to make sure everyone 

understands the scope of work, construction/thermal standards, environmental mitigation 

requirements, materials, inspection, change orders, and payment procedures. In addition, the 

contractor must be advised that should human remains, historic or cultural resources be uncovered 

during excavation or site development, all work must be stopped until an additional environmental 

analysis is completed.

For new construction or rehabilitation, the Loan Originator should provide Exhibits F and 

G of RD Instruction 1924-A to the contractor at or before the preconstruction conference. These 

exhibits give details on the completion assurance (surety) that the contractor can elect to obtain. 

The Loan Originator also should provide the “Equal Employment Is The Law” poster, which 

explains the requirements of applicable fair labor standard laws to the contractor to post at the 

work site.

(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572

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Paragraph 5.23 Preparing for Construction

The Loan Originator should prepare an agenda before the meeting and take minutes during 

the meeting. All parties should review and sign these minutes to indicate their approval. The Loan 

Originator may use Form RD 1924-16, Record of Pre-Construction Conference, or Attachment 

12-F (for 504’s) as a basis for preparing the agenda and recording the minutes.

To prepare for loan closing, the contractor and applicant should undertake any preconstruction activities necessary to ensure that construction can begin shortly after closing. This 

might include getting building permits and lining up material suppliers.

C. Construction Contract

For new construction, a written construction contract is always required. Written contracts 

are strongly recommended for all rehabilitation-related construction and are required if there is a 

contract that exceeds $10,000 and/or there is construction work involved that would affect the 

dwelling’s structural integrity (otherwise, a rehabilitation plan with cost estimates and bid 

specifications may be used). The applicant and contractor must sign the construction contract no 

later than at the pre-construction conference. 

The Agency is not a party to this contract; however, the Agency provides many forms 

that should be executed during the preconstruction conference (at or before closing) when 

contracts exceed $10,000 for any single contractor, including: 

• Form RD 1924-6, Construction Contract;

• Form RD 400-1, Equal Opportunity Agreement;

• Form RD 400-3, Notice to Contractors and Applicants; and

• Form RD 400-6, Compliance Statement.

D. Department of Labor Notification

For contracts greater than $10,000, the Loan Originator must prepare a letter within 10 days 

after the contract is signed to notify the U.S. Department of Labor (DOL) of the execution. The letter 

notifies the U.S. Department of Labor of the contract period and amount, and the contractor’s name, 

address, and employer identification number. Exhibit C of RD Instruction 1901-E provides a format 

for the Loan Originator to use. To obtain the most current DOL address, visit the DOL website 

https://www.dol.gov/ofccp/contacts/regkeyp.htm

5.24 CONSTRUCTION PERIOD

Once the construction contract is in place, construction can begin. All construction work 

should be inspected periodically in accordance with RD Instruction 1924-A to ensure that the work 

is done properly. When Agency staff perform an inspection, Form RD 1924-12 Inspection Report 

should be retained in the borrower’s case file. The borrower should attend all inspections and be 

available to sign checks if payment is approved for the completed work. 

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Paragraph 5.24 Construction Period

A. Qualified Inspector

The borrower will be responsible for 

making inspections necessary to protect their 

interest. Agency inspections are to protect the 

Agency’s interest and to ensure the

completion of construction or rehabilitation without implication of duty or obligation to the 

borrower. The final inspection can be conducted by the Loan Approval Official/Originator, or by a 

qualified third party. Inspections fees from third parties, like building permits, are eligible loan 

purposes. The inspector must be qualified to perform a construction inspection. A qualified third 

party includes, a local building official, an inspector certified by a nationally recognized home 

inspection entity, or a state-licensed inspector who inspects property according to the International 

Code Council (ICC). The ICC publishes the International Building Codes used by most of the 

jurisdictions within the United States. An appraiser may perform a completion valuation inspection 

but this report is not sufficient for the Agency’s purpose without other supporting documentation 

such as a certificate of occupancy, or a final inspection from a local building official or other 

qualified third party.

A qualified third party inspector should be able to execute each of the following, as 

applicable:

• Inspecting for conformity with development plans and building codes, with written 

reports, at footing, framing, and final project phases.

• Preparation of additional inspection reports to include an analysis of the project’s 

progress and quality of workmanship. Reports may include notes from 

teleconferences, inspection reports, video and/or photos.

• Issue specific and critical activity reports, video or photos of apparent errors or 

problems with workmanship.

• Document and evaluate any expressed opinion, fact, and observation by the owner, 

third party inspector, or building/code official.

• Document discussions with the owner, inspector(s) and contractor.

B. Periodic Inspections

If inspections are conducted by a third party, the inspector should submit periodic inspection 

reports to the Agency. The number and timing of inspections varies by the type and extent of work 

performed. When concerns are raised by the inspector, contractor, borrower, or Agency staff, clear 

communication between the parties is critical to successful completion of the work.

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Borrower’s Responsibility 

for Inspection

The borrower is responsible for making 

inspections to protect his or her interest. The 

Agency’s inspections are not intended to assure 

the borrower that the house is built according to 

the approved plans and specifications.
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Paragraph 5.24 Construction Period

• New construction. Inspections may be conducted as necessary, but a minimum of 3 

generally are required: (1) footings while under construction; (2) after the dwelling 

is framed-in; and (3) a final inspection once all work is complete.

• Substantial rehabilitation. A new addition, remodeling, moving walls, changing the 

foundation, or structural integrity of the home are examples of substantial 

rehabilitation. It is more complex than simple repairs and oftentimes affects multiple 

major components of the dwelling. This type of work generally requires permits and 

inspections by the local building department. All rehabilitation work must be 

inspected, but the Agency does not prescribe specific guidelines for inspecting 

rehabilitation work that does not involve new construction. A qualified third-party 

inspector may be used and should inspect at intervals that are appropriate for the 

complexity of the work. The Loan Originator may also rely on current media (photos, 

video) and third-party inspection reports, which are quickly and easily transmitted, to 

render an effective remote assessment for compliance determinations.

• Final Inspection: The following documents should be submitted prior to final 

payment and the Loan Originator should address the acceptability of the 

documentation and the completed repairs in the running record:

◊ The forms listed in Paragraph 5.27.

◊ Borrower’s written acceptance of the completedwork.

◊ Photos of the completed work as provided by the borrower and/orcontractor.

◊ A copy of a third-party inspection (if applicable).

• Environmental requirements. If environmental mitigation measures are required, 

the Agency’s inspector should follow up on the implementation of such measures and 

document compliance on Form RD 1924-12. Noncompliance with environmental 

mitigation measures must be reported promptly to the Loan Originator and the SEC.

C. Partial Payments

Partial payments for work completed can be issued after each inspection. The contractor and 

Loan Originator establish a draw schedule before loan closing. This schedule identifies when 

partial payments may be made, based on the amount of work completed. The amount of the

payment is typically based on the value of the work, according to Exhibit A of RD Instruction 

1924-A, or the Marshall and Swift guidelines. To ensure that all work will be satisfactorily 

completed, 40 percent (or a lesser percent if required by state law) of each payment request is 

typically withheld until all of the work items established in the draw schedule are complete 

and final payment is made, as described in Paragraph 5.27. The amount withheld can be 

reduced to 10 percent if the contractor obtains a Surety Bond, Performance Bond, or Payment 

Bond, but this is extremely rare.

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Paragraph 5.24 Construction Period

D. Changes DuringConstruction

If changes to the approved drawings and specifications are required during construction, the

applicant and contractor must sign Form RD 1924-7, Contract Change Order. All modifications 

must be certified on Form RD 1924-25, Plan Certification, if the modification is regulated by the 

applicable development standard. Before signing it, the Loan Approval Official must review and 

sign the change order to ensure that the change fits within the approved loan amount and the funds 

are being used for an eligible loan purpose.

If the change order does not fit within the approved loan amount, several courses of action 

are possible:

• If the change is necessary and the borrower has repayment ability, the Agency may 

make a subsequent loan for the amount required to pay for the change;

• The scope of work may be scaled back to accommodate the change;

• The Agency may increase the loan amount if it can be supported by the appraisal, the 

cost of the property remains below the applicable area loan limit, and the borrower has 

repayment ability; or

• The borrower may be required to provide additional cash.

The environmental review for the project must be amended if there are changes to plan and 

specifications during construction (with or without the provision of additional financial assistance), 

which will alter the purpose, operation, location, or design of the project as originally approved.

5.25 CONSTRUCTION CLOSEOUT

Once construction or rehabilitation work is satisfactorily completed, the Agency will make 

final payment to the contractor. Before that can occur, the Loan Originator must ensure that the 

work has been done properly and that no one will make any claims against the property(such as 

dissatisfied subcontractors). The Agency provides several forms to help the Loan Originator close 

out the construction process, as listed below.

• Certificate of Contractor’s Release. Form RD 1924-9, Certificate of Contractor’s 

Release must be signed by the contractor; it certifies that the work has been completed 

according to the drawings and specifications and the Agency’sstandards.

• Release by Claimants. The contractor must have each subcontractor used during 

construction sign Form RD 1924-10, Release by Claimants. It certifies that the contractor 

has paid each subcontractor and that there are no outstanding claims against the property 

for work performed.

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Paragraph 5.25 Construction Closeout

• Builder’s warranty. A warranty is a guarantee of the quality of work or materials. 

The Agency must have a copy of 1 of the 2 acceptable forms of builder’s warranties 

as listed below (the applicant keeps the original).

◊ Form RD 1924-19, Builder’s Warranty is a 1-year warranty provided to the 

borrower by the contractor after the construction work has been accepted by the 

borrower and the Agency. A builder’s warranty is issued for new construction (or 

rehabilitation involving construction) that has had appropriate periodic inspections 

conducted by the Agency (or third party). The warranty guarantees that the builder 

will repair or replace any defects in materials or construction that occur within 1 

year from the date of acceptance. The Servicing and Asset Management Office 

(Servicing Office) will be responsible for notifying the borrower of the expiration 

of the builder’s warranty within eleven months of acceptance of the final 

inspection

◊ An insured 10-year warranty is purchased by the builder and insures the 

borrower against builder defaults and/or major structural defects. This policy is 

typically used when the borrower is purchasing an existing or newly 

constructed dwelling and the Agency does not have acceptable documentation 

of construction quality. If construction quality is not adequately documented, 

loans for new dwellings are limited to 90 percent of the market value plus 

allowable excess costs (see Paragraph 6.7).

However, a builder may provide an insured 10-year warranty as acceptable 

documentation of construction quality so that the Agency may loan 100 percent 

of the market value plus allowable costs, provided the policy is non-refundable 

or cancellable, the policy is from an insurance company licensed to do business 

in the state where the property is located, and the coverage includes (from 

effective date) at least one year for any defects caused by faulty workmanship 

or defective materials, two years coverage on major systems (e.g., electrical, 

plumbing, HVAC), and ten year structural defect coverage. 

• Other documentation. The Agency should maintain the following documentation, 

if applicable:

◊ Certificate of Occupancy (in some localities, a certificate of occupancy from 

the local authority is required before a new or renovated structure may be 

occupied);

◊ Copies of building permits;

◊ Form RD 1924-25, Plan Certification;

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Paragraph 5.25 Construction Closeout

◊ Certifications regarding the adequacy of all systems, as described in Paragraph

5.7 A.; and

◊ Additional certifications and warranties, including insulation, carpet,major 

equipment and appliances. 

◊ Thirty days after the final inspection and issuance of the Builder’s Warranty, the 

Loan Originator will send Guide Letter 1924-1 of RD Instruction 1924-F informing 

the borrower that financial assistance may be available to them under the 

Compensation for Construction Defects Program. 

5.26 SPECIAL SITUATIONS

A. Funds Remaining AfterCompletion

When all planned construction or rehabilitation work has been completed, remaining loan 

funds may be used for any additional authorized loan purposes agreed upon by the applicant and the 

Agency. The Loan Originator must document the purposes for which the funds disbursed to the 

borrower will be used. The Loan Originator should adjust the development plan accordingly. Once 

the work is complete, the Loan Originator should maintain documentation of the work performed, 

such as invoices and receipts for materials, equipment or supplies. If no agreement can be reached, 

the Agency should apply the funds to the borrower’s outstanding principal balance. 

B. Construction Disputes or Work That Is Not Progressing:

If construction or rehabilitation work cannot be completed because the contractor is unable or 

unwilling to do so, whether due to dispute with the borrower or some other reason, and the applicant 

is unable to obtain another contractor (even with the Agency’s assistance), funds should be applied to 

reduce the borrower’s principal balance. The Agency is not a party to, or arbiter of a contract, and in 

the case of a dispute the contractor and borrower must use good-faith efforts to reach an agreement 

between themselves so the construction can continue in the best interest of all parties. Agency staff 

may assist with communication between the parties, at the Agency’s discretion, but the borrower and 

the contractor are the responsible parties for resolving a dispute, to effectively not put the Agency’s 

security at risk. 

Agency Field Staff should act promptly upon learning that a dispute has delayed, or will 

likely delay, the completion of the subject property. A letter should be sent to the borrower that 

summarizes the current situation and requests the borrower’s action plan within 30 days of the 

Agency’s letter. The letter should include: 

• The current state of construction (as observed or reported),

• Agency known and/or borrower’s claims of deficiencies,

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(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572

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Paragraph 5.26 Special Situations

• Funds remaining to complete construction (SBA and/or funds not yet drawn),

• Remaining construction period per the contract,

• Options the borrower has, including:

o Resolving the dispute with the contractor, including correcting any 

deficiencies if applicable. Form RD 1924-7, Contract Change Order, must 

be executed if there are material changes to design/features/materials, 

additional costs are incurred, or timeframe for completion needs to be 

extended.

o Review Form 1924-6, Construction Contract, to determine if there is 

cause to terminate the contract, and if so, work with the Agency to 

determine the appropriate payment to be authorized for any work in place.

o Select a new contractor to complete the construction with the remaining 

funds (after original contractor has been notified of termination).

o Sell the property to the contractor, investor, or other third party for an 

amount sufficient to pay the outstanding Agency debt (a short sale may be 

considered if it is in the Agency’s best interest).

• Actions the Agency may take if a resolution is not reached within a specific and 

reasonable timeframe:

o Convert the construction loan to a permanent loan (even if construction is 

not yet completed and/or the borrower is not occupying the property), 

which will require the borrower to begin repayment at the full note rate. 

Payment assistance may be activated only if the borrower is occupying the 

home and they have submitted all required documentation, including final 

inspection or certificate of occupancy.

o Return any unused loan funds in a supervised bank account to the 

Servicing Office as a principal curtailment on the permanent loan.

o Provide the borrower Guide Letter 1924-1 regarding compensation for 

construction defects claims in accordance with RD Instruction 1924-F 

(see Paragraph D, below).

o Once converted, assuming other alternatives have been unsuccessful,

notify the Servicing Office for their review of servicing options, including 

nonmonetary default foreclosure actions.

Agency staff may be asked by contractors and subcontractors for payments of 

completed work and/or materials during a dispute. However, the Agency may not disburse any 

payment to a contractor without the borrower’s written authorization (e.g., borrower’s 

countersignature on the check).

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Paragraph 5.26 Special Situations

C. Deceased Borrowers

If a borrower dies before funds are disbursed for completed construction or rehabilitation 

work, the Loan Originator may authorize payment for work completed when there is written 

evidence (such as a letter) that the work was accepted as complete and satisfactory by the borrower 

or an authorized representative, and an authorized Agency representative has inspected the work and 

found it satisfactory. The authorized representative can endorse the check on behalf of the deceased 

borrower. If there is no authorized representative or the contractor files a mechanics lien, advice 

from the Office of the General Counsel (OGC) should be sought to ensure the Agency’s interests are 

protected.

D. Compensation for Construction Defects

RD Instruction 1924-F defines a newly constructed dwelling. The Government may pay 

for major defects in dwelling construction that are not repaired adequately by the builder (such 

defects are usually the result of poor workmanship, and the contractor refuses to repair the defect 

or the repairs are inadequate) only in dwellings that meet the eligibility requirements. To be 

eligible, the borrower must submit a claim to the Field Office within 18 months after the date the 

borrower signs the final inspection report. Guidance on how to notify borrowers of this policy, as 

well as instructions on how to implement the policy, can be found in RD Instruction 1924-F. This 

option should only be used as a last resort after all other actions to correct the defects have failed.

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Attachment 5-A 

Page 1 of 12

ATTACHMENT 5-A 

STATEMENT OF WORK (SOW) FOR APPRAISAL SERVICES AND 

APPRAISAL INSTRUCTIONS SINGLE FAMILY HOUSING

RESIDENTIAL PROPERTY

BACKGROUND: USDA Rural Development (RD) provides direct loans to eligible applicants 

for single family housing (SFH) residential property. To support this program, RD requires 

qualified appraisers to provide appraisal services, in accordance with 7 Code of Federal 

Regulations (CFR) Part 3550, at https://www.rd.usda.gov/files/3550appendix01.pdf.

OBJECTIVE: High quality appraisals to determine market value of SFH residential properties 

are key to ensuring the Agency obtains adequate security for its loans. 

1. REQUIREMENTS FOR APPRAISALS: 

A. The appraiser(s) signing the appraisal must be currently licensed in the state where the 

subject property is located as a Certified General, Certified Residential, or Licensed 

Appraiser. The appraiser shall be identified as active on the Appraisal Subcommittee 

website (www.asc.gov) at time of award and maintain professional errors and omissions 

insurance coverage in accordance with local and state government requirements. The 

appraiser shall have the specialized knowledge and experience necessary to be competent 

to appraise single-family housing. 

A trainee may sign the report. If a trainee signs the report, the trainee’s registration shall be 

provided to RD and the qualified appraiser shall sign as Supervisory Appraiser and 

personally inspect the subject property. 

If an appraisal assignment is awarded to a contractor not holding an appraisal license, the 

awarded contractor may subcontract the appraisal assignment (or any part of it) to a 

qualified appraiser as outlined above with prior written consent of the RD Contracting 

Officer (CO). In the event of subcontracting the assignment, the contractor must also 

adhere to any licensure requirements imposed by any entity having jurisdiction in the state 

where the property is located. 

If required by RD, the appraiser(s) signing the report shall defend the appraisal in court or 

in the RD appeals process. Cost associated with the defense of the appraisal, when 

necessary, will be negotiated under a separate purchase order/contract.

Except where noted herein, the contractor or appraiser shall provide all facilities, materials, supplies, 

tools, equipment, personnel, and travel to accomplish the performance of the requirements of this 

agreement.

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Attachment 5-A 

Page 2 of 12

B. The appraisal must comply with the current edition of the Uniform Standards of 

Professional Practice (USPAP) and agency requirements as described in Handbook-1- 

3550 https://www.rd.usda.gov/files/hb-1-3550.pdf , Handbook-2-3550, Chapter 2,

https://www.rd.usda.gov/files/3550-2chapter02.pdf , together with 7 CFR 3550 as 

applicable to all additional appraisal requirements 

https://www.rd.usda.gov/files/3550appendix01.pdf, and Rural Development Instruction 

1922-A, https://www.rd.usda.gov/files/1922a.pdf.

C. All appraisals for RD will provide market value based on the following market value 

definition used by federally insured financial institutions; Title XI of the Financial 

Institutions Reform and Recovery Enforcement Act of 1989; Definition of Market Value 

(12 U.S.C. 1818,1819): 

Definition of Market Value:

Market value means the most probable price which a property should bring in a 

competitive and open market under all conditions requisite to a fair sale, the buyer and 

seller each acting prudently and knowledgeably, and assuming the price is not affected by 

undue stimulus. Implicit in this definition is the consummation of a sale as of a specified 

date and the passing of title from seller to buyer under conditions whereby: 

(1) Buyer and seller are typically motivated;

(2) Both parties are well informed or well advised, and acting in what they consider their 

own best interests;

(3) A reasonable time is allowed for exposure in the open market;

(4) Payment is made in terms of cash in U.S. dollars or in terms of financial 

arrangements comparable thereto; and

(5) The price represents the normal consideration for the property sold unaffected by 

special or creative financing or sales concessions granted by anyone associated with 

the sale.

D. The appraisal must be completed using the most recent version one of the following forms: 

Fannie Mae Form 1004/Freddie Mac Form 70, "Uniform Residential Appraisal Report," for 

all one-unit, single family dwellings; Fannie Mae Form 1004C/Freddie Mac Form 70B, 

“Manufactured Home Appraisal Report,” for all manufactured homes; Fannie Mae Form 

1073/Freddie Mac Form 465, “Individual Condominium Unit Appraisal Report” for all 

individual condominium units; Fannie Mae Form 2055/Freddie Mac Form 2055, "ExteriorOnly Inspection Residential Appraisal Report," for all one-unit, single family dwellings for 

all properties when there is no visual inspection of the interior required or requested by RD; 

or Fannie Mae Form 1004D/Freddie Mac Form 442, “Appraisal Update and/or Completion 

Report”.
HB-1-3550

Attachment 5-A 

Page 3 of 12

2. TYPES OF VALUES: 

Depending on the purpose of the appraisal, an appraiser will either determine the estimated 

market value of the property in its current condition (the “as-is” value) or; determine the 

estimated market value of the property, based on completion of construction in accordance 

with plans and specifications, or completion of rehabilitation based on a list of repairs to be 

considered (the “as-improved” value). https://www.rd.usda.gov/files/3550-1chapter05.pdf

(Handbook-1-3550, Chapter 5 (5.15)) 

A. As-Improved value (Value Subject to Completion) - Loans for planned new construction 

or rehabilitation require an estimate of the “as-improved” value considering all 

construction / repairs / rehabilitation are complete. 

B. As-Is value – Loans for existing dwellings (including a new construction dwelling that 

has been completed at the time of appraisal) involving no repairs require an as-is value. 

As-is value appraisals may also be needed to support loan servicing actions or to 

determine a disposition plan for real estate owned (REO)properties.

C. Liquidation Value – Liquidation appraisals may be needed to support loan foreclosure 

actions or to determine a disposition plan for real estate owned (REO) properties.

Liquidation Value, is defined as:

The most probable price that a specified interest in property which a property should 

bring under the following conditions: 

1. Consummation of a sale within a short time period;

2. The property is subjected to market conditions prevailing as of the date of 

valuation ; 

3. Both buyer and seller are acting prudently and knowledgably;

4. The seller is under extreme compulsion to sell;

5. The buyer is typically motivated;

6. Both parties are acting in what they consider to be their bestinterests;

7. A normal marketing effort is not possible due to the brief exposure time;

8. Payment will be made in cash in US dollars (or the local currency) or in terms of 

financing arrangements comparable thereto;

9. The price represents the normal consideration for the property sold unaffected by 

special or creative financing or sales concessions granted by anyone associated 

with the sale.

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th Ed., (Chicago: 

Appraisal Institute, 2015):

(01-23-03) SPECIAL PN 

Revised (06-21-18) SPECIAL PN
HB-1-3550

Attachment 5-A 

Page 6 of 12

3. SPECIAL INSTRUCTIONS: 

A. Loan Servicing Appraisal - In the event the appraiser is requested to complete an 

appraisal for a servicing action such as foreclosure, short sale, deed-in-lieu, etc., an 

appraisal reflecting the market value of the property in its “as-is” condition is necessary 

for RD use.

Additionally, the appraiser shall provide under the same cover within the addenda, a 

liquidation value estimate for the subject property, as defined in Item 2, considering a 

prescribed marketing period of 30 days. 

Typically, when a property in foreclosure is occupied, the appraiser will not be required to 

gain access for a visual inspection of the interior of the subject property. In this case, the 

appraiser must complete the appraisal report on the Fannie Mae Form 2055/Freddie Mac 

Form 2055, “Exterior-Only Inspection Residential Appraisal Report” unless specifically 

instructed otherwise by RD. The report must include an extraordinary assumption that 

there was no visual inspection to the interior and details of the sources being used for the 

interior components and the assumed condition of the interior. 

https://www.rd.usda.gov/files/3550-1chapter13.pdf (Handbook-1-3550, Chapter 13 

(13.17) (C) (3).

B. Subsidy Recapture Appraisal – The appraiser must complete an as-is market 

value appraisal. 

The appraiser must provide the estimated contributory value of all capital improvements 

added to the subject property from original date of purchase as specified / indicated by the 

owner. In the event the appraiser cannot determine from local records what capital 

improvements may have been added, the appraiser may contact the Authorized Government 

Representative (AGR) to determine if original loan records detail historic property 

conditions. Each capital improvement must be noted individually. The appraiser must 

provide the estimated contributory amount of market value, if any, for each capital 

improvement item. Items considered to be general maintenance are not considered to be 

capital improvements. Values shall be supported by market evidence or other valuation 

methods deemed appropriate by the appraiser. https://www.rd.usda.gov/files/3550-

2chapter02.pdf (Handbook-2-3550, Chapter2 (2.23) (8) 
HB-1-3550

Attachment 5-A 

Page 5 of 12

4. APPRAISAL METHODOLOGY

RD requires appraisers to use the following appraisal methods to arrive at a final estimate of 

value.

A. Sales Comparison Approach: Under this method, the appraiser uses the recent sales prices 

of properties that are comparable in location and characteristics to the subject property in 

order to estimate a market value for the property. The appraiser must use at a minimum 

three (3) comparable closed sales of single family residential properties that sold in the 

previous 12 month period unless the appraiser provides documentation that such 

comparable transactions are not available in the area. Comparable sales should be located 

as close as possible to the subject dwelling, from within the competitive market area, and 

should be the most comparable available for purposes of valuation. 

B. Cost Approach: This method is specified in Handbook 1-3550, Chapter 5, found at this 

web address, http://www.rd.usda.gov/files/3550-1chapter05.pdf. For all proposed 

construction or all homes having an age of one year or less, RD requires that the 

appraiser develop, report and reconcile the cost approach to value. On homes over one 

year of age, the appraiser should determine whether the cost approach is relevant or 

necessary to determine a valid opinion of market value. This determination must be 

developed and reported in accordance with the USPAP.

Under this method, the appraiser derives an estimate of value using replacement cost 

estimates for the improvements, less depreciation of all forms, and then adding an 

estimate of the site value.

The appraiser will identify the source of cost estimates, such as Marshall and Swift 

Residential Cost service, local builder’s cost data or other national

publication for residential costs, used in the cost approach. The methodology used to 

estimate depreciation must be stated in the report.

Properties in remote rural areas, on tribal lands (American Native and Alaskan Native), areas 

with a lack of market activity, or those representing a leasehold interest, where it may be 

difficult to obtain adequate comparable sales to be used for comparative purposes in order to 

appraise a property. In these areas, the sales comparison approach is not required. Instead, 

Marshall & Swift Form 1007, Square Foot Appraisal Form, must be used. 

Remote rural areas are identified by RD and are defined as areas lacking sufficient 

market activity and having the following characteristics:

• Scattered population;

• Low density of residences

(01-23-03) SPECIAL PN

Revised (02-15-19) PN 521
HB-1-3550

Attachment 5-A 

Page 6 of 12

C. Income Approach: Under this method, the appraiser derives a value indication for an 

income-producing property by converting its anticipated benefits (cash flows and 

reversion) into property value. This conversion can be accomplished in two ways. One 

year’s income expectancy can be capitalized at a market-derived capitalization rate or at a 

capitalization rate that reflects a specified income pattern, return on investment, and 

change in the value of the investment. Alternatively, the annual cash flows for the 

holding period and the reversion can be discounted at a specified yield rate.

The Income Approach method of valuation may only be used for Agency NonProgram Properties such as Real Estate Owned (REO) or Non-Program Loan 

Assumptions.

USPAP Standards Rule 2-2 (a) (viii) require the appraisal report to summarize the 

information analyzed, the appraisal methods and techniques employed, and reasoning 

that supports the analyses, opinions, and conclusions; and also, exclusion of the sales 

comparison approach, cost approach, or income approach must be explained. 

5. APPRAISAL REQUIREMENTS:

A. The appraiser signing the appraisal report must understand and agree that RD is the client, 

and all reports must be addressed to USDA – Rural Development. The intended user of 

the report will be RD and any other intended user specified by the agency. Any questions 

relating to agency requirements of the appraisal assignment should be directed to the AGR 

and will not be directed to the property owner, real estate agent, builder/contractor, or any 

other party to the transaction. Communication relating to the assignment, directed

B. to the AGR, can come from the appraiser signing the appraisal report or the contractor 

selected for the assignment and in all instances RD staff will be granted permission to 

directly communicate with the appraiser signing the report. 

C. The appraisal report must be Uniform Appraisal Dataset (UAD)compliant.

D. A property contact person will be provided by the AGR and ensure the appraiser has access 

to the subject property for inspection, unless the property is occupied and the appraisal is 

for foreclosure purposes. In this situation, a drive-by / exterior only appraisal shall be 

conducted utilizing the extraordinary assumption the condition of the exterior of the 

dwelling indicates a similar condition for the interior.
HB-1-3550

Attachment 5-A 

Page 7 of 12

Appraisal fees or turnaround times must not be discussed with the property contact, the 

property owner or the borrower. The appraiser must notify the AGR immediately if any of 

the following occurs:

(1) The appraiser cannot gain adequate access to the property;

(2) The appraiser does not receive essential property information in a timely manner;

(3) The appraiser has previously appraised or is in the process of appraising the property 

for another client; or

(4) The appraiser has any other potential conflict of interest with respect to 

the assignment. 

E. If appropriate, the RD Field Office will prepare a list of repairs needed to insure the 

property meets the Agency regulations and guidance. The list of repairs, which is based on 

the inspection reports prepared by state-licensed inspectors or qualified third-party 

inspectors hired by the applicant will be provided to the appraiser for the purpose of 

obtaining an “as-improved” value. The list of repairs shall be provided by the RD Office 

processing the loan application. The appraiser is responsible to take into account the RD 

required repairs and must include the list of repairs in the addendum of the appraisal 

report.

F. The appraiser must provide an opinion of site value supported by a narrative of 

comparable land sales or other methods used for estimating site value. If support is not 

included in the appraisal report, a statement by the appraiser that such information is 

available for review upon request and in the appraiser’s work file should be made. The 

land must be valued as though vacant and ready for development. 

• The appraiser must specify whether the site is or can be subdivided into more 

than one site under existing local zoning ordinances. 

• The appraiser shall discuss the site size and the concluded site value and 

whether they are typical for the subject market.

• Any land area of the subject property that is determined by the appraiser as 

either excess land or surplus land must be addressed and valued accordingly 

together with documentation and support within the appraisal report for the 

appraiser’s conclusions. 

G. In addition, the appraisal report for a manufactured home must also meet the following 

requirements:

(1) Cost Approach: Manufactured Home Appraisal Reports will require a published 

cost data service such as the Marshall and Swift Residential Cost Guide or the

N.A.D.A. Manufactured Housing Appraisal Guide calculations to be included. The 

appraiser must take at least one of those values into consideration in arriving at a 

value conclusion. 

(01-23-03) SPECIAL PN

Revised (02-15-19) PN 521
HB-1-3550

Attachment 5-A 

Page 8 of 12

(2) Sales Comparison Approach: The appraisal report must contain at least two 

comparable manufactured home sales of similar configuration and quality. The 

appraiser may use either site-built housing or a different type of factory-built housing 

as the third comparable sale if the appraiser explains the reason for selecting the 

comparable and support the appropriate adjustments in the appraisal report. 

H. All extraordinary assumptions, hypothetical conditions, and limiting conditions must be 

clearly and prominently described in a single location near the beginning of the report 

and in appropriate sections of the appraisal. General assumptions and limiting conditions 

that reduce the normal scope of appraisal due diligence are not allowed. 

I. The appraiser must keep all information and materials furnished by Rural Development, the 

owner, and/or property contact regarding the subject property confidential, as required by 

USPAP and the Gramm-Leach-Bliley Act (also known as the Financial Services 

Modernization Act of 1999). Any information obtained through public sources is not 

considered confidential information. Disregard of this privacy requirement will be cause 

for immediate debarment as a contractor for the federal government. 

J. All appraisals must comply with the Fair Housing Amendments Act of 1988. 

According to the Act, it is unlawful for an appraiser to use factors that are 

discriminatory on the basis of race, color, religion, sex, disability, familial status, or 

national origin in the sale, rental, leasing, or financing of housing. 

K. Each appraisal will be submitted electronically, using the industry standard Extensible 

Markup Language (XML) appraisal data formats Mortgage Industry Standard 

Maintenance Organization (MISMO), with embedded PDF. Electronic submissions, in 

the above formats, must be emailed to the AGR as indicated on the confirmed Single 

Family Appraisal Order Form, Purchase Order, or Task Order (SF 1449). 

6. OBSERVED CONDITIONS: 

The appraiser is required to make a property inspection to gather data to support the 

determination of value. Readily observable conditions shall be noted. 

A. The appraiser(s) signing the appraisal report must make at a minimum a personal inspection 

of the subject (interior and exterior) unless the appraisal is for foreclosure purposed of an 

occupied dwelling, then an exterior only inspection is required. Also, inspection of all 

comparable sales (exterior) at a minimum from the street. The appraiser must indicate that 

the subject’s interior and exterior and all comparable sales were personally inspected / 

observed within the appraisal report. Readily observable conditions must be noted for the 

following: attic space, crawl space, floors and walls for significant structural failure, 

moisture damage, or evidence of past fire damage; the roof condition for remaining life; the 

mechanical systems for operability; and all surfaces for defective paint.
HB-1-3550

Attachment 5-A 

Page 9 of 12

B. In the event that access to the subject interior and/or exterior cannot be obtained, the 

appraiser must obtain prior authorization to continue the assignment without inspection. In 

the event RD authorizes valuation without an inspection, the appraiser must comply with 

USPAP Standard Rule 1-2 (F) which requires the appraiser to identify any extraordinary 

assumptions necessary in the assignment. The extraordinary assumption must include 

detailed disclosure of the assumed condition, the source(s) the extraordinary assumption is 

based upon and must be clearly labeled as such within the appraisal.

C. The appraiser must note any suspected environmental hazards, including issues external to 

the property that could adversely impact the property's value. Examples of environmental 

hazards would include damaged asbestos-containing building materials, underground 

storage tanks, chemical leaks, spills, staining of ground surfaces, or on-site waste disposal 

such as sludge, oil, paints, or chemical residues. If the appraiser observes any suspected 

environmental hazards, he/she must notify the AGR immediately and refrain from 

finalizing aspects of the appraisal that could be impacted until resolution of the issue or 

until instructed otherwise.

D. The appraiser must notify the AGR. In the event the appraiser observes a deficiency in 

the property that does not meet minimum property requirements, of decent, safe and 

sanitary as outlined in HB-1-3550, Paragraph 5.7. (http://www.rd.usda.gov/files/3550-

1chapter05.pdf).

E. For uninhabited dwellings where utilities are temporarily disconnected, the appraiser will 

inspect all mechanical systems (heating, plumbing, electrical) for observable conditions, 

but will not be responsible for reporting operability of these systems. Unless otherwise 

notified, the appraiser may assume operability for valuation purposes and this must be 

mentioned as an “extraordinary assumption” in the appraisal report.

F. Where applicable, appraisers should be familiar with the general provisions of “green 

properties” in single-family housing. The appraiser shall consider what impact (if any) 

such factors have on the value of the subject property. Any impact on value should be 

supported by market evidence. 

G. The Mutual Self-Help Program is a housing program utilizing supervised labor 

performed by borrowers as part of the construction process. Construction conducted 

under the program is supervised by technical experts to assure the quality of its 

completion.

Appraisal of properties constructed under the Mutual Self-Help Program should consider 

construction, materials and finish will be completed in a workmanlike and professional 

manner.

(01-23-03) SPECIAL PN

Revised (02-15-19) PN 521
HB-1-3550

Attachment 5-A 

Page 10 of 12

7. DOCUMENTATION: 

All approaches to value and the value opinion must be in accordance with acceptable 

appraisal methodology.

A. All reports must include a location map (should include proximity to applicable 

road/highway), flood plain map when the property is located in a designated flood plain, 

land sales map, sales comparable map, rent comparable map (if applicable), plat map, and 

building sketch (indicating interior building layout, garages and all external buildings). 

B. For new construction, the appraisal report must include clear original color photographs of 

the subject’s front, rear, street and street easement (private access), if applicable. In all other 

appraisals colored photographs showing at a minimum the front, rear, and both sides to the 

exterior. Interior photographs should be included showing each room type, attic and crawl 

spaces, other non-gross living area (sunrooms, patio/deck/porch/fences) and any noted 

structural, safety and/or sanitary deficiencies. Additionally, photographs of improvement 

components that have been upgraded shall be included to document and support the 

appraiser’s determination of the subject’s effective age if different than its actual age. A 

current original photograph of each comparable sale and listing used in the completion of 

the appraisal is required. If the comparable sale and listing photographs are not available 

the appraiser should provide, at a minimum, multiple listing service photographs, whenever 

possible, along with the cited source from which the photographs were obtained. 

C. The bedroom shall meet legal requirements (building code, zoning ordinance, etc.) as 

mandated by the local county/state government enforcement agency and applicable agency 

regulations where subject property is located, if any such legal requirements exist.

D. Verification from third party sources should be noted within the appraisal and maintained as 

part of the appraisers work file.

E. The appraisal shall include photographs of all external buildings as well as interior photos 

of the external buildings (if possible). The external dimensions for each of the external 

buildings must be included, preferably in the building sketch or identified in the addendum 

of the appraisal report.

The appraiser must estimate the remaining economic life of the subject's improvements, (the remaining 

number of years that the subject's improvements will contribute value to the land) and report this 

estimate in the cost approach section. An explanation is required if the remaining economic life is less 

than 30 years (the explanation is used to justify reducing the term of the mortgage to less than 30 years).
HB-1-3550

Attachment 5-A 

Page 11 of 12

F. All appraisals of existing properties must include a discussion of deferred maintenance

for the subject property. Items of deferred maintenance must be listed, and cost to cure

for each item must be estimated with support provided. 

G. All reports must include a written explanation and documentation to support individual line 

item adjustments. Total net adjustment percentages and gross adjustment percentages when 

compared with the comparable sale unadjusted sale price shall be discussed. 

8. COMPLETION CERTIFICATION:

A. If determined by Rural Development (RD), the appraiser may be requested to re-inspect 

properties to determine if repairs to the home or construction of home were completed.

RD shall determine the need for an appraiser to re-inspect a property. Re-inspection 

services may also be ordered on a separate contract if required. A list of additional repairs 

will be provided to the appraiser. Not all “subject to” appraisals will require re- inspection 

services.

B. The appraiser shall submit their findings using the Fannie Mae Form 1004D/Freddie Mac 

Form 442 “Appraisal Update and/or Completion Report.” The completed report shall be 

delivered to the AGR within 7 business days from the date the order was received. The 

report shall include pictures of completed work. 

C. Re-inspection reports are due within 7 business days after notification is received 

from the AGR.

9. APPRAISAL REPORTDELIVERY DEADLINES:

The appraiser shall complete and deliver appraisals to the AGR within 10 business/working 

days or specified noted delivery time after date of order, or upon receipt of the appraisal 

information from AGR unless a different deadline is set by written mutual agreement at the 

time of order. If corrections and/or amendments to the appraisal are requested by the AGR, the 

corrections and/or amendments are to be delivered as soon as possible, but not later than 4 

business days following the request unless, by written mutual agreement, other arrangements 

are made. If, for any reason the timely delivery of the appraisal report is delayed for reasons 

beyond the appraiser's control, the appraiser must contact the AGR and convey the reasons for 

the delay. 

If, for any reason the timely delivery of the appraisal report is delayed for reasons beyond the 

appraiser's control, the appraiser must contact the AGR and convey the reasons for the delay.

(01-23-03) SPECIAL PN 

Revised (06-21-18) SPECIAL PN
HB-1-3550

Attachment 5-A 

Page 12 of 12

10. REVIEW OF THE APPRAISAL REPORT:

All appraisals prepared for RD are subject to technical review by the agency. Appraisers 

must be prepared to discuss their analyses, reasoning, opinions, and conclusions. 

Additionally, if requested, they must provide additional written support, clarification, and/or 

corrected appraisal pages or report. If requested by the AGR or RD’s Regional Agency 

Appraiser, they will provide assistance to monitor the progress and quality of the appraiser’s 

performance and in all instances RD Regional Agency Appraisers will be granted permission 

to directly communicate with the appraiser signing the report as part of the review process.

11. ATTACHMENTS: 

The Agency will provide the appraiser all necessary support information available at the time 

of appraisal engagement.

12. COMPLIANCE WITH STATEMENTOF WORK:

The appraiser must follow all provisions and instructions contained in this Statement of 

Work. When, in the opinion of the appraiser, the Regional Agency Appraiser or the AGR 

request effort(s) falling outside this Statement of Work, the appraiser shall promptly notify 

the AGR, in writing.

The Regional Agency Appraiser or the AGR has the authority to direct the accomplishment 

of any effort which goes beyond the Statement of Work, however, any changes resulting in 

additional charges must be approved by the contracting officer prior to commencement of 

work.

If the appraiser is unable to fully comply with this Statement of Work, the appraiser must 

decline the appraisal assignment in accordance with the USPAP.

13. SPECIFIC STATE REQUIREMENTS:

None

*PLEASE NOTE: FAILURE TO FOLLOW THE STATEMENT OF WORK AND

APPRAISAL INSTRUCTIONS CAN RESULT IN DENIAL OF FUTURE

ASSIGNMENTS.*
HB-1-3550

Attachment 5-B

Page 3 of 5

ATTACHMENT 5-B 

SINGLE FAMILY HOUSING SITE CHECKLIST

Buyer/Owner Name PropertyAddress

Name of Subdivision: 

Year Built: 

Property is currently ( ) occupied ( ) unoccupied. Was interior accessible? ( ) Yes ( ) No

1. SITESUITABILITY, ACCESS, AND COMPATIBILITYWITH SURROUNDING 

DEVELOPMENT

Has the site been used as a dump, sanitary landfill, or mine waste disposal area? ( ) Yes ( ) No If 

no, is the site in proximity to any such uses? ( ) Yes ( ) No

Is there indication of:

Yes No Yes No

distressed vegetation ( ) ( ) oil/chemicalspills ( ) ( ) 

waste material/containers ( ) ( ) abandoned machinery, cars,

soil staining, pools of liquid ( ) ( ) refrigerators, batteries, tires, etc. ( ) ( ) 

loose/empty drums, barrels ( ) ( ) transformers, fill/vent pipes,

foul odor ( ) ( ) pipelines, drainage structures ( ) ( ) 

underground or above ground

storage tanks ( ) ( ) 

Are there property easements for high-tension power lines or gas lines? ( ) Yes ( ) No

Are there other unusual conditions on site which might indicate potential for contamination from hazardous 

waste, hazardous substances, or petroleum products? ( ) Yes ( ) No

Is the site adjacent or in proximity to industrial areas, refineries, dry cleaners, chemical storage areas, recycling 

facilities, oil or gas wells, fueling stations, etc.? ( ) Yes ( ) No

Note: Complete a Transaction Screen Questionnaire (TSQ) for any “YES” answer in item 1 before proceeding 

further. Contact the State Environmental Coordinator with any questions.

(01-23-03) SPECIAL PN

Revised (11-03-17) PN 505
HB-1-3550

Attachment 5-B 

Page 2 of 5

Are any of the following conditions present? Check if observed and explain on page 5 of 5:

( ) mold/mildew ( ) peeling paint(interior)

( ) insect infestation ( ) peeling paint(exterior)

( ) asbestos(interior) ( ) ponding/standingwater

( ) asbestos (exterior) ( ) evidence of water runoff from adjacent properties 

( ) knowledge of past or current use for production of methamphetamine

Is the site compatible with surrounding area in terms of:

Yes No Yes No

Land use ( ) ( ) Building type ( ) ( )

Height, bulk, mass ( ) ( ) Building density ( ) ( )

Will the site be unduly influenced by:

Yes No Yes No

Building deterioration ( ) ( ) Transition of land uses ( ) ( )

Postponed maintenance ( ) ( ) Incompatible land uses ( ) ( )

Obsolete public facilities ( ) ( ) Inadequate off-street parking ( ) ( )

2. SOIL STABILITY, EROSION, ANDDRAINAGE

Slopes: ( ) Not applicable ( ) Steep ( ) Moderate ( ) Slight

Is there evidence of slope erosion or unstable slope conditions on or near the site? ( ) Yes ( ) No

Is there evidence of ground subsidence, high water table, or other unusual conditions on the site?

( ) Yes ( ) No

Is there any visible evidence of soil problems (foundations cracking or settling, basement flooding, etc.) in the 

neighborhood of this site? ( ) Yes ( ) No

Have soil studies or boring been made for the site or the area? ( ) Yes ( ) No ( ) Unknown

Do the soil studies or boring indicate marginal or unsatisfactory soil conditions? ( ) Yes ( ) No

Is there indication of cross-lot runoff, swales, drainage flows on the property? ( ) Yes ( ) No

Are there visual indications of filled ground? ( ) Yes ( ) No

Are there active rills and gullies on site? ( ) Yes ( ) No

If the site is not to be served by a municipal waste water disposal system, has a report of the soil conditions 

suitable for on-site septic systems been submitted?( ) Yes () No ( ) Not Applicable
HB-1-3550

Attachment 5-B

Page 3 of 5

3. NUISANCES AND HAZARDS

Will the site be affected by natural hazards:

Yes No Yes No

Faults, fracture ( ) ( ) Fire hazard materials ( ) ( )

Cliffs, bluffs, crevices ( ) ( ) Wind/sand storm concerns ( ) ( )

Slope-failure from rains ( ) ( ) Poisonous plants, insects, animals ( ) ( )

Unprotected bodies of water ( ) ( ) Hazardous terrain features ( ) ( )

Will the site be affected by built hazards and nuisances:

Yes No Yes No

Hazardous street 

Dangerous intersection

( ) 

( )

( ) 

( )

Railroad crossing 

Inadequate screened

( ) ( ) 

Through traffic ( ) ( ) drainage catchments ( ) ( )

Inadequate separation Hazards in vacant lots ( ) ( )

of pedestrian/vehicle traffic ( ) ( ) Chemical tank-carterminals ( ) ( )

Traffic way ( ) ( ) Other hazardous chemical storage ( ) ( )

Inadequate street lighting ( ) ( ) High-pressure gas or liquid

Quarries petroleum transmission

or other excavations ( ) ( ) lines on site ( ) ( )

Dumps/sanitary landfills or Overhead transmission lines ( ) ( )

mining ( ) ( ) Hazardous cargo

Heavy industry ( ) ( ) transportation routes ( ) ( )

Incinerators ( ) ( ) Oil or gas wells ( ) ( )

Power generating plants ( ) ( ) Industrial operations ( ) ( )

Oil refineries ( ) ( ) Cement plants ( ) ( )

Will the site be affected by nuisances:

Yes No Yes No

Gas, smoke, fumes ( ) ( ) Unsightly land uses ( ) ( )

Odors ( ) ( ) Abandoned vehicle ( ) ( )

Vibration ( ) ( ) Vermin infestation ( ) ( )

Vacant/boarded-up Industrial nuisances ( ) ( )

buildings ( ) ( ) Other ( ) ( )

(01-23-03) SPECIAL PN

Revised (11-03-17) PN 505
HB-1-3550

Attachment 5-B 

Page 4 of 5

4. WATER SUPPLY, SANITARY SEWERS, AND SOLID WASTE DISPOSAL

Is the site served by an adequate and acceptable:

water supply ( ) Yes ( ) No ( ) Municipal ( ) Private;

sanitary sewers and waste disposal systems ( ) Yes ( ) No ( ) Municipal ( ) Private; and

trash collection and solid waste disposal ( ) Yes ( ) No ( ) Municipal ( ) Private.

If the water supply is non-municipal, has an acceptable “system” been approved by appropriate authorities and 

agencies?

( ) Yes ( ) No

If the sanitary sewers and waste water disposal systems are non-municipal, has an acceptable “system” been 

approved by appropriate authorities and agencies?

( ) Yes ( ) No

5. NOISE ABATEMENT

Is the site located near a major noise source, i.e., civil airports (within 5 miles), military airfields (15 miles), 

major highways or busy roads (within 1000 feet), or railroads (within3000 feet)? ( ) Yes ( ) No

6. AIRPORTHAZARDS

Is the project within 3,000 feet from the end of a runway at a civil airport? ( ) Yes ( ) No

Is the project within 2-1/2 miles from the end of a runway at a military airfield? ( ) Yes ( ) No

7. OTHERCONDITIONS

Are there any field conditions not specified above that would adversely affect the acceptability of the 

lots/sites? ( ) Yes ( ) No

Prepared By Date
ITEM NUMBER ADDITIONAL COMMENTS

(01-23-03) SPECIAL PN

Revised (11-03-17) PN 505

HB-1-3550

Attachment 5-B 

Page 5 of 5 
ATTACHMENT 5-C 

HB1-3550

Attachment 5-C 

Page 1 of 1 

AMENDMENTS TO MORTGAGES WITH LEASEHOLDINTEREST 

The following paragraphs must be inserted in the mortgage. The first paragraph should be placed 

directly before the legal description of the real estate.

“All Borrower’s right, title, and interest in and to the leasehold estate for a term of 

years beginning on , 20 , created, executed and established by 

certain Lease dated , 20 , by , Page of

 Records of said County and State, and any renewals and extensions thereof, and 

all Borrower’s right, title, and interest in and to said Lease, covering the following real 

estate.”

“Borrower will pay when due all rents and any and all other charges required by said 

Lease, will comply with all other requirements of said Lease, and will not surrender or 

relinquish, without the Government’s written consent, any of Borrower’s right, title, or 

interest in or to said leasehold estate or under said Lease while this instrument remains in 

effect.”

(01-23-03) SPECIAL PN

Revised (11-03-17) PN 505
ATTACHMENT 5-D 

HB1-3550

Attachment 5-D 

Page 1 of 1 

TRANSMITTAL COVER SHEET FOR MAPPING SYSTEM MODIFICATION

Utilize this as a coversheet to transmit your request for ineligible area re-designations or errors identified 

to the present public website mapping system. Complete all fields to avoid delays in your request.

Request: Re-designation of rural areas

Correction of Error to existing mapping system

State: 

Applicable Counties: 

Submitters Name - 

Point of Contact:

Email Address: 

Telephone #: 

Form RD 2006-3, Instruction and Form Justification has been completed 

and a copy of the State Supplement to the HB-1-3550

has been approved or isincluded with thissubmission.

Documentation Submittal:

Email

Send to: RA.dcwashing3.SFHGLD(SFHGLD@usda.gov) 

AND

RA.dcwashing2.RDSFHDP(SFHDIRECTPROGRAM@usda.gov)

(When an email copy is not feasible, contact the SFH Direct Loan Division for instructions.)

Comments: Include additional information regarding errors to the present mapping system or re- designation 

comments.

(01-23-03) SPECIAL

Revised (03-19-20) PN 534
ATTACHMENT 5-E 

ELIGIBILITY SYSTEM MODIFICATION REQUEST PROCESS

Instructions for Eligibility Map Changes

HB-1-3550

Attachment 5-E 

Page 1 of 6

No map changes will be processed without an approved Form RD 2006-3 showing the rural 

area changes as adopted by the state.

The preferred method of delivery is electronic. Refer to Attachment 5-E regarding the 

level of detail and process flow that occur once modified maps and text is submitted. There are 

three types of modification requests. The level of complexity (the number of modifications 

requested) determines the length of time to production implementation.

Allow ample time prior to implementation of revised ineligible areas. The RD GIS Portal is the 

preferred method for maps as they are digitized and facilitate changes to the mapping system. 

Maps that require digitizing to enable posting to the public eligibility website will require 

additional time, as will substantial changes to the existing mapping system. 

Occasionally states identify actual errors to the public website mapping system (i.e. a 

correction to an incorrectly coded map). This type of modification falls under Type 1 identified 

in Attachment 5-F.

Attachment 5-F is provided for visual purposes.

The following information discusses the process of requesting changes to the public 

eligibility website. It also discusses what the State Offices need to do in order to test and 

approve requested modifications. Finally, it will provide an idea of what is involved in the 

request approval process that must go through the Configuration Management & Standards 

Compliance Branch in the St. Louis DCIO office. The level of detail is provided to keep states 

abreast of the processes that must take place in order to modify the public eligibility website.

I. Modification Request Types, Request Instructions and Examples

There are 3 types of modification requests. Their descriptions are below, along with the procedure 

to complete a request. The differences are (1) the number of modifications within a request and

(2) the length of time it will take for making the modifications and their eventual deployment to 

the Production environment. 

The RD GIS Portal will be used to collaborate with and convey map changes to the RD GIS 

Specialist. For further guidance, please refer to the RD GIS Portal Collaboration Guide which is 

published on the Single Family Housing SharePoint site under the Rural Areas folder.

(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
HB-1-3550

Attachment 5-E 

Page 2 of 6

* Type 1 – Basic Modification\Correction Request:

A basic modification request is a request that requires modification to the text description and/or a 

state’s eligibility map (mapping to be based at a county level). A basic modification has no more 

than 2 ineligible areas within the request. This request should include a map with an outline of the 

new or modified ineligible area. Type 1 requests (including changes to boundary lines or 

corrections to erroneous maps) take approximately one to two weeks for modifications. When 

modification is complete, the requestor will be contacted for testing. Once the maps are tested and 

approved by the requester, the implementation process will begin. The timeline for modification 

and implementation is typically 3 to 5 weeks.

* Type 2 - Moderate Modification\New Eligibility Area Request:

A moderate modification or new eligibility area request is a request that requires significant 

modifications to more than 2 ineligible areas on a state’s eligibility map (mappings being based at 

a county level), or is a newly defined ineligible area. This request should include a map with an 

outline of the new or modified ineligible area. Type 2 requests take approximately two to four 

weeks for modifications. When modification is complete, the requestor will be contacted for 

testing. Once the maps are tested and approved by the requester, the implementation process will 

begin. The timeline for modification and implementation is typically 4 to 7 weeks.

* Type 3 – Text Description Modification Request:

A text description modification request is only for text changes. Type 3 requests should contain the 

exact text the Field Office requires to be placed on the site. The text description will be utilized to 

prepare the boundary lines and will be compared to the map submitted. It is important that the text 

version clearly defines the boundaries submitted. When modification is complete, the requestor 

will be contacted for testing. Once the text version is tested and approved by the requester, the 

implementation process will begin. The timeline for modification and implementation is typically2 

to 3 weeks.
* How to request a modification, addition or correction:

HB-1-3550

Attachment 5-E 

Page 3 of 6 

The State Office should request changes through utilization of a transmittal similar to Attachment 

5-D. The Program Director is the state point of contact and communication regarding

modifications, additions or corrections must be transmitted through the Program Director. 

Requests will not be accepted from Field Offices. Electronic requests will be forwarded to the 

National Office at: RA.dcwashing3.SFHGLD (SFHGLD@usda.gov) and RA.dcwashing2.RDSFHDP (SFHDIRECTPROGRAM@usda.gov). Accompanying each request, the state must 

clearly indicate the type of request to be performed. The request should have detailed listings 

of all changes required by county and\or city. 

The transmittal should also clearly reference what should be changed on the public eligibility map. 

Clearly referencing the changes to occur are recommended as follows: 1) If the State or Field 

Offices have access to Microsoft Word (place a copy of a map of the area to be modified into a 

Microsoft Word document. Utilize the drawing tools within Microsoft Word for highlighting 

changes that are needed. 2) If the State or Field Offices have access to Adobe Acrobat, use the 

tools to draw on an existing map. 3) Scan a hand-written modification on a printed map. The 

examples provided are suggestions to a timelier more accurate implementation of boundary line 

changes. If the State or Field Office cannot provide a detailed mapping, a text description only will 

be accepted. Insure the text version clearly defines the ineligible boundaries. Personnel from the 

Enterprise Technologies Branch in the St. Louis DCIO office will contact the requestor with any 

questions.

(01-23-03) SPECIAL PN

Revised (12-08-12) PN 572
HB-1-3550

Attachment 5-E 

Page 4 of 6

II. Testing RequestedChanges

Once the modifications have been made, they are implemented into the Test environment. Upon 

these changes being made in the Test environment, the requestors will be contacted and asked to 

review the requested modifications for approval.

The State or Field Office representatives that made the initial request should then review the 

requested changes in the Test environment. An email notification will be sent to the requestor 

notifying them of modifications implemented into the Test environment. The Test environment 

can be found at the following link:

Eligibility Test Site: https://eligibility.test.sc.egov.usda.gov/eligibility/welcomeAction.do 

The user’s e-authentication identification will be utilized to access the site.

Log into the test environment and review the changes on both the map and the text description. If 

there are any issues with what has been changed, or questions, refer those issues/questions to 

whom the email request was received from.
III. Approving Requested Changes and the ImplementationProcess

HB-1-3550

Attachment 5-E 

Page 5 of 6

Once the requestor has reviewed and approved the changes necessary for their ineligible area 

map, respond to the email requestor stating that the changes made fit the business needs of the 

State and Field Offices. The following information lists specific detail that must accompany your 

response and confirmation. The items are required by the Configuration Management process in 

order to get the changes implemented to the Certification and deployed to the Production 

environments. The items that need to be listed in the email response are:

• What county and state have been reviewed

• State that all changes made have been tested and are acceptable

• State that all changes made should be moved to the Certification and Production 

Environments

• In the email, please refer to RFA number “A-11012” and RFC number “RFC-11108”

The above listed items are a requirement for the User Acceptance letters used in the 

Configuration Management implementation process. 

Once received, the Enterprise Technologies Branch (ETB) in the St. Louis DCIO office will 

create a request package for the implementation of the changes to be placed into both the 

Certification and Production environments. 

There are many types of configuration implementation process. Updates to the public eligibility 

website will utilize the CERT\HOLD\PROD request type for Configuration Management 

implementation. This request type indicates changes will be implemented into the Certification 

(CERT) environment first, followed by Production (PROD) in either of the next 2 regularly 

scheduled Production releases. The implementation into the Certification environment can take up 

to one week. Additionally, a one or two week gap between implementation to the Certification and 

Production environment could occur.

Once the changes are placed into the Certification environment, the Enterprise Technologies Branch 

will be responsible for reviewing/confirming the changes in the Certification environment match 

those within the Test environment that was approved. These can be viewed at the following link: 

https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

The user’s e-authentication identification will be utilized to access the site.

After review of the Certification environment has been completed and approved, the Production 

implementation will take place. The implementation will be completed during the next available, 

normal Production release (typically the following Wednesday, depending on the length of time it 

takes the requestor to reply to the email notification). If the Certification environment review fails, 

the Enterprise Technologies Branch will acquire the correct file structure from the approved Test 

environment and request the local Configuration Management team re-deploy the correctly 

modified files.

(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
HB-1-3550

Attachment 5-E 

Page 6 of 6

The Production environment link is as follows: 

https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfpd

*Extraordinary Circumstances/Special Request Process

In the event that there are extenuating circumstances that require the updates be placed to the 

Production environment more timely than the typical flow, a special request process can be 

utilized. This request must be justified based on Field Office\State Office need. To submit a special 

request for an expedited implementation, the State Director must provide a justification as to the 

circumstances requiring an implementation timeline that requires attention over the typical flow of 

timelines outlined in Type 1, 2 and 3 above. The justification must indicate specific reasons for an 

expedited implementation and must confirm the need is beyond the control of the state and is not 

due to the lack of planning the change or otherwise an error on the part of the state. This 

justification will accompany the transmittal and modifications request.
ATTACHMENT 5-F 

HB-1-3550

Attachment 5-F 

Page 1 of 1 

ELIGIBILITY SYSTEM MODIFICATION WORKFLOW

(01-23-03) SPECIAL PN

Revised (08-21-13) PN 465
6-1

(01-23-03) SPECIAL PN

Revised (02-01-18) PN 508

SECTION 1: OVERVIEW OF THE UNDERWRITING PROCESS

6.1 INTRODUCTION

The underwriting process brings together the applicant eligibility requirements discussed 

in Chapter 4 and the property requirements discussed in Chapter 5 with the loan and subsidy 

requirements that are discussed in detail in this chapter. By putting all of this information 

together, the Loan Originator can determine the applicant’s repayment ability, whether a loan 

can be approved, and the amount of the loan. This chapter is structured as follows:

• Section 1 reviews the concept of underwriting;

• Section 2 describes loan terms and requirements;

• Section 3 provides policies and procedures for determining whether the applicantis 

eligible for payment subsidy and the amount of the subsidy; and

• Section 4 provides policies and procedures for underwriting a loan for a specific 

property and preparing the loan approvalrecommendation.

6.2 WHAT IS UNDERWRITING?

Through the underwriting process, the Loan Originator evaluates an applicant’s 

circumstances and the condition and value of the property to determine whether making a 

particular loan is a prudent use of funds. Exhibit 6-1 summarizes key underwriting decisions.

Underwriting has both objective and subjective elements. For example, 

income eligibility is an objective factor -- if the applicant’s income exceeds program 

income limits, the applicant cannot receive a program loan. On the other hand, 

analyzing an applicant’s credit history and estimating the value of the property both

involve some degree of judgment. The underwriter’s challenge is to make both objective and 

subjective decisions in a fair and impartial manner for all applicants.

CHAPTER 6: UNDERWRITING THE LOAN

HB-1-3550
HB-1-3550

Exhibit 6-1

Key Underwriting Decisions 

Does the Applicant Meet Program Requirements?

The applicant must:

• Have the legal capacity to enter into a loan agreement;

• Have the financial resources to repay the loan;

• Have an acceptable credit history; and

• Meet the specific requirements for participation in the program, such as eligibility based 

on income and citizenshipstatus.

• A first-time homebuyer must complete a homeownership education course prior to 

entering into a contract to purchase or construct a home for maximum benefit (or shortly 

thereafter).

Does the Property Meet Program Requirements?

The property must:

• Meet Agency standardsregarding location and housing quality;

• Meet the Agency’s environmental reviewrequirements;

• Not have legal hindrances to the borrower’s ownership of the property; and

• Have sufficient value to protect the Agency’sfinancial investment in the property.

Does “The Deal” Work?

• Can the Agency offer loan terms and conditions that enable the applicant to afford the 

loan?

• Isthe applicant willing and able to meet the terms and conditions the Agency can offer?

Paragraph 6.2 What is Underwriting?

The Agency’s underwriting standards and procedures are similar in many respects to 

those used by private lenders. However, because the Agency’s mission, in part, is to serve home 

buyers who are unable to obtain private credit, the underwriting process differs in 4 key respects:

• The Agency’s criteria for an acceptable credit history are somewhat less stringent 

than those used by private lenders;

• Agency loan-to-value requirements enable many applicants to become homeowners 

with little or no down payment;

• In most circumstances, the Agency has the ability to offer subsidies that enhance an 

applicant’s ability to repay the loan; and

• The Agency conducts quality checks on new loans as well as on withdrawn and 

rejected applications to confirm that the Loan Originator complied with the 

underwriting standards and procedures. Refer to Attachment 6-B for guidance on 

monitoring requirements.

6-2
HB-1-3550

6-3

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

6.3 USING UNIFI TO FACILITATE UNDERWRITING

UniFi automatically completes most of the underwriting calculations discussed in this 

chapter. However, the Loan Originator must understand how the calculations are made, in order 

to enter the correct information into the system and, more importantly, to be able to explain the 

results to applicants.
HB-1-3550

SECTION 2: LOAN TERMS AND REQUIREMENTS

6.4 ELIGIBLE LOAN PURPOSES AND USES [7 CFR3550.52]

The Section 502 program is intended to help those who do not currently own adequate 

housing buy, build, relocate, rehabilitate, or improve a property to use as a principal residence. 

All improvements must be on land that, after closing, is part of the security property. Eligible 

costs are listed below.

A. Site-RelatedCosts

Eligible site-related costs include:

• Providing a minimum adequate site, as described in Section 1 of Chapter 5, if the 

applicant does not already own an adequate site;

• Providing adequate utilities, including adequate and safe water supply and wastewater 

disposal facilities; and reasonable connection fees, assessments, or the pro rata 

installment costs for utilities such as water, sewer, electricity and gas;and

• Site preparation, including grading, foundation plantings, seeding or sodding, trees, 

walks, yard fences, and driveways.

B. Dwelling-Related Costs

In addition to costs for acquisition, construction, repairs, or the cost of relocating a 

dwelling, eligible dwelling-related costs include:

• Special design features or equipment necessary because of a physical disability of a 

member of the applicant’shousehold;

• Approved energy saving materials, equipment, or construction methods (heating 

systems must use a type of fuel that is commonly used, economical, and dependably 

available);

• Storm cellars and similar protective structures;and

• Purchase and installation of essential equipment including range, refrigerator, clothes 

washer and/or dryer, if these items are not included in the sale of the home or are not 

in working order, and if the purchase of these items is not the primary purpose of the

loan.

6-4
HB-1-3550

Paragraph 6.4 Eligible Loan Purposes and Uses [7 CFR 3550.52]

C. Fees and Related Costs

Other eligible costs include:

• Reimbursement for certain items paid by the borrower outside of closing (i.e. 

earnest money deposit, inspection fees required by the Agency, and the first 

year’s hazard insurance premium); legal fees; architectural and engineering 

services; costs of title clearance and loan closing services; the appraisal fee; 

surveying, environmental and tax service services; personal liability insurance 

fees under Mutual Self-Help Housing; and other incidental expenses approved by 

the Loan Approval Official. Commissions, finders’ fees, homeowner association

fees, placement fees,and administrative fees charged to the buyer by the real 

estate agent are not eligible costs;

• Fees for acceptable homeownership education under 7 CFR 3550.11 provided the 

fee does not exceed the reasonable costs determined by the State Director. Fees 

may be added to the loan amount in excess of the area loan limit and the appraised

value ofthe house in cases where the borrower requests it be included in the loan;

• The buyer’s portion of real estate taxes that the applicant must pay at the time of 

closing including delinquent taxes on a property owned by the applicant;

• Real estate taxes that become due during the construction period on houses to be built;

• The borrower’s share of Social Security taxes and similar taxes for labor hired 

by the borrower in connection with making the planned improvements;

• Establishment of escrow accounts, including the initial escrow deposit, for the 

payment of taxes and property insurance premiums;

• Payment of recapture amounts deferred by a former borrower;

• Costs associated with implementation of mitigation measures to ensure

environmental compliance;

• For leveraged loans, lender charges and reasonable fees related to obtaining the

non- Agency loan; and

6-5

(01-23-03) SPECIAL PN

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

Paragraph 6.4 Eligible Loan Purposes and Uses [7 CFR 3550.52]

• Fees to public agencies and private nonprofit organizations that are tax exempt 

under the Internal Revenue Code for the packaging of loan applications. The 

charges must be reasonable considering the services provided and the cost of similar 

services in the same or a similar rural area. The fee cannot exceed the amount listed 

in Attachment 3-A and the package must comply with the requirements outlined in 

the aforementioned attachment.

D. Loan Restrictions [7 CFR 3550.52(e)]

Agency loans can be used to finance existing properties that include in-ground 

swimming pools. However, in-ground swimming pools with new construction or with 

dwellings that are purchased new are prohibited. 

Agency funds cannot be used to purchase or improve structures designed for incomeproducing purposes or income-producing land. Home-based operations such as childcare, 

product sales, or craft production that do not require specific features are not restricted.

6.5 REFINANCING

In general, Agency funds should not be used to refinance existing debt; however, 

refinancing is permitted in limited circumstances.

A. Refinancing Agency Debt [7 CFR 3550.52(c)]

Borrowers with Agency nonprogram loans (nonprogram assumptions or credit sales) or 

initial Section 502 program loans with a term less than 25 years are not eligible for payment 

subsidy. Borrowers with these types of loans may be permitted to refinance if the borrower is 

eligible to receive a program loan, the property is program-eligible, and the borrower is in danger 

of losing the property due to circumstances beyond the borrower’s control. 

Subject to the availability of funds and Agency priorities, Agency debt including subsidy 

recapture, may be refinanced as a special servicing option. When an existing Agency loan is 

being refinanced as a special servicing action in the limited circumstances provided in 7 CFR 

3550.52 and 3550.201, the household’s adjusted income must not exceed the applicable 

moderate income limit for the area at the time of loan approval and closing. 

6-6
HB-1-3550

Paragraph 6.5 Refinancing

B. Refinancing Non-Agency Debt [7 CFR3550.52(b)]

1. Situations in Which Refinancing is Permissible

Refinancing of non-Agency debt, except for debt on manufactured homes, is 

permissible in 3 circumstances.

• Refinancing for an existing home at risk of foreclosure. An applicant who 

owns a home but is clearly unable to continue making payments and risks losing 

the home through foreclosure may be eligible for Agency refinancing if the risk 

is due to circumstances beyond the applicant’s control. Risk of foreclosure 

doesn’t necessarily mean that the applicant’s mortgage is currently delinquent; it 

means that foreclosure is a highly likely eventuality because the mortgage 

payments are no longer sustainable due to circumstances beyond the applicant’s

control.

• Refinancing for an existing home in need of repairs. Debt on an existing 

home may be refinanced if the home is in need of repairs totaling $5,000 or 

more to correct major deficiencies and make the dwelling decent, safe, and 

sanitary; and refinancing is necessary for the borrower to show repayment 

ability. In such cases the owner need not be at risk of losing the property through

foreclosure.

• Refinancing for a site without a dwelling. Agency funds may be used to 

refinance non-Agency debt on a building site without a dwelling if the debt is for 

the sole purpose of purchasing the site, the applicant is unable to pay the debt, 

and the applicant is otherwise unable to acquire decent, safe, and sanitary 

housing. The site must meet the conditions described in Section 1 of Chapter 5. 

The Agency loan must include adequate funds to construct a dwelling on the site

that conforms to the requirements of Section 2 of Chapter 5, and the applicant 

must occupy the property once it is constructed.

In any of these circumstances, a non-Agency loan, including a Single Family Housing 

Guaranteed Loan, can be refinanced only if the Agency will have adequate security. For a 

site with an existing dwelling, the applicant must engage the services of a State-licensed 

inspector to perform a whole house inspection and provide statement that the dwelling 

appears to meet the Agency’s DSS standards as described in Section 2 of Chapter 5. If there 

are any noted deficiencies that prevent the home from meeting decent, safe, and sanitary

standards, the deficiencies must be addressed as part of the loan.

6-7

(01-23-03) SPECIAL PN

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

6-8

Paragraph 6.5 Refinancing

2. Eligible Debt

In general, Agency funds can be used to refinance only debt that was incurred for eligible 

purposes, as described in Paragraph 6.4. For applicants who are in danger of foreclosure, 

Agency funds also may be used to repay a protective advance made by a mortgagee for costs 

related to the delinquency, such as accrued interest, insurance premiums, real estate tax 

advances, or preliminary foreclosurecosts.

The primary debt to be refinanced must be secured with a lien against the security 

property. For existing dwellings, but not for sites without a dwelling, short-term or unsecured 

debts also may be included in the refinancing if refinancing of these debts is necessary to 

establish sound repayment ability, the debts were incurred for purposes that are eligible under 

Section 502, and they do not represent a significant portion of the loan.

3. Timing of the Debt

In general, the debt to be refinanced must have been incurred before the application was 

filed. Costs incurred after the application date, but before loan closing, may be refinanced if: (1) 

they are incurred for legal fees or other technical services related to the property, or for materials, 

construction or site acquisition; (2) the applicant is unable to pay the costs from personal 

resources or to obtain credit from other sources; and (3) failure to authorize the use of Agency 

funds to pay such costs would jeopardize the applicant’s ability to repay the loan. The applicant 

should consult with the Loan Originator before incurring such expenses.

4. Verification ofDebt

To verify that the debt to be refinanced meets these requirements, the Loan Originator 

should send Form RD 3550-30, Verification of Debt Proposed for Refinancing, to each creditor 

whose debt is proposed for refinancing. The form, which asks for account information as well as 

a copy of the original debt and security instrument, should be accompanied by a preaddressed, 

postage-paid envelope (sufficient enough to cover the cost of and large enough to hold the 

multiple-paged instruments) and Form RD 3550-1, Authorization to Release Information, which 

authorized the respondent to release this information.
HB-1-3550

6.6 MAXIMUM LOAN AMOUNT [7 CFR 3550.63]

Unless an exception is granted, a loan 

may not exceed the area loan limit. The loan 

may exceed the area loan limit in an amount 

necessary to cover the appraisal fee, the tax 

service fee, homeownership education fee, and 

any required contribution to an escrow account 

for taxes and insurance (excluding the first-year 

insurance premium).

All area loan limits are available online at: 

https://www.rd.usda.gov/files/RDSFHAreaLoanLimitMap.pdf

A. Granting Exceptions

Exceptions to the area loan limit may be 

granted on a case-by-case basis when the current 

limit is insufficient to provide adequate housing. 

Exceptions may be granted to accommodate the 

specific needs of an applicant, for example, to 

serve exceptionally large households or to 

provide reasonable accommodation for a 

household member with a disability. Requests 

for exceptions may be approved by the State 

Director if the cost of the property will not

exceed $5,000.

To request an exception, the Loan Originator must fully document the need for the 

exception. If approval is granted, the Loan Originator should follow UniFi procedures to 

override the maximum mortgage limit.

6-9

(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Effects of the Area Loan Limit

Determining if a property is modest prior to orderingan 

appraisal. Market value is generally reflective of the price 

for a property agreed upon between a willing and informed 

buyer and a willing and informed seller and/or contractor 

under usual and ordinary circumstances when the property 

is exposed for sale on the open market with reasonable 

time allowed to find a purchaser. Since the modest 

determination must be made when the purchase agreement 

or construction package is submitted, if the property is 

deemed modest but the appraised value subsequently 

comes in higher than the area loan limit - the property will 

still be considered modest.

Maximum Loan Amount. The total amount of the 

Agency loan, loans from other sources, or the applicant’s 

own funds, including but not limited to the value of the 

site, cannot exceed the applicable area loan limit.

Costs of Appraisal or Closing. The loan an applicant 

receives must not exceed the area loan limit unless the 

applicant chooses to finance the appraisal fee, tax service 

fee, homeownership education fee, or the initial 

contribution to fund the escrow account, in which case 

the loan can exceed the area loan limit by the cost of 

these items.
HB-1-3550

6-10

Paragraph 6.6 Maximum Loan Amount [7 CFR 3550.63]

Exceptions also can be granted for subsequent loans that may cause the entire 

indebtedness to exceed the area loan limit only if necessary to protect the Government’s 

interests. The State Director can authorize subsequent loans that exceed the area loan limits to 

accommodate the cost of necessary repairs, reasonable closing costs, and allowable excess costs 

(including the appraisal fee, tax service fee, homeownership education fee, and initial deposit to 

fund the escrow account), without authorization from the Deputy Administrator, Single Family 

Housing, even if the increase exceeds $5,000.

B. SpecialSituations

To further ensure that only modest housing is financed, the maximum loan amount will 

be limited in the following situations:

1. Housing Other than Self-Help

• If the applicant owns the building site free and clear or if an existing non-Agency 

debt on the site will not be refinanced with Agency funds, the market value of 

the lot will be deducted from the area loan limit.

• If Agency funds will be used to refinance non-Agency debt on the building 

site, the equity (market value minus the debt owed against the site) will be 

deducted from the area loan limit.

• When the applicant is purchasing a site below the market value, the difference 

between the market value and the sales price will bededucted from the area 

loan limit.

• When an applicant is receiving a housing grant or other form of affordable housing 

assistance for eligible loan purposes other than closing costs, the amount of 

such grants and other affordable housing assistance will be deducted from the 

area loan limit.

2. Self-Help Housing

The maximum loan amount for self-help housing will be determined by adding the total 

of the market value of the lot (including reasonable and typical costs of site development), the 

cost of construction, and the value of sweat equity. The total of these factors cannot exceed the 

area loan limit for the area.
HB-1-3550 6.7 LOAN-TO-VALUE (LTV) RATIO [7CFR3550.63(b)]

The LTV ratio is the relationship between the amount to be financed, including all leveraged 

loans and grants (where a lien will be taken), and the market value of the security property. The value of 

the property is determined using the appraisal procedures described in Section 5 of Chapter 5. A loan 

may exceed the LTV limitations discussed in Paragraphs 6.7 A. and B. to allow the borrower to finance 

certain allowable excess costs. For any Agency loan, the amount that can be financed in excess of the 

allowable LTV includes the appraisal fee, the tax service fee, homeownership education fee, and the 

initial contribution to the escrow account.

A. Loans for Existing Dwellings (100%LTV)

For existing dwellings, the LTV limitation for a Section 502 loan, plus any other liens on 

the security property, is 100 percent of value plus allowable excess costs.

B. Loans for New Dwellings (90-100%LTV)

For loans on new dwellings, the permitted LTV ratio depends upon whether the applicant 

provides documentation that the construction quality is acceptable to the Agency. If construction 

that meets the Agency standards can be documented, the LTV limitation is 100 percent of value 

plus allowable excess costs.

If construction quality is 

not adequately documented, 

loans for new dwellings are 

limited to 90 percent of the 

market value plus allowable 

excess costs.

The following are 

acceptable documentation of 

construction quality:

• The Agency has 

issued a conditional 

commitment and 

inspected the property,

as described in Section 1 of Chapter 9.

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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

If the allowable LTV is 100%, the maximum loan is $50,740 (the 

appraised value plus allowable excess costs). $1,000 of the closing 

costs must be paid by the borrower in cash.

If the allowable LTV is 90%, the maximum loan is $45,740 (90% of 

the appraised value plus allowable excess costs). $6,000 must be paid

by the borrower in cash.

Purchase Price

Appraisal and Tax servicing 

Closing Costs

$ 400 Costs to Establish Escrow

Example - Maximum Loan Based on Loan to Value Ratios

$50,000 Appraised Value

$51,740 Total Costs Including:

$49,500

$ 340

$ 1,500
HB-1-3550

6-12

Paragraph 6.7 Loan-to-Value (LTV) Ratio [7 CFR 3550.63(b)]

• The dwelling is covered by an insured 10-year warranty plan, as described in RD 

Instruction 1924-A, and there is a certificate of occupancy when issued by the local 

governing agency. In areas where there is no local authority to issue a certificate of 

occupancy or similar document, the State Office will provide appropriate guidelines 

for what will be considered acceptable documentation of a dwelling’s or unit’s livable 

condition.

• The loan will be closed prior to the start of construction so that the Agency can 

monitor the construction following the procedures described in Section 6 of 

Chapter 5.

• The new dwelling is a manufactured home that meets the requirements set forth in 

Section 3 of Chapter 9.

• Applicant provides a complete set of plans and specifications and, to demonstrate that 

the construction was properly inspected, copies of all construction-phase reports 

prepared by a licensed construction inspector. In the case of properties inspected by 

the Federal Housing Administration (FHA) or Veterans Affairs (VA), a certification 

that the dwelling was built in accordance with approved plans and specification may 

be submitted in lieu of construction-phase reports.

C. Subsequent Loans for Necessary Repairs

If necessary to protect the Government's security interest, the Agency may make a 

subsequent loan that causes the total indebtedness to exceed the market value of the property 

and/or the area loan limit. The excess amount cannot exceed the cost of the necessary repairs, 

reasonable closing costs, and allowable excess costs. The Loan Originator should review the 

status of the borrower’s account in LoanServ and coordinate with the Servicing and Asset 

Management Office (Servicing Office) as necessary.

D. Subsequent Loans for Closing CostsOnly

When the Agency makes a subsequent loan to a program borrower for closing costs only 

at the time of the sale of an REO property or a property transfer and assumption, total 

indebtedness may exceed the market value and/or the area loan limit by up to 1 percent, plus 

allowable excess costs.
HB-1-3550

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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Paragraph 6.7 Loan-to-Value (LTV) Ratio [7 CFR 3550.63(b)]

E. Refinanced Loan for Existing Agency Borrower

When the Agency refinances an existing Agency loan, including those refinanced as a 

special servicing action (subject to the availability of funds and Agency priorities) such as at the 

end of a moratorium, the loan may exceed the market value of the property and/or the area loan 

limit only as necessary to cover the borrower's outstanding indebtedness, closing costs associated 

with the new loan, and allowable excess costs. Directives will be provided for usage of this 

option as Agency priorities are determined.

F. Affordable Housing Products

In those cases where a junior lien is a soft, silent or forgivable subordinate affordable 

housing product, the loan to value ratio may exceed the market value provided:

• Agency is in the senior lien position and the Agency loan is fully secured (with 

allowable exceptions for the tax service fee, appraisal fee, homebuyer education, 

and initial escrow for taxes and insurance);

• The junior lien is for an authorized loan purpose identified in § 3550.52; and

• The grant or forgivable affordable housing product comes from a recognized 

grant source such as a Community Development Block Grant or a Home 

Investment Partnerships Program (HOME). 

Only affordable housing products that result in a lien against the property need to be 

considered in evaluating the loan to value ratio. Grants and similar funding that do not result in a 

lien and are not required to be paid back should not be considered in evaluating the loan to value 

ratio.

6.8 REPAYMENT PERIODS [7 CFR 3550.67]

Loans must be scheduled for repayment over a period that does not exceed the useful 

life of the property. The standard maximum loan term for most Section 502 loans is 33 years.
HB-1-3550

Paragraph 6.8 Repayment Periods [7 CFR 3550.67]

6-14

A. Exceptions to the Standard 33-Year Maximum Term

Repayment may be scheduled over a 38-year term for:

• Initial loans, or subsequent loans made in conjunction with an assumption, if the 

applicant’s adjusted income does not exceed 60 percent of the applicable area median 

income and the longer term is necessary to show repayment ability;and

• Subsequent loans not made in conjunction with an assumption, if the borrower’s 

initial loan was for a period of 38 years, the borrower’s adjusted income at the time 

the subsequent loan is approved does not exceed 60 percent of the applicable area 

median income, and the longer term is necessary to show repayment ability.

The repayment period is limited to a maximum of 10 years for loans under $24,000, and 

for unsecured loans as described in Paragraph 5.12 A. Loans under $24,000 should first be 

considered at 10 years; however, a longer term may be used when necessary to show repayment 

ability. Manufactured homes are eligible for a maximum loan term of 30 years.

B. Effect of Repayment Period on Payment Subsidy

Loans may be approved for less than the maximum period. However, before approving a 

loan with a payment term that is less than the maximum period, the Loan Originator should 

consider the effect this may have on any payment subsidy for which the applicant may be 

eligible. Because a shorter loan term could require the Agency to contribute a higher payment 

subsidy, an applicant with an initial loan term of less than 25 years cannot obtain payment 

subsidy. An applicant may receive payment subsidy on a secured subsequent loan with a term of 

less than 25 years if the initial loan had a term of 25 years or more. Section 3 of this chapter 

provides additional information about payment subsidies.

6.9 INTEREST RATES [7 CFR3550.66]

A. Note Rates

The note rate is the interest rate shown in the promissory note. Exhibit B of RD 

Instruction 440.1 provides current interest rates for program and nonprogram loans. For program 

loans, the note rate used for the promissory note must be the lower of the Rural Housing (RH) 

502 very low or low-income limit interest rates in effect at loan approval and obligation of funds 

or at loan closing.
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(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

Paragraph 6.9 Interest Rates [7 CFR 3550.66]

For non-program loans, the non-program rate in effect at loan approval must be used for 

the promissory note. For program and non-program loans, the date the loan was approved must 

be the same date the loan was obligated in LoanServ. 

B. Subsidized Rate

As described in Section 3, borrowers 

who qualify may receive payment subsidies 

based upon a lower interest rate. The 

subsidized rate does not affect the promissory 

note. Instead, a separate agreement is executed 

annually (or more often if the subsidy amount 

changes) to document the amount of payment 

subsidy provided.

6.10 USE OF ASSETS [7 CFR3550.64]

A. Asset Limits

Applicants with assets in excess of established limits must use those assets for a down 

payment or other costs associated with the purchase of the property. Section 2 of Chapter 4 

discusses assets in detail. Applicants may choose to use assets that fall below the established 

limits toward the purchase, even though they are not required to do so.

• Nonelderly applicants must use nonretirement assets in excess of $15,000 toward the 

purchase of the property.

• Elderly applicants must use nonretirement assets in excess of $20,000 toward the 

purchase of the property.

Example - Effect of Interest Rate and Repayment 

Period on Monthly Payments

Loan Amount Loan Term MonthlyPayment

$50,000 @ 7% 33 years $324.05

$50,000 @ 7% 38 years $313.79

$50,000 @ 1% 33 years $148.29

$50,000 @ 1% 38 years $131.84
HB-1-3550

Paragraph 6.10 Use of Assets [7 CFR 3550.64]

B. Eligible Uses of Assets

Eligible uses for excess assets or assets the 

applicant has elected to contribute include making 

payments to:

• Reduce the principal balance;

• Pay architectural, engineering, inspection, 

or testing fees related to new construction 

orrepairs;

• Establish the escrow account for taxes and 

insurance;

• Pay closing costs and related fees;

• Reduce non-housing debts;

• Contribution to a retirement asset;or

• Purchases not considered a net family asset (Exhibit 4-3).

C. Ineligible Uses ofAssets

If an applicant has excess assets, those assets cannot be used for purposes other than 

those listed in Paragraph 6.10 B.

6-16

Required Down Payment

If an applicant was issued a Certificate of Eligibility 

that listed a required down payment and they 

subsequently spend or dispose of those funds for 

ineligible loan purposes and now no longer have assets 

sufficient to cover the required down payment, the Loan 

Approval Official will re-evaluate eligibility at the time 

of approval or denial. If the applicant is no longer 

eligible, the reasons for denial will include Attachment

1-B with appeal rights.
HB-1-3550

SECTION 3: PAYMENT SUBSIDIES [7 CFR 3550.68]

6.11 AN OVERVIEW OF PAYMENTSUBSIDIES

The Agency uses payment subsidies to enhance an applicant’s repayment ability for 

Section 502 loans. UniFi calculates the applicant’s payment subsidy. The sample calculations 

provided in this section are intended to help the Loan Originator understand how the calculation 

works so that it can be explained to the applicant.

A. Three Types of Subsidy

1. Interest Credit

A borrower who initially received subsidy in the form of interest credit can continue 

to do so as long as the borrower remains eligible and continuously receives interest credit 

assistance. Subsequent loans to these borrowers should be subsidized with interest credit. 

Paragraph 6.13 describes the method for calculating subsidies using the interest credit 

method.

2. Payment Assistance Method 1

A borrower currently receiving payment assistance using payment assistance method 

1 will continue to receive it for the initial loan as the borrower is eligible for payment 

assistance method 1. However, if a borrower receiving payment assistance method 1 

receives a subsequent loan, payment assistance method 2 will be used to calculate the 

subsidy for the initial loan and subsequent loan. Paragraph 6.12 B describes the method 

for calculating subsidies using payment assistance method 1.

3. Payment Assistance Method 2

All other eligible applicants will receive payment assistance method 2. This includes: 

applicants who receive new initial loans; borrowers obtaining subsequent loans who 

qualify for payment subsidy, but who are not currently receiving interest credit; and 

applicants who assume loans under new rates and terms. Borrowers who cease to receive 

interest credit or payment assistance method 1 for 6 months or more will receive 

payment assistance method 2 if they subsequently begin to receive payment subsidies. 

Paragraph 6.12 A describes the method for calculating payment assistance method 2.

6-17 (01-23-03) SPECIAL PN 

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

Paragraph 6.11 An Overview of Payment Subsidies

B. Applicant Eligibility

1. Income Eligibility

Applicants who obtain loans on nonprogram terms are not eligible for payment 

subsidies. To be eligible for an initial loan at the time of origination, an applicant must 

be income-eligible for the Section 502 loan -- that is, have adjusted income that does not 

exceed the applicable low-income limit at the time of loan approval and the applicable 

moderate-income limit at the time of loan closing. When an existing Agency loan is 

being refinanced as a special servicing action including, but not limited to, following a 

moratorium, the household’s adjusted income must not exceed the applicable moderate 

income limit for the area at the time of loan approval and closing. Initial approval of 

payment subsidy for borrowers who become eligible after loan closing is the

responsibility of the Servicing Office. A borrower who is receiving payment subsidy 

can continue to receive it, even if their income exceeds the moderate income limit, as 

long as their subsidized rate does not exceed the note rate.

2. Occupancy Requirement

To be eligible to receive a payment subsidy, the applicant must occupy the dwelling

as their principal residence, unless during the term of the loan the Agency determines 

that the dwelling is uninhabitable or that the borrower may be absent temporarily from 

the property for reasons acceptable to the Agency, such as seasonal or migratory 

employment, military call-ups, or hospitalization. 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.).

C. Loan Requirements

1. Loan Term

For an applicant to be eligible for a payment subsidy, initial loans and subsequent 

loans made in conjunction with a new rates and terms assumption must have a term of at 

least 25 years. Borrowers can receive a payment subsidy for a subsequent loan not made 

in conjunction with an assumption with a term of less than 25 years, if the initial loan had 

a term of at least 25 years.

2. Type ofLoan

To receive payment subsidy, the loan must be made on program terms and must be 

secured by a mortgage on the property.

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Paragraph 6.11 An Overview of Payment Subsidies

D. Annual and Interim Reviews

Subsidy agreements are effective for a period not exceeding 24 months. For 

agreements that exceed 12 months, an annual review is conducted by the Servicing 

Office to determine whether the borrower is eligible to continue to receive payment 

subsidies. Annual and interim reviews of borrowers receiving payment subsidies are the 

responsibility of the Servicing Office. Borrowers who receive payment subsidies must 

notify the Agency if any adult household member changes or obtains employment, the 

household composition changes, or if income increases by more than 10 percent. 

Borrowers may report other changes that would result in increased payment subsidies. 

The review period may be different in certain circumstances. Borrowers receiving 

payment assistance via method 1 with adjusted incomes above 80 percent of the 

applicable adjusted median income will pay the Equivalent Interest Rate (EIR) for the 

appropriate income contained in Exhibit 6-4.

1. Self-Employed Applicants

For a self-employed applicant, the initial payment subsidy agreement will run from 

the effective date to 3 months after the end of the applicant’s business fiscal year, but not 

more than a 12-month period. This will allow subsequent agreements to coincide with 

the applicant’s business fiscal year, with a 3-month overlap, to provide sufficient time for 

the applicant to supply verification of the previous year’s income.

2. Unemployed Applicants

For an applicant receiving unemployment benefits, the agreement will be effective for 

the period during which the applicant will receive unemployment benefits, or, if the 

period is unknown, no longer than 6 months. The expiration date of the agreement will 

be established by the Loan Originator.

3.Annual Payment Borrowers

For an applicant currently paying an annual installment who receives a subsequent 

loan, the initial payment subsidy agreement, including the subsequent loan, will be in 

effect until the next January 1st.
HB-1-3550

Paragraph 6.11 An Overview of Payment Subsidies

E. Recapture Requirement

Borrowers are required to repay all or a portion of the payment subsidy received over the 

life of the loan when the title to the property transfers or when the borrower ceases to meet the 

occupancy requirement described in Paragraph 6.11 B. 2. The borrower must sign Form RD 

3550-12, Subsidy Repayment Agreement, at the time of loan closing for existing properties, 

when a construction loan is converted to a permanent loan, or whenever the borrower qualifies 

for payment subsidy for the first time.

The amount to be recaptured is determined by a calculation specified in the borrower’s 

subsidy repayment agreement and is based on the borrower’s equity in the property at the time 

of loan pay off. If there is no equity based on the recapture calculation, the amount of principal 

reduction attributed to subsidy is not collected. The recapture calculation includes the amount 

of principal reduction attributed to subsidy plus the lesser of:

• The amount of subsidy received; or 

• A portion of the value appreciation of the property subject to recapture. In order 

for the value appreciation to be calculated, the borrower will provide a current 

appraisal, including an appraisal for any capital improvements, or arm’s length 

sales contract as evidence of market value upon Agency request. Appraisals must 

meet Agency standards.

6.12 CALCULATINGPAYMENTASSISTANCE

A. Payment Assistance Method 2

The amount of payment assistance granted is the lesser of the difference between:

• The annualized promissory note installments for the combined RHS loan and 

eligible leveraged loans plus the cost of taxes and insurance less 24 percent of the 

borrower’s adjusted income,or

• The annualized promissory note installment for the RHS loan less amount the 

borrower would pay if the loan were amortized at an interest rate of 1percent.

Borrowers receiving payment assistance method 2 must pay the greater of:

• A payment to RHS based on 24 percent of their adjusted annual income lessthe 

amortized payment for the eligible leveraged loan less the cost of taxes and 

insurance; or

• A payment to RHS based on an interest rate of 1 percent plus theamortized 

payment for the eligible leveraged loan plus the cost of taxes and 

insurance.

An eligible leveraged loan is a loan with payments amortized over a period of not less 

than 30 years and an interest rate that does not exceed 3 percent.

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HB-1-3550

Paragraph 6.12 Calculating Payment Assistance

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(01-23-03) SPECIAL PN

Revised (01-06-17) PN 492

B. Payment Assistance Method 1

The amount of payment assistance granted is the difference between the installment due 

at the promissory note rate and the amount the borrower must pay based upon income.

Borrowers receiving payment assistance method 1 must pay the greater of:

• A floor payment calculated as a percentage of adjusted income, less the cost of taxes 

and insurance; or

• The loan payment amortized at the applicableEIR.

Borrowers who receive leveraged loans are not subject to floor payments. Exhibit 6-3 

provides a sample payment assistance method 1 calculation.

1. Establishing the FloorPayment

The floor payment is a minimum percentage of adjusted income that the borrower must 

pay for Principal, Interest, Taxes, and Insurance (PITI).

• Very low-income borrowers must pay a minimum of 22 percent.

• Low-income borrowers with adjusted incomes below 65 percent of the applicable 

adjusted median income must pay a minimum of 24percent.
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Paragraph 6.12 Calculating Payment Assistance

6-22

Exhibit 6-2

Sample Payment Assistance Method 2 Calculation

The Jones family wishes to purchase a home for $90,000. They have been approved for a $60,000 loan from RHS 

and a $30,000 Affordable Leveraged Loan.

The family’s adjusted income is $23,000; monthly taxes and insurance are estimated at $150/month.

(1) Calculate the combined Annual Payment at the Note Rate plus Taxes and Insurance less 24% of the Adjusted 

Annual Income (AAI).

-$460

$166

Insurance (PITI at Note Rate) 

AAI ($23,000 X 24%)

Total Monthly Subsidy

(2) Calculate the annualized RHS note installment lessthe annualized 1% installment.

PAYMENT SUBSIDY WILL BE THE LESSER OF (1) OR (2).

$166 MonthlySubsidy

Calculate Monthly Installment(P&I)

Principal Amount Payment Period Note Rate

RHS Loan $60,000 33 years 6.0%

Affordable Leveraged Loan $30,000 30 years 3.0%

$349 RHS Loan ($60,000 @ 6% for 33years)

$127 Affordable Leveraged Loan ($30,000 @ 3% for 30years)

$150 Estimated Monthly Taxes and Insurance(T&I)

$626 Combined Principal, Interest, Taxes and

$349 RHS Monthly Note Installment

-$178 RHS 1% Payment ($60,000 @ 1% for 33years)

$171 Total Monthly Subsidy

$460 24% of AAI

-$127 Affordable Leverage

-$150 T&I

$183 Total Monthly P&I Installment
HB-1-3550

Paragraph 6.12 Calculating Payment Assistance

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(01-23-03) SPECIAL PN

Revised (01-06-17) PN 492

Exhibit 6-3

Sample Payment Assistance Method 1 Calculation

The Jones family has received payment assistance method 1 on their initial loan since it was approved. They have 

recently been approved for a subsequent loan to make needed repairs.

The following financial information is needed to calculate the payment assistance.

The family’s Adjusted Annual Income is $23,000. The Adjusted Median Income is $36,500.

(1)

(2) Calculate the Floor Payment forPI*

24% Floor payment percentage for applicant @ 63% of median income

$460 Floor payment for PITI* ($23,000 ÷ 12 months x0.24)

$310 Floor payment for PI* ($460 - $150 for taxes andinsurance)

(3) Calculate the Payment at theEIR*

4% EIR* for applicant at 63% of median

(4)

* PI = Principal and Interest.

PITI = Principal, Interest, Taxes,and Insurance 

EIR = Equivalent InterestRate

Principal Amount Repayment Period Note Rate

Initial Loan $60,000 33 Years 7%

Subsequent Loan $30,000 33 Years 6%

$23,000 Adjusted income

63% Percent of adjusted median ($23,000 ÷$36,500)

$150 Monthly taxes and insurance

Calculate the Payment at the Note Rate

$389 Initial Loan payment at the note rate (amortized amount for $60,000 @ 7% for 33 years)

$174 Subsequent Loan payment at the note rate (amortized amount for $30,000 @ 6 % for 33 years)

$563 Total

$273 Initial Loan payment at the EIR (amortized amount for $60,000 @ 4% for 33 years)

$137 Subsequent Loan payment at the EIR (amortized amount for $30,000 @ 4% for 33 years)

$410 Total Payment at EIR

Compute Monthly Payment Assistance

$563 Payment at the note rate (combine initial and subsequent loans)

-$410 Required payment is the greater of (2) or (3)

$153 Monthly payment assistance

Low-income borrowers with adjusted incomes between 65 and 80 percent of the 

applicable adjusted median income must pay a minimum of 26 percent.
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Paragraph 6.12 Calculating Payment Assistance

6-24

2. Calculating the Payment at theEIR

The EIR is determined by comparing the applicant’s adjusted income to the applicable 

adjusted median income for the area in which the security property is located. The payment at 

the EIR is calculated by amortizing the loan using the applicant’s loan amount, the term of the 

loan, and the EIR for which the applicant qualifies. Exhibit 6-4 provides the EIRs to be used.

Exhibit 6-4 

Equivalent Interest Rates

Use the equivalent interest rate for the income range applicable to 

the applicant’s adjusted income.

Adjusted Median 

Income Range

Equivalent 

Interest Rate*

0%-50% 1.0%

50.01%-55% 2.0%

55.01%-60% 3.0%

60.01%-65% 4.0%

65.01%-70% 5.0%

70.01%-75% 6.0%

75.01%-80% 6.5%

80.01%-90% 7.5%

90.01-100% 8.5%

100.01%-110% 9.0%

110.01%-greater 9.5%

* EIR can never exceed the note rate.

6.13 CALCULATING INTEREST CREDIT

The amount of interest credit granted is the difference between the installment due at the 

promissory note rate and the amount the borrower must pay.

• 20 percent of adjusted monthly income, less the cost of taxes and insurance;or

• A loan payment reflecting the loan amount amortized at an interest rate of 1 percent. 

Exhibit 6-5 provides a sample interest credit calculation.
HB-1-3550

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(01-23-03) SPECIAL PN

Revised (01-06-17) PN 492

Paragraph 6.13 Calculating Interest Credit

Exhibit 6-5

Sample Interest Credit Calculation

The Joneses have received an interest credit subsidy on their initial loan since it was 

approved and have recently been approved for a subsequent loan to make needed repairs. 

The terms of the 2 loans are as follows:

Principal Amount Payment Period Note Rate

Initial Loan $60,000 33 years 7.0%

Subsequent Loan $15,000 33 years 6.5%

The family’s adjusted income is $22,000; monthly taxes and insurance are estimated at

$90/month.

(1) Calculate the Annual Payment at the NoteRate

$389 Initial Loan (Amortized amount for $60,000 @ 7% for 33years)

$ 92 Subsequent Loan ($15,000 @ 6.5% for 33years)

$481 Total

(2) Calculate the Minimum Payment for Principal andInterest

$367 Minimum amount for PITI* ($22,000 ÷ 12 months x0.20)

$277 Minimum amount for PI* ($367 -$90)

(3) Calculate the Required Payment at 1 Percent

$222 Monthly payment at the subsidized rate ($75,000 @ 1% for 33years)

(4) Compute Monthly InterestCredit

$481 Monthly payment at the note rate

-$277 Required payment is the greater of (2) or(3)

$204 Monthly paymentsubsidy

* PI = Principal and Interest

PITI = Principal, Interest, Taxes, and Insurance 

EIR = Equivalent Interest Rate
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HB-1-3550

SECTION 4: UNDERWRITING A LOAN FOR A SPECIFIC PROPERTY

6.14 APPROVING A SPECIFIC PROPERTY

Underwriting for a specific property begins after the applicant has been determined 

eligible and submits information about the property.

• Applicants who do not currently own the property must submit an option or

sales contract. The sales contract must specify whether the purchaser or seller 

will be paying for the inspections and certifications.

• Applicants who already own the property must submit evidence of ownership as 

described in Paragraph 5.11, a legal description, and a property survey showing all 

structures on the site.

If the property appears to be acceptable (refer to Paragraph 5.17 B. for additional 

guidance), the Loan Originator requests an appraisal of the property. If the property is not 

acceptable, the Loan Originator must notify the applicant and provide a new Form RD 1944-59, 

Certificate of Eligibility.

6.15 FUNDS AVAILABLE FOR CLOSING

If the applicant must pay for closing costs that cannot be financed, or plans to make a 

down payment to reduce the loan amount, the Loan Originator must obtain complete copies of 

the borrower’s two most recent consecutive bank statements to ensure that the applicant has 

sufficient funds to pay the required costs, or can demonstrate that the funds will be available 

before closing. If additional funds are to be received from an outside source, the Loan Originator 

must ensure that the applicant has completed Form RD 3550-2, Request for Verification of 

Gift/Gift Letter, to certify that the additional funds will not need to be repaid.
HB-1-3550

6.16 CALCULATING THE APPROVABLE LOAN AMOUNT

Once the Loan Originator verifies and enters all applicable applicant information and 

receives the appraisal, then UniFi can be used to determine whether the applicant appears to 

qualify for the needed loan amount, and if not, determine whether there are ways to make the 

loan feasible.

A. Calculating the Approvable Loan at Standard Terms

Once the required information is entered, the worksheet automatically computes the PITI 

and TD ratios, determines whether the applicant is eligible for a payment subsidy and the 

amount, and determines whether the applicant can afford the selected property using standard 

loan terms. If UniFi indicates that the loan can be approved, the Loan Originator should prepare 

the loan approval package, as described in Paragraph 6.17.

B. Working with Applicants Who Do Not Qualify Using StandardTerms

If the applicant cannot be approved for a loan using standard terms, the Loan Originator 

should determine whether any of the adjustments described below are possible. If any of the 

adjustments make the loan feasible, the Loan Originator should prepare the loan approval 

package, as described in Paragraph 6.17.

1. Possible Applicant Actionsto Make aLoan Feasible

The Loan Originator should discuss with the applicant options for enhancing their 

ability to obtain Agency financing including: (1) identifying additional parties to the note;

(2) seeking down payment assistance or other assistance programs to supplement the 

Agency loan; (3) providing an additional down payment to reduce the principal amount 

of the loan; (4) seeking a less expensive dwelling; or (5) obtaining leverage funds with 

terms more favorable than available from the Agency.

2. Possible Agency Actions to Make a Loan Feasible

The Loan Originator should first consider any compensating factors, as described in 

Paragraph 4.24 A., that have not yet been considered and does not result in multiple risk 

layering. The Loan Originator should then recompute the loan using a 38 year term 

provided the applicant’s income qualifies for a 38 year loan.

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Revised (06-02-23) PN 583
6-28

HB-1-3550

Paragraph 6.16 Calculating The Approvable Loan Amount

In the case of a subsequent loan, the Agency may authorize reamortization of the 

initial loan if the borrower cannot reasonably be expected to meet installment payments 

unless the account is reamortized. The Loan Originator should consult with the

Servicing Office to determine whether reamortization is appropriate.

6.17 APPROVINGCREDIT

The results of the underwriting analysis are summarized on UniFi’s Eligibility Summary.

The Eligibility Summary must be signed, dated, and filed in the applicant case file, and must 

reflect the verified applicant and property information at the time of loan underwriting.

If the results of the analysis indicate that the applicant’s loan is feasible, the Loan 

Originator should recommend that it be approved. Before forwarding the case file, the Loan 

Originator should review it to ensure that all documentation required for approval as listed in 

Attachment 3-G is included. The Loan Originator also should reconfirm that the documentation 

in the case file demonstrates that:

• The applicant is eligible, as described in Chapter 4;

• The property is eligible, as described in Chapter 5; and

• The loan is feasible at approvable loan terms, as described in thischapter.

When the Electronic Case File (ECF) is complete, the Loan Originator will inform the 

Loan Approval Official the file is ready for review and decision. Refer to Attachment 3-G for 

guidance on the documentation required prior to loan approval. The Loan Approval Official is 

responsible for all underwriting exceptions within their authority (or obtaining higher level 

authority) and determining loan approval or denial. To ensure adequate separation of duties, the 

Loan Approval Official must be different than the Loan Originator for the subject application.

If a Loan Approval Official’s first year loan delinquency exceeds the national new loan 

delinquency rate, they are required to use the Underwriting, Pre-Closing, and Compliance Tool 

(which can be found in SharePoint) as part of their review and decision of Section 502 loans.

Housing Program Directors are responsible for monitoring the required use of this tool (as well 

as new loan delinquencies), and the National Office will monitor use of the tool as well.
HB-1-3550

Attachment 6-A 

Page 1 of 1 

ATTACHMENT 6-A 

Reserved for Future Agency Use
HB-1-3550

Attachment 6-B 

Page 1 of 8

ATTACHMENT 6-B

LOAN QUALITY REVIEW

Quality loan underwriting ensures that the Agency properly and prudently uses funds and 

contributes to reducing the first- and second-year delinquency rates, when coupled with 

homeownership education.

I. State Office Monitoring

State Offices must periodically conduct quality checks on new loans, as well as on 

withdrawn and rejected applications, for each Field Office to confirm that the Loan Approval 

Official complied with the underwriting standards and procedures. A minimum of one first year 

loan, one withdrawn, and one rejected application, or five percent of loans in each of these 

categories (whichever is greater) will be reviewed for each Loan Approval Official at least 

annually using the questions in item IV. of this attachment. A State Office Summary of these 

reviews (item III. of this attachment) will be submitted to National Office at 

SFHDIRECTPROGRAM@usda.gov for the prior fiscal year no later than December 31st.

States who are scheduled for an Internal Compliance Review (ICR) will not be 

required to complete the 6-B, Loan Quality Review, within the fiscal year in which the ICR is

being conducted.

II. National OfficeMonitoring

The National Office will hold a teleconference with State Offices to discuss their 

submitted review results and actions they have or will take to address noted underwriting 

weaknesses or trends.

(01-23-03) SPECIAL PN

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

Attachment 6-B 

Page 2 of 8

III. State Office Summary

Date:

State:

State’s (current) 1st Year Delinquency Rate:

State’s (current) 2nd Year Delinquency Rate:

Number of Loan Approval Officials:

Number of Loan Originators:

A. Please describe any underwriting and/or post-closing 

reviews or other oversight activities the State Office 

has completed in the last year.

B. Please describe issues or trends that were identified through State Office oversight in the last 

year, and what has been done to resolve them.

C. Please address any issues, trends, or factors you think may be contributing to new loan 

delinquency (first and second year loans) in yourstate.

D. Based on the results of the individual file reviews, list any follow up action needed (e.g. 

training to be provided, action to be taken in an automated system, follow up withthe 

Servicing Office, etc.) and timeframe for completion. Use a continuation sheet if necessary.

Action Item Person Responsible Target Date

Recommended Reports:

• 24 Report

• Summary of Active 

Monthly New Loans (Hyperion

– SFH (rddw)>SFH 

Direct>Loan Servicing>SFHD 

New Loans Drilldown –

Servicing State)

• UniFi State and Field Office 

ManagementReports
HB-1-3550

Attachment 6-B 

Page 3 of 8

IV. State Office LoanReview

Applicant’s/Borrower’s Name: 

Account Number(s): Status:

Reviewer’s Name: 

State:

Obligation Date: Closing Date: Conversion Date (construction advances):

Loan Approval Official(LAO):

LAO’s 1stYear DelinquencyRate: 

Did the LO/LAO ensure Attachment 3-G was fully completed? Yes No 

Rejected Applications

1. If the adverse decision was subject to appeal, was the applicant informed of their informal

administrative review, mediation, and appeal rights, using HB Letter 15 and HB-1-3550, 

Attachment 1-B?

Yes No

2. If the adverse decision was not subject to appeal, was the applicant notified that they 

may request an informal administrative review using HB Letter 15 and HB-1-3550, 

Attachment 1-C?

Yes No

Reviewer to provide brief narrative on the reason(s) the application was rejected and the 

appropriateness of the rejection:

Withdrawn Applications

1. Did the applicant withdraw the application by writing or calling the Field Office?

Yes No

2. Was the application withdrawn by the Field Office because of missinginformation, 

which was requested in Handbook Letter 11, RequestInformation?

Yes No

Reviewer to provide brief narrative on the reason(s) the application was withdrawn and the 

appropriateness of the withdraw:

(01-23-03) SPECIAL PN

Revised (03-19-20) PN 534
HB-1-3550

Attachment 6-B 

Page 4 of 8

When answering the questions below, focus on the documentation at the time of loan closing (or 

the most recent documentation available for rejected or withdrawn applications).

A. Income Eligibility:

Were all income sources:

1. Properly classified (annual and/or repayment)? Yes No

2. Verified using preferred method? Yes No 

If no, identify alternative method(s) used to verify income:

3. Evaluated for stability and dependability? Yes No

Reviewer to provide brief narrative on this issue, including length/stability of employment:

4. Were 

applicable deductions verified? Yes No

If no, reviewer to provide brief narrative on this issue:

5. Reviewer is to perform their own income calculations (annual, adjusted, andrepayment).

Annual Adjusted Repayment

Loan Originator

Reviewer

Difference
HB-1-3550

Attachment 6-B 

Page 5 of 8

(01-23-03) SPECIAL PN 

Revised (03-19-20) PN 534

a. Are the Loan Originator’s income projections within 10 percent of the reviewer’s

income calculations? Yes No

b. Explain any difference between annual and repayment calculations (e.g. non-taxable

income “grossed up” as applicable, different sources of income were used,etc.).

B. Creditworthiness:

1. What was the credit score(s) for the applicant(s)? Applicant:

Co-applicant:

2. Did the applicant(s) have more than one creditscore? Yes No

If no, reviewer to provide brief narrative on this issue, including any non-traditional 

credit verifications that were used:

3. If the applicant’s credit score was under 640, was Form RD 1944-61 used to evaluate the

TMCR? Yes No NA

4. If the applicant’s credit history as reported on the TMCR and third-party verifications

indicated unacceptable credit handling:

i. Were the circumstances properly documented? Yes No NA

Reviewer to provide brief narrative on this issue below: 

ii. Was an allowable exception approved by the Loan Approval Official?

Yes No NA
HB-1-3550

Attachment 6-B 

Page 6 of 8

C. Qualifying Ratios:

1. Were all debts reported on the credit report included in the debt-to-income ratios?

Yes No

If no, which debts were excluded and what kind of documentation was used to support the 

decision?

2. Based on the reviewer’s repayment income calculation as determined above as well as the 

established and verified factors at the time of loan closing (loan amount, monthly taxes and 

insurance, liabilities listed on the TMCR, etc.), were the resulting qualifying ratios within 

the applicable parameters?

Reviewer’s ratio calculations below:

PITI:

Total Debt:

If no, was a compensating factor properly usedand documented? Yes No 

Reviewer to provide brief narrative on this issue below:

3. Was an exception approved by the Loan Approving Official or by a higher-level 

supervisor when required? Yes No NA

If yes, name ofsupervisor (ifapplicable):

4. Did the applicant have payment shock? Yes No

Reviewer calculation below or enter “could not be measured” if applicable:

Payment shock = (Total proposed principal, interest, taxes, and insurance payment after 

subsidy / current housing expense excluding utilities) – 1
(01-23-03) SPECIAL PN

Revised (06-02-23) PN 583

HB-1-3550

Attachment 6-B

Page 7 of 8

If payment shock is more than 100%:

a. Were there other risk layers (adverse credit waivers, use of compensating factors, 

etc.)? Yes No NA

D. Eligible Loan Purposes:

Were Agency funds used for eligible purposes? Yes No 

If no, explain:

E. Property Eligibility Requirements:

1. Was the property located in an eligible area per

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do? Yes No

If a printout from this site is not on file, the reviewer should enter the property address 

into this site.

2. Was the appropriate environmental analysis completed prior to obligation of funds?

Yes No

3. Was there proof of adequate insurance at closing? Yes No

F. Debts vs. Market Value:

Was the total of all debts secured by the property less than or equal to the property’s market 

value as determined by the appraisal, except by allowable excess costs? Yes No

If no, provide explanation below:
HB-1-3550

Attachment 6-B 

Page 8 of 8

G. Post-Closing / Servicing Activity:

1. Has insurance been force-placed after closing? Yes No NA

2. Has the account been approved for a moratorium? Yes No NA

3. If yes, reviewer to provide a brief narrative below (check ECF for moratorium 

documentation):

4. Has the account been accelerated? Yes No

If yes, reviewer to provide brief narrative below (e.g. has borrower indicated a reason 

for the delinquency; how long from closing to acceleration; if account is severely 

delinquent but not yet accelerated, why; etc.)

5. Has the borrower filed for bankruptcy since loan closing? Yes No

If yes, reviewer to provide brief narrative below (e.g. date of filing; was the Agency’s 

debt reaffirmed; etc.)

6. Is the borrowerin foreclosure? Yes No

If yes, reviewer to provide brief narrative below (e.g. date of initial foreclosure action; 

did the borrower attempted to cure the default; etc.)

State Office Summary Comments (Include State Office observations on the soundness of the 

loan, necessary or specific action to be taken as a result of your review, such as training needs 

identified and a plan for providing it):
HB-1-3550

7-1

7.1 INTRODUCTION

Besides loan payments, other costs associated with being a homeowner include real estate 

taxes, hazard and flood insurance premiums, and related costs such as street or water 

assessments. The Agency has an interest in making sure that these costs are paid in order to 

protect the property from tax sale or foreclosure, and to make sure that funds will be available to 

repair the property should it be damaged. 

SECTION 1: ESCROW [7 CFR 3550.60]

7.2 OVERVIEW

To ensure that funds are available to pay for the cost of real estate taxes, insurance 

premiums, and other assessments when they come due, the Agency requires borrowers who 

receive new loans -- whether initial or subsequent -- to deposit monthly funds to an escrow 

account in order to be used to pay the borrower’s tax and insurance bills. These funds are 

included in the borrower’s regular monthly payment. An escrow account must be established at 

loan closing for all loans with a total outstanding indebtedness greater than $15,000 (be it 502, 

504, or combination thereof) except new construction. This is because loan payments are not due 

during construction. Since the exact amount of taxes, insurance premiums and assessments are 

not known in advance, a cushion is established at closing to help ensure that there will be 

sufficient funds available to pay the bills. If the Agency underestimates the amount needed, the 

Agency will advance funds to pay the tax or insurance bill and raise the borrower's escrow 

payments during the following year to repay the amount advanced. If the Agency overestimates 

the funds needed, a refund may be issued if the amount is greater than $50. If the amount of 

overage is less than $50, it will be credited to the next year’s escrow. Annual-pay borrowers are 

exempt from the escrow requirement but are responsible for timely payment of taxes and 

insurance premiums. The Agency will not escrow where the security property is located on a 

farm tract also financed by the Farm Service Agency (FSA), and we are unable to obtain a 

separate tax bill. FSA will be responsible for paying taxes in these situations. The only exception 

to this is for a Section 504 loan over $15,000 on a farm tract (see Paragraph 12.10). 

CHAPTER 7: ESCROW, TAXES, AND INSURANCE

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

7-2

Paragraph 7.2 Overview

The Agency will establish and administer escrow accounts in accordance with the 

Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act and the Truth 

In Lending Act (TRID) and section 501(e) of the Housing Act of 1949, as amended.

The Agency requires most borrowers who receive new loans to escrow funds for taxes 

and insurance. Borrowers are exempt from escrow if they:

• Are current on an annual payment plan;

• Have a leveraged loan and the escrow is maintained by the primary lending 

institution;

• Have received only a Section 504grant;

• Have a Section 504 loan(s) with a total outstanding balance of $15,000 or less, and 

the Agency determines there is no risk to the Government’s security interest in the 

property;

• Assumed a loan on same rates and terms; or

• Have security property which includes a farm and the property is not subdivided 

between the farm and non-farm tract. In these cases, the Agency may still elect to 

require escrow where the housing represents the majority of the value of the security 

property or it is in the Agency’s best interest to require escrow.

The Servicing and Asset Management Office (Servicing Office) is responsible for 

administering the escrow account. However, the Loan Originator is responsible for determining 

the monthly escrow deposit contribution during the first year, ensuring that the appropriate 

amount is collected at closing to establish the escrow account and to educate the borrower about 

what escrow accounts are and how they work.

7.3 ESCROW DEPOSITS

Escrow accounts are funded from 3 sources -- monthly payments, an initial deposit 

required at closing, and funds from the seller to cover taxes accrued prior to closing. Exhibit 7-1 

illustrates the calculation of the initial deposit and monthly escrow payments.
HB-1-3550

7-3

Paragraph 7.3 Escrow Deposits

A. Monthly Payment

The borrower's monthly installment includes not only the amount due for principal and 

interest, but also 1/12 of the anticipated amount required for taxes, insurance, other assessments 

for the year, plus a cushion as authorized by TRID.

B. Borrower’s Initial Deposit to the Escrow Account

Over the course of a year the borrower's monthly payments should provide the amount 

needed to pay all tax, insurance (including flood insurance as applicable), and other assessment 

bills. However, the timing of the payments may be such that a bill comes due before the 

borrower has made sufficient payments to cover the cost. To avoid this problem, the borrower is 

required to make an initial deposit to the escrow account that is large enough to ensure that all 

anticipated payments can be met when they come due, but that at its low point the account 

contains no more than the equivalent of 2 monthly escrow payments.

C. Seller’s Tax Liability

Taxes must be prorated between the buyer and the seller. To ensure that funds from the 

seller’s pro rata share of the taxes are available to pay the taxes when they come due, funds are 

collected at closing to pay the borrower’s closing costs or initial escrow deposit. Prorated tax 

funds may not be paid to the applicant/borrower other than for reimbursement of certain items 

paid by the applicant outside of closing. See Paragraph 8.6 F for additional guidance.

7.4 CALCULATING ESCROWAMOUNTS

The Loan Originator must provide UniFi with tax and insurance figures that are then used 

to estimate the maximum loan amount, to determine the amount of loan funds to obligate, and to 

establish monthly payments and the initial deposit to the escrow account.

Although tax and insurance information used early in the process will be based on rough 

estimates, the Loan Originator should make every effort to obtain accurate information about 

historic and future costs so that later entries will be as accurate as possible. For construction 

loans, when calculating the escrow payment for closing, the Field Office is to use the amount 

needed to cover the real estate taxes for the upcoming 12 months. The Loan Originator must 

consider that there may be a re-assessment of the real estate taxes upon the completion of the 

dwelling and the escrow calculations will be made accordingly.

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

7-4

Paragraph 7.4 Calculating Escrow Amounts

Exhibit 7-1 

Escrow Account Funding

The initial escrow balance and the escrow payment amount are calculated in accordance with TRID and any other 

associated regulation. UniFi prepares Form RD 3550-9, Initial Escrow Account Disclosure Statement, described in 

Paragraph 7.5. The following example is intended to show how escrow accounts are funded each year.

Assumptions: 

(1) The loan closing occurs on April 12, 2020 with the first payment due May 12, 2020

(2) Taxes of $753 are paid in July andDecember

(3) Hazard insurance of $1,228.00 is paid in March

(4) The Agency requires a minimum balance equal to 2 months of payments

Monthly Payment Calculation: 

$ 753.00

$ 753.00

$1,228.00

$2,734.00 Total anticipated escrow disbursements divided by 12 equals

$ 227.83 per month escrow payment

Month Payments to Escrow Disbursements Balance

Loan Closing $683.53 $ 0.00

$ 0.00

$ 0.00

$ 753.00

$ 0.00

$ 0.00

$ 0.00

$ 0.00

$ 753.00

$ 0.00

$ 0.00

$1,228.00

$ 0.00

$ 683.53

$ 911.36

$1,139.19

$ 614.02

$ 841.85

$1,069.68

$1,297.51

$1,525.34

$1,000.17

$1,228.00

$1,455.83

$ 455.66

$ 683.49

The borrower will be required to pay $227.83 per month and will also be required to fund the escrow account 

at closing in the amount of $683.53. Part of the tax payment component of the initial escrow deposit will be 

contributed by the seller for the period from January 1st to the closing on April 12th.

According to TRID, the lending institution may at some time during the year achieve an escrow balance that does 

not exceed 2 monthly escrow payments. In this example the balance equal to 2 monthly payments ($455.66), occurs 

in March after the payment for hazard insurance.

The Servicing Office is required to perform an escrow analysis within 12 months of the first payment and every 

year thereafter. The actual running escrow balance from the prior year will become the basis for projecting the 

necessary escrow payment for the next year. The low point achieved will be compared to the projected minimum of

$455.66. If the low point is below $455.66, the loan will be deemed to have a shortage. If the low point is greater 

than $50, the loan will have a surplus, which will be refunded to the borrower. If the surplus is less than $50, the 

amount will be credited to the next year’s escrow.

May $227.83

June $227.83

July $227.83

August $227.83

September $227.83

October $227.83

November $227.83

December $227.83

January $227.83

February $227.83

March $227.83

April $227.83
HB-1-3550

7-5

7.5 CLOSING

The Closing Agent/Attorney will use the Closing Disclosure to prorate real estate taxes 

for the current year between the seller and the buyer.

Form RD 3550-9, Initial Escrow Account Disclosure Statement, will be completed by 

the Loan Originator and sent to the Closing Agent/Attorney at loan closing. 

The Closing Agent/Attorney will collect the escrow funds at closing, and in most cases 

will provide them to the Servicing Office along with the closing documents. If real estate taxes 

are due within 60 days of the date of closing, the Closing Agent/Attorney should pay the real 

estate taxes and provide the remaining amount to the Servicing Office. 

7.6 CONSTRUCTION LOANS

During the construction period, borrowers must be counseled that they are responsible for 

payment of taxes which come due since loan payments are not due during the construction 

period. The borrower is also responsible for the initial escrow deposit when construction is 

complete. Field Staff should complete Attachment 7-A to determine the borrower’s full tax and 

insurance needs during the construction period. Funds for the payment of taxes during 

construction, and for the initial escrow deposit which includes both taxes and insurance, can be 

handled by one of the following two methods. 

• One method would be to include any taxes that must be paid during construction and 

the initial escrow deposit in the loan amount. This option is at the discretion of the 

applicant, and is subject to loan underwriting standards. If this option is used, the 

applicant must be counseled that they are responsible for delivering the tax bill to the 

Field Staff so a loan check can be requested to pay the taxes. The applicant is 

responsible to follow-up with Field Staff, or the taxing authority, to ensure their tax 

payments were paid on time. If the initial escrow deposit was included in the loan, 

the applicant must also be counseled that they are responsible for funding any 

shortages. This may occur if the construction is delayed.

• The other method would be for the applicant to pay any taxes which come due during 

construction with personal funds while saving funds to make the initial escrow 

deposit at the end of the construction period. Should an applicant choose this option, 

they must be counseled to pay the tax bills when due and provide a copy to the Field 

Office. The applicant must also be counseled on how much will be required at the 

end of the construction period to adequately fund the initial escrow deposit. 

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

7-6

Paragraph 7.6 Construction Loans

Insurance is paid for one year in advance by loan closing. Therefore, an insurance bill 

should not come due during the construction period. If a bill does come due during construction, 

the borrower is responsible to pay the full annual premium. If the borrower does not pay tax 

bills or insurance bills which become due during construction, or there are insufficient funds to 

establish the escrow account when the loan is converted, the Field Office will cue the Servicing 

Office and provide the estimated amount of shortage, and the facts in the case. The Servicing 

Office will generally increase the monthly payments scheduled for the remainder of the escrow 

cycle to compensate for any shortage. The Servicing Office may also elect to charge the 

borrower’s account for the shortage and reamortize the loan.

7.7 SERVICING ESCROWACCOUNTS

The Servicing Office will handle ongoing actions related to escrow accounts, including 

collecting monthly payments, depositing funds into the escrow account, and handling all tax and 

insurance payments. The Servicing Office will conduct the annual escrow account analysis and 

send annual escrow disclosure statements to borrowers to give an escrow account history for the 

past year, including any differences between what was estimated and what was actually 

disbursed.
HB-1-3550

7-7

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

SECTION 2: TAXES

7.8 ESTIMATING THE AMOUNT OFTAXES

The Loan Originator can gather tax information from several sources. For existing 

properties, the Loan Originator can contact the real estate agent, the seller, and/or the local taxing 

authority to determine current taxes and whether any reassessment or tax rate increase is 

anticipated.

It will be more difficult for the Loan Originator to estimate taxes when dealing with 

planned new construction or a newly constructed property that has not yet been assessed. To 

make this estimate, the Loan Originator will use comparable existing residential property values 

in the market area for the first year, in order to prevent significant increases in the second year 

escrow payment as a result of the increase in property value to make this estimate. Any prorated 

amount of taxes to be paid by the seller should be based on the current assessment, even if it is 

not recent and does not reflect the actual value of the house.

7.9 TAX SERVICE FEE

Each new borrower will be charged a one-time tax service fee at the time of loan closing. 

The fee covers the cost of a tax monitoring service to track tax payments due, determine the most 

advantageous time to pay them, and arrange for payment of the taxes to be disbursed from the 

borrower’s escrow account. State Directors are responsible for determining the tax exempt status 

of Native American reservation, tribal, and trust land and notifying those Field Offices which are 

affected. If the land is tax exempt, meaning no real estate taxes are assessed or charged, then a 

tax service fee will not be collected. Individual plots that are typically owned in fee simple are 

generally subject to taxation and a tax service fee will be collected. Borrowers who are

obtaining a subsequent loan will not pay a second tax service fee. Refer to the tax service fee 

schedule shown in Attachment 7-B to determine the fee charged for new loans and new rates and 

terms assumptions.

7.10 TAX INFORMATION SHEET

At closing, the Loan Approval Official or Designee will review, update, and return a 

copy of the completed Form RD 3550-15, Tax Information, to the Closing Agent/Attorney with 

other closing documents. Form RD 3550-15 should list all of the local taxing authorities to 

which taxes are due, the amounts, the due dates, the parcel identification number, and a legal 

description of the property. All of this information is needed to allow the Servicing Office to 

manage the escrow account effectively and to protect the borrower from a shortage in their 

escrow account.
SECTION 3: INSURANCE [7 CFR 3550.61]

7.11 OVERVIEW

The borrower is responsible for obtaining and continuously maintaining insurance on 

the security property until the loan is paid in full. The applicant will learn about the 

Agency’s requirements and borrower’s responsibilities regarding insurance during applicant 

orientation.

After the loan is closed, the Servicing Office is responsible for handling most insurance issues.

The Field Office is likely to become involved only if the Servicing Office requests 

assistance to determine whether adequate repairs have been made to a property for which 

an insurance claim has been paid.

7.12 TYPES OF INSURANCE

A. Hazard Insurance

Most borrowers are required to 

maintain hazard insurance to protect the 

property against fire and weatherrelated damage (these policies may also 

be called “Fire and Extended 

Coverage,” “Homeowner’s,” “All 

Physical Loss,” or “Broad Form” 

policies). Hazard insurance is not 

required if the total outstanding Agency 

debt and any senior liens against the 

property are equal to or less than 

$15,000.

B. Flood Insurance

Flood insurance is required when any form of federal financial assistance which is intended 

in whole or in part for the acquisition, construction, reconstruction or substantial 

improvement of any building located in a Special Flood Hazard Area (SFHA), as identified 

by the National Flood Insurance Program (NFIP), administered by the Federal Emergency 

Management Agency (FEMA) and described in RD Instruction 426.2. 

Substantial improvement means any reconstruction, rehabilitation, addition, or other 

improvement of a structure, the cost of which equals or exceeds 50 percent of the market 

value of the structure (a) before the start of construction of the improvement, or (b) if the 

structure has been damaged and is being restored, before the damage occurred.

7-8 

Master Policies

A master policy is one containing substantially the same 

standard provisions adopted or recommended by legislative 

action or by order of the State’s insurance authority and 

ensures that the policy meets State requirements. The Loan 

Originator should require a master policy, unless State statutes 

exempt the company from the regulations requiring its use. In 

order for a company’s policy to be approved by the Agency, it 

must submit a copy of the master policy and all attachments to 

the State Office for review and approval.

In States without master policies, Field Staff will ensure that 

policies meet the requirements of Attachment 7-C.

Many State Directors issue State Supplements to help Field 

Staff identify acceptable insurance policies.
HB-1-3550

7-9

(01-23-03) SPECIAL PN

Revised (07-16-20) PN 538

Paragraph 7.12 Types of Insurance

1. How to determine substantial improvement.

When improvements to a building are proposed, the cost of the improvement must 

include all labor and materials necessary to perform the work. The market value of the 

structure is the market value before the improvements are performed.

2. How to determine the market value of a building.

The requirements outlined in Chapter 5 must be followed when determining if an 

appraisal of market value prepared by a qualified professional is needed. 

If an appraisal is not required, there are three methods that can be used to estimate the 

market value for the substantial improvement threshold: 

• Property assessment values determined by a local taxing authority. The assessor’s 

office should provide an adjustment factor that, when applied to assessed value, 

yields the “adjusted assessed value”.

• The actual cash value or replacement cost value, including depreciation for 

physical conditions. 

• “Qualified estimates” based on the professional judgment of a local official.

Substantial Improvement Example:

$83,170 – market value prior to improvements

RD 504 loan funds: $10,500 

RD 504 grant funds: $7,500

Total costs of improvements: $18,000

$18,000 = .22 (22 percent)

$83,170

The total cost of improvements does not equal or exceed 50 percent of the market 

value prior to the start of improvements; therefore, flood insurance is not required. 
7-10

HB-1-3550

Paragraph 7.12 Types of Insurance

3. Special Flood Hazard Area (SFHA)

FEMA’s Standard Flood Hazard Determination Form (SFHDF) determines if the home is 

located in a Special Flood Hazard Area (SFHA) and states the availability of flood 

insurance based on whether the community participates in the National Flood Insurance 

Program (NFIP).

The Loan Originator will be responsible for acquiring the SFHDF from CoreLogic Flood 

Services at: https://www.floodcert.com/.

Existing dwellings located in a SFHA are eligible for federal financial assistance if flood 

insurance is available for the community. The flood insurance can be through NFIP or 

under NFIP’s “write your own” program where the policy is through a private insurance 

that meets the requirements of 42 USC 4012a (b)(1)(A). 

Flood insurance must be obtained and maintained throughout the life of the loan when any 

portion of a home is located in a SFHA, including attached garages, decks and carports, etc. 

Flood insurance is not required for any additional structure that is located on the property 

but is detached from the home (such as detached shed, garage, or other ancillary structure). 

Flood insurance is not required if the financial assistance is less than the substantial 

improvement threshold. If the financial assistance is to make minor repairs, the Agency 

must perform step 8 of the eight-step decision making process to evaluate the proposed 

impacts when providing federal funding to a property in a floodplain. 

If the home is in a SFHA and flood insurance is required, the Loan Originator should notify 

the applicant using Form RD 3550-6, Notice of Special Flood Hazards, Flood Insurance 

Purchase Requirements, and Availability of Federal Disaster Relief Assistance; and obtain 

the FEMA Elevation Certificate. The applicant must sign and return Form RD 3550-6 at or 

before loan closing. 

C. Builder’s Risk Policies

A builder’s risk policy is acceptable while the dwelling is under construction as long as it meets 

the Agency’s requirements. An acceptable policy either: (1) names the borrower as the insured; 

or (2) contains a builder’s risk endorsement for a policy issued to the borrower. A policy 

issued only to a contractor is not an acceptable substitute for the property insurance a borrower 

is required to provide. A builder’s risk policy should automatically convert to full coverage 

when the dwelling is completed. Otherwise, acceptable insurance must be obtained to coincide 

with the expiration of the builder’s risk provisions of the policy. 
HB-1-3550

7-11

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

7.13 EVIDENCE OF INSURANCE

For loans secured by a first lien, the applicant must provide the original policy or 

declaration page, and evidence that 1 full year’s premium has been paid before or at the time 

of closing. For loans secured by other than a first lien, a copy of the policy or declaration 

page, or other evidence of insurance, is acceptable. The applicant may submit a written 

binder in lieu of the policy or declaration page, as long as the policy will be submitted to the 

Servicing Office within 60 days of closing. Existing borrowers already on escrow 

submitting an application for a subsequent loan are not required to provide evidence of a full 

years paid premium. 

7.14 AUTHORIZED INSURANCEPROVIDERS

Borrowers must purchase their policies from approved insurance companies licensed 

to do business in the State where the property is located. If the required insurance is not 

available at comparable rates from a State-licensed insurance company, the Loan Originator 

may accept insurance from another company if: 

• The Office of General Counsel (OGC) confirms that policies issued by the 

company are enforceable despite the fact that the company is not licensed to 

conduct business in the State, and the company is a legal entity that may be sued 

in the State where the property is located; and

• The State Director determines that the company is reputable and financially sound, 

based on the company’s financial statements, industry rating standards, or 

information available from the State insurance authority, or other lending 

institutions.

7.15 REVIEWING INSURANCEPOLICIES

The borrower must submit evidence of insurance to the closing agent before or at the 

time of closing. The closing agent will review the policy, declaration page, or binder to ensure 

that it meets the requirements outlined in Attachment 7-C. If it is acceptable, the evidence of 

coverage should be kept in the borrower’s case file after closing. If the borrower’s policy or 

evidence is insufficient, the closing agent should explain why it is not acceptable (for example, 

there is not an adequate amount of coverage, it is not in the correct name, or the premium has not 

been paid). The closing will be postponed until suitable evidence has been provided to the 

closing agent. 
ATTACHMENT 7-A 

HB-1-3550

Attachment 7-A 

Page 1 of 4

CALCULATION OF ESTIMATED TAXES DUE THROUGH CONSTRUCTION 

PERIOD AND INITIAL ESCROW DEPOSIT

Date Prepared: 

Customer Name: 

Loan Amount: $ 

County/Parish:

Loan Closing Date: 

Number of Months in Annual Insurance

Construction Period: Premium Amount: $

Estimated Real Estate Annual Real Estate

Taxes (Lot Only): $ Taxes (As Improved): $ 

STEP 1 

STEP 2 

Estimate the taxes and insurance costs over the next 12 months:

Taxes $ divided by 12 = $ monthly 

Insurance $ divided by 12 = $ monthly

TOTAL Estimated Monthly Escrow $ (STEP 1)

Estimate the actual tax bills that will come due during the construction period.

STEP 3

Due: Due: 

Due: 

Amount $

Amount $

Amount $ 

Total Taxes Due During Construction $ (STEP 2)

STEP 4 

Estimate the two month cushion by taking the monthly escrow calculated in STEP 1 and 

multiplying it by two.

Estimated Monthly Escrow (from STEP1) $ x 2 = $ (STEP 3)

Estimate the initial escrow deposit for property insurance by taking the annual premium, 

dividing by 12, and then multiplying the result by the number of months for construction.

Monthly Insurance $ 

STEP 5

x (# of months to construct) = $ (STEP 4)

STEP 6 

STEP 7 

Estimate the initial escrow deposit for taxes by taking the annual taxes due, dividing by 

12, multiplying the result by the number of months for construction, and then subtracting 

the amount estimated in STEP 2.

Monthly Taxes $ x (# of months to construct) = $ 

minus $ (result of STEP 2) = Total (enter “0” if negative) $ (STEP 5)

Estimate the borrower’s total financial needs for taxes and insurance by adding the results

of STEPS 2 through 5 = GRAND TOTAL $ (STEP 6)

NOTE: The “GRAND TOTAL” is the amount of taxes due during the construction period 

plus the initial escrow deposit.

Estimate the initial escrow deposit by adding the results of STEPS 3, 4, and 5 = 

TOTAL ESTIMATED INITIALESCROW DEPOSIT $ (STEP 7)

For borrowers who so elect, and subject to loan underwriting requirements, the Grand Total (STEP 6) may be included in the 

loan amount. The taxes due in STEP 2 will be paid during the construction period from loan proceeds. The estimated initial 

escrow deposit will be forwarded to the Servicing Office when construction is complete, and the loan is converted to an active 

account. If STEP 6 is not included in the loan amount, the borrower must be counseled to save this amount during the 

construction period and pay taxes when due.

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

Attachment 7-A 

Page 2 of 4

CASE STUDY #1

Susan Smith has been selected to participate in the Self-Help housing program. She will be borrowing

$75,000. The construction period is estimated to be 11 months, and loan closing is May 1, 1998. Real 

estate taxes are paid twice a year - on June 30 and December 30. Taxes on the lot are $240 per year and 

are estimated to be $1,200 when the house is complete. The local county will reassess taxes on the 

completed house at an undetermined time after the Certificate of Occupancy is issued and the first full tax 

bill will be issued at the beginning of next full tax cycle. Annual insurance is estimated at $360. 

See Page 3 of 4 for the results.

CASE STUDY #2

Tony Williams is a mason and owns his own lot. He obtained a building permit several months ago and 

has recently constructed a full foundation on his site. Mr. William’s loan for $55,000 was just approved 

and loan closing scheduled for July 1, 1998. The local county will reassess taxes each October, and taxes 

are due January 1 and July 1. The taxes are currently $360 per year on the site (including the foundation), 

and are estimated to be $1800 when the house is complete. Construction will take approximately 60 days. 

Since construction will be completed prior to October (tax assessment time) the January 1 tax bill will 

reflect the full tax assessment. Annual insurance is $600 per year.

See Page 4 of 4 for the results.
HB-1-3550

ATTACHMENT 7-A 

Attachment 7-A 

Page 3 of 4 

CALCULATION OF ESTIMATED TAXES DUE THROUGH CONSTRUCTION 

PERIOD AND INITIAL ESCROW DEPOSIT

Date Prepared : 4/1/98

Customer Name: Susan Smith County/Parish: Carolina

Loan Amount: $ 75,000 Loan Closing Date: 5/1/98

Number of Months in Annual Insurance

Construction Period: 11 Premium Amount: $ 360

Estimated Real Estate Annual Real Estate

Taxes (Lot Only): $ 240 Taxes (As Improved) $ 1,200

STEP 1 

STEP 2 

Estimate the taxes and insurance costs over the next 12 months: 

Taxes $ 240 divided by 12 = $ 20 monthly

Insurance $ 360 divided by 12 = $ 30 monthly

TOTAL Estimated Monthly Escrow $ 50 (STEP 1)

Estimate the actual tax bills that will come due during the construction period.

Due: 6/30/98 Amount $ 120

Due: 12/30/98 Amount $ 120 

Due: Amount $ 

STEP 3 

Total Taxes Due During Construction $ 240 (STEP 2)

Estimate the two month cushion by taking the monthly escrow calculated in STEP 1 and 

multiplying it by two.

STEP 4 

STEP 5 

STEP 6 

STEP 7 

Estimated Monthly Escrow (from STEP 1) $50 x 2 = $ 100 (STEP 3)

Estimate the initial escrow deposit for property insurance by taking the annual premium, 

dividing by 12, and then multiplying the result by the number of months for construction . 

Monthly Insurance $ 30 x 11 (# of months to construct) = $ 330 (STEP 4)

Estimate the initial escrow deposit for taxes by taking the annual taxes due, dividing by 

12, multiplying the result by the number of months for construction, and then subtracting 

the amount estimated in STEP 2.

Monthly Taxes $ 20 x 11 (# of months to construct) = $ 220

minus $ 240 (result of STEP 2) = # -20 Total (enter “0” if negative) $ 0 (STEP 5)

Estimate the borrower’s total financial needs for taxes and insurance by adding the results

of STEPS 2 through 5 = GRAND TOTAL $ 670 (STEP 6)

NOTE: The “GRAND TOTAL” is the amount of taxes due during the construction period 

plus the initial escrow deposit.

Estimate the initial escrow deposit by adding the results of STEPS 3, 4, and 5 = 

TOTAL ESTIMATED INITIAL ESCROW DEPOSIT $ 430 (STEP 7)

For borrowers who so elect, and subject to loan underwriting requirements, the Grand Total (STEP 6) may be included in the 

loan amount. The taxes due in STEP 2 will be paid during the construction period from loan proceeds. The estimated initial 

escrow deposit will be forwarded to the Servicing Office when construction is complete, and the loan is converted to an active 

account. If STEP 6 is not included in the loan amount, the borrower must be counseled to save this amount during the 

construction period and pay taxes when due.

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

Attachment 7-A 

Page 4 of 4

ATTACHMENT 7-A 

CALCULATION OF ESTIMATED TAXES DUE THROUGH CONSTRUCTION 

PERIOD AND INITIAL ESCROW DEPOSIT

Date Prepared: 6/98

Customer Name: Tony Williams County/Parish: South

Loan Amount: $ 55,000 Loan Closing Date: July 1, 1998

Number of Months in Annual Insurance

Construction Period: 2 Premium Amount: $ 600

Estimated Real Estate Annual Real Estate

Taxes (Lot Only): $ 360 (includes existing foundation) Taxes(AsImproved) $ 1,800 

STEP 1 

STEP 2 

STEP 3 

Estimate the taxes and insurance costs over the next 12 months:

Taxes $ 1,800 divided by 12 = $ 150 monthly (Note: Full taxes were used since next 

Insurance $ 600 divided by 12 = $ 50 monthly tax bill will reflect a completed

house)

TOTAL Estimated Monthly Escrow $ 200 (STEP 1)

Estimate the actual tax bills that will come due during the construction period. The first bill may 

be able to be reduced by the amount of any prorated taxes collected from the seller at closing.

Due: 7/1/98 Amount $ 180 *(Note: Being paid at loan closing 7/1/98) 

Due: Amount $ 

Due: Amount $ 

Total Taxes Due During Construction $ 0 * (STEP 2)

Estimate the two month cushion by taking the monthly escrow calculated in STEP 1 and 

multiplying it by two.

STEP 4 

STEP 5 

STEP 6 

STEP 7 

Estimated Monthly Escrow (from STEP 1) $ 200 x 2 = $ 400 (STEP 3)

Estimate the initial escrow deposit for property insurance by taking the annual premium, 

dividing by 12, and then multiplying the result by the number of months for construction . 

Monthly Insurance $ 50 x 2 (# of months to construct) = $ 100 (STEP 4)

Estimate the initial escrow deposit for taxes by taking the annual taxes due, dividing by 

12, multiplying the result by the number of months for construction, and then subtracting 

the amount estimated in STEP 2.

Monthly Taxes $ 150 x 2 (# of months to construct) = $ 300

minus $ 0 (result of STEP 2) = Total (enter “0” if negative) $ 300 (STEP 5)

Estimate the borrower’s total financial needs for taxes and insurance by adding the results

of STEPS 2 through 5 = GRAND TOTAL $ 800 (STEP 6)

NOTE: The “GRAND TOTAL” is the amount of taxes due during the construction period 

plus the initial escrow deposit.

Estimate the initial escrow deposit by adding the results of STEPS 3, 4, and 5 = 

TOTAL ESTIMATED INITIAL ESCROW DEPOSIT $ 800 (STEP 7)

For borrowers who so elect, and subject to loan underwriting requirements, the Grand Total (STEP 6) may be included in the 

loan amount. The taxes due in STEP 2 will be paid during the construction period from loan proceeds. The estimated initial 

escrow deposit will be forwarded to the Servicing Office when construction is complete, and the loan is converted to an active 

account. If STEP 6 is not included in the loan amount, the borrower must be counseled to save this amount during the 

construction period and pay taxes when due.

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

ATTACHMENT 7-B 

TAX SERVICE FEE

Attachment 7-B 

Page 1 of 1 

Loan Transaction Tax Service Fee Charged

INITIAL 502 LOAN greater than $7,500

CREDIT SALE WITH OR WITHOUT A SUBSEQUENT

LOAN same as initial 502 loan

504 LOANS if the total outstanding indebtedness is greater than

$15,000 and taxes & insurance are not escrowed through another 

lender

**

**

**

NEW RATES AND TERMS ASSUMPTION WITH OR

WITHOUT SUBSEQUENT LOAN. (NOTE: if financing an 

existing Agency loan with new loan funds, the applicable New 

Loans Tax Service Fee listed below is used, rather than the $10 

fee shown here.)

New Borrower pays $10 regardless of what previous borrower 

paid. No additional charges apply.

$10

SAME RATES AND TERMS ASSUMPTION $0

SUBSEQUENT LOAN if greater than $15,000 and borrower does

not have an established escrow account. **

If borrower has an existing escrow account. $0

** New Loans Approved

September 30, 2023 – September 29, 2024

September 30, 2024 – September 29, 2025

September 30, 2025 – September 29, 2026

September 30, 2026 – September 29, 2027

September 30, 2027 – September 29, 2028

$80.00

$82.00

$84.05

$86.15

$88.31

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

Attachment 7-C

Page 1 of 3

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

ATTACHMENT 7-C 

INSURANCE POLICY REQUIREMENTS

A. Loss or Damage Covered

Hazard insurance policies must insure buildings against loss or damage by fire, lightning, 

windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, and smoke. The flood 

insurance, if applicable, must cover any damage due to flooding conditions.

B. Amount

The Loan Originator must require borrowers with a total indebtedness of more than

$15,000 to obtain hazard insurance to cover the dwelling and any other essential buildings (such 

as a garage). The minimum required hazard insurance coverage is the lesser of the insurable 

value (i.e. the cost to restore the property back to its state prior to a loss) of the dwelling and 

other essential buildings, or the outstanding principal balance of the loan. Although the lesser of 

these two amounts is required, the Loan Originator should encourage the borrower to obtain 

hazard insurance coverage in the amount greater of the insurable value of the dwelling and other 

essential buildings, or the outstanding principal balance of the loan.

Flood insurance must cover the lesser of the outstanding principal balance of the loan or 

the maximum amount of coverage allowed under FEMA’s National Flood Insurance Program 

(NFIP).

The policy must state whether or not the building is on a leasehold. State Supplements 

provide guidance on specific State insurance requirements pertaining to leasehold interests.

C. Borrower’s Deductible

The borrower’s deductible may not exceed the generally accepted minimums based on 

current industry standards and local market conditions. Typically, the borrower’s deductible will 

not exceed the higher of 1 percent of the face value of the policy or $1,000 unless State law 

requires a higher maximum deductible amount. In areas where such deductibles are not 

reasonably available due to local market conditions, i.e. areas on coastal lines or prone to high 

winds, State Supplements will be issued with prior National Office approval to provide guidance 

for current market deductibles. The supplemental guidance must identify the specific areas, the 

associated amount and the detailed justification for each area in the State that is authorized for 

higher deductibles. For flood insurance, these deductibles apply unless the insurance carrier 

requires a higher deductible amount.

D. Term

The policy must have a term of at least 1 year, with evidence that 1 year’s premium has 

been paid prior to or at closing.
HB-1-3550

Attachment 7-C 

Page 2 of 3

E. Effective Date

If there are insurable buildings on the property (as opposed to vacant land to be built upon), 

the policy must be in force at the time the loan is closed. When a dwelling is to be constructed, 

the insurance coverage must be effective as of the date the materials are delivered to the 

property. No payments from loan funds for labor or materials can be made unless insurance 

coverage is in place.

F. Construction Specifications and Use Conditions

If the insurance policy specifies certain standards of construction or prescribes certain uses 

of the property, the policy will be acceptable only if the property meets the specifications or 

conditions.

G. Names and Location

The policy must include the legal names of all parties being insured. It also must contain a 

description of the property’s location, although a legal metes and bounds description is not 

required.

H. Mortgagee Clause

A mortgagee clause ensures that the Agency will be reimbursed in the event of a loss by 

identifying the Agency as the secured party on the lien (the “mortgagee”). The standard 

mortgagee clause adopted by the State must be attached to or printed in the policy, and must 

identify the Agency as the mortgagee. Specifically, the Agency must be identified as the 

“United States of America, acting through the Rural Housing Service or its successor agency.” 

The Agency, and all other mortgagees whose interests are insured under the policy, must be 

shown in either the mortgagee clause or on the declaration page in the order of priority of their 

mortgages. The address should be:

USDA, Rural Development 

Servicing Office

Attn: Insurance Department

P.O. Box 66876

St. Louis, Missouri 63166

Whenever a new mortgagee clause is issued after the policy has been in force, the new 

mortgagee clause must be signed by an authorized agent or officer of the company that issued the 

policy.
HB-1-3550

Attachment 7-C

Page 3 of 3

(01-23-03) SPECIAL PN

Revised (07-16-20) PN 538

When an approved mortgagee clause is not printed in the policy, a “loss payable clause,” 

which lists all the parties that would receive payment in case of a loss, is acceptable, provided 

the Agency will receive payment in case of loss, even in circumstances in which the company 

would not be liable to the borrower. The closing agent must verify that an authorized official of 

the insurance company has sent a signed letter to the State Director stating that all insurance 

policies issued by the company in the State incorporate all the provisions of the standard 

mortgagee clause and that the Agency is named in the loss payable clause (a State Supplement 

will be issued offering guidance on the requirements of this letter and can be found in 

Appendix 7).
HB-1-3550

8.1 INTRODUCTION

Once the Loan Originator has completed all of the procedures described in Chapters 3 

through 7 and has decided based on the qualifications of the applicant, the characteristics of the 

property, and the results of the underwriting analysis that the loan should be made, the case file 

is submitted to the Loan Approval Official for final review and approval. Section 1 of this 

chapter describes the procedures used to notify the applicant of the Loan Approval Official’s 

decision and to obligate loan funds, if appropriate. Section 2 describes the steps the Loan 

Originator and the closing agent must take to prepare the loan for closing. Section 3 describes 

the steps required to actually obtain funds for the closing and ensure that the closing is 

accomplished. Section 4 describes the process for administering construction loans. 

SECTION 1: LOAN APPROVAL AND OBLIGATION

8.2 THE LENDING DECISION

If the underwriting analysis indicates that the loan should be approved, the Loan Originator 

must submit a complete case file to the Loan Approval Official. The Loan Approval Official should 

review all of the documents contained in the case file to ensure that they are completed properly, and 

must confirm that the Loan Originator’s underwriting decision is sound. The Loan Approval Official 

should approve or reject the loan within 30 days of receiving a complete case file.

A. Rejection

Handbook Letter 15 (3550), Standardized Adverse Decision Letter, must be signed by the 

Loan Approval Official and sent to the applicant. Whenever applicants are denied credit, they 

must be advised of their review and appeal rights, as described in Paragraph 1.9. 

B. Approval

If the loan is approved, Form RD 3550-7, Funding Commitment and Notification of Loan 

Closing, will be issued, signed and dated by the Loan Approval Official. Throughout the fiscal 

year, loans may be approved subject to an appraisal. When this allowance is used, the box 

labeled “This commitment is contingent upon RHS obtaining an acceptable appraisal that 

adequately secures the loan and meets the requirements of 7 CFR Part 3550, section 3550.62” on 

Form RD 3550-7 must be checked.

8-1 

(01-23-03) SPECIAL PN

Revised (06-28-23) PN 585

CHAPTER 8: LOAN APPROVAL AND CLOSING
HB-1-3550

Paragraph 8.2 The Lending Decision

8.3 OBLIGATING FUNDS

A. Initial Obligation

A loan must be approved and obligated the same day. Form RD 3550-7 must be signed 

and dated by the Loan Approval Official at the time of loan approval and obligation. Therefore, 

Form RD 3550-7 or any approval letter must not be issued to the applicant unless the loan has 

been approved and obligated. 

As soon as the Loan Approval Official approves the loan and signs Form RD 3550-7, 

the Loan Originator will obligate funds through LoanServ. The executed Form RD 3550-7 

must be stored in the recipient’s case file in ECF. If, after 15 days Form RD 3550-7 is not 

signed and returned, the Loan Originator must deobligate the loan and complete Form RD 

1940-10, Cancellation of U.S. Treasury Check and/or Obligation. Once the loan has been 

deobligated, the application is withdrawn. Should the applicant express interest in another 

loan, a new application must be filed, and would be processed based on the new application 

date.

Loan approval and funds obligation may also trigger re-disclosure of the Loan Estimate if 

the interest rate and/or closing costs at loan approval are greater than disclosed on the original 

Loan Estimate. If a revised Loan Estimate is required, it must be issued within 3 business days 

of loan approval/obligation but no later than 4 business days prior to loan consummation 

(7 business days if the revised Loan Estimate is mailed to the applicant).

B. Changing the Loan Amount

If the loan amount must be increased or decreased prior to loan closing, any paperwork 

that reflects or is affected by the loan amount must be revised. The closing agent and the 

applicant must return any loan closing forms that have already been distributed so that they can 

be revised appropriately. Exhibit 8-1 illustrates the steps for making changes to the loan amount. 

When an increase in the obligation amount is needed, the Agency has 15 days from when funds 

become available to adjust the amount in the appropriate system and a new Form RD 3550-7 

must be issued. The applicant has 15 days from date of the form to sign and return it. 

NOTE: Form RD 1940-10, Cancellation of U.S. Treasury Check and/or Obligation, must 

be completed for any deobligation (full or partial). This must be signed by the Loan Approval 

Official within 5 business days after allotted appeal timeframe has expired (if applicable), or 

within 5 business days once it has been determined funds are no longer needed or valid (if appeal 

rights are not given). Deobligation processing must occur within 15 business days from 

date/signature on Form RD 1940-10. 

If a loan amount must be increased or decreased for a prior fiscal year, the Field Office 

should contact the Servicing and Asset Management Office (Servicing Office) Disbursement 

Unit. All requests to increase the obligation amount for a direct loan with prior fiscal year 

funds are subject to the availability of funds at the time for the request. The Servicing Office 

Disbursement Unit will make the required corrections to the obligation amount.

8-2 
HB-1-3550

Paragraph 8.3 Obligating Funds

NOTE: Although it is understandable that errors sometimes occur when obligating and closing 

loans, Field Offices are required to make every effort to adhere to the guidelines outlined in 

this handbook for correctly obligating loans.

Exhibit 8-1

Steps for Changing the Loan Amount

Increase Amount of Loan

Verify availability of funds.

If the funds have not yet been sent to the Field Office or closing agent, 

cancel the request. If a check has already been sent, void the check and 

return it to the Servicing Office with Form RD 1940-10 and Form RD 

3550-17. If ACH or wire funds have been sent, contact the SFH

Assistance Section at the Servicing Office so they can initiate retrieval of 

the funds.

Cancel the obligation for the loan in LoanServ. 

Update the new loan information in UniFi 

Reobligate the loan for the correct amount and request a new check or 

ACH through LoanServ

Decrease Amount of Loan

If the check or ACH disbursement has not yet been sent to 

the Field Office, cancel the request. If the funds have 

already been sent, void the check, if applicable, and return 

it to the Servicing Office with Form RD 1940-10 and 

Form RD 3550-17. If ACH or wire funds have been sent, 

contact the SFH Assistance Section at the Servicing Office 

so they can initiate retrieval of the funds.

Amend the original obligation in LoanServ. 

Update the new loan information in UniFi.

Request a new check or ACH through LoanServ.

C. Canceling a Loan

To cancel the entire loan prior to loan closing, the Loan Originator must deobligate the 

loan and cancel the funds request in LoanServ. Form RD 1940-10, Cancellation of U.S. 

Treasury Check and/or Obligation, must be completed for any deobligation (full or partial, 

including when an applicant does return the Form RD 3550-7 within 15 days and in cases 

where the loan has not closed). This must be signed by the Loan Approval Official within 5 

business days after allotted appeal timeframe has expired (if applicable), or within 5 business 

days once it has been determined funds are no longer needed or valid (if appeal rights are not 

given). Deobligation processing must occur within 15 business days from the date of signature 

on Form RD 1940-10. The executed Form RD 1940-10 must be stored in the recipient’s case 

file in ECF. If ACH or wire funds were already sent, the Field Office should contact the 

Servicing Office’s SFH Assistance Section and request that the funds be recalled from the 

closing agent. If a Treasury check has already been sent to the Field Office or closing agent, the 

check must be voided and returned to the Servicing Office with the completed Forms RD 1940-

10, Cancellation of U.S. Treasury Check and/or Obligation, and RD 3550-17, Funds 

Transmittal Report. The Agency’s or applicant’s decision to cancel the loan must be 

documented carefully. The following instructions are to be followed for returning checks to the 

Servicing Office for cancellation:

Return Treasury Checks via overnight mail to: 

USDA Rural Development 

Single Family Housing Branch 

211 North Broadway 

Suite 1701; Mail Stop 2234 

St. Louis, MO 63102 ______________________________________________________________________________________________________________________________ 

8-3 

(01-23-03) SPECIAL PN

Revised (06-28-23) PN 585
HB-1-3550

Paragraph 8.3 Obligating Funds

The required information for this packet is:

1) Form RD 1940-10, Cancellation of U.S. Treasury Check and/or Obligation;

2) Form RD 3550-17, Funds Transmittal Report; and

3) Check

After the funds have been returned, the Loan Originator must notify the applicant and closing 

agent of the loan cancellation using Handbook Letter 15 (3550), Standardized Adverse Decision 

Letter, which must be signed by the Loan Approval Official. In situations where the cancellation is not 

the applicant’s choice, Handbook Letter 15 (3550) must indicate any action that can be taken to correct

or appeal the decision. It is the applicant’s responsibility to notify the seller and any contractors of the

cancellation.

D. Monitoring Obligations:

The National Office posts an Undisbursed Obligation report to SharePoint each month so 

that State Offices can monitor undisbursed obligations over 180 days. This monthly report must 

be reviewed utilizing Attachment 8-B, Unliquidated Obligation Review, and must be saved in 

the recipient’s case file within ECF. Timely usage of funds is essential and aids the Agency in 

ensuring that program dollars are not deobligated in the following fiscal year, making them 

unavailable to fund other applications. The monitoring of a State’s unliquidated obligations 

should consider the circumstances of the loan, determine the need for the remaining funds, and 

whether a full or partial deobligation should occur. Based on the monitoring process in place, 

e.g., monthly reviews identified in Attachment 8-B, these should be used to provide a status on 

the semi-annual ULO Certification report.

In conjunction with the Undisbursed Obligation report, National Office also posts the 

Loans Fully Disbursed, not Activated report to SharePoint each month so the State Offices can 

monitor loan funds which have been fully disbursed, but the loan has not yet been activated. 

Timely activation is essential to ensure borrower repayment begins promptly, to avoid negative 

impacts for the borrower and the Agency. 

8-4
HB-1-3550

SECTION 2: PREPARING FOR CLOSING

8.4 TITLE INSURANCE AND CLOSING AGENTS

For most loans, the Agency requires title insurance, and requires that the loan closing be 

conducted by a closing agent who meets the Agency’s standards. This paragraph summarizes the 

Agency’s requirements for title insurance and closing agents, and the procedures for approving 

the individuals and firms that provide those services. Details about these procedures can be found 

in RD Instruction 1927-B.

A. Title Insurance

Title insurance is required for most loans unless the State Director determines that the use 

of title insurance is not possible, is not economically feasible for the type of loan involved, or in 

the area of the State where the loan will be made. In these cases, an attorney’s opinion can be 

accepted. If the total outstanding balance of any unsecured (note only) Section 502 loans is less 

than $7,500, title insurance is not required. If the total outstanding balance on Section 504 loans 

is $25,000 or less, title insurance is not required. Title insurance is not required for loans made

on tribal trust land when a certified Title Status Report is issued by the Bureau of Indian Affairs.

B. Closing Agents

An attorney or title company may act as a closing agent and close Agency real estate 

loans, provide necessary title clearance services, and perform other closing-related duties 

prescribed by the Agency. A closing agent approved by the Agency is required for all section 

502 loans of $7,500 or greater and for 504 loans where the total outstanding balance is greater 

than $25,000 with the exception of a subsequent loan made for minimum essential repairs 

necessary to protect the Government’s interest. When feasible, loans made on tribal trust land 

do not require a closing agent as they may be closed by the Agency in conjunction with the 

Bureau of Indian Affairs.

C. Approvals

State Offices maintain a list of title insurance companies that are authorized to provide 

title insurance in the State. Each approved title insurance company may provide a master list of 

title companies and attorneys that are covered by its closing protection letter and are thereby 

authorized to perform closings on behalf of that title insurance company. The State Office 

determines which title insurance companies will be authorized to issue title insurance policies for 

Agency loans based on RD Instruction 1927-B.

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________

8-5

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

Paragraph 8.4 Title Insurance and Closing Agents

Since a title insurance company is not regulated by the State, the approval process will be 

repeated at least every 5 years, or more often if adverse information becomes available, to ensure 

continued compliance by the title insurance company. 

If an applicant selects a title company or attorney that is on the State Office list, no 

further verifications are necessary. If the attorney or title company selected is not on the list, 

they should provide an acceptable closing protection letter from an approved title insurance 

company.

Alternatively, title companies may submit Form RD 1927-20, Certification of Title 

Insurance Company, and attorneys may submit Form RD 1927-19, Certification of Attorney, to 

request Agency approval. 

D. Procedures

If the applicant selects a title company or attorney that is not on the State Office list, the 

Loan Originator must send the title company or attorney Form RD 1927-20 or Form RD 1927-19, 

whichever is appropriate. The title company or attorney must return Form RD 1927-20 or Form 

RD 1927-19 to the Loan Originator for review. Standards for evaluating a title company or 

attorney’s qualifications are contained in RD Instruction 1927-B.

To notify a title company or attorney of their selection and approval, the Loan Originator 

should send Form RD 1927-4, Transmittal of Title Information, and attach Form RD 1927-9, 

Preliminary Title Opinion, if an attorney is performing loan closing. 

8.5 RESPONSIBILITIES OF THECLOSINGAGENT/ATTORNEY

The Loan Originator must provide Form RD 3550-25, Loan Closing Instructions and 

Loan Closing Statement, to the closing agent/attorney. This form provides information about the 

amount of personal funds required from the applicant, the appropriate disbursement of funds, any 

remaining requirements that the applicant must meet, and the instruments and forms required for 

loan closing. The Loan Originator also should attach all forms needed for loan closing as well as 

copies of other documents to facilitate the closing agent’s/attorney’s review (e.g., tax bills, legal 

descriptions, or surveys). Closing documents may be sent via email IF THE EMAIL

ATTACHMENT IS ENCRYPTED WITH A SECURITY PASSWORD TO PROTECT

THE APPLICANT’S/BORROWER’S SENSITIVE INFORMATION WHICH INCLUDES

THE SOCIAL SECURITY NUMBER, ADDRESS, DATE OF BIRTH, etc. Form RD

3550-25 need not be executed until loan closing, and must be returned, along with the other closing 

documents.

8-6 
HB-1-3550

Paragraph 8.5 Responsibilities of the Closing Agent/Attorney

The closing agent/attorney is required to perform a number of tasks, including:

• Provide a title insurance binder (or prepare Form RD 1927-9, Preliminary Title 

Opinion) within 10 days of the date of the transmittal letter;

• Secure a title insurance policy within 60 days of loan closing or a final title opinion 

within 14 days of loan closing; 

• Establish a mutually convenient date for the loan closing;

• Assess whether, after closing, the borrower will have an ownership interest in the 

property that is of the priority required by the Agency and subject only to those 

exceptions approved by the Agency; 

• Ensure that the applicant provides a copy of an acceptable hazard insurance policy or 

insurance binder, and evidence that 1 year’s premium has been paid; 

• Confirm that the applicant has flood insurance, ifapplicable;

• Collect any other information the Agency has instructed the applicant to provide;

• Ensure that the applicant is aware of any funds that must be brought to closing; and

• On the day of the loan closing, confirm that the applicant has no outstanding 

judgments. If any additional entries of record are identified, the loan cannot be closed 

until these entries are cleared or approved. 

The Agency or closing agent/attorney must 

complete the Closing Disclosure, which itemizes 

the costs to be paid by the applicant and seller at 

closing. The Closing Disclosure may be used to 

reset tolerance instead of reissuing a

revised Loan Estimate when a change in circumstance has occurred. UniFi will provide much of 

the information needed for the Closing Disclosure, including the amount of the initial deposit to 

the escrow account. This information should be provided to the closing agent/attorney. Real 

estate taxes and homeowners’ association/condo fees must be prorated between the seller and 

borrower using the Closing Disclosure to estimate the actual amount of cash needed for closing 

and to determine the actual payment amount. The closing agent/attorney also must ensure that 

there are no outstanding demands for payment from a contractor or supplier for construction or 

repair work. If required by State Supplement, Form RD 1927-5, Affidavit Regarding Work of 

Improvement, must be signed at closing by the seller or, in the case of a subsequent loan, by the 

borrower, to certify that there are no outstanding claims.

8-7 

(01-23-03) SPECIAL PN

Revised (06-28-23) PN 585

The Agency is responsible for meeting the 

accuracy and timing requirements of the 

Closing Disclosure.
HB-1-3550

8.6 RESPONSIBILITIES OF THE LOAN ORIGINATOR

The Loan Originator is responsible for coordinating all aspects of the process so that the 

required pieces come together on the day of closing. Between the time the loan is approved and 

the day of closing, the Loan Originator must: (1) work with applicants to be sure they understand 

and carry out their obligations; (2) work closely with the closing agent and review their work, as 

appropriate; (3) re-verify income, eligibility and validate the interest rate; (4) prepare the 

documents that the Agency must provide for closing; and (5) ensure all loan approval conditions 

have been met. 

A. Prepare the Applicant

The Loan Originator must work with applicants to ensure that they understand the steps 

required to reach closing successfully.

1. Notification of Loan Closing

The Loan Originator must notify the applicant of the conditions to be met and 

information to be provided at or before loan closing using Form RD 3550-7, Funding 

Commitment and Notification of Loan Closing. The applicant must review, sign, and 

return Form RD 3550-7 to the Loan Originator within 15 days from the date of the form. 

The loan cannot be closed unless Form RD 3550-7 has been signed and all obligations 

listed on the form have been met.

2. Closing Costs

The applicant may be required to bring funds to closing for a variety of purposes, 

including assets that must be contributed as a down payment, funds to pay for closing costs, 

or resources to fund the initial deposit to the escrow account. Borrowers receiving a 

subsequent loan may be required to prepay interest at closing. If loan closings occur on the 

29th, 30th, or 31st, the applicant will choose a desired payment due date between the 1st and 15th of 

the following month, 30 days from loan closing. UniFi will calculate the number of days and 

dollar amount of prepaid interest to be collected at closing as described in Chapter 10 of the 

DLOS manual. An estimate of the required amount, determined by the Loan Originator, is 

provided on Form RD 3550-7. The closing agent/attorney makes the final determination of 

the actual amount required from the applicant. 

8-8 
HB-1-3550

Paragraph 8.6 Responsibilities of the Loan Originator

B. Review Title Insurance Binder (or Preliminary Title Opinion) and OtherClosing 

Documents

Upon receipt of a title insurance 

binder (or Form RD 1927-9, Preliminary 

Title Opinion), the Loan Originator must

carefully review it and consider the issues 

identified in Exhibit 8-2. The Loan 

Originator should review any exceptions 

listed to determine if the lien position is in 

jeopardy. If the exceptions will adversely 

affect the property’s title, suitability, or 

security value, the loan cannot be closed.

If prior liens will be present as part 

of a leveraging strategy, Form RD 1927-8, 

Agreement with Prior Lienholder, must be 

executed by the lien holder and recorded in 

the appropriate real estate mortgage 

records.

If any required information is 

omitted, or if the title insurance binder (or

Form RD 1927-9) is not satisfactory, the Loan Originator should return it to the closing 

agent/attorney for corrections.

8-9

(01-23-03) SPECIAL PN

Revised (06-28-230) PN 585

Exhibit 8-2

Reviewing the Title Insurance 

Binder (or Preliminary Title 

Opinion)

• Afterclosing,the borrowermust becomethe

owner of record of the real property.

• Any liens or recorded claims that would prevent the 

Agency from obtaining an enforceable mortgage 

must be removed.

• Outstanding judgments, bankruptcy,insolvency, 

or probate proceedings must be resolved.

• All property rightsintended to be taken assecurity 

must be available.

• If wetlands easements or other conservation 

easements have been placed on the property, they 

must be acceptable to the Agency.

• If there are any exceptions of record, they 

must be acceptable to the Agency.
HB-1-3550

Paragraph 8.6 Responsibilities of the Loan Originator

The Loan Originator must also review the Closing Disclosure prepared by the closing 

agent/attorney and, if correct, will proceed (or authorize the closing agent/attorney) to provide 

the disclosure to the applicant at least three business days before loan consummation. The 

applicant may waive the three-business day waiting period if they are facing a bona fide financial 

emergency. Such request for waiver of the three-business day waiting period must be received 

from the applicant in writing. If revisions to the Closing Disclosure are needed after it has been 

provided to the applicant, an additional three business day waiting period will be required. 

C. Re-verifying Employment and Income 

The Loan Originator must obtain an oral verification of employment (VOE) within 10 

business days prior to the closing date if the applicant has worked for the employer for less than a 

year or the other types of verifications are inconsistent or suspicious. A written verification of 

employment, dated within 10 business days prior to the closing date, may be accepted in lieu of an 

oral VOE. Documentation to re-verify the applicant’s income must be updated before loan closing 

if: (1) the closing will occur more than 120 days after the date on the income/employment 

verification documents; (2) there is evidence to indicate a change in financial status; or (3) the 

applicant’s employment status had changed within 4 months prior to submission of the application. 

All re-verification activity should be documented carefully. 

If the income re-verification indicates a significant change in income, the Loan 

Originator should take the following steps: 

• Verify that the applicant is still income-eligible. A program loan cannot be granted if 

the applicant’s adjusted income exceeds the moderate-income level at closing. 

Regardless of whether the applicant’s income decreases or increases to change their 

status from very-low or low income, no changes are needed on the loan obligation. 

(There are no income restrictions for non-program applicants.) 

• Determine whether the applicant is eligible for payment subsidy. Payment subsidy 

may be granted if the applicant’s adjusted income is at or below the applicable 

moderate-income limit.

• Consider whether the applicant could obtain 100 percent private financing and refer 

the applicant to a private lender, if appropriate.

• Confirm that the applicant has adequate repayment ability.

8-10
HB-1-3550

Paragraph 8.6 Responsibilities of the Loan Originator

D. Re-verify Eligibility

The applicant’s circumstances may have changed since loan approval/obligation and 

must be reviewed as part of closing preparations. Form RD 3550-7, Funding Commitment and 

Notification of Loan Closing, should be reviewed to be sure all obligations are included on the 

most recent Eligibility Summary. After all re-verifications have been completed, the Loan 

Originator will print out and sign a new UniFi Eligibility Summary and place it in the applicant 

case file.

E. Validate the Interest/Note Rate

Before preparing the loan closing documents, the Loan Originator must validate the note 

rate. The validation process involves reviewing the information in UniFi and LoanServ to 

ensure that both systems have the same and correct interest rate.

The Loan Originator should use the following process to validate the note rate.

• Review the interest rate history to determine if an interest rate change occurred 

between loan approval/obligation and loan closing. 

• Determine which of the interest rates is lower. The Loan Originator must use the 

applicable interest rate in effect at loan approval or loan closing, whichever is

lower.

• If the interest rate at closing is lower than the one in effect at the loan 

obligation/approval date, both UniFi and LoanServ must be updated to reflect the 

lower rate.

• Ensure that documents printed from UniFi, especially those affected by the interest 

rate such as the Promissory Note, Loan Estimate and Closing Disclosure, Truth in 

Lending Statement (as applicable) and Form RD 410-4, are accurate, consistent with 

the information in LoanServ, and in compliance with program guidelines. 

8-11

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

Paragraph 8.6 Responsibilities of the Loan Originator

F. Prepare Loan Documents

The Loan Originator should assemble the forms needed for closing, and forward them to 

the closing agent/attorney with Form RD 3550-25, Loan Closing Instructions and Loan Closing 

Statement. When preparing the instructions, any cash back to the applicant/borrower must be 

limited to the reimbursement for certain items paid by the applicant/borrower outside of closing 

(i.e. earnest money deposit, homeownership education fee, inspection fees, and the first year’s 

hazard insurance premium). Loan funds or excess seller paid concessions may not be disbursed to 

the applicant/borrower. Excess loan funds should be applied as a principal reduction. 

Closing documents may be sent via email IF THE EMAIL ATTACHMENT IS

ENCRYPTED WITH A SECURITY PASSWORD TO PROTECT THE

APPLICANT’S/BORROWER’S SENSITIVE INFORMATION WHICH INCLUDES THE

SOCIAL SECURITY NUMBER, ADDRESS, DATE OF BIRTH, etc. 

The closing agent/attorney is responsible for completing the appropriate forms, preparing 

the security instruments, and obtaining signatures at closing, as needed. Attachment 8-A lists the 

documents needed for loan closing. 

In unusual circumstances, changes must be made to the text of a security instrument or 

promissory note. For example, in the case of a non-program borrower, the clauses relating to 

refinancing to other credit and prohibition on leasing will be stricken. The Loan Originator 

should draw a line through only the specific language to be deleted, and alert the closing 

agent/attorney of the deletions. All persons signing the security instrument or promissory note

must initial the changes in the margin.

8-12
HB-1-3550

Paragraph 8.6 Responsibilities of the Loan Originator

1. Special Documents for Assumptions

Whether new funds are obligated or existing loan funds are recycled through an 

assumption is primarily an accounting function, and is largely transparent to the 

purchaser and seller. However, there are 3 procedural differences that will affect the 

purchaser and the seller. First, the purchaser must sign Form RD 3550-22, Assumption 

Agreement Single Family Housing, at closing. Second, the original note is not returned 

to the seller. Instead, the note is amended to indicate that it has been assumed. The 

original Promissory Note, with a copy of Form RD 3550-22 attached, is kept in a locked 

fire-proof file. Copies are placed in the purchaser’s case file. Third, Form RD 3550-16, 

Release from Personal Liability, is provided to the seller at closing. The agreement is 

executed to release the seller from all personal liability for the amount of debt being 

assumed. In cases where the debt is not being assumed in full, the Servicing Office will 

handle the settlement of the remaining debt and any release of liability for that portion 

of the debt not being assumed. 

Unless required by State law, a previous mortgage / deed of trust may be released 

provided that all previous promissory notes and assumption agreements are listed on both 

the new assumption agreement and the new mortgage or deed of trust to ensure that all 

debts are adequately secured.

2. Special Documents for SubsequentLoans

Applicants who are obtaining a subsequent loan have a legal right to cancel the loan 

within 3 business days from whichever of the following activities occurs last:

(1) execution of the mortgage or deed of trust; (2) receipt by the applicant of the Closing 

Disclosure at least 3 business days prior to consummation; or (3) receipt of Form RD 

1940-43, Notice of Right to Cancel. The Loan Originator or closing agent/attorney 

cannot disburse funds to the applicant until the 3 business days have passed, unless a 

hardship exists and the applicant waives their right to cancel the loan in writing.

3. Special Instructions for Loans on Tribal Trust Land

Only the Bureau of Indian Affairs (BIA) has the legal authority to secure a recording 

on tribal trust land. The BIA serves as the recording office and title insurance guarantor 

for all tribal trust lands. A Title Status Report (TSR) must be requested from the BIA for 

which the Agency will need to provide certain lending documents such as the approved 

lease agreement, mortgage / deed of trust, promissory note, etc. The Agency may close 

the loan upon BIA approval and commitment to issue the certified TSR which will show 

the recorded Agency lien. Without a certified TSR issued from the BIA the Agency does 

not have a secured lien. 

8-13

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

SECTION 3: CLOSING

8.7 OBTAINING FUNDS FORCLOSING

The Agency utilizes an automated process for the electronic disbursement of loan funds 

known as the Automated Clearing House (ACH) network. This process pertains only to initial 

disbursements on section 502 loans. At the appropriate time, funds are released via ACH into

the closing agent’s/attorney’s account in order to close the loan. Under no circumstances will the 

loan closing proceeds be transferred from one closing agent’s/attorney’s bank account to another. 

In the event the funds were sent to the wrong closing agent/attorney, call the Servicing Office at 

the Field Support/ACH Help Desk. 

The ACH process is not utilized for subsequent disbursements on construction loans,

section 504 Loan and Grant combos, 504 grants, and 504 loans. Subsequent disbursements on 

construction loans, section 504 Loan and Grant combos, 504 loans, and 504 grants only are 

requested via the LoanServ system.

Any loan that is closed in the Field Office will use a paper check, i.e. Native American 

loans closed via Office of General Counsel (OGC) and section 502/504 Note only loans. Checks 

are generated the day they are requested and are dated for 3 days later.

8.8 ESTABLISHING THE DISBURSEMENTSCHEDULE 

Some borrowers will be able to occupy their dwellings immediately, while others will 

need to remain in other housing until construction or rehabilitation is complete. To avoid 

requiring borrowers to repay an Agency loan while continuing to pay other housing costs, 

borrowers who cannot occupy the property within 30 days are permitted to defer loan payments.

A. Permanent Loans

If loan funds are to be used to purchase an existing dwelling or newly built house (that 

was complete or largely complete when the purchase agreement was signed), or to complete 

minor repairs, such as painting or carpeting, the borrower should be able to occupy the property 

within 30 days. In these situations, a permanent loan is made and the borrower’s repayment 

obligation begins immediately. Funds for permanent loans are requested in a single 

advance. In general, the loan funds are disbursed in full at closing. If funds for repairs are not 

fully disbursed at loan closing, the undisbursed loan proceeds are deposited into an escrow 

account supervised by the closing agent/attorney, or into a supervised bank account and disbursed 

in accordance with RD Instruction 1902-A.

8-14
HB-1-3550

Paragraph 8.8 Establishing the Disbursement Schedule

B. Construction Loans

If loan funds are to be used to build a new dwelling or 

to undertake repairs that will prevent the borrower from 

occupying the dwelling for more than 30 days, the loan is 

made as a construction loan. Funds for construction loans are 

disbursed in multiple advances that begin to accrue daily simple interest as of disbursement at 

the borrower’s subsidized rate and will not exceed the note rate. When activating the 

construction loan, and to ensure that interest accrues at the subsidized rate during construction, 

the Loan Originator must enter the subsidized rate into LoanServ. The deferral period identified

on Form RD 1940-16, Promissory Note, should be within the estimated timeframe to complete the

construction as identified in the construction contract documents (e.g., Form RD 1924-6, 

Construction Contract). If the construction period exceeds the estimated deferral period, the Loan 

Originator will modify the note and contact the Servicing and Asset Management Office, SFH 

Assistance Section, to request the deferral period to be extended. 

The Loan Originator will post each disbursement into LoanServ. LoanServ will calculate 

and record the amount of the interest accrual during the construction period. The Loan 

Originator must generate the Approved Eligibility Summary from UniFi and place it in the 

borrower’s case file when the construction loan is activated. The construction loan is converted 

for amortized payments, which will be due the first day of the month as a permanent loan in 

LoanServ, once the final disbursement is posted in LoanServ and following any of these events: 

• Final inspection by the Agency or qualified third party;

• Issuance of the Certificate of Occupancy by the local jurisdiction;

• Occupancy of the new or repaired dwelling

NOTE: If a borrower is unwilling to initial the revised note, the loan may still be 

converted (see table in Paragraph 8.13). 

When construction funds are not fully expended at loan conversion, all remaining loan 

proceeds are deposited into an escrow account supervised by the closing agent/attorney, or into a 

supervised bank account and disbursed in accordance with RD Instruction 1902-A. Principal 

curtailments for construction funds remaining after completion are handled according to Chapter 

5, Paragraph 5.26. 

C. Construction Take-Out Loans

If loan funds are to be used to purchase a newly built house where construction had not 

started or just started at the time the purchase agreement was signed and where the builder will 

retain ownership of the lot during construction and fund the construction, the loan is made as a 

purchase new loan. In this situation, the obligation can occur in advance of construction 

provided the proposed construction and site meet the property and environmental standards. In 

addition, the Loan Originator should determine how the construction quality will be documented 

following the guidance in Chapter 6, Paragraph 6.7 B. Once the construction is complete, the 

closing is held and the disbursement schedule follows that of a permanent loan. 

(01-23-03) SPECIAL PN

Revised (06-28-23) PN 585

8-15

Interest will always accrue at 

the subsidized rate during the 

construction period.
HB-1-3550

 Prior to closing, obligations for these loans must be closely monitored. The Loan 

Originator should routinely check in with the builder and/or applicant (e.g. by telephone, 

email, etc.) to ensure the construction is progressing in a timely manner based on the 

closing date established on the purchase agreement. Valuation updates or completion 

reports from the appraiser are not required unless the Agency learns of substantial changes 

to the plans or specifications which were not pre-approved by the Loan Approval Official. 

8.9 ESTABLISHING A REPAYMENTSCHEDULE

A. Monthly Installments

The Loan Originator must indicate the appropriate monthly payment schedule on Form 

RD 1940-16, Promissory Note. Under no circumstances will a new loan be scheduled with an 

annual installment. Borrowers with existing loans specifying annual payments may request 

conversion to monthly payments, and must convert to a monthly payment schedule before any 

subsequent loan or new payment subsidy is approved. 

B. Housing Assistance Program (HAP)

HAP payments made from the Housing Choice Voucher-Homeownership Program 

should be handled in the following manner. The Loan Originator should: 

• Encourage the Public Housing Authority (PHA) to send the HAP (principal, interest, 

taxes and insurance portion only) directly to Rural Development (via the appropriate 

lockbox) or to the leveraged lender versus sending it directly to the family. 

• Notify the PHA of the appropriate lockbox address and inform the PHA that the 

check must include the borrower’s name and account number at a minimum. 

• If the PHA elects to use any other payment method, Field Offices will be responsible 

for monitoring these accounts, which will require coordination with the Servicing 

Office to ensure they remain current.

• Accounts that use the Housing Choice Voucher should be designated a “Yes” in the 

field called “Section 8 Vouchers” in the “New Application Additional Set Up Screen” 

in UniFi.

8.10 ORIGINAL EQUITY

Original equity is calculated using the market value, as defined in Form RD 3550-12, 

Subsidy Repayment Agreement, at the time of loan approval/obligation for both new and 

existing properties. Original equity is the difference between current market value and the total 

of all Agency and leveraged assistance (including subordinate affordable housing products 

and/or grants). Prepaid taxes and insurance are not considered original equity, nor are 

contributions toward closing costs. Form RD 3550-12, Subsidy Repayment Agreement, contains 

the original equity amount. Only one agreement should be executed by the subject borrower for 

the subject property. A new agreement should not be completed when extending additional 

financing (i.e. subsequent loans) to an existing borrower with an active agreement. 

8-16
HB-1-3550

When an applicant is purchasing a program Real Estate Owned (REO) property and the 

purchase price is less than the market value due to an administrative price reduction, the equity

to be credited to the borrower (if any) is any difference between the actual purchase price and the 

loan amount. Administrative price reductions do not affect original borrower equity.

8.11 LOAN CLOSING

The closing agent/attorney must review each closing document with the applicant, obtain 

signatures, as appropriate, and collect and disburse all required funds. Attachment 8-A provides a list 

of the documents that may be required at closing. 

A. Loan Closing DocumentSubmission

• Many of the legal documents and other 

information used in underwriting the loan must 

be provided to the Servicing Office in order to

assist with quality assurance and servicing.

• Prior to loan closing the Loan Originator must

complete the following items to be submitted to the closing 

agent/attorney:

1. Form RD 3550-19, Transmittal – Closing Documents, with the appropriate 

documents as indicated on the transmittal.

2. Form RD 3550-25, Loan Closing Instructions and Loan Closing Statement, 

which includes the required forms to be signed by the borrower(s) at loan closing. 

Once loan closing has occurred, the closing agent/attorney will:

1. Send to the Servicing Office via express (overnight)mail:

a. Form RD 3550-17, Funds Transmittal Report, and

b. A check for total fees collected as shown on Form RD 3550-17.

2. Send to the Field Office via express (overnight) mail:

a. Original loan closing documents, and

b. Copy of Form RD 3550-17, Funds Transmittal Report, along with a 

copy of check for total fees collected.

The Field Office is responsible for submitting closing documents to the Servicing 

Office within 3 working days of loan closing, as described in Form RD 3550-25, Loan Closing 

Instructions and Loan Closing Statement, and in Chapter 10 of the DLOS manual. 

8-17

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Special Loan Closing 

Requirements

See Chapter 9 for condominiums, 

community land trusts, planned 

unit developments, or 

manufactured homes. See Chapter 

10 for leveraged loans.
HB-1-3550

Paragraph 8.11 Loan Closing

The closing agent/attorney must return all original documents to the Loan Originator to be 

retained in the case file. However, the original Promissory Note and other essential records must be 

retained in their original hard copy form, in a locking-type fire proof filing cabinet or safe. The title 

insurance policy (or final title opinion) will be sent only to the Loan Originator and applicant by 

separate envelope. The Servicing Office does not receive a copy of the Final Title Policy.

The loan docket for construction loans should not be sent to the Servicing 

Office until the loan is converted to a permanent loan and the Promissory Note is 

amended.

B. Review Closing Documents

The Loan Approval Official must review the closing documents to verify that the Agency 

has received the proper lien priority. The Loan Approval Official also should check Form RD 

3550-7, Funding Commitment and Notification of Loan Closing, to confirm that the applicant 

submitted all required information. The Loan Approval Official then signs Form RD 3550-25, 

Loan Closing Instructions and Loan Closing Statement, to certify that the loan was closed in 

accordance with the instructions provided.

C. Activate the Loan

The Loan Originator activates the loan in LoanServ after loan closing to signal the 

Servicing Office that the loan has been closed, and that servicing should begin. The Servicing 

Office does not begin to service construction loans until they are converted to permanent.

D. Record Mortgage or Deed of Trust

The closing agent/attorney must record Form RD 3550-14 after loan closing. The closing 

agent/attorney should submit an unrecorded copy to the Loan Originator along with the other 

closing documents. The recorded copy should be provided to the Loan Originator as soon as it is 

completed.

If the original is retained by the filing official, a conformed copy showing the date and 

place of recordation must be provided.

E. Secure Title Insurance Policy

The closing agent/attorney must secure the title insurance policy and deliver it to the 

Loan Originator and applicant. A copy of the binder/commitment letter must be submitted to 

the Servicing Office with other closing documents.

8-18
HB-1-3550

SECTION 4: CONSTRUCTION LOANS

8.12 ADMINISTER CONSTRUCTIONFUNDS

When funds are used for construction or rehabilitation, the Loan Originator must 

supervise their use. The Loan Originator and the borrower must each accept the work when the 

contractor wishes to receive payment. If applicable, proper implementation of mitigation 

measures required by the environmental assessment also should be reviewed. If the work is 

acceptable, the Loan Originator should order a check with the borrower’s and contractor’s names 

on it as instructed in Chapter 12 of the DLOS manual. The check is sent to the Field Office, and 

once received, it should be given only to the borrower for endorsement. After the borrower 

endorses the back of the check, it should be promptly delivered to the contractor. The payment 

process may be expedited if the Loan Originator, borrower, and contractor meet at the dwelling, 

but this may not be feasible in all instances.

The amount of each disbursement for construction loans is determined by the draw 

schedule, which is developed based on the value of the work, according to Marshall and Swift 

guidelines. To ensure that all work will be completed satisfactorily, the Agency holds back 40 

percent of each payment to the contractor, unless the contractor has obtained a Surety Bond, 

Performance Bond, or Payment Bond, in which case only 10 percent is held back. Holdbacks are 

released with the final payment.

8.13 CONVERT CONSTRUCTION LOANS

When a construction loan is made, the promissory note is written at the promissory note 

rate; however, when the loan is activated, the subsidized rate the borrower will receive is entered 

in LoanServ as the note rate. This causes interest during the construction period to accrue at the 

subsidized rate.

A construction loan is converted to a permanent loan effective on the first of the month 

following final inspection, or occupancy, or issuance of an occupancy permit. First payment due 

date should be the first of the month following the loan conversion. When the loan is converted to 

a permanent loan, the Loan Originator must change the note rate in LoanServ to the note rate 

that was in effect when the construction loan was made, so that it matches the borrower’s note. 

Loan conversion and the final inspection can occur on the same day provided the local 

office receives a copy of the final occupancy permit or other equivalent inspection report prior to 

the date of final inspection and funds have been fully disbursed. 

8-19

(01-23-03) SPECIAL PN

Revised (06-28-23) PN 585

 Example - Establishing the 1st Payment Due Date

 Loan closed - 5/17/21 

 Final Inspection, Occupancy, or Occupancy Permit Date - 2/25/22 

 Loan Conversion Date - 3/1/22

 1st Payment Due Date - 4/1/22
HB-1-3550

Paragraph 8.13 Convert Construction Loans

A. Modify Note and LoanServ

On the conversion date, the Loan Originator updates Form RD 

1940-16, Promissory Note, to reflect the new principal amount of the 

loan, including the interest generated during the construction period. 

The borrower should initial the note to acknowledge the change. The 

Loan Originator then amortizes the new principal amount over the 

remaining term of the loan. The Loan Originator also must change the 

note rate in LoanServ, which was entered at the applicable subsidized 

rate, to reflect the note rate in effect when the construction loan was 

made, and change the account number, as directed by the Servicing 

Office, to reflect the conversion from a construction loan to a 

permanent loan. Conversion to the permanent loan number will signal 

the Servicing Office to take over servicing responsibilities.

B. Update Payment Subsidy

If the borrower is eligible for payment subsidy, the Loan Originator must reverify income 

if more than 120 days have passed since the last verification or there is evidence to indicate a 

change in financial status since the construction loan was made. Income will be verified using 

the preferred sources. Written verifications may be valid for an additional 60 days with oral 

reverifications at the end of the 120 days. The Loan Originator must generate Form RD 1944- 

14, Payment Assistance/Deferred Mortgage Assistance Agreement, or Form RD 1944-6, Interest 

Credit Agreement, and Form RD 3550-12, Subsidy Repayment Agreement, and obtain the 

appropriate signatures.

The LESSER of the sales price including construction/rehabilitation costs, or appraised 

value obtained in connection with the loan approval/obligation is used to determine market value 

on Form RD 3550-12, Subsidy Repayment Agreement, regardless of the length of the 

construction process. For Self-Help loans, the market value is the appraised value as determined 

at the time of loan approval/obligation, which is subject to completion per plans and 

specifications. If the construction is not ultimately finished under the Self-Help program, an 

amended Form 3550-12, Subsidy Repayment Agreement, using the market value definition in 

this paragraph must be used. If the applicant owns the site free and clear, or if an existing nonAgency debt on the site without a dwelling will not be refinanced with Agency funds, the market 

value at the time of loan approval will be the LESSER of the appraised value or the construction 

cost plus the value of the site.

8-20

Borrower Acknowledgement 

of Accrued Interest

If the borrower is unavailable or 

unwilling to acknowledge the revised loan 

amount from the accrued interest during 

construction, the Loan Originator should 

proceed with conversion to permanent in 

LoanServ. The running record should be 

documented and a letter sent to the 

borrower with a copy of the revisions to 

the promissory note.
HB-1-3550

ATTACHMENT 8-A 

Attachment 8-A 

Page 1 of 1 

RD 410-4 

DOCUMENTS TO BE SIGNED OR SUBMITTED AT LOAN CLOSING

Uniform Residential Loan Application (printed from UniFi)

RD 3550-14

RD 1940-16

RD 1927-9 

RD 3550-7 

CFPB H-24 

RD 1940-41

RD 1940-43 

CFPB H-25 

RD 1944-6 

RD 1944-14

RD 3550-12

Document 

RD 3550-15

RD 3550-9 

RD 1927-5 

RD 1927-8 

RD 3550-22

RD 3550-16

RD 3550-17

RD 3550-19

RD 1955-49

RD 3550-10

RD 3550-11

RD 3550-25

RD 3550-29

Real Estate Mortgage or Deed of Trust for (State) 

Promissory Note

Preliminary Title Opinion or Title Insurance Binder 

Funding Commitment and Notification of Loan Closing 

Loan Estimate (if applicable)

Truth in Lending Statement (if applicable)

Notice of Right to Cancel (if applicable – subsequent loan, refinance, etc.) 

Closing Disclosure

Interest Credit Agreement (if applicable)

Payment Assistance/Deferred Mortgage Assistance Agreement (if applicable) 

Subsidy Repayment Agreement (if applicable)

Evidence of Insurance and receipt for 1st year premium 

Tax Information

Initial Escrow Account Disclosure Statement

Affidavit Regarding Work of Improvement (within 45 days) 

Agreement with Prior Lienholder (if applicable)

Assumption Agreement - Single Family Housing (if applicable) 

Release from Personal Liability (if applicable)

Funds Transmittal Report

Transmittal-Closing Documents and Attachments listed on Form (if applicable) 

Quitclaim Deed or Warranty Deed (if applicable)

Condominium Rider (if applicable)

Planned Unit Development Rider (if applicable)

Loan Closing Instructions and Loan Closing Statement 

Authorization Agreement for Preauthorized Payments (if applicable) 

Document Errors and Omissions Agreement

First payment coupon generated from UniFi

(01-23-03) SPECIAL PN

Revised (03-19-20) PN 534
HB-1-3550

Attachment 8-B

Page 1 of 4

ATTACHMENT 8-B 

UNLIQUIDATED OBLIGATION REVIEW

Obligation of funds should not occur until the loan and/or grant has been fully underwritten in 

accordance with the procedures described in Chapters 3 thru 7 of this handbook. Once funds are 

obligated, they must be disbursed in a timely manner. Loan approval and obligation implies that 

the Agency has determined the applicant has an immediate need for and will promptly use the 

funds. Therefore, it is imperative that unliquidated obligations are monitored to ensure that the 

funds are still needed and will be used by the applicant. 

Monthly reviews of obligations are important to the Agency in order to properly report and 

certify the validity of obligation balances, prevent the loss of loan funds that expire at the end of 

a fiscal year, make funds available that otherwise would not be used and reduce the risk of fraud, 

waste and abuse.

1. State Office Monitoring

The National Office will post an Undisbursed Obligation report to SharePoint each 

month so that the State Office can monitor undisbursed obligations on a monthly basis. 

This report provides a detailed listing of all unliquidated obligations that are more than 

180 days old. The report of unliquidated obligations will contain a close code of “1”, “4” 

or “9”. An obligation with a close code of “4” is classified as an application, indicating 

the loan has not yet closed, while obligations with a close code of “1” or “9” are 

classified as active accounts, signifying a closed loan.

The review official’s sample must consist of all unliquidated obligations that have 

been inactive for twelve months or more. In addition, at least half of the unliquidated 

obligations that have been inactive for less than 12 months must be reviewed.

Obligations selected shall be reviewed to determine whether the intended purpose of the 

loan or grant is expected to occur. The following review guide entitled, “Single Family 

Housing Unliquidated Obligations” must be utilized for completion of the review. After 

completion of the review guide, the review official will inform the Field Office if the 

obligation may remain outstanding or if de-obligation is required.

(01-23-03) SPECIAL PN

Revised (09-19-18) PN 516
Attachment 8-B 

Page 2 of 4

This review is intended to disclose unliquidated obligations for loans or grants:

(a) That do not have a legal basis, or are not properly authorized and

supported by appropriate documentation;

(b) Which have been completed and have not been closed out; and

(c) Under which no future expenditures are expected.

Once a determination is made that an obligation can be deobligated, the Loan 

Originator will take the applicable action as per the instructions in HB-1-3550, Chapter 8, 

Paragraph 8.3 B. or C. as appropriate.
HB-1-3550

Attachment 8-B

Page 3 of 4

Single Family Housing Unliquidated Obligation Review

State Office Reviewer 

Title

Applicant’s Name: 

State

Review Date

Account Number: 

Date of Obligation: 

1. Has the loan/grant closed? Yes No 

2. If the loan/grant has not closed, has the applicant provided all the necessary information and 

does the file contain documentation as to why the loan has not closed?

Yes No NA 

3. Are legal or construction issues preventing disbursal of funds or the loan from 

closing? Yes No NA 

4. Has the planned construction period expired? Yes No NA 

5. Have funds been spent consistent with percentage of construction 

completion? Yes No NA 

6. Has the customer received any supplemental or subsequent loans or other additional funds? 

Yes No 

7. If the answer above is yes, is there justification for increase in funding levels? 

Yes No NA 

8. Is there a period of inactivity? Yes No 

If yes, explain and document the reasons below. 

9. Is the undisbursed obligationjustified? Yes No 

If yes, explain justifications and basis to continue with loan below.

10. Should the obligation be canceled? Yes No 

If no, establish a completion date for closing out the obligation below.

(01-23-03) SPECIAL PN

Revised (09-19-18) PN 516
HB-1-3550

Attachment 8-B 

Page 4 of 4

2. National Office Monitoring

The National Office will periodically request loan/grant files to conduct reviews of 

undisbursed obligations. The results of the review will be shared with the State Offices. 

If the National Office review concludes the unliquidated obligation is not justified, the 

State Office must inform the Field Office to de-obligate the funds and follow-up to 

ensure that it is accomplished in a timely manner.
CHAPTER 9: SPECIAL SITUATIONS

H

HB-1-3550

9.1 INTRODUCTION

This chapter describes the requirements for processing loans in several special situations.

Section 1 discusses conditional commitments. Section 2 deals with processing requirements

surrounding condominium ownership, community land trusts, and planned unit developments.

The chapter concludes with Section 3, which describes the specific processing differences for

manufactured homes.

SECTION 1: CONDITIONAL COMMITMENTS [7 CFR 3550.70]

9.2 OVERVIEW OF CONDITIONAL COMMITMENTS

A conditional commitment is a written assurance from the Agency to a qualified builder,

dealer-contractor, or seller that a dwelling to be constructed or rehabilitated will be certified as

acceptable for purchase by qualified loan applicants, as long as the construction and sales price

meet certain conditions. The conditional commitment does not reserve loan funds, nor does it

guarantee that an eligible loan applicant will be available to purchase the property. It does,

however, provide a reasonable assurance to the builder that the home will be eligible for

financing once it is completed.

If the area does not remain rural, the conditional commitment will not be honored unless

a purchaser is found who applied for a loan before the rural area designation changed.

9.3 APPLICATION AND FEE

Builders, dealer-contractors, or sellers interested in becoming conditional commitment

contractors must apply using Form RD 1944-36, Application for Conditional Commitment. A

single application form may be used to request conditional commitments for multiple dwellings.

All required attachments must be included for each dwelling for which a conditional

commitment is requested, including the proposed selling price, address, evidence of building site

ownership, and detailed descriptions of all proposed construction.

9-1

(01-23-03) SPECIAL PN

Revised (04-15-21) PN 549
HB-1-3550

Paragraph 9.3 Application and Fee

Applicants must include a standard application fee for each dwelling for which a

conditional commitment is requested. This fee is updated periodically through an Unnumbered

Letter (UL) posted to the Agency’s Directives website. The UL will generally be posted 30 days

prior to the effective date of the fee change. If a preliminary inspection of the property or

investigation of the conditional commitment applicant indicates that a conditional commitment

will not be issued, the application fee should be refunded. Once the appraisal is conducted, the

application fee cannot be refunded. When a loan on a property with a conditional commitment is

closed, the appraisal fee collected from the purchaser is disbursed to the conditional commitment

contractor.

9.4 EVALUATING THE CONDITIONAL COMMITMENT APPLICATION

An application for a conditional commitment is evaluated based on the criteria discussed

below.

• Ownership. The applicant must have an adequate ownership interest in the property,

as described in Paragraph 5.11, before beginning construction.

• Capacity. The applicant must have the experience and ability to complete any

proposed work competently and must be financially responsible and able to finance or

obtain financing for any proposed work. The capacity of applicants for conditional

commitments should be evaluated in the same manner as for any construction

contractor, as discussed in Paragraph 5.25 A.

• Legal capacity. The applicant must have the legal capacity to enter into the required

agreements. Legal capacity can be verified by checking the applicant’s business

license and registration.

• Civil rights. The applicant must agree to comply with all applicable laws,

regulations, and Executive Orders relating to civil rights, as described in Paragraph

1.9.

• Affirmative marketing. Any company that receives 5 or more conditional

commitments during a 12-month period must develop an acceptable

Affirmative Fair Housing Marketing Plan, as described in RD Instruction 1901-E.

• Site requirements. The proposed site must meet the requirements listed in Section 1

of Chapter 5.

• Dwelling requirements. If the dwelling is to be constructed or substantially

rehabilitated, it must meet the requirements listed in Section 2 of Chapter 5. If it is a

new manufactured home, it must meet the requirements of Paragraph 9.19.

9-2
HB-1-3550

Paragraph 9.4 Evaluating the Conditional Commitment Application

• Environmental Requirements. An environmental review must be completed as

described in Section 3 of Chapter 5.

• Start of construction. Conditional commitments for new or substantially

rehabilitated dwellings will not be issued after construction hasstarted.

• Local market demand. The number of conditional commitments issued in any

locality should not exceed existing market demand. In particular, the number of

outstanding commitments in the area must not exceed the number of loans that can

reasonably be expected to be made within 3 months of dwelling completion. To

determine this, the Loan Originator should consider the availability of loan funds and

the number of loan applications typically received in the office.

• Proposed price. The proposed price must not exceed the applicable area loan limit,

as described in Paragraph 6.6.

9.5 PRELIMINARY APPROVAL

In general, the Loan Originator must review the application materials within 7 days of

receiving a completed application. Staff is encouraged to use online resources, such as the

county assessor or taxing authority, to verify property details provided in the conditional

commitment application package.

A. Ordering an Appraisal

If the document review indicates that all of the requirements outlined in Paragraph 9.4

can reasonably be met (except for the site requirements which will be reviewed upon receipt of

an appraisal), an appraisal should be ordered in accordance with the guidelines set forth in

Paragraph 5.17. Because the application fee cannot be refunded after the appraisal is conducted,

the appraisal should never be ordered until the document review is complete.

B. Site Approval and Responsibility for Environmental Reviews

Upon receipt of the appraisal, the Loan Originator should ensure that construction has not

begun and that the site meets the requirements of Section 1 of Chapter 5. In addition, the Loan

Originator will initiate an environmental review as discussed in Section 3 of Chapter 5. Unless

there are unresolved environmental issues, the Loan Originator must determine within 7 days of

receipt of the appraisal, whether the application for a conditional commitment should be

accepted or rejected.

9-3

(01-23-03) SPECIAL PN

Revised (04-15-21) PN 549
HB-1-3550

9-4

Paragraph 9.5 Preliminary Approval

If there are environmental issues that will take additional time to resolve, the Loan Originator

must inform the conditional commitment applicant about the outstanding issues.

C. Rejecting the Application for Conditional Commitment

If any of the requirements outlined in Paragraph 9.4 are not met, the Loan Originator

must deny the application for a conditional commitment. The documents attached to the

application must be returned to the applicant, along with a letter explaining why the application

was not approved. The application, a copy of the supporting documents, and a copy of the

rejection letter should be retained in the conditional commitment applicant’s file.

If no appraisal has been conducted, the letter should indicate that the application fee will

be refunded separately. In this case, the Loan Originator should provide the Serving and Asset

Management Office (Servicing Office) with the information needed to send the refund check. If

the application was not approved because of the Loan Originator’s assessment of the

applicant’s experience or financial capacity, the letter should specify that the applicant has the

right to appeal the decision to the National Appeals Division (NAD).

9.6 FINAL APPROVAL

The final decision about approving an application for a conditional commitment depends

on the results of the appraisal. The proposed selling price listed on the conditional commitment

application must not exceed the property’s appraised value or the area loan limit, whichever is

lower.

A. Proposed Price Too High

If the proposed selling price exceeds the property’s appraised value, the Loan Originator

must notify the conditional commitment applicant that the application cannot be approved unless

the selling price is reduced. If the conditional commitment applicant decides to reduce the

proposed price, this decision must be provided to the Loan Originator in writing; the Loan

Originator cannot make changes based on verbal instructions. If the conditional commitment

applicant elects not to reduce the proposed price, the documents attached to the application

should be returned along with a letter explaining why the application was not approved.

B. Proposed Price Acceptable

If all of the eligibility requirements are met and the proposed price is acceptable, a

conditional commitment can be issued. The Loan Approval Official should complete and sign

Form RD 1944-11, Conditional Commitment, and forward a copy to the conditional commitment

applicant.
HB-1-3550

9.7 DURATION OF COMMITMENT

Conditional commitments are valid for 12 months from the date of issuance. At the

conditional commitment contractor’s request, the Loan Approval Official may extend the

commitment period for up to an additional 6 months if there have been unexpected delays in

construction caused by such factors as bad weather, materials shortages, or marketing

difficulties. In order to document the extension, the Loan Originator should modify Form RD

1944-11, Conditional Commitment.

A conditional commitment will be canceled if construction does not begin within 60 days

after the commitment is issued, unless the Loan Approval Official determines that there were

unavoidable circumstances that justified the delay. The Agency’s construction inspector, or

other qualified inspector as set forth in Section 6 of Chapter 5, should visit the site to verify that

construction has begun. If the inspector finds that construction has not begun, the Loan

Originator should send a letter to the contractor indicating that the conditional commitment has

been canceled and specifying the reasons.

9.8 CHANGES IN PLANS, SPECIFICATIONS, OR COMMITMENT PRICE

The Loan Approval Official may approve changes in project plans, specifications, or

commitment price if the conditional commitment contractor requests the changes in writing, and

the conditions discussed below have been met.

• The property must continue to meet applicable development standards after any

changes;

• If a change is requested after a loan applicant has exercised an option on the property,

the change may be approved only if the loan applicant and the contractor both agree

to the changes in writing;

• Any increase in costs must have been caused by factors beyond the control of the

commitment holder, such as an unforeseeable materials shortage;

9-5

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485
HB-1-3550

9-6

Paragraph 9.8 Changes in Plans, Specifications, or Commitment Price

• The increased commitment price must remain at or below the lesser of the property’s

appraised value or the applicable area loan limit; and

• If the proposed change will alter the purpose, operation, location, or design of the

project as originally approved, the environmental review for the project must be

amended (or a new environmental review completed) prior to approval of the change.

Changes to plans and specifications must be noted on Form RD 1924-25, Plan Certification.

If an approved change will result in an increase in the conditional commitment price that

exceeds the original appraised value, a revised appraisal report (to be paid for by the conditional

commitment contractor) should be ordered by the Agency, and Form RD 1944-11, Conditional

Commitment, should be revised based upon the latest appraisal. The revised commitment should

be initialed and dated by the Loan Approval Official, and initialed by the commitment holder. A

new appraisal is not required if the new price does not exceed the original appraised value.

9.9 PROPERTY INSPECTIONS

Property inspections will be performed according to the procedures for new construction

and major rehabilitation set forth in Section 6 of Chapter 5. If the contractor fails to correct any

deficiencies detected during an inspection or to complete the work according to previously

approved plans and specifications, the Loan Approval Official may cancel the conditional

commitment.

9.10 BUILDER’S WARRANTY

The builder or seller, as appropriate, must execute either Form RD 1924-19, Builder’s

Warranty, or provide a 10-year insured warranty when construction is completed. Builder’s

warranties are discussed in Paragraph 5.24.
HB-1-3550

9.11 CONDITIONAL COMMITMENTS INVOLVING PACKAGING OF

APPLICATIONS

A conditional commitment may be made to a seller, builder, or dealer-contractor who

packages a loan application for a prospective purchaser. In cases where the dwelling is to be

constructed for sale to a specific eligible applicant, all of the following conditions listed below

must be met.

• The conditional commitment will not be approved until the applicant’s loan has been

approved.

• Construction will not begin until funds are obligated for the loan. Exceptions may be

made when it appears likely that funding will be forthcoming and as long as the

Agency’s lien priority is not jeopardized. The sales agreement must indicate that the

loan has been approved, but not funded and must provide that if the loan is not closed

within 90 days of the date of approval, the contractor may terminate the sales

agreement and sell the property to another party. If the sales agreement is terminated,

the conditional commitment will be honored for another eligible loan applicant for the

remaining period of the commitment.

• The Agency loan will be closed only after the dwelling is constructed or the required

rehabilitation completed, and final inspection has been made.

9-7

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485
HB-1-3550

9-8

SECTION 2: SPECIAL FORMS OF OWNERSHIP

9.12 OVERVIEW

This section discusses processing requirements for loans for dwellings with three types of

special ownership: condominiums, community land trusts, and planned unit developments.

Unless otherwise indicated in this section, the same basic requirements for loan approval

discussed elsewhere in this handbook apply to these loans, along with the additional

requirements specified here. Documents related to the establishment and operation of community

land trusts must be reviewed by the Office of the General Counsel (OGC) to determine whether

the Agency’s rights are sufficiently protected. Other forms of ownership will be referred to OGC

when the Loan Approval Official determines it necessary to ensure the Agency’s rights are

protected.

9.13 LOANS FOR CONDOMINIUM UNITS [7 CFR 3550.71]

Loans may be made to finance the purchase of dwellings in condominium developments

if the conditions described in this paragraph are met, and the applicant and the property

otherwise meet the requirements outlined in this handbook.

A. Definition

A condominium is defined as a real estate project in which each unit owner has title to a

unit, an undivided interest in the common areas of the project, and sometimes the exclusive use

of certain limited common areas. The project may include dwelling units in detached, semidetached, row, garden-type, low or high rise structures.
HB-1-3550

Paragraph 9.13 Loans for Condominium Units [7 CFR 3550.71]

B. Financing Approval

Loans cannot be approved for condominium units unless the project has been approved

for financing by:

• Department of Housing and Urban Development (HUD),

• Federal National Mortgage Association (Fannie Mae),

• Federal Home Loan Mortgage Corporation (Freddie Mac),

• Department of Veterans Affairs (VA),

• State Housing Finance Agency (SHFA),

The applicant must submit documentation from the appropriate agency showing that the

project is acceptable for financing. HUD approved projects can be found by conducting a search

for condominium on their website at http://portal.hud.gov/hudportal/HUD. The Fannie Mae

Project Eligibility Review Service (PERS) website can be found at:

https://singlefamily.fanniemae.com. Freddie Mac does not currently publish a list of approved 

projects on their website. VA approved projects can be found by conducting a search through 

the Veterans Information Portal at https://vip.vba.va.gov/portal/VBAH/Home.

If the project has not been approved by one of the sources listed above, the State Director

may approve the specific condominium unit in accordance with Attachment 9-C, Condominium

Questionnaire. This type of approval represents a greater risk to the Agency, and should be used

with caution.

9-9

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485
HB-1-3550

Paragraph 9.13 Loans for Condominium Units [7 CFR 3550.71]

C. Condominium Status

Agency financing will not be considered for any condominium regardless of how

the project was approved unless, at the time of loan approval, the status of the

condominium projects meets the conditions listed below.

• At least 70 percent of the units must have been sold. (Multiple purchases of

condominium units by one owner are counted as one sale when determining if the

sales requirements have been met.)

• No more than 15 percent of the unit owners can be more than 1 month delinquent in

payment of homeowners’ association dues or assessments at the time the Agency loan

is approved.

• The condominium project must consist of a structure or structures containing four or

more units and must not contain any commercial space. Units in a rental project

which was converted to condominium ownership are not eligible.

• In addition, condominium projects that are considered ineligible by HUD, Fannie

Mae, Freddie Mac, or VA, such as condominium hotels, timeshares or houseboats,

etc., are not eligible for Agency financing.

D. Protection of Agency Rights and Lien Position

A loan may not be approved unless condominium documents preserve the rights and lien

position of the Agency described below.

1. Right of First Refusal

Any right of first refusal in the condominium documents must not impair the rights of

the Agency to: (1) foreclose or take title to a condominium unit under the remedies in the

mortgage; (2) accept a deed in lieu of foreclosure if a mortgagor defaults; and (3) sell or

lease a unit it acquires.

9-10
HB-1-3550

Paragraph 9.13 Loans for Condominium Units [7 CFR 3550.71]

2. Agency Obligation for Charges

If the Agency obtains title to a condominium unit under the remedies in its mortgage or

through foreclosure, it will not be liable for more than 6 months of the unit’s unpaid

regularly budgeted dues or charges accrued before it acquired title to the unit. The

homeowners’ association’s lien may include the cost of collecting unpaid dues.

All taxes, assessments, and charges that may become liens prior to the first mortgage

under local law must relate only to the individual condominium units and not to the

condominium project as a whole.

3. Provisions in the Case of Condemnation or Substantial Loss

In the case of condemnation or substantial loss to the units or common elements of

the condominium project, unless at least 51 percent of the first mortgagees of the

individual condominium units have given their consent, the homeowners’ association

may not:

• By act or omission seek to abandon or terminate the condominium project;

• Change the pro rata interest or obligations of any condominium unit in order to levy

assessments or charges, allocate hazard insurance proceeds or condemnation awards,

or determine the share of ownership in the common elements;

• Partition or subdivide any condominium unit;

• Seek to abandon, partition, subdivide, encumber, sell, or transfer the common

elements by act or omission (the granting of easements for public utilities or other

public purposes consistent with the intended use of the common elements by the

condominium project is not a transfer within the meaning of this clause); or

• Use hazard insurance proceeds for losses to any condominium property (whether

units or common elements) for purposes other than the repair, replacement, or

reconstruction of the condominium property

• The condominium documents must not give the condominium unit owner (or any

other party) priority over the Agency’s right to insurance proceeds or

condemnation awards for losses to, or taking of, condominium units or common

elements.

9-11

(01-23-03) SPECIAL PN

Revised (04-15-21) PN 549
HB-1-3550

Paragraph 9.13 Loans for Condominium Units [7 CFR 3550.71]

9-12

• The condominium documents must not give the condominium unit owner (or any other party)

priority over the Agency’s right to insurance proceeds or condemnation awards for losses to,

or taking of, condominium units or common elements.

E. Closing Documents

Form RD 3550-10, Condominium Rider, must be used to amend and supplement the security

instruments to accommodate special requirements that apply because the owners’ association may hold

title to the property. For example, hazard insurance may be paid by the owners’ association, rather than

by the borrower.

Condominiums are a private residence owned by an individual homeowner/family in a building

with multiple units. Because there are multiple units located within one structure, the condominium

association purchases a Master Policy, which insures the structure against loss. A copy of this policy

must be provided at closing, and annually thereafter. This policy, however, does not provide “studs-in”

or contents coverage. If the unit owner opts to purchase this coverage under a HO-6 policy, they are

responsible for payment of the premium, as the Agency does not include this premium in escrow.

Condos are escrowed for taxes only.

F. Association Dues

The Agency also does not include the monthly fees or dues for the condo association in escrow.

The unit owner is responsible for that payment. In the event the unit owner becomes delinquent on their

dues and the association places a lien on the property, the Servicing Office’s Escrow Department may

pay delinquent dues and a fee will be amortized on the account.

9.14 LOANS FOR UNITS IN A COMMUNITY LAND TRUST

Loans may be made to finance the purchase of dwellings located on land owned by community

land trusts if the conditions described in this paragraph are met, and the applicant and the property

otherwise meet the requirements outlined in this handbook. Documents related to the establishment and

operation of community land trusts must be reviewed by the Office of the General Counsel (OGC) to

determine whether the Agency’s rights are sufficiently protected. These documents should include, but

are not limited to: articles of incorporation and bylaws; organizational resume or history summarizing the

organizations experience in affordable housing; list of staff responsible for the community land trust’s

homeownership program; current annual report; and ground lease.

Ground Leases. Some common issues which should be addressed in a ground lease include, but are not

limited to:

• Duration of lease (typically 99 years);

• Lease fee;
HB-1-3550

Paragraph 9.14 Loans for Units in a Community Land Trust

• Use of the leased land (residential use only, maintenance of common areas, etc.);

• Taxes and assessments;

• Improvements to the home and/or land;

• Financing (permitted mortgages, excess sale proceeds);

• Liability, insurance, damage and destruction, eminent domain;

• Transfer/Sale of the home;

• Default (must contain language that ensures that all restrictions relating to community

land trusts will automatically and permanently terminate upon foreclosure or Agency

acceptance of a deed in lieu of foreclosure);

• Mediation / Arbitration

• Other General Provisions

When reviewing a ground lease, staff may also find it helpful to compare the submitted lease to

other model leases available through National Community Land Trust Network; which can be

searched at http://cltnetwork.org.

A. Definition

A community land trust is defined as a private nonprofit community housing

development organization that owns and leases land under a long-term ground lease to low- and

moderate-income households, at affordable prices. The organization must:

• Be organized under State or local laws;

• Have no part of its net earnings benefiting any member, founder, contributor, or

individual;

• Comply with standards of financial accountability;

• Have among its purposes significant activities related to the provision of decent

housing that is affordable to low- and moderate-income people;

9-13

SPECIAL PN (01-23-03)

Revised (05-28-20) SPECIAL PN
HB-1-3550

Paragraph 9.14 Loans for Units in a Community Land Trust

9-14

• Maintain, through significant representation on the organization’s governing board and

otherwise, accountability to low-income community residents with regard to decisions on the

design, sitting, development, and management of affordable housing;

• Have its corporate membership open to any adult resident of a particular geographic area

specified by the by-laws of the organization; and

• Is established to carry out all of the following activities:

◊ Acquire parcels of land, held in perpetuity, primarily for conveyance under long-term

ground leases;

◊ Transfer ownership of any structural improvements located on such leased parcels to the

lessees; and

◊ Retain a pre-emptive option to purchase any such structural improvements at a price

determined by a formula that is designed to ensure that the improvement remains

affordable to low- and moderate-income people in perpetuity.

B. Preservation of Agency Rights and Lien Position

The relevant legal documents must contain language that ensures that all restrictions relating to

community land trusts will automatically and permanently terminate upon foreclosure or Agency

acceptance of a deed in lieu of foreclosure. Language that merely subordinates the restrictions to the

mortgage is not sufficient -- the restrictions also cannot be forced upon subsequent purchasers following

resale by the Agency.

C. Restrictions on Resale Price

Restrictions on the limits to the resale price of the property or recapture of equity are permitted.

A maximum sales price may be imposed or the sales proceeds due the borrower may be limited, with any

excess payable to a governmental body or nonprofit organization for reuse in the community land trust. If

resale restrictions include income limits for prospective buyers, the limits may be as restrictive as

applicable Direct income limits in effect at the time of the purchase agreement, but must not be more

restrictive. When such restrictions apply, the requirements listed below must be met.

• The borrower must be permitted to recover at least the original purchase price, sales

commission and other typical selling expenses, and cost of capital improvements made by the

borrower, when the borrower sells the property.

• If the property has depreciated such that the original purchase price was greater than the

current market value, the borrower must be permitted to recover at least the current market

value (less typical selling expenses) when the borrower sells the property.
HB-1-3550

Paragraph 9.14 Loans for Units in a Community Land Trust

• The borrower must be permitted to recover a reasonable amount of appreciation as

determined by the Agency below. Appreciation is measured by the difference

between the original purchase price and the actual price at which the property is

resold.

• If the program permits the borrower to sell the property at market value but recaptures

part of the equity, the Agency considers a reasonable share of appreciation to be at

least 50 percent. The Agency does not object to situations whereby the borrower’s

share of appreciation is on a sliding scale beginning at 0, provided that within 2 years

the homeowner would be permitted to retain 50 percent of the appreciation.

• If the program sets a maximum sales price restriction, the borrower must be permitted

to retain 100 percent of the appreciation.

• Other arrangements for sharing appreciation may be approved by the State Director.

D. Right of First Refusal

One method commonly used to ensure that housing remains part of an affordable housing

program is for the community land trust to hold a right of first refusal or an option right that can

be exercised when the borrower proposes to sell the home to a purchaser not eligible for the

program benefits. Such a provision is permitted if all of the requirements listed below are met.

• The rights must be held only by a governmental body or eligible nonprofit

organization and exercised by them or someone they have identified as an eligible

purchaser.

• Any right must be exercised within 45 days after the holder of these rights may

exercise them (for example, the rights are often triggered by a notice of sale from the

borrower).

• Payment Subsidy Recapture 

The borrower’s ability to repay payment subsidies may be affected by the resale

restrictions of the community land trust. Upon closing, the lease agreement and/or

any other document(s) containing information about the community land trust’s resale

restrictions should be sent to the Servicing Office with the other applicable closing

documents, to ensure accurate subsidy recapture calculations in the future.

9-15

(01-23-03) SPECIAL PN

Revised (04-15-21) PN 549
HB-1-3550

Paragraph 9.14 Loans for Units in a Community Land Trust

Case-by-case exceptions to Agency recapture requirements may be approved by the

Administrator if necessary to accommodate the restrictions imposed by the land trust.

E. Appraisals

A property located on a site owned by a community land trust must be appraised as a

leasehold interest, with thorough analysis of the ground lease, and resale and other restrictions

which may apply.

Because the community land trust may subsidize the sales price to a borrower, the sales

price may be significantly less than the market value of the leasehold interest in the property. The

appraised value of the leasehold interest must be accurately developed by the appraiser because

the resale restrictions, as well as other restrictions that may be included in the ground lease, can

also affect the value of the property.

The appraiser must use a three-step process to develop an opinion of value.

• Fee Simple Value = Sales Comparison Analysis Approach.

In determining the fee simple value of the subject property, the appraiser must use

comparable sales of similar properties that are owned as fee simple estates. If this

is not possible, the appraiser may use sales of properties that are subject to other

types of leasehold estates as long as he or she makes appropriate adjustments,

based on the terms of their leases, to reflect a fee simple interest.

When the community or neighborhood has sales activity for other leasehold estates

held by a community land trust, the appraiser must discuss them in the appraisal

report, but must not use them as comparable sales because, in all likelihood, the

sales prices will have been limited by

restrictions in the ground lease.

• Value of Leased Fee = Ground Rent / Capitalization Rate. The appraiser must

provide support for the capitalization rate selected.

• Value of Leasehold = Value of Fee Simple – Value of Leased Fee

9-16
HB-1-3550

9.15 PLANNED UNIT DEVELOPMENTS

Loans may be made to finance the purchase of dwellings located in Planned Unit

Developments (PUD) if the conditions described in this paragraph are met and the applicant and

property otherwise meet the requirements outlined in this handbook.

A. Definition

A Planned Unit Development is a project or subdivision that includes common property

that is owned and maintained by a homeowners’ association for the benefit of and use by the

individual PUD unit owners. A PUD can consist of detached single family homes,

condominiums (which must also meet the requirements of Paragraph 9.13 of this Handbook), or

townhomes. Certain properties may have the physical appearance of a townhome, but are owned

as a condominium; in which case the requirements of Paragraph 9.13 of this Handbook must be

followed.

B. Preservation of Agency Rights and Lien Position

The Owners Association must be controlled by the homeowners and any restrictions

imposed on the owners in the PUD Constituent Documents must not jeopardize the Agency’s

rights or lien position. The “Constituent Documents” are the declaration, articles of

incorporation, trust instrument or any equivalent document which creates the Owners

Association and any by-laws or other rules or regulations of the Owners Association.

C. Closing Documents

Form RD 3550-11, “Planned Unit Development Rider” must be used to amend and

supplement the security instrument to accommodate special requirements. For example the

Owners’ Association may maintain a “master” or “blanket” Hazard Insurance Policy.

9-17

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485
HB-1-3550

9-18

SECTION 3: MANUFACTURED HOMES [7 CFR 3550.73]

9.16 AUTHORIZED LOAN PURPOSES

A. Definition

Manufactured homes are built to different construction standards and codes and have

different inspection requirements than those manufactured structures generally referred to as

“modular” or “panelized” homes. The major difference between manufactured homes and modular

or panelized homes is the construction standard or code to which they are built and the inspection

requirements. Modular or panelized homes, as described in Exhibit B of RD Instruction 1924-A, are

not affected by the requirements of this section.

B. Authorized Loan Purposes

When a real estate mortgage or deed of trust covers the unit and the site, Section 502

loans may be used to finance the following:

• Site development work that conforms to the requirements of RD Instruction

1924-A;

• Purchase of an eligible new unit, transportation and set-up costs, and purchase of an

eligible site if not already owned by the applicant;

• Subsequent loans for equity or repair in conjunction with an assumption or Real

Estate Owned (REO) sale; and

• Subsequent loans for repair of units that are financed with Section 502 loans.

C. Loan Restrictions

The Agency will not use Section 502 loan funds to finance:

• The purchase of an existing unit and site, unless the property is already financed with

a Section 502 loan or is Agency REO property;

• The purchase of a site without also financing the unit;

• A unit that does not meet Federal Manufactured Home Construction and Safety

Standards (FMHCSS);A unit that does not meet or exceed the FMHCSS thermal

requirements for the county in which the home is to be located (see Attachment 9-B,

Thermal Requirements for a Manufactured Home);
HB-1-3550

9-19

(01-23-03) SPECIAL PN 

Revised (11-18-22) PN 571 

Paragraph 9.16 Authorized Loan Purposes

• Alteration or remodeling of the unit when the initial loan is made, unless repairs are

needed in conjunction with an assumption or REO sale;

• Repairs not associated with a transfer, REO sale, or unit that is already financed with

a Section 502 loan;

• Existing debt owed by the applicant; or

• Furniture, including movable articles of personal property such as drapes, beds,

bedding, chairs, sofas, divans, lamps, tables, televisions, radios, stereo sets, and other

similar items of personal property (furniture does not include wall-to-wall carpeting,

refrigerators, ovens, ranges, washing machines, clothes dryers, heating or cooling

equipment, or other similar equipment).

9.17 DEALER-CONTRACTOR REQUIREMENTS

No loans will be made on a manufactured home sold or serviced by any entity that is not 

an approved dealer-contractor. Once the applicant has submitted the name of the selected dealercontractor, the Loan Originator should check the State Office’s list of approved dealercontractors. If the dealer-contractor is approved, the Loan Originator should notify the applicant 

of what information must be submitted to the Agency for review and approval. 

If the dealer-contractor is not approved, the Loan Originator should offer the applicant 

the opportunity to select another dealer-contractor who is on the approved list, or to request that

the Loan Originator inform the dealer-contractor about the Agency’s procedures for approval. 

The applicant and the dealer-contractor will be notified of the Agency’s thermal

requirements for the county in which the home is to be located. Rural Development accepts the

FMHCSS Uo Value Zones for new manufactured homes financed by the Agency. Attachment 

9-B lists the FMHCSS Uo Value Zones for each state, by county, and Puerto Rico.

All new manufactured homes built to the FMHCSS are provided with a Comfort Heating

and Cooling Certificate. This certificate (which may be combined with the Data Plate) is affixed

in a permanent manner near the main electrical panel or other readily accessible and visible

location inside the unit. The certificate specifies to FMHCSS Uo Value zone of the home as

Zone 1, 2 or 3. (The U/O Value Zone Map on the certificate does not apply.) An example of the 

Comfort Heating and Cooling Certificate is provided as Attachment 9-A.
HB-1-3550

9-20

Paragraph 9.17 Dealer-Contractor Requirements

An entity may apply to become an approved dealer-contractor by submitting Form RD

1944-5, Manufactured Housing Dealer-Contractor Application, supplementary data sources, 

such as financial statements and tax returns should be used to verify or determine employment,

income, held assets and credit history. An entity that owns multiple locations within a state, and

will be responsible for meeting all of the Agency requirements for each branch location listed on 

the application, needs only submit one application. The entity must identify sales personnel, 

sales area, and number of branches as well as the addresses of all branchlocations to be covered 

by the individual application. Independent retailers of manufactured homes are required to obtain 

individual approval in their company name. To qualify to participate, a dealer-contractor must 

be: (1) financially responsible; (2) qualified and equipped toset up the unit on a site-built 

permanent foundation and develop the site; and (3) willing to provide a warranty acceptable to 

the Agency.

The evaluation of applications for dealer-contractor status involves a joint effort by Loan

Originators, Loan Approval Officials, and State Directors.

When evaluating these applications, the Loan Originator should perform the following

tasks.

• Maintain an operational file for each dealer-contractor who submits Form RD1944-5

and a CPA prepared financial statement.

• Make direct checks on trade and bank references and check with the local Better

Business Bureau.

• Inspect the dealer's place of business to determine its permanency and the adequacy

of available equipment.

• Obtain copies of brochures, descriptive literature, guarantees, sales contracts, and price

lists.
HB-1-3550

9-21

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485

Paragraph 9.17 Dealer-Contractor Requirements

• Determine that the dealer-contractor has the necessary equipment and experience to

perform or subcontract all site development work. If the firm uses subcontractors,

obtain the names of the subcontractors and their qualifications. A field inspection of

recently-developed sites and set-ups is desirable in determining whether the dealercontractor has the necessary experience.

• Carefully analyze the collected information to determine if the dealer-contractor is

able to provide the full service of sales, service, erection, and warranty of

manufactured units and developing sites for them. Based on this analysis, the Loan

Originator should develop a recommendation with supporting documentation as to

whether or not the dealer-contractor is acceptable.

• If necessary, the Loan Originator should maintain a complaint file to establish a basis

for limiting future business with the dealer-contractor.

The Loan Approval Official should review the Loan Originator's recommendations and

forward them, with any additional comments, to the State Director for review.

The State Director will make the decision on the dealer-contractor's acceptability and, if

applicable, issue a letter of acceptance. The State Director also will issue a list of acceptable

dealer-contractors in the State. The list of dealer-contractors should include only acceptable

dealer-contractors that are active. Active is defined as a dealer-contractor who has sold a

manufactured home within the last two years that was financed by a Rural Development direct or

guaranteed loan borrower. Dealer-contractors that have not been active in a two year period may

be removed from the active list of approved dealer-contractors. If the State Director determines

that the dealer-contractor is not acceptable, appeal rights will be granted. Any dealer-contractor

determined to be unacceptable may reapply for acceptance at any time the dealer-contractor has

reason to believe the conditions leading to the determination have been removed.
HB-1-3550

9-22

9.18 PROCESSING PROCEDURES

A. Submission Requirements

In addition to the documents required for a standard Section 502 loan, the applicant must

submit the following before the loan can be approved:

• A plot plan and site development plan as described under RD Instruction 1924- A, Exhibits C

and J;

• A foundation plan per RD Instruction 1924-A, Exhibit C adapting manufacturer’s design to

the specific site conditions. Specific site conditions that may require modification may

include slope, soils type, frost depth and requirements of FD adopted code and/or local

codes.

• Certification of site and foundation designs on Form RD 1924-25, Plan Certification;

• An itemized cost breakdown of the total package, including the base unit, eligible options,

site development, installation, set up, lot costs, and any credit for wheels and axles;

• A statement signed by the dealer-contractor indicating that any cash payment or rebate as a

result of the purchase will be deducted from the price of the unit and not paid to the

applicant; and

• A statement signed by the dealer-contractor that the proposed cost is the full price of the unit

and all development activities, and if furniture is being purchased by the applicant with other

funds, that a lien will not be filed against the Agency’s security property.

B. Appraisal Techniques

The site and unit must be appraised before loan approval, using normal single family

residential appraisal techniques. Since other manufactured units and sites provide the most

similar comparables, every effort must be made to obtain such comparables, even if their

distance from the subject property is greater than preferred. If units are not available within a

reasonable distance, the appraiser may use homes other than manufactured homes, after adjusting

for factors such as location, construction material, size, and quality.

C. Loan Rates and Terms

The interest rates for manufactured homes are the same as for other real estate loans made

with Section 502 loan funds, but the maximum loan term is 30 years. Applicants for Section 502

loans on manufactured homes may receive payment subsidy, if they are eligible.
HB-1-3550

9-23

(01-23-03) SPECIAL PN

Revised (01-06-17) PN 492

9.19 CONSTRUCTION AND SITE REQUIREMENTS

The unit must meet the requirements for new dwellings contained in Section 2 of Chapter 5

and must have a floor area of 400 square feet or more, and a width of 12 feet or more for a singlewide unit, and 20 feet or more for a double-wide unit. In addition, the unit must meet the Agency’s

Thermal Performance Standards as set forth in RD Instruction 1924-A, for the winter degree day

zone where the unit will be located. Finally, site development and set up must conform to Exhibit

C and Exhibit J of RD Instruction 1924-A, and the environmental requirements of RD Instruction

1970 series “Environmental” must be met. Development under the Mutual Self-Help and borrower

construction methods is not permitted for manufactured homes.

9.20 LOAN CLOSING

In general, loan closing procedures are the same whether the Section 502 loan is made for

the purchase of a manufactured home or another type of single family home. However, the Loan

Originator should be aware of the following requirements.

A. Contract Requirements

The dealer-contractor must sign Form RD 1924-6, Construction Contract, which will cover

both the unit and site development work. Multiple contracts are prohibited, but a dealer-contractor

may use subcontractors if the dealer-contractor remains solely responsible for all work under the

contract. Payment for all work will be made in accordance with Form RD 1924-6 and RD

Instruction 1924-A, except that no payment will be made for materials or property stored on site

(for example, payment for a unit will be made only after it is permanently attached to the

foundation).

B. Lien Release Requirements

All firms furnishing materials or labor in connection with the contract must sign Form

RD 1924-10, Release by Claimants, except for the manufacturer of the unit. The manufacturer

of the unit must furnish an executed manufacturer's certificate of origin indicating that the unit is

free and clear of all legal encumbrances. Form RD 1924-10 and the manufacturer’s certificate of

origin should be filed in the case file.

C. Warranty Requirement

A dealer-contractor must provide the borrower with a warranty in accordance with the

provisions of RD Instruction 1924-A. The warranty must identify the unit by serial number. The

dealer-contractor must certify that the unit substantially complies with the plans and

specifications, and the home has sustained no hidden damage during
HB-1-3550

9-24

Paragraph 9.20 Loan Closing

transportation. If the home was manufactured in separate sections, the dealer-contractor also

should certify that the sections were properly joined and sealed according to the manufacturer's

specifications. The dealer-contractor must furnish the applicant with a copy of all

manufacturers’ warranties.

D. Real Estate Tax Requirement

Whether manufactured homes are considered personal or real property may vary stateto-state. When the loan closes, the unit and site must be taxed as real estate by the jurisdiction

in which it is located, if such taxation is permitted under applicable law.
HB-1-3550

(01-23-03) SPECIAL PN

Revised (09-23-09) PN 433

ATTACHMENT 9-A

Attachment 9-A

SAMPLE COMFORT HEATING AND COOLING CERTIFICATE
HB-1-3550

Attachment 9-B

Page 1 of 7

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485

ATTACHMENT 9-B

THERMAL REQUIREMENTS FOR MANUFACTURED HOMES

BACKGROUND: The minimum thermal requirement for new manufactured homes acceptable

to Rural Development is the Federal Manufactured Home Construction and Safety Standard

(FMHCSS) Uo Value Zone(s) indicated on the Comfort Heating and Cooling Certificate for the

following States:

NOTE: For a FMHCSS Uo Value Zone 1 or higher, higher means a FMHCSS Uo Value Zone 2

or 3. For a FMHCSS Uo Value Zone 2 or higher, higher means a FMHCSS Uo Value Zone 3.

Also, Attachment 9-A is an example of a Data Plate containing the Comfort Heating and Cooling

Certificate; however, the U/O Value Zone Map on the Certificate does not apply to Rural

Development. Rural Development will continue to use Attachment 9-B.

ALABAMA

FMHCSS Uo Value Zone 1 or higher is acceptable for all counties in the State.

ALASKA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

ARIZONA

FMHCSS Uo Value Zone 2 or higher is acceptable for the following counties:

Cochise Greenlee Mohave Santa Cruz

Gila

Graham

La Paz

Maricopa

Pima

Pinal

Yuma

FMHCSS Uo Value Zone 3 is acceptable for all other counties.

ARKANSAS

FMHCSS Uo Value Zone 2 or higher is acceptable for all counties in the State.
HB-1-3550

Attachment 9-B

Page 2 of 7

CALIFORNIA

FMHCSS Uo Value Zone 2 is acceptable for the following counties:

Alpine Modoc Nevada Sierra

Lassen Mono Plumas Siskiyou

FMHCSS Uo Value Zone 2 or higher is acceptable for all other counties.

COLORADO

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

DELAWARE / MARYLAND

FMHCSS Uo Value Zone 3 is acceptable for all counties in both States.

FLORIDA / VIRGIN ISLANDS

FMHCSS Uo Value Zone 1 or higher is acceptable for the following Florida counties and

the Virgin Islands:

Brevard

Broward

Charlotte

Citrus

Collier

Dade

DeSoto

Glades

Hardee

Hendry

Hernando

Highlands

Hillsborough

Indian River

Lake

Lee

Levy

Manatee

Marion

Martin

Monroe

Okeechobee

Orange

Osceola

Palm Beach

Pasco

Pinellas

Polk

Sarasota

Seminole

St Lucia

Sumter

Volusia

FMHCSS Uo Value Zone 1 or higher is acceptable for all other counties.
HB-1-3550

Attachment 9-B

Page 3 of 7

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485

GEORGIA

FMHCSS Uo Value Zone 1 or higher is acceptable for all counties in the State.

HAWAII

FMHCSS Uo Value Zone 1 or higher is acceptable for all counties in the State.

IDAHO

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

ILLINOIS

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

INDIANA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

IOWA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

KANSAS

FMHCSS Uo Value Zone 2 or higher is acceptable for the following counties:

Barber

Chautauqua

Cherokee

Comanche

Cowley

Crawford

Elk

Harper

Labette

Montgomery

Neosho

Sumner

Wilson

FMHCSS Uo Value Zone 2 is acceptable for all other counties.

KENTUCKY

FMHCSS Uo Value Zone 2 or higher is acceptable for all counties in the State.
HB-1-3550

Attachment 9-B

Page 4 of 7

LOUISIANA

FMHCSS Uo Value Zone 1 or higher is acceptable for all counties in the State.

MAINE

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

MASSACHUSETTS / RHODE ISLAND / CONNECTICUT

FMHCSS Uo Value Zone 3 is acceptable for all counties in the three States.

MICHIGAN

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

MINNESOTA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

MISSISSIPPI

FMHCSS Uo Value Zone 1 or higher is acceptable for all counties in the State.

MISSOURI

FMHCSS Uo Value Zone 2 or higher is acceptable for the following counties.

Barry

Butler

Cape Girardeau

Dunklin

Howell

Jasper

McDonald

Mississippi

New Madrid

Newton

Oregon

Ozark

Pemiscot

Ripley

Scott

Stoddard

Stone

Taney

FMHCSS Uo Value Zone 2 is acceptable for all other counties.
HB-1-3550

Attachment 9-B

Page 5 of 7

MONTANA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

NEBRASKA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

NEVADA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

NEW JERSEY

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

NEW MEXICO

FMHCSS Uo Value Zone 2 or higher is acceptable for the following counties:

Bernalillo

Chaves

Curry

De Baca

Dona Ana

Eddy

Grant

Guadalupe

Hidalgo

Lea

Lincoln

Luna

Otero

Quay

Roosevelt

Sierra

Socorro

FMHCSS Uo Value Zone 2 is acceptable for all other counties.

NEW YORK

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

NORTH CAROLINA

FMHCSS Uo Value Zone 2 or higher is acceptable for all counties in the State.

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485
HB-1-3550

Attachment 9-B

Page 6 of 7

NORTH DAKOTA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

OHIO

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

OKLAHOMA

FMHCSS Uo Value Zone 2 is acceptable for the following counties

Beaver Cimarron Texas

FMHCSS Uo Value Zone 2 or higher is acceptable for all other counties.

OREGON

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

PENNSYLVANIA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

PUERTO RICO

FMHCSS Uo Value Zone 1 or higher is acceptable for all of Puerto Rico.

SOUTH CAROLINA

FMHCSS Uo Value Zone 1 or higher is acceptable for all counties in the State.

SOUTH DAKOTA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

TENNESSEE

FMHCSS Uo Value Zone 2 or higher is acceptable for all counties in the State
TEXAS

HB-1-3550

Attachment 9-B

Page 7 of 7

UTAH

FMHCSS Uo Value Zone 1 or higher is acceptable for all counties in the State.

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

VERMONT / NEW HAMPSHIRE

FMHCSS Uo Value Zone 3 is acceptable for all counties in both States.

VIRGINIA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

WASHINGTON

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

WEST VIRGINIA

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

WISCONSIN

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

WYOMING

FMHCSS Uo Value Zone 3 is acceptable for all counties in the State.

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485
HB-1-3550

Attachment 9-C

Page 1 of 2

ATTACHMENT 9-C

CONDOMINIUM QUESTIONNAIRE

Project Name and Address:

Documents that are needed to complete this questionnaire are as follows:

Υ Recorded covenants, conditions and restrictions (CC&Rs)/Declaration/Master Deed;

Υ Articles of Incorporation (Articles of Association or Condominium Trust);

Υ Bylaws;

Υ Current year’s budget, and current balance sheet (less than 90 days old);

Υ Prior fiscal year-end financial statement(s)

Υ Minutes of last two (2) Homeowner Associations meetings;

Υ Condominium association master insurance policy (flood, liability, hazard insurance,

fidelity bond).

Questions: YES NO

1. Does the condominium consist of 4 or more units?

2. Have current and complete copies of the condominium project’s

legal documents been submitted for review?

3. Has OGC determined that the condominium project complies with

the requirements of the enabling statute and all applicable state and

local laws?

4. When required by state or local laws, has the “Condominium Resale

Certificate” been provided to the buyer?

5. Has OGC determined that the condominium project’s legal

documents preserve the rights and lien position of the Agency?

6. Has control of the owners’ association been turned over to the unit

owners?

7. Is the owners’ association currently involved in any litigation?

8. If the condominium project is on a leasehold, does the underlying

lease provide a term that is equal to or greater than the life of the

loan?

9. Is the project professionally managed?

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485
HB-1-3550

Attachment 9-C 

Page 2 of 2 

Questions: YES NO

10. Does the project contain commercial or non-residential space?

11. Did the owners’ association provide a current copy of the financial

statement (audited financial statement if the project contains 10 or

more units)?

12. Are the reserve funds clearly separate from the operating funds?

13. Is the reserve account funded at a level that is sufficient to meet

planned expenses and ongoing maintenance of the condominium

project, without assessing additional fees to the unit owners?

(Funding of replacement reserves for capital expenditures and deferred

maintenance should be at least 10% of the budgeted income.)

14. Are more than 15% of the unit owners more than 1 month delinquent

in payment of homeowners’ association dues or assessments?

15. Are at least 70% of the units sold?

16. Are the common elements of the project well maintained?

17. Does the owners association have adequate insurance coverage for

the project and common elements? (i.e. - hazard insurance must cover

100% of the replacement cost)

Comments: (Responses in any of the shaded boxes require explanation if approval is 

recommended)

Recommendation: The project has been reviewed and the unit (check one) Υ is Υ is not 

acceptable for Agency financing. 

SIGNATURE OF REVIEWER TITLE DATE OF INSPECTION

SIGNATURE OF STATE DIRECTOR DATE OF INSPECTION
HB-1-3550

SECTION 1: UNDERSTANDING LEVERAGED LOANS

10.1 OVERVIEW

A leveraged loan is an Agency loan that is supplemented by an affordable housing loan 

or grant from another funding source that is provided at the same time the Agency loan is closed. 

Only eligible leveraged loans will be considered in the payment subsidy calculation. For the 

purpose of payment subsidy only, an eligible leveraged loan is defined as an affordable housing 

loan that is characterized by long term (not less than 30 years), amortized payments with a note 

interest rate equal to or less than 3 percent. Detailed guidance for calculating payment subsidy is 

provided in Paragraph 6.12. This does not preclude other types of participating leveraging.

Leveraging reduces the loan amount the Agency must provide to help an applicant obtain 

adequate housing. The additional funding source may be a private lender that provides home 

financing at market rates and terms, a State or local government, or a nonprofit organization that 

provides subsidized loans or grants. Leveraged loan payment, security, and processing 

requirements may vary from non-leveraged loans as provided in this chapter. This chapter 

provides basic information about leveraging and describes the modifications to regular loan 

processing procedures that are made when a loan is to be leveraged.

A. Advantages of Leveraged Loans

Leveraged loans offer advantages to both the Agency and applicants. By combining its 

resources with those of other lenders, the

Agency can assist more borrowers. For this 

reason, loan packages that receive an affordable 

housing loan from an Agency recognized source 

will receive a processing priority when the 

supplemental funding reduces the amount 

otherwise needed from the Agency by at least 

20 percent with loan funds or 15 percent if 

entirely grants, forgivable loans or deferred 

payment loans.

For some applicants, purchasing a home through a leveraged loan will be the first 

opportunity to establish a relationship with a private lender. For other applicants, combining the

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CHAPTER 10: LEVERAGED LOANS

Who Can Be a Participating Lender?

“Lender,” as it is used in this chapter, refers to an 

organization that provides long term, amortized loans 

for housing, including private lenders, State and local 

governments, and nonprofit organizations. The 

Agency encourages grant funding when it is 

available. However, a grant provider is not 

considered a “lender.”
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Paragraph 10.1 Overview

Agency loan with a grant or low-interest loan from another subsidy program may be the only 

way to make homeownership possible. Leveraging is especially encouraged in the case of 

assumptions on new rates and terms, since the applicant may be able to obtain a non-Agency 

loan for purchase costs above the outstanding balance to be assumed.

B. Two Separate Financial Agreements

When a loan is leveraged, each lender enters into a separate financial agreement with the 

applicant. The combined resources that are provided enable the applicant to purchase a home.

Although each lender remains responsible for final underwriting decisions for its loan, the 

application and underwriting processes should be streamlined whenever possible to avoid 

duplication of effort and extra burden on the applicant.

10.2 SOURCE OF LEVERAGED FUNDS

Agency funds may be supplemented by funds from a variety of sources. One of the 

challenges for the Loan Originator will be to understand the implications for the applicant and 

the Agency of the requirements that may be imposed by these sources.

A. Market Rate Financing

Market rate financing may be appropriate under some circumstances. The applicant’s 

repayment ability must be considered in determining whether it is appropriate for referral to 

market rate sources. Market rate loans will not be considered in the payment assistance formula. 

Private lenders generally have a variety of loan products that are tailored to fit specific 

circumstances, for example, different products for new purchases, refinancing, and home 

improvement loans. The private lender loan must be a long-term, fixed rate mortgage of at least 

30 years or a term no shorter than 15 years with a balloon payment and installment based on at 

least a 30-year amortization schedule. The Agency will not accept an adjusted rate mortgage 

(ARM) or an interest only mortgage. The Agency will not participate in loan packages that 

involve interest rates that are more than 2% (200 basis points) above the Agency note rate. Loan 

Originators may need to work with the lender and applicant to identify an appropriate loan 

product that meets lender and Agency requirements.

B. Other Subsidized Financing

Although there are many variations in the specifics, the subsidized funds that can 

supplement Agency funds will generally come in one of the forms described below.

• Grants without long-term restrictions. Some grants are provided with no 

restrictions, as long as the applicant is eligible and the funds will be used for an 

eligible purpose.
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Paragraph 10.2 Source of Leveraged Funds

• Forgivable loans. Some sources provide funds that require repayment only if the 

home buyer fails to comply with program requirements or restrictions. For example, 

a funding source may provide funds for a down payment or rehabilitation that need 

not be repaid if the home buyer remains in the property for a specified period oftime. 

The funds are generally provided as a loan to permit the funding agency to record the 

circumstances under which repayment is required.

• Deferred payment loans. Deferred payment loans may be used to provide funds that 

are repaid only upon transfer of the property or as a balloon payment at the end of a 

specified period. These funding arrangements often include a provision for the 

funding source to share any appreciation that occurs with the home buyer.

• Affordable Housing Loans. In many areas, low-interest loans are offered by State 

and local government agencies. These loans require repayment on a monthly basis 

and may include provisions for the funding source to share in any appreciation.

Grants, forgivable loans, deferred payment loans, and any other nonamortizing loans are not 

considered in calculating the monthly principal, interest, taxes, and insurance (PITI) or total debt 

(TD) ratios. The Agency’s ability to recapture subsidy funds may be affected by the provisions 

of these loans. Agency loans should be subordinated only in the case of an amortizing loan of 20 

to 30 percent of the total transaction. While an applicant may obtain a loan from another source 

of less than 20 percent of the total transaction, such a loan would not receive benefits such as 

lien priority, or processing priority. Further, USDA payment assistance is used to make the 

home affordable rather than to make the participating financing affordable.

10.3 KEY DIFFERENCES IN POLICIES ANDPROCEDURES

This paragraph highlights major policy and procedural differences between qualifying 

leveraged loans and other participation loans. Detailed processing guidance for originating 

leveraged loans is provided in Section 2 of this chapter.

A. Eligible Loans and Grants

Cash contributions by the applicant, gifts from individuals, and donations of land do not 

count as leveraged or participation amounts. These are applicant contributions. Likewise, seller 

contributions or assistance from organizations that require seller participation or seller 

contributions do not count towards leveraged or participation amounts. Subsequent loans cannot 

be leveraged unless they are used in conjunction with assumptions on new rates and terms.

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Paragraph 10.3 Key Differences in Policies and Procedures

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The Agency will not consider leveraging arrangements with market-rate financing 

sources in which the lender’s loan amount is less than 20 percent or greater than 50 percent of 

the combined transaction amount. When all the leveraging consists of subsidized financing 

(affordable housing products, such as down payment assistance except funds that come directly 

or indirectly from seller contributions, forgivable loans, etc.), the minimum acceptable 

leveraging is 15 percent.

Other financing totaling less than 20 percent for lenders or 15 percent from other 

subsidized housing assistance is permissible. However, Rural Development will not subordinate 

its lien position to the lender if the loan is less than these required thresholds.

B. Lien Position

To encourage participation by other lenders, the Agency will subordinate its lien position 

to a leveraged lender providing at least 20 percent of the financing. However, liens related to 

other subsidized funds provided in the form of grants and nonamortizing loans, such as deferred 

payment or forgivable loan, must be subordinated to the Agency's loan. In those cases where 

there is a soft, silent or forgivable lien, the total debt may exceed the market value as prescribed 

in Paragraph 6.7 F.

C. Payment Subsidy Calculation

Regardless of the percentage of the 

loan that is financed by the leveraged lender, 

the monthly note installment of an eligible 

leveraged loan as described in paragraph 10.1, 

will be considered in the payment subsidy 

calculations. Detailed guidance for 

calculating payment subsidy is provided in 

Paragraph 6.12.

D. Availability of Mortgage Credit Certificates (MCC)

Under current tax law some State and local issuers of mortgage bonds may issue a 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” according to income calculation guidance described in 

Paragraph 4.4 H. MCCs are typically issued by Housing Finance Agencies through private 

lenders. The maximum annual MCC tax credit is limited by the IRS Tax Code (currently

$2,000).

Will the leveraged loan payment be considered 

when calculating payment subsidy?

Only when the eligible leveraged loan is amortized for 

at least 30 years with an interest rate that does not 

exceed 3 percent.

Exhibit 6-2 provides a sample payment subsidy 

calculation.
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Paragraph 10.3 Key Differences in Policies and Procedures

E. Section 8 Housing Choice Vouchers (HCV)

Housing Choice Vouchers may be used with or without a leveraged loan. The voucher 

itself is not considered leveraging.

F. Origination

Many processing steps can be conducted by the participating lender, rather than Agency 

staff. For example, the Agency may accept application and income information provided by the 

lender and permit the participating lender to conduct appraisals and inspections when the lender 

has a stake in the transaction. However, even when the Agency relies on the work of the 

participating lender, it retains internal control, final underwriting, and loan approval 

responsibility for the Agency loan. Responsibility for compliance with environmental 

requirements remains with the Agency, although the lender may be asked to assist in collecting 

needed environmental information. The Agency is also responsible for compliance with the 

disclosure requirements under the Truth in Lending Act and Real Estate Settlement Procedures 

Act Integrated Mortgage Disclosures (TRID) regulation for the Agency loan. Section 2 of this 

chapter provides detailed processing guidance for originating leveraged loans.

G. Servicing

Leveraged loans are eligible for the same servicing actions as any other Section 502 loan.

It is imperative that any leveraging arrangement be structured so that applicant rights are 

preserved. However, servicing strategies may be different because of the Agency's lien position 

and the need to coordinate servicing strategies with the participating lender.

1. Tax Service Fee (Tax and Insurance Escrow)

The Agency will collect a tax service fee on all leveraged loans. Either the 

participating lender with at least 20 percent of the total amortized loan amount or the 

Agency may maintain the escrow account. Lenders with less than 20 percent and all 

affordable housing product agencies may not maintain the escrow account. When 

necessary, the Agency may make advances to pay taxes or insurance premiums.

The Agency is customarily in a subordinate lien position with the largest portion of 

the loan amortized for the longer term and is at more risk than the other lender. An 

exception to this may be agreed to with the prior lien holder when the tax service vendor
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Paragraph 10.3 Key Differences in Policies and Procedures

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agrees in writing to cover both the Agency’s and the leveraged lender’s loans. The 

vendor must also agree to make annual real estate tax searches and report any 

delinquencies to the National Financial and Accounting Operations Center in St. Louis, 

Missouri.

2. Special Servicing

The Agency will aggressively pursue all available special servicing remedies to help 

solve applicant problems. If foreclosure is necessary, each lender has an independent 

responsibility to protect its interest. Form RD 1927-8, Agreement with Prior Lienholder, 

which must be executed and recorded in the appropriate Real Estate Mortgage Records, 

requires the participating lender to notify the Agency before accelerating any loan and 

permits, but does not require, the Agency to pay or reinstate the prior lien to protect the 

Agency's interest.

10.4 DEVELOPING STATE-BY-STATEAPPROACHESTO 

LEVERAGING

The way in which leveraging is most effectively handled will vary state-to-state and 

community-to-community, depending upon

market conditions, the availability of 

Government subsidy funds, and the interest of 

private lenders. For this reason, each State 

Director should develop an independent 

leveraging strategy that will encourage and 

facilitate the use of leveraged loans.

A. Lender Outreach

Each state should implement lender outreach activities that encourage participation by all 

prospective lenders. For example, Field Staff should:

• Collect and maintain sales information for each market area that will enable the Loan 

Originator to assess whether applicants are candidates for 100 percent private 

financing or for leveraging.

• Identify lenders who are active in the State and provide information about the 

Agency's loan programs and how leveraging arrangements mightwork.

Elements of an Effective Lending Strategy

• Lender Outreach and Marketing

• Effective Borrower Education

• Streamlined Processing Procedures
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Paragraph 10.4 Developing State-by-State Approaches to Leveraging

• Identify the sources of loan and grant funds that may be available from State and 

local governments, and nonprofit sources. Provide information on the Agency's loan 

programs to active and appropriate sources, and describe how leveraging 

arrangements might work.

• Consider maintaining lists of interested lenders, and information on their 

loan rates and terms. Care should be taken to provide information to

applicants in a manner that does not provide preferential treatment to specific lenders 

or borrowers.

B. Borrower Education

Each State should develop briefing materials that explain the leveraging concept and why 

leveraging funds may be advantageous. Some applicants may need guidance and assistance in 

identifying and contacting appropriate non-Agency funding sources.

C. Streamlined Processing Procedures

Lenders will be less interested in working with the Agency if the leveraging process 

greatly increases their processing time or their documentation requirements. However, 

streamlining procedures must be balanced with prudent lending and internal control practices. 

Each Field Office should develop streamlined procedures for coordinating with participating 

lenders and for reviewing underwriting determinations made by those lenders. Each State 

Director should consider the following approaches:

• Develop a separate application package specifically for applicants seeking leveraged 

loans.

• Inform participating lenders in advance of the Agency's requirements for the 

qualification of appraisers, inspectors, and closing agents and, if requested, provide 

advance approval of lender staff or contractors who routinely provide these services 

for lenders’ loans.

• Provide staff training to ensure expedited review of leveraged loans.

• Develop and enter into a Memorandum of Understanding (MOU) with active lenders 

covering basic policies and procedures, rather than operating on a loan-by-loan basis. 

See Attachment 10-A for a list of topics that should be considered in developing a 

Memorandum of Understanding.
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Paragraph 10.4 Developing State-By-State Approaches to Leveraging

• The terms of the MOU, including requirements for leveraged loans outlined in this 

chapter, should be negotiated up front. A good MOU eliminates future 

misunderstandings, is a good public relations opportunity, and is strongly 

recommended for all partners. A copy of the MOU in each leveraged loan file is 

suggested.

• Over time, use information from LoanServ to generate information about the 

performance of leveraged loans to inform lenders, and to adjust processing 

procedures. To assure this information is accurate and useful, inconsistencies (such 

as First National Bank v. 1st Natl. Bank) should be avoided. The leveraged lender ID 

field in UniFi, including the lender’s Tax ID number, must be completed.
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SECTION 2: ORIGINATING LEVERAGED LOANS

10.5 TAKING APPLICATIONS

If the applicant applies directly to the Agency, the application procedures described in 

Chapter 3 should be followed. When the applicant has already completed an application to 

another funding source, a copy of that loan or grant application may be accepted if the other 

funding source used a version of the Uniform Residential Loan Application (pages 1-5 of Form 

RD 410-4). However, the applicant also must complete Additional Information Required for 

RHS Assistance, pages 6 through 9 of Form RD 410-4, Uniform Residential Loan Application.

10.6 REFERRING APPLICANTS TO PARTICIPATINGLENDERS

Because both loan and grant funds may leverage Agency financing, any applicant for an 

Agency loan is a potential candidate for leveraging. The Loan Originator should provide 

information about other sources of subsidized loans or grants to applicants. Applicants should 

be referred to entities offering affordable housing products such as grants, forgivable loans, 

deferred interest loans, and below-market interest rate loans when such funding sources are

available in the local area for which they appear to qualify.

The applicant may be a candidate for a leveraged loan because they are working with or 

have already completed an application to another funding source prior to coming to the Agency 

for a loan.

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10.7 DETERMINING APPLICANTELIGIBILITY

Applicants for Section 502 leveraged 

loans must meet the eligibility requirements 

described in Chapter 4. In addition, they may 

have to meet additional eligibility requirements 

imposed by participating lenders. Participating

lender credit requirements may be more stringent than the Agency’s, but the Loan Originatorcan 

encourage lenders to work with applicants who meet Agency requirements. In talking with the 

participating lender, the Loan Originator should stress that the Agency will be sharing risk with 

the participating lender and that the participating lender will hold the first lien position. Also, 

the lender may receive CRA credit for making loans in partnership with the Agency. Leveraged 

loans may be sold on the secondary market though the lender must notify Rural Development 

upon sale and assure the investor/buyer is aware of leveraging arrangements and all 

requirements.

10.8 ISSUING THE CERTIFICATE OFELIGIBILITY

To issue Form RD 1944-59, Certificate of Eligibility in conjunction with a leveraged 

loan, the Loan Originator should follow the procedures described in Paragraph 4.25, with the 

following exceptions. For leveraged loans, Form RD 1944-59 will contain:

• The total maximum loan for which the applicant qualifies -- not just the Agency’s 

portion of that loan; and 

• The expected Agency and lender shares of funds to be provided.

10.9 UNDERWRITING LEVERAGEDLOANS

A. Lender vs. Agency Underwriting

There are many underwriting processes 

that may be performed by either the Agency or 

the lender, such as income verification and title 

clearance. Lenders should be allowed to do the

primary legwork involved in collecting underwriting information, but only when all or a portion 

of their loan is at risk. Allowing lenders to collect underwriting

The Agency is responsible for making 

sound underwriting decisions regardless 

of another lender’s participation.

Community Reinvestment Act (CRA)

CRA requires lenders to help meet the credit needs 

of the communities in which they are chartered to do

business.
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Paragraph 10.9 Underwriting Leveraged Loans

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information does not imply that the Agency is relieved of its responsibility to make sound 

underwriting decisions, only that information collected by the lender is generally acceptable to 

use in making these decisions.

B. Property Requirements and Appraisal

The property must meet all of the requirements described in Chapter 5. The Loan 

Originator may accept property inspections and appraisals conducted by the participating lender, 

as long as evidence of the qualifications of the individuals performing these activities is provided 

and accepted. The Loan Originator must still inspect the property to determine eligibility. An 

administrative review of the appraisal must be completed before the appraisal is accepted. The 

environmental review remains the responsibility of the Agency; however, the participating 

lender may be requested to provide environmental information.

C. Loan-to-Value Ratio

When loans are funded solely by the Agency, the applicant’s total debt may exceed the 

market value of the property by the total of the Agency appraisal and tax monitoring fees, the 

required contribution to establish the escrow account, plus the fee for homeownership education. 

Down payments are required only if the nonelderly households cash value of non-retirement 

assets exceed $15,000 ($20,000 for elderly households). (See Paragraph 4.6.)

Some lenders may be willing to participate in a loan when the total debt exceeds the 

value of the property because their risk is limited by the Agency's participation in the loan. 

However, others will require that applicants have some equity in the property, because they 

believe an investment in the property improves the likelihood that the applicants will fulfill their 

commitments. This means that applicants with leveraged loans may need to contribute more 

cash than other applicants. The Loan Originator should explain to the applicant whether a cash 

contribution will be necessary and work with the lender to lower their usual equity requirements.

D. Loan Terms and Fees

Lenders are expected to charge reasonable and customary interest rates and fees. The 

Loan Originator may be able to help the applicant negotiate favorable terms.

The leverage loan interest rate must be the rate the lender typically charges to its best 

mortgage applicant customers – an extra amount may not be charged because of low income or 

other high risk factors. The interest rate may be no more than 2 percent (200 basis points) above
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Paragraph 10.9 Underwriting Leveraged Loans

the Agency note rate in effect at loan closing. Also, the lender may not include “points” to buy 

down or pre-pay the interest. If funds are available from the applicant, they must be used to 

reduce the amount borrowed (reducing the cost to the government).

Non-Agency loans must be amortized over a 30-year period, but may contain provisions 

for a balloon payment at the end of the 15th year.

Loan fees must be kept as low as possible. All fees must be reasonable. “Underwriting 

fees” and similar add-ons are not permitted. The total fees paid to the lender may not exceed 3-

1/2 percent of the lender’s loan. (This limitation on the lender applies regardless of whether the 

buyer or the seller pays the fees.) However, an additional amount may be considered when the 

lender does most or all of the loan processing (including the Rural Development loan) and the 

additional amount is for reimbursements, such as fees for appraisals, inspections, etc.

In general, the loan originator must assure loan fees are minimized. The 3-1/2 percent is 

a maximum, not a baseline. The total Rural Development loan may not be considered when the 

lender is establishing fees. Lender fees must be commensurate with the amount of service 

provided by the lender.

E. Determining Loan Amount

The Agency loan may include costs for the initial contribution to the escrow account for 

taxes and insurance, even if the participating lender will manage the escrow account. The loan 

amount for leveraged loans is determined using the procedures described in Chapter 7, with the 

following exceptions.

• The note installment of an eligible leveraged loan (loan amortized for at least 30 

years and an interest rate that does not exceed 3%) will be considered in the payment 

subsidy calculation.

• Agency loans leveraged with private financing should always be at the standard 

terms. If the loan is not affordable at standard rates and terms, the Agency’s shareof 

the loan should be increased, rather than extending the loan term. Loans requiring 

38-year repayment terms should never be leverage with market rate financing.

• Use the Agency’s cost for an appraisal to determine total allowable debt, even when 

the appraisal is performed by the participating lender’s appraiser.
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Paragraph 10.9 Underwriting Leveraged Loans

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• Packages involving affordable housing products or grants that primarily pay loan 

packaging fees or costs other than an eligible loan purpose, as defined in Chapter 6, 

do not count toward the 15/20 percent limitations for the loan to automatically 

receive leveraged loan benefits.

F. Agreements with the Participating Lender Regarding Construction

For loans that involve new construction or rehabilitation, the Agency and lender must 

agree on how construction inspections, payment draws, and final acceptance of the work will be 

handled. This may be accomplished by an agreement developed for the specific loan or through 

a general memorandum of understanding that covers multiple loans.

1. Inspections

Construction inspections completed by the participating lender may be accepted if 

the Field Office has approved the qualifications of the inspector. The participating 

lender may be asked to provide the Agency with a status report on implementation of any 

mitigation measures required by the Agency’s environmental assessment; however, the 

ultimate responsibility for compliance rests with the Agency.

2. Construction Draws

Typically, construction draws should be made by each lender in proportion to the 

amount of the loan each is contributing. For example, if the Agency provides 60 percent 

of the loan and the participating lender 40 percent, 60 and 40 percent of each draw would 

be paid by the Agency and the participating lender, respectively. However, there are 

circumstances in which another arrangement would be appropriate. For example, a 

participating lender might prefer to fully fund the acquisition of the site at the beginning 

of the construction period. If the participating lender is unwilling to provide construction 

funding until the Agency loan funds have been used, the Agency can provide the 

construction funding up to the maximum amount of the Agency’s loan.
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10.10 LOAN CLOSING

The Agency’s Loan Approval Official must review the leveraged loan package and the 

lender’s Loan Estimate to determine if fees are reasonable and proposed use of loan funds is 

permissible. The Loan Approval Official will not approve a transaction where the fees are 

questionable or excessive.

A joint closing generally will be held for Agency and participating lender loans. If the 

leveraged loan will close after the Agency loan is closed, a written, firm loan commitment from 

the participating lender must be provided to the Agency by the time of the Agency’s loan 

closing. Closing procedures for the Agency’s loan are identical to those described in Chapter 8. 

When the Agency’s lien will be subordinated, the prior lien holder must execute Form RD 1927-

8, Agreement with Prior Lienholder.

Field offices should work closely with leveraged lenders to minimize loan closing costs.

It may be possible to use one title insurance policy to cover both the participating lender and 

Rural Development. The State Director should check with the Regional Attorney to assure this 

is an acceptable practice and obtain any special instructions to assure the government’s interests 

are protected.

Leveraged loan packages that include any type of broker referral fee are not acceptable. 

Some mortgage lenders pay these fees for loans closed at a higher than prevailing interest rate. 

These fees, along with the cost of credit, must be disclosed in accordance with the TRID 

regulation. They may be found in the “Origination Charges” section on the Loan Estimate and 

Closing Disclosure, as yield spread premiums, yield differentials, rate participation fees, par-plus 

pricing, or similar terms.

Mortgage insurance is not acceptable. This includes Private Mortgage Insurance (PMI), 

Mortgage Insurance Premium (MIP), and similar products.

Some lenders offer additional insurance products at loan closing, including mortgage 

payment insurance. Generally, the Agency will not approve a loan with such supplemental 

coverage unless the customer makes a written request for such coverage.

A. Required Documentation

In addition to the documentation required to support the Agency’s loan, a copy of the 

mortgage, promissory note, evidence of title and hazard insurance, and closing documents for the 

non-Agency loan or grant must be provided for the borrower's case file.
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Paragraph 10.10 Loan Closing

Ideally, there should be only one Closing Disclosure. It should include all details of the 

transaction including Agency and leveraged financing. If the leveraged lender requires a 

separate Closing Disclosure, a copy must be provided to Rural Development. The Loan 

Approval Official will review the Closing Disclosure to assure leveraged customers are charged 

fees as agreed prior to closing. The review will include fees that are not part of the leveraged 

loan amount and/or those paid by the seller.

B. Recording the Lien/Legal Documents

The closing agent should be informed of the lien position the Agency will take.

In addition to recording the real estate mortgage or deed of trust, the closing agent will 

record the executed Form RD 1927-8. Among other features, this agreement requires the lender 

to notify Rural Development prior to declaring the security instrument to be in default and 

accelerating the loan.
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Attachment 10-A

Page 1 of 2

ATTACHMENT 10-A

SAMPLE TOPICS TO BE ADDRESSED IN A MEMORANDUM OF UNDERSTANDING

In general, the lender will recognize Rural Development requirements for leveraged loans, 

particularly in providing required notices. A good Memorandum of Understanding (MOU) 

avoids future problems and strengthens partnerships.

ORIGINATION

• Agency will subordinate to permit lender to obtain first lien position when at least 20 percent of the 

total financing is provided.

• Lender must use standard application form and obtain Agency approval of qualifications for the 

appraiser, inspector, and closing agent.

• Agency will be responsible for the appropriate level of environmental review; however, the lender 

may be asked to assist in the collection of needed environmental data.

• The lender rates and terms will be the same as those offered to best customers obtainingsimilar 

mortgage financing.

• Agency makes independent underwriting decisions based upon reviewing the participating lender’s 

origination package.

• A joint closing will be conducted and a single Closing Disclosure provided. Closing costs will be 

controlled.

• For construction loans:

◊ Describe how the lender will participate during the construction process (e.g., will the lender 

provide construction financing, will the lender defer amortization until the borrower occupies the 

dwelling, etc.);

◊ Describe how draws will be paid (a pro rata share from each lender is preferred);

◊ Describe how inspections will be completed (e.g., if the lender completes inspections, theAgency 

must receive a copy of the inspection and have the borrower’s acceptance before making draw 

payments); and

◊ Describe what will happen if the Agency loan will close before the participating loan. For 

example, the lender must provide a firm commitment at the time of Agency loan closing, 

contingent only upon successful completion of the construction.

SERVICING

• Describe who will establish and maintain the escrow account. If the lender maintains the account, the 

lender must report annually to the Agency on the state of tax and insurance payments.

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Attachment 10-A 

Page 2 of 2

• Describe what information will be shared between lenders (e.g., results of periodic inspections, 

delinquency or default information). Note: Information provided by the applicant cannot be released 

to another party without the applicant’s permission.

• Describe how each lender will:

◊ Pursue joint special servicing actions if a problem arises;

◊ Notify the lender in the case the loan is declared in default or accelerated;

◊ Provide a reasonable period for the other lender to cure the default (i.e., through a new 

loan or advance) with the borrower; and

◊ Pursue a joint foreclosure action if the borrower is in default on both accounts.

• Describe graduation review and the role of lender, customer, and Rural Development.

• Describe reporting requirements, if any.

• A copy of the MOU should be filed in each affected individual casefile.
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11.1 INTRODUCTION

A nonprogram loan is an extension of credit to a borrower who does not qualify for 

program credit, or an extension of credit to allow a buyer to purchase a property that does not 

qualify as a program property. The Agency will make nonprogram loans to:

• Allow the assumption of an existing program loan on new rates and terms; or

• Expedite the sale of a Real Estate Owned (REO) property.

Unless otherwise specified in this chapter, nonprogram loan applications should be 

accepted, evaluated, and closed following the procedures described for Section 502 loans in 

Chapters 2 through 10. For a summary of the differences between program and nonprogram 

loans, see Attachment 11-A.

A. Nonprogram Assumptions

When an existing Agency borrower 

wishes to sell a security property, the Agency 

will assist that borrower by allowing any 

creditworthy buyer to assume the outstanding 

Section 502 debt, even if the purchaser is not 

eligible for a program loan or the property does

not qualify as a program property. This helps the borrower sell the property and reduce the 

chances that the borrower will default without requiring the Agency to obligate new funds. The 

amount assumed is reamortized over a full new loan period.

B. Nonprogram Loans to Purchase REO Property

When the Agency has REO property to dispose of and funding is available, credit may be 

extended on nonprogram terms in order to facilitate the sale of the property. Field Staff should 

consult with the State Office to ensure that funds for nonprogram REO sales are available before 

offering credit. Nonprogram credit may only be offered after the expiration of any restriction 

period on program properties. Chapter 16 provides additional guidance on REO sales.

11-1

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

CHAPTER 11: NONPROGRAM LOANS [7 CFR 3550.74]

Same Rate and Terms Assumptions

In certain cases, generally those involving 

transfers of title between family members, a loan 

may be assumed under the same rates and terms by 

someone who is not program-eligible. However, 

such a loan is not considered a nonprogram loan.
HB-1-3550

11.2 PRE-QUALIFICATION

The pre-qualification step is substantially the same as for program loans, as described in 

Section 1 of Chapter 3. When a potential applicant expresses interest in nonprogram credit, the 

Loan Originator explains the Agency’s nonprogram requirements and uses UniFi to determine 

whether the potential applicant has adequate repayment ability. Although the potential applicant 

may submit an application regardless of the outcome of the pre-qualification, this step can save 

the applicant and Agency staff time in the long run by letting potential applicants know in 

advance about any reasons they may not be eligible for a nonprogram loan.

11.3 APPLICATION PROCESSING

This step is substantially similar to the process for a program loan described in Section 2 

of Chapter 3. The nonprogram applicant must submit Form RD 410-4, Uniform Residential 

Loan Application. The Loan Originator then determines whether the application is complete, 

asks follow up questions needed to understand the applicant’s situation, and conducts a 

preliminary credit check, as described in Paragraph 4.11. The Loan Originator then makes a 

preliminary eligibility determination and notifies the applicant.

Unlike applicants for program loans, applicants for nonprogram credit must submit a 

nonrefundable $100 application fee. However, this fee cannot be collected prior to issuing the 

Loan Estimate to nonprogram applicants, in accordance with Paragraph 3.8. The application fee 

is waived for applicants who are public bodies or nonprofit organizations.

11.4 ELIGIBILITY

Nonprogram applicants are not subject to the income eligibility, asset, citizenship, or 

occupancy requirements described in Chapter 4 for program borrowers. They may own other 

properties and are not required to first seek private sources of financing. However, they must 

comply with other requirements found in Section 4 of Chapter 4 relating to legal capacity, 

truthful applications, and suspension or debarment, and must meet the credit requirements 

outlined in Section 3 of Chapter 4.

11.5 PROPERTY REQUIREMENTS

Properties financed with nonprogram loans are not required to meet the site and dwelling

requirements described in Sections 1 and 2 of Chapter 5, but are required to meet the 

environmental requirements described in Section 3 of Chapter 5. Chapter 16 describes 

disclosure and documentation requirements for REO properties being disposed of that are not 

decent, safe, and sanitary or that may contain hazards.

11-2
HB-1-3550

11.6 UNDERWRITING THELOAN

A. Down Payment Requirement

Nonprofit organizations and State and local governments are not required to contribute a 

down payment. Other nonprogram applicants are required to make a down payment.

Nonprogram borrowers who intend to occupy the property must contribute 2 percent of the 

purchase price. Nonprogram borrowers who do not intend to occupy the property must 

contribute 5 percent of the purchase price.

B. Amount to be Financed

For assumptions, Agency credit is limited to the lesser of the sales price or the amount of 

the existing borrower’s outstanding debt, less the purchaser’s down payment. If the purchaser 

requires additional funds to purchase the property, the funds must come from another source.

For REO sales, Agency credit is limited to the sales price, less the purchaser’s down 

payment. Closing costs and fees, tax service fees, and any required initial deposit to the escrow 

account cannot be financed.

C. Interest Rate

The interest rate charged for nonprogram loans is the nonprogram rate in 

effect at the time of loan approval. Nonprogram rates can be found in Exhibit B of 

RD Instruction 440.1.

D. Loan Repayment Period

The repayment period for nonprogram loans depends on whether the applicant intends to 

personally occupy the property.

For nonprogram applicants who intend to personally occupy the property, the maximum 

loan term is 30 years. If an applicant already has a nonprogram loan, a new 30-year loan is not 

permitted, even if the applicant intends to occupy the new property.

For nonprogram applicants who do not intend to personally occupy the property, the 

maximum loan term is 10 years. If more favorable terms are necessary to facilitate the sale, the 

loan may be amortized over a period of up to 20 years, with payment in full due not later than 10 

years from the date of closing.

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Revised (03-09-22) SPECIAL PN
HB-1-3550

Paragraph 11.6 Underwriting the Loan

E. Repayment Ability

Chapter 6 provides detailed guidance on the use of the principal, interest, taxes, and 

insurance (PITI) and total debt (TD) ratios. For nonprogram applicants the ratios permitted 

depend upon whether the applicant intends to personally occupy the property. For nonprogram 

applicants who intend to personally occupy the property, the PITI ratio must not exceed 33 

percent of repayment income, and the TD ratio must not exceed 41 percent. For nonprogram 

applicants who do not intend to occupy the property, the TD ratio must not exceed 41 percent. 

No analysis of the PITI ratio is required.

11.7 LOAN APPROVAL AND CLOSING

As with program loans, once the Loan Originator has completed the underwriting 

analysis, loans recommended for approval are forwarded to the Loan Approval Official. When 

the loan is approved, the applicant selects a closing agent who conducts title clearance, reviews 

security requirements to verify that they conform to the Agency’s standards, and works with the 

Loan Originator to ensure that all required closing documents are prepared for signature at 

closing.

Because the same closing forms are used for both program and nonprogram borrowers, 

the Loan Originator must modify the security instruments, promissory note, and, if applicable, 

the assumption agreement to delete:

• Any conditions related to financing or refinancing with other credit, restrictions on 

leasing, and consent to junior lien encumbrances; and

• Any references to borrower eligibility for payment subsidies and special servicing 

actions.

Chapter 8 provides detailed instructions for closing both program and nonprogram loans.

11.8 SERVICING NONPROGRAMLOANS

After closing, the Loan Originator activates the loan in LoanServ and prepares a loan 

docket to send to the Servicing and Asset Management Office (Servicing Office) for servicing, 

as described in Chapter 8. Nonprogram borrowers are not subject to periodic reviews of their 

ability to refinance with private credit and are not eligible for payment subsidies, moratoriums, 

or subsequent loans.

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Attachment 11-A

Page 1 of 2

ATTACHMENT 11-A

SUMMARY OF DIFFERENCES BETWEEN 

PROGRAM LOANS AND NONPROGRAM LOANS

Topic Section 502 Program Loan Nonprogram Loan

Income Borrower must not be above lowincome at loan approval and must 

not be above moderate-income at 

loan closing.

No income eligibility restrictions.

Application No application fee. $100 application fee except from 

public bodies or nonprofit 

organizations.

Interest Rate Promissory note rate is the lower of 

the program rate in effect at loan 

approval and loan closing. Program 

interest rate is used.

Promissory note rate is the 

nonprogram rate in effect at loan 

approval. Nonprogram interest rate 

is used.

Payment Subsidy Borrower may be eligible for 

payment subsidies.

No payment subsidy available.

Loan Term Standard term is 33 years; some 

may qualify for a 38 year term.

Maximum term for an occupant is 

30 years; maximum term for a 

nonoccupant is 10 years.

Down Payment Borrowers required to contribute 

non-retirement assets greater than

$15,000 ($20,000 for elderly 

households).

Purchasers who will be occupants 

are required to contribute 2 percent 

of the purchase price as a down 

payment. Purchasers who will be 

nonoccupants must contribute 5 

percent.

Repayment 

Ability

Borrowers must not exceed a 33 

percent principal, interests, taxes, 

and insurance (PITI) ratio, and 41 

percent total debt (TD) ratio. 

Borrowers who will personally 

occupy the property must not 

exceed a 33 percent PITI ratio and 

41 percent TD ratio. Borrowers 

who will not personally occupy the 

property must not exceed a 41 

percent TD ratio.

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

Attachment 11-A 

Page 2 of 2

Topic Section 502 Program Loan Nonprogram Loan

Closing Costs Closing costs may be financed with 

Agency funds to the extent that the 

total debt does not exceed the 

property’s market value and the area 

loan limits.

Closing costs cannot be financed 

with Agency funds.

Escrow and 

Other Fees

Initial escrow deposit, tax service 

fee, homeownership education fee, 

and appraisal fee may be financed 

with Agency funds, even if these 

amounts cause the loan to exceed the 

market value of the property or the 

area loan limit.

These fees and initial escrow 

deposit cannot be financed with 

Agency funds.

Eligibility for 

Servicing Actions

Borrowers are eligible for a variety 

of servicing actions, including 

payment subsidies.

Payment moratoriums, payment 

subsidies, and subsequent loans are 

not permitted. If both the borrower 

and property are eligible, the loan 

may be refinanced with Agency 

credit to permit payment assistance.

Refinancing with 

Private Credit

Borrower must refinance with 

private credit when able to do so.

No requirement for refinancing 

with private credit.

Leasing 

Restrictions

Borrower cannot lease property for 

more than 3 years and cannot offer 

the renter an option to purchase.

Borrower may lease property for 

any period of time, and with 

purchase options.
HB-1-3550

12.1 INTRODUCTION

The objective of the Section 504 loan/grant program is to help very low-income owner 

occupants of modest single-family homes in rural areas repair their homes. Loan funds are available 

for repairs to improve or modernize a home, make it safer or more sanitary, or remove health and 

safety hazards. For homeowners that are 62 years of age and older, grant funds are available to 

remove health or safety hazards, or remodel dwellings to make them accessible to a household 

member with a disability. Attachment 12-A provides a summary of the differences between Section

504 loans and Section 504 grants, Attachment 12-B provides the differences between Section 502 and 

Section 504 loans, Attachment 12-C: provides a processing and closing checklist, Attachment 12- D: 

provides a checklist for assessment of an existing dwelling, Attachment 12-E: provides items included 

with a complete application, and Attachment 12-F: provides a pre-construction checklist.

The procedures that differ from Section 502 loans are described in this chapter.

Unless otherwise specified in this chapter, Section 504 loan/grant applications should be 

accepted, evaluated, and closed following the same procedures described for Section 502 loans 

in Chapters 2 through 10. However, Section 504 loans cannot be assumed except on Same 

Rates and Terms as described in Paragraph 2.4 B. In addition, a property survey is not required 

for a Section 504 loan or grant unless a mortgage or deed of trust is being filed and there is a 

compelling reason to question the placement of the dwelling on the property; or, in farm acreage 

cases, where the house site is subdivided from a larger parcel. The cost of a survey can be 

included in the loan if there is sufficient equity. 

12.2 ELIGIBLE PURPOSES FOR 504 FUNDS [7 CFR 3550.102]

Section 504 loan funds may be used to make general repairs to improve or modernize the 

property (including a new addition to an existing home), as long as the dwelling remains modest. 

Loan Originators may approve any of the eligible costs listed in Paragraph 6.4, unless specifically 

prohibited in 7 CFR 3550 and this chapter. In limited circumstances, funds may be used to refinance 

an Agency loan as a special servicing action (subject to the availability of funds and Agency 

priorities) such as at the end of a moratorium. Directives will be provided for usage of this option 

as Agency priorities are determined.

Section 504 grant funds may be used only for repairs and improvements that will remove 

health and safety hazards, or to repair or remodel dwellings to make them accessible and useable for a 

household member with a disability. A hazard is a property condition that jeopardizes the health or 

safety of the occupants or members of the community, but that does not make it unfit for habitation. 

A major hazard is a condition so severe that it makes the property unfit for habitation.

12-1 

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607

CHAPTER 12: SECTION 504 LOANS AND GRANTS
HB-1-3550

Paragraph 12.2 Eligible Purposes for 504 Funds [7 CFR 3550.102]

A. Eligible Purposes for 504 Funds

In addition to the above, Section 504 loan and grant funds may be used to:

• Pay for the purchase and installation of essential equipment including range stove, 

refrigerator, clothes washer and/or dryer, if the applicant’s existing equipment is not in 

working order or the equipment is not currently in the home, and if the purchase is not the 

primary purpose of the 504 funds;

• Construct a storm shelter when needed for safety in areas with tornadoes or hurricanes; and

• Cover the initial escrow deposit when the Agency must set up an escrow account (see 

Paragraph 12.10).

B. Repairs to Mobile or Manufactured Homes

Section 504 loan and grant funds can be used to repair mobile or manufactured homes if:

• The applicant owns the home and the site and occupied the home prior to filing an 

application;

• The repairs are needed to remove health or safety hazards; and

• The home is on a permanent foundation or will be put on a permanent foundation 

with Section 504 funds.

• A permanent foundation is either: (1) a full below-grade foundation; or

(2) blocks, piers, or some other type of foundation with skirting, and 

anchoring with tie-downs.

C. Restrictions on the Use of 504 Funds

Section 504 loan or grant funds cannot be used to:

• Assist in the construction of a new dwelling;

• Make repairs to a dwelling in such poor condition that when the repairs are 

completed, the dwelling will continue to have major hazards;

• Move a mobile home or manufactured home from one site to another;

• Pay for any off-site improvements except for necessary installation and assessment 

costs for utilities;

• Refinance non-Agency debt or obligation that the applicant incurred before the date 

of application (except for payment of the installation and assessment costs of 

utilities); or

• Pay packaging fees to for-profit entities (nonprofit packaging fees may be paid by 504 

loan or grant funds).

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HB-1-3550

12.3 FORM RD 3550-35, SECTION 504 HOME REPAIR LOAN AND GRANT PROGRAM 

INTAKE FORM

The prequalification process offers potential applicants an optional way to evaluate the 

likelihood of their program eligibility. Those interested in the 504 program can be provided Form 

RD 3550-35, Section 504 Home Repair Loan and Grant Program Intake Form and Form RD 

3550-1, “Authorization to Release Information” prior to completing a full application as described 

below in Paragraph 12.4. Using the unverified information provided on the Intake Form, the 

Loan Originator will enter the prequalification data into UniFi and discuss the results with the 

potential applicant. If an application is requested, the Loan Originator should print Form RD 410-

4, “Uniform Residential Loan Application,” from UniFi and provide it to the applicant with the 

standardized application package. Further information regarding the prequalification process can 

be found in Chapter 3, Section 1.

12.4 APPLICATIONS [7 CFR 3550.104]

Applicants interested in the 504 program will be provided the standardized 

application package (which Field Staff can find in the SFH Direct SharePoint site under 

General Info > Useful Documents).

The “Date Application Received” field in UniFi must be completed promptly upon 

receipt of an application; and applications must be reviewed within 3 business days after 

receipt to determine if the Loan Estimate disclosure requirement was triggered (see, Paragraph 3.8) and to determine if items are missing. The Non-Purchase Loan Estimate 

and Closing Disclosures should be utilized for 504 loans where a security interest will be 

taken. For unsecured loans (i.e., the total Section 504 indebtedness is less than $7,500), 

Form RD 1940-41, “Truth in Lending Statement is required.”

The Loan Originator will send Handbook Letter 11 (3550), Request Information, to the 

applicant requesting any missing items and stating that their application will be withdrawn if 

the missing information is not received within 15 days (30 days may be allotted if the applicant 

is waiting for repair bid(s)). A complete Section 504 application includes applicable items 

listed on Attachment 12-E checklist.

The Loan Approval Official should make a determination of eligibility within 30 days 

of receiving a complete loan application. When funding is available, a pre-construction 

conference should be scheduled within 30 days of an eligibility determination and loan/grant 

approval.

Attachment 12-F is utilized to document the pre-construction conference. If funding is 

not available send Handbook Letter 2 (3550), Waiting Period, to the applicant.

Section 504 applications requesting assistance to remove health or safety hazards should 

receive priority processing. Veterans’ preference described in Paragraph 3.13 C. should be 

used in cases where multiple applications with the same priority preference are received on the 

same day. When funding is insufficient, complete applications with health and safety hazards 

(e.g., unsafe water, failed septic system, lack of heat, and those affected by natural disasters) 

will receive First Priority, and all other applications will be Second Priority. In the case of 

applications with equivalent priority status that are received on the same day, priority will be 

extended to applicants qualifying for a veterans’ preference.

A property evaluation may be conducted utilizing online resources and photos to view 

the property and real estate tax assessments to determine the condition and value of the 

property. If the condition of the property cannot be determined using online resources, or 

recent photos from the applicant, an on-site visit is documented with Attachment 12-D, 

Checklist for Evaluation of Existing Dwelling.

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Revised (03-08-24) PN 607
HB-1-3550

Paragraph 12.4 Applications [7 CFR 3550.104]

By submitting applications for a grant, applicants certify that they will not engage in

the unlawful manufacture, distribution, dispensing, possession, or use of a controlled 

substance in conducting any activity with the grant.

12.5 APPLICANT ELIGIBILITY [7 CFR 3550.103]

A. Income

To be eligible for a Section 504 loan or grant, the adjusted income at the time of 

loan/grant approval and at loan closing must not exceed the applicable very low-income limit. 

Low-income applicants cannot receive assistance under Section 504.

Medical deductions in excess of 3% of annual income should be closely examined and 

applied to elderly applications, as described in HB-1-3550, Paragraph 4.4 G. Consider the 

following unreimbursed ongoing/projected medical expenses; Medicare premiums, supplemental 

insurance, long- term care insurance, prescription drug coverage, pharmacy expenses, copayments, eyewear, hearing aid / batteries, exams, monthly payments for medical bills, disability 

expenses, in home care expenses, dental expenses, including the greater of the actual travel costs 

for medical appointments or the published Internal Revenue Service mileage rate. You may not 

deduct funeral or burial expenses, nonprescription medicines, toothpaste, toiletries, cosmetics, a 

trip, or program for the general improvement of your health, or most cosmetic surgery.

Additional guidance on eligible medical expenses can be located on the Internal Revenue Service

website.

B. Credit Requirements

Applicants receiving grant only funding do not need a credit history evaluation. An 

applicant with an outstanding judgment obtained by the United States in a Federal court, other 

than in the United States Tax Court, is not eligible for a Section 504 grant or 504 loan.

For loans, applicants must have a credit history that indicates a reasonable ability and 

willingness to meet debt obligations. Applicants with a credit score of 620 or higher, do not

require Form RD 1944-61, “Credit History Worksheet,” or further evaluation. These

applicants are considered to have acceptable credit histories, with the exception for loan

applicant(s) with a significant delinquency described in Paragraph 4.12 A., or delinquency of a 

federal debt.

For unsecured loans, an infile credit score is considered reliable. An applicant with a credit 

score less than 620 must demonstrate a history of reliable traditional or non-traditional credit 

using Form RD 1944-61, “Credit History Worksheet” to conduct the credit analysis.

The indicators of unacceptable credit described in Exhibit 4-4 for Section 502 loans 

can be used to evaluate the applicant’s credit history; however, general credit requirements 

may be less stringent than those for Section 502 loans. Late payments for housing costs 

should not be considered as an indicator of unacceptable credit.

The Loan Originator will check Department of Treasury’s Do Not Pay (DNP) portal, as 

described in Paragraph 4.11 for loan and grant requests. Infile credit reports will be required 

for applicant(s) receiving a 504 loan assistance. A Tri-Merge Credit Report (TMCR) is 

required for all applications for loans of $7,500 or greater, but the cost of the report is not 

charged to the applicant. A TMCR is not required to deny a loan request of less than $7,500.

12-4
HB-1-3550

Paragraph 12.5 Applicant Eligibility [7 CFR 3550.103]

C. Asset Requirements

Asset requirements are identical to those imposed by Section 502, except only assets that 

can be converted to cash in 60 days or less are included in the calculation of non-retirement 

assets. Non-retirement assets in excess of $15,000 (or $20,000 for an elderly household), must 

be used to reduce the Section 504 request.

An applicant’s home equity should not be considered in the asset calculation and should 

not be used as a test for other credit. 

D. Repayment Ability

To qualify for a Section 504 loan, the applicant must have a reliable income source 

sufficient to allow repayment of the loan as supported by a budget. A budget is defined by 

using a maximum Total Debt (TD) ratio of 41%. Non-taxable income is not “grossed up” for 

the Section 504 program.

E. Age for Section 504Grants

At least one qualified applicant must be 62 or older for a household to receive grant 

assistance. A qualified applicant with an eligible grant purpose may receive grant funds first 

(up to the lifetime limit). If grant funds are not enough to cover the needed repairs, the 

applicant’s loan repayment ability will be calculated (see, Paragraph 12.4 D.).

F. Ownership of Property

The applicant must own and occupy the property to be eligible for Section 504 funds, and 

must be able to document ownership, as described in Paragraph 5.11, with 3 exceptions:

Leasehold Interest: For Section 504 loans, the property must be covered by a lease with 

an unexpired portion of not less than 2 years beyond the term of the promissory note, and for 

grants, the remaining lease period must be at least 5 years.

Land Purchase Contract: This form of ownership is acceptable if the applicant is 

current on all payments and has the ability to remain current.

Nonstandard Forms of Ownership: If standard evidence of ownership, as described in 

Paragraph 5.11, is not available, Section 504 loan/grant applicants may demonstrate ownership 

by presenting any of the following:

• Records of the local taxing authority that show the applicant as owner and that 

demonstrate that real estate taxes for the property are paid by the applicant;

• Affidavits by others in the community stating that the applicant has occupied the 

property as the apparent owner for a period of at least 10 years, and is generally 

believed to be the owner; or

• Any instrument, whether or not recorded, that is commonly considered evidence of 

ownership, such as a deed or mortgage.

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Revised (03-08-24) PN 607
HB-1-3550

Paragraph 12.5 Applicant Eligibility [7 CFR 3550.103]

Trusts, partnerships, limited liability companies, for-profit, or non-profit corporations 

are not an eligible program applicant, borrower, or owner. In limited cases, an individual 

exception request for a special needs trust can presented to the National Office for 

consideration (see, Paragraph 1.15). 

12.6 PROPERTY ELIGIBILITY [7 CFR 3550.106(a)]

A. Property Requirements

To be eligible for Section 504 funds, the property must be owner occupied and the 

applicant’s sole and principal residence. The property must be considered typical and modest for 

the area and must not be used for rental or other income producing purposes. However, Section 

504 loan or grant funds may be used to improve a home on a property that has income-producing 

land or a small business, if the loan or grant is only used to improve the applicant’s residence.

The property must be deemed a single-family housing residential unit. The Agency 

will not use 504 program funds to improve multi-family housing, or accessory dwelling units 

(see, Paragraph 5.6 D.2.).

A modest dwelling may not have an estimated or appraised value that is greater 

than the applicable area loan limit unless waived by the State Director. Waivers will be 

documented in the recipient’s electronic customer file.

B. Determining Property Value

The Loan Approval Official will determine whether an appraisal is needed to assure 

adequate security exists for the proposed loan. An appraisal is never required for an 

unsecured loan. An appraisal is required when the sum of all secured (RD or non-RD) 

indebtedness, including the proposed repair loan, exceeds $25,000. Section 504 applicants 

are required to pay an appraisal fee if an appraisal is deemed necessary. The cost of the

appraisal fee is described in Paragraph 5.20 and may be included in the 504 loan amount.

If an appraisal is not required, the value and the method used to develop the estimate 

should be documented in the running record. Utilization of tax assessments, and real 

estate websites such as Zillow.com, Trulia.com and Realtor.com may be considered as a 

tool to estimate the value of security. Appraisals are required when issuing an adverse 

action based on inadequate value of security.

C. Construction Standards

Dwellings repaired with Section 504 loan or grant funds must remain modest and all 

work must be completed in accordance with local codes and standards. They do not need to be 

brought up to Agency development standards, nor must all of the existing hazards be removed, 

provided the property does not continue to have major health or safety hazards after the planned 

repairs are made. Refer to Section 6, Chapter 5 for all construction management information.

D. Environmental Requirements

Section 504 loans and grants are subject to the same environmental requirements as 

Section 502 loans, as described in Section 3 of Chapter 5.

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HB-1-3550

12.7 INTEREST RATE AND LOAN TERM [7 CFR 3550.113]

Section 504 loans have an interest rate of 1 percent and a term of 20 years.

Section 504 loans are amortized on a monthly basis. Annual payment terms are not 

permitted.

12.8 MAXIMUM LOAN AND GRANT AMOUNTS [7 CFR 3550.112]

A. Maximum and Minimum Loan Amount

Loan and grant amounts should be rounded to the nearest whole dollar. The 

maximum loan that an individual applicant may receive is limited by the three factors 

discussed below:

• Outstanding loan amount. The sum of the outstanding balance on all Section 504 loans 

may not exceed $40,000.

• Repayment ability. The applicant receiving a loan must demonstrate repayment ability 

based on an analysis of the applicant’s TD ratio not to exceed 41%. Please refer to 

Paragraph 4.22 (B) (2) “Establishing TD”, for guidance regarding calculating total 

debt. Compensating factors may be approved by the Loan Approval Official and 

exceed the TD ratio described in Paragraph 4.24 A without approval by a next level 

supervisor.

• Eligible costs. The applicant can only receive loan funds to cover eligible costs. 

For example, if the applicant has only $5,000 of eligible repairs to make, the 

maximum loan allowed is $5,000.

B. Grant Limits

The lifetime grant assistance to any one household or one dwelling cannot exceed a cumulative 

total of $10,000. A dwelling’s grant eligibility is reset when it is transferred to a new owner provided 

the transfer wasn’t to a household member.

12.9 LOAN APPROVAL AND CLOSING [7 CFR 3550.108]

A. Loan Approval

Form RD 3550-7, “Funding Commitment and Notification of Loan Closing” is used to 

notify applicants of loan approval for secured loans. Handbook Letter 12 (3550), Notification 

of Approval, (504 Grant and/or Loan) is used to notify applicants of loan approval for 

unsecured loans. Ideally on the same day, Form RD 3550-7 is signed by the Loan Approval 

Official, the Loan Originator obligates the funds in LoanServ, and the form is sent to the 

applicant. The applicant has 15 days to sign and return the form or the Loan Originator must 

deobligate the loan. If the loan amount increases prior to loan closing, a revised Form RD 

3550-7 (secured loan) or HB Letter 12 (unsecured loan) will be sent to the applicant within 15 

business days of the increase; the applicant has 15 days to sign and return the new form or the 

Loan Originator must deobligate the loan. Deobligations will follow the processes outlined in 

Chapter 8, Paragraph 8.3.

Preparation of all forms needed to close the loan should be handled in accordance with 

Chapter 8.

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Revised (03-08-24) PN 607
HB-1-3550

Paragraph 12.9 Loan Approval and Closing [7 CFR 3550.108]

Handbook Letter 15 (3550) Standard Adverse Decision Letter is used to notify applicant of 

a denial of credit.

B. Security Requirements

If the total Section 504 loan indebtedness is $7,500 or more, it must be secured by a 

mortgage on the property. The Agency does not require first lien position, but the total of all 

debts secured by the property must not exceed the property’s market value, except by the amount 

of any required contributions to an escrow account for taxes and insurance and any required 

appraisal fee.

C. Loan Closing

If the total outstanding balance on Section 504 loans is $25,000 or less, the loan may be 

closed by the Loan Originator or designee and requires a Non-Purchase Loan Estimate and Closing 

Disclosure be provided in accordance with Truth in Lending Act and Real Estate Procedures Act 

Integrated Mortgage Disclosures (TRID). If the total outstanding balance on Section 504 loans is 

greater than $25,000 the loan must be closed by a closing agent and is also subject to TRID 

disclosure requirements. Unsecured loans (i.e., the total Section 504 indebtedness is less than

$7,500) require issuance of Form RD 1940-41, “Truth in Lending Statement.” Please refer to 

Chapter 3 for further information on TRID. The process for selecting a closing agent is the same 

as for a Section 502 loan and is detailed in Paragraph 8.4.

12.10 GRANT APPROVAL AND DISBURSEMENT

A. Grant Approval

Grant recipients are notified of grant approval by sending Handbook Letter 12(3550), 

Notification of Approval (504 Grant and/or Loan) immediately after the funds are obligated in 

LoanServ. If the grant amount increases, a new letter must be sent to the applicant within 15 days of 

the change.

B. Grant Repayment Agreements [7 CFR 3550.114]

Before any grant funds are disbursed, the recipient(s) must sign Form RD 3550-24, “Grant 

Agreement.” The agreement states that if a home repaired with Section 504 grant funds is sold 

within three (3) years of signing the grant agreement, the full amount of the grant must be repaid. 

In the case of a life estate interest or an undivided ownership interest, as described in Paragraph 

5.11, all co-owners living or planning to live in the household must sign Form RD 3550-24. The 

original Form RD 3550-24 should be filed with the promissory notes in a locked cabinet with a 

copy to the recipient’s electronic customer file, and a copy provided to the recipient. Exhibit 12-1 

illustrates owner and co-owner income, assets and signatures required for secured loans and 

unsecured loans or grants.

12-8
HB-1-3550

Paragraph 12.10 Grant Approval and Disbursement

Exhibit 12-1

Applicant 

Co-Applicant

Co-Owner 

Resident

Co-Owner 

Non-Resident

Other Household 

Members

Verify Income Yes Yes No Yes

Verify Assets Yes Yes No Yes

Repayment 

Agreement Yes Yes No No

Security 

Instrument Yes Yes Yes or No* No

*Undivided interests, life estates and other jointly held property not exceeding 50 

percent of ownership, may be excluded by the State Director if permitted by State law 

for secured loans (see Paragraph 5.11).

C. Documentation of Grants

To ensure that any one household or one dwelling does not receive more than the maximum 

allowable grant assistance, the Loan Originator must document the amount of any prior grant 

provided to each homeowner or dwelling. Since 1998, grant records have been maintained in 

LoanServ. A list of grants closed prior to 1998 will be retained in the state operational file folder 

3550-C, "Section 504 Grantee List." When processing grant applications for individuals born 

prior to 1936, both LoanServ and the operational file folder will be checked to document if prior 

assistance was received. For all other grant applications, LoanServ must be checked by 

individual and by dwelling address. A dwelling that received past maximum grant assistance 

may only receive a new grant if ownership has changed.

12.11 ESCROW, TAXES, AND INSURANCE [7 CFR 3550.109, 7 CFR 3550.110]

If the total outstanding indebtedness is more than $15,000, Section 504 borrowers are 

responsible for furnishing and maintaining hazard insurance, as described in Section 3 of Chapter

7. If funds are not escrowed through another lender to pay for taxes and insurance, the 

borrower must contribute the appropriate amount to an escrow account managed by the Agency.

Escrow is also not required where the security property includes a farm, and the property is not 

subdivided between the farm and non-farm tract unless the housing represents the majority of the 

value of the security property, or it is in the Agency’s best interest.

Flood insurance is required when any form of federal financial assistance which is intended 

in whole or in part for the acquisition, construction, reconstruction, or substantial improvement of 

any building located in a Special Flood Hazard Area, as identified by the National Flood Insurance 

Program, administered by the Federal Emergency Management Agency and described in RD 

Instruction 426.2. Substantial improvement means any reconstruction, rehabilitation, addition, or 

other improvement of a structure, the cost of which equals or exceeds 50 percent of the market 

value of the structure (a) before the start of construction of the improvement, or (b) if the structure 

has been damaged and is being restored, before the damage occurred (see Chapter 7, Section 3 for 

further information on calculating substantial improvements).

12-9

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607
HB-1-3550

12.12 MANAGING REPAIRS AND MINORREHABILITATION

This section generally refers to work being done that is not new dwelling construction 

such as subsequent loans, and unsecured Section 504 loans and grants. Typically, the repairs, 

improvements, or minor rehabilitation (work) discussed within this section would be able to be 

completed within 30 days of it commencing. If work will take more than 30 days, the loan must 

be processed and coded as ‘construction’ (e.g., interest deferral period and subsequent conversion 

to a permanent loan).

A. Communicating theStandards

It is the applicant’s responsibility to be aware of the standards the local jurisdiction has in 

place for repairs or improvements to their home before the design or bid process progresses.

Contractors should be provided with a scope of work by the applicant to ensure that the repair 

estimates for labor and materials are consistent with the homeowners’ expectations. If application 

fees and permits are required, the scope of work will identify the party responsible for submitting 

the permit fees and approval from the local jurisdiction.

B. Selecting the Contractor

While the Agency does not approve contractors, the Agency may provide applicants with 

sound advice on selecting a contractor (e.g., encouraging competitive bids, checking references, 

Better Business Bureau review, etc.). The Loan Originator should discuss any concerns from 

their initial review with the homeowner to assist with their contractor selection decision. The

Loan Originator should document in the running record which contractor(s) the homeowner 

selected.

The contractor must be checked in the Do Not Pay Portal and have a valid contractor’s 

license if required by the local jurisdiction, and such license must be documented by the Loan 

Originator (e.g., contractor provided verification or online search, when available). In many 

cases, the applicant will have a contractor in mind. The contractor’s bid should include a 

breakdown of materials and labor and describe the quantity, quality, grades, styles, model 

numbers, etc. to identify the work and materials to be furnished.

The applicant will provide an adequate number of bid(s) from a qualified contractor(s).

The local office must review the bid(s) obtained to ensure costs are reasonable for the area 

serviced and the number of bid(s) are sufficient. Online construction cost comparison tools may 

be used when appropriate. The bid(s) must be detailed to include cost of material, size, quantity,

and manufacturer.

C. Pre-Construction Conference

Once the funding has been obligated, the Agency, the applicant(s), and the contractor(s) are 

required to hold a pre-construction conference using Attachment 12-F, Pre-Construction Conference 

prior to work commencing. The purpose of the conference is to ensure that each party understands their

respective roles and responsibilities. The parties should review the contract or accepted contractors 

bid/proposal, start date, estimated completion date, requirements, and specifications to ensure all parties

understand the scope of work, construction/thermal standards, environmental mitigation requirements, 

12-10
HB-1-3550

Paragraph 12.12 Managing Repairs and Minor Rehabilitation

fees, materials, inspection requirements, change orders, responsibilities for access, cleanup, and 

payment procedures. Along with the RD Representative, the applicant/owner and the contractor

should sign Attachment 12-F. Alternatively, the applicant/owner and the contractor can

acknowledge the pre-construction conference via an email exchange that includes the completed 

Attachment 12-F with the RD Representative’s signature.

D. Construction Contract

Written contracts using Form RD 1924-6, “Construction Contract” are strongly 

recommended for all rehabilitation-related construction and are required if the construction work 

will affect the dwelling’s structural integrity (widening doorways, removing walls, foundation 

work, termite/water damage, etc.). A contract or bid not exceeding $10,000 may use Form RD 

1924-6, “Construction Contract,” but it is not required. Contractors commonly have bid 

acceptance language at the bottom of their bid proposals, regardless the homeowner’s signature 

is required as it binds the agreement (contract). The applicant and contractor must sign the 

contract(s) or bid/proposal no later than the pre-construction conference. If there are multiple 

contracts or bids and when utilizing the Borrower Method, Form RD 1924-1, “Development 

Plan” with cost estimates and bid specifications must be used. Separate contracts and 

arrangements which split responsibility of contractors (multiple small simultaneous contracts), 

should be avoided whenever it is practical to do so.

12.13 COMMENCEMENT OFWORK

Once the contract or bid has been accepted and/or signed, the pre-construction 

conference has been held, the work may begin. Generally, the complexity of most repairs and 

minor rehabilitation will not require periodic inspections by Agency staff. The homeowner and 

contractor should communicate with Agency staff any unforeseen issues that arise which could 

increase costs or jeopardize timely completion.

A. Inspecting the Work

The homeowner is responsible for inspections necessary to protect their interest. Agency 

inspections, (including acceptable alternatives) are completed to ensure the fundswere used for the 

approved purpose and do not imply duty or obligation to the homeowner. The inspection(s) may 

be conducted on-site by Agency staff utilizing Form RD 1924-12, “Inspection Report”, or by 

alternative methods provided by the contractor or homeowner such as photos/videos showing the 

completed work. Alternative methods of inspection should be accompanied by a written report as 

needed to document items such as the appropriate posters being on display, percent of work 

completed, etc. Written reports without photos provided to the Loan Originator should be used as 

last resource and must be confirmed by the homeowner.

Qualified third-party inspectors may be used when on-site inspections or alternative 

methods are not feasible. The cost for these services may also be reimbursed to the 

homeowner with loan or grant funds. Because of additional costs to the homeowner, payment 

for qualified third-party inspectors is not the preferred method. If inspections are conducted 

by a third party, the inspector should submit periodic inspection reports to the Agency.

12-11

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607
HB-1-3550

Paragraph 12.13 Commencement of Work

B. Payment Upon Completion 

Payment Options

Before the Loan Originator initiates payment(s), the homeowner’s authorization must be 

documented on Form RD 1924-9, “Certificate of Contractors Release.” The number and timing

of inspections varies by the type and extent of work performed.

Once work has commenced, there are two payment options. The first and preferred 

method is lump sum payment upon completion of work. The second is multiple advances 

for work in place in accordance with HB 1-3550, Paragraph 5.26 C. Multiple advances are 

used to pay the contractor for work completed and calculated not to exceed 60% of the value 

of work in place for that portion of the contract (i.e., contract $10,000, 25% of work 

completed, calculated as: 0.25 x $10,000 x 0.60 = $1,500 payment).

C. Required Forms

The Loan Originator determines acceptability of documentation submitted showing 

completion of repairs and documents the running record accordingly.

1. For unsecured loans and grants the Loan Originator must receive the following 

documentations prior to final payment:

• Form RD 1924-9, “Certificate of Contractor’s Release” including an

applicant/owner signature(s) confirming their acceptance of the work.

• Photos of the completed work as provided by the owner or contractor, and/or a copy of a thirdparty inspection.

2. For secured loans the Loan Originator must receive the following 

documentation prior to final payment:

• Form RD 1924-9, “Certificate of Contractor’s Release” including an

applicant/owner signature(s) confirming their acceptance of the work.

• Form RD 1924-10, “Release by Claimants.”

• Form RD 1924-19, “Builder’s Warranty,” other 1 year warranty document.

• Evidence of completed work: Either Form RD 1924-12, “Inspection Report,” or a copy

of a third-party inspection, or photos of the completed work as provided by the owner 

or contractor.

12-12
HB-1-3550

Paragraph 12.13 Commencement of Work

D. Borrower Method [RD Instruction 1924-A, 1924.6 (b)]

Borrower method can be used when the construction method is not feasible, and the 

borrower demonstrates the capacity and experience to oversee the construction process. This 

method increases Agency risk and provides the least amount of coverage to the borrower. If this 

method is utilized, the total development of rehabilitation and repairs cannot exceed $5,000. A 

detailed estimate of labor and materials should be obtained in writing, with the exception for 

amounts less than $100. The Agency has two payment options:

• Checks can be made payable directly to the laborer(s) and/or supplier(s) to purchase 

labor, equipment and materials, or

• Checks can be issued to the owner, if the owner has paid for labor/material out of 

pocket, provides receipts/invoices to document the amount paid, and has obtained 

signatures of the workers who performed labor on FormRD 1924-11, “Statement of 

Labor Performed”.

The following documentation should be completed prior to final payment:

• Form RD 1924-1, “Development Plan,”

• Form RD 1924-11, “Statement of Labor Performed” for each worker involved in

performing borrower method paid labor,

• Itemized invoice to include all equipment and materials furnished,

• Homeowners’ written acceptance of the completed work,

• Photos of the completed work provided by the owner, or third-party inspector.

12.14 CLOSEOUT PROCESS

Once work is satisfactorily completed, the Agency will release the final payment in the 

form of a check made out to the homeowner and their contractor. The homeowner is party to the 

contract and therefore responsible to countersign the check and release it to the contractor as 

payment. Before payment occurs, the Loan Originator ensures that the work has been accepted 

by the homeowner. If construction or rehabilitation work cannot be completed because the 

contractor is unable or unwilling to do so, and a new contractor is not identified by the 

homeowner within 30 days, loan funds will be applied to reduce the borrower’s principal balance. 

Grant funds will be returned to the Servicing and Asset Management Office (Servicing Office).

The homeowner must be notified of this action in writing.

If the homeowner refuses to pay the contractor due to a dispute or unsatisfactory 

workmanship, the undisbursed funds will be processed in the following manner:

• If litigation is pending, the Agency will consult with the Office of the General 

Counsel prior to disbursing or returning funds.

12-13

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607
HB-1-3550

Paragraph 12.14 Closeout Process

• If litigation is not pending, the Agency will return remaining funds to be applied to the 

borrower’s loan or grant amount. Once funds have been disbursed or returned, loans 

must be converted to permanent accounts on the first of the following month. The 

homeowner should also be advised of their contractual obligations and may wish to seek 

their own legal counsel.

A. Funds Remaining After Completion [RD Instruction 1951-A, 1951.11(b)(3)]

Funds remaining after completion of 

construction and disbursement payment to the 

contractor, may either be returned as unused funds or 

used toward an eligible repair. Loan funds returned 

will be curtailed to principal. However, if a borrower 

received a combination loan and grant, the remaining 

funds will first be returned to reduce the grant amount. 

A notice informing the borrower of their right to appeal 

must be issued within 10 days of the determination to 

return unused funds. The remaining funds must be 

returned within 90 days.

B. Disbursement [DLOS Manual Chapter8]

Loans and grants can be disbursed utilizing either multiple draws or single check 

disbursement (lump-sum payment) function in LoanServ. For rehabilitation projects exceeding 30 

days and those requiring multiple draws the purpose code on the registration screen in UniFi must 

be coded 40 (construction loan). This code will transfer to the new loan screen in LoanServ which 

should reflect a close code of “5” and must be verified at loan closing. When ordering multiple 

draws for loan-grant combinations, additional draws on the grant portion cannot be performed once 

the loan has been fully disbursed.

Loan funds will typically be disbursed before grant funds; however, this may not always be 

feasible as grant funds are disbursed to remove safety and health hazards or make the dwelling 

accessible for household members with a disability. Funds remaining after completion of work should 

always be returned to reduce the grant balance first when feasible.

In some instances, a supervised bank account may be necessary for multiple disbursements.

Please refer to RD Instruction 1902-A for Supervised Bank Accounts (SBA) requirements. The 

Washington, D.C. based AgFed Credit Union is equipped to establish SBAs virtually nationwide.

C. Cancellation of Funds

Partial or full cancellation of loan and grant funds can be performed in accordance with 

DLOS Manual Chapter 8. If a Treasury Check is held by the Agency, it must be voided and 

returned to Servicing Office with form RD 3550-17, “Funds Transmittal Report”. The following 

reason codes may be used on the Funds Transmittal Report:

05 Cancellation of Treasury Funds (loan or grant)

20 Principal Curtailment

12-14

Example - Joe Smith receives

$6,000 in combination loan and 

grant assistance ($2,000 loan 

and $4,000 grant funds). The 

repairs are completed and 

invoiced at only $4,000, less 

than the original contract price. 

The remaining $2,000 will be 

returned as unused funds to 

reduce the grant (not the loan).
ATTACHMENT 12-A 

SUMMARY OF DIFFERENCES BETWEEN

SECTION 504 LOANS AND GRANTS

HB-1-3550

Attachment 12-A

Page 1 of 1

Note: This attachment summarizes key requirements to assist the reader in comparing Section 

504 loans and grants. It is not a comprehensive description of all requirements.

Topic Section 504 Loan Section 504 Grant

Use of Funds May be used to: (1) improve or 

modernize; (2) make dwelling 

decent, safe, and sanitary;

(3) remove hazards.

Cannot be used for acquisition or 

new construction. Specific 

prohibitions are listed in 

Paragraph 12.2 A.

May be used only to remove health 

and safety hazards or to make 

dwelling accessible to household 

member with disabilities.

TRID Disclosure 

Requirements

Loans of $7,500 or more require 

the issuance of Non-Purchase Loan 

Estimate and Closing Disclosure.

Loans of less than $7,500 require 

the issuance of Form RD 1940-41 

“Truth in Lending Statement.”

A list of Settlement Service 

Providers is only required when a 

Loan Estimate is issued.

N/A

Credit Reports Required for all applicants. but 

no fee charged. Loans $7,500 or 

greater require a TMCR.

N/A

Age of Applicant N/A 62 or older

Leaseholds The property must be covered by a 

lease with an unexpired portion of 

not less than 2 years beyond the 

term of the promissory note.

The remaining lease period must be 

at least 5 years from closing.

Appraisals Fee charged if appraisal completed. N/A

Maximum Assistance $40,000 outstanding at one time. $10,000 lifetime limit.

Security If the total Section 504 indebtedness 

is greater than or equal to

$7,500, a mortgage is required.

No security required.

Insurance Ifindebtedness greaterthan$15,000, 

property insurance is required.

Flood insurance isrequired in 

Special Flood Hazard Areas 

(SFHA) for substantial 

improvements per Paragraph

7.12 B.

Flood insurance is required in 

SFHA for substantial 

improvements per Paragraph 7.12 

B.

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607
HB-1-3550

Attachment 12-B

Page 1 of 4

ATTACHMENT 12-B

DIFFERENCES BETWEEN SECTION 502 AND SECTION 504 LOANS

Note: This attachment summarizes key requirements to assist the reader in comparing Section 

502 and 504 loans. It is not a comprehensive description of all requirements.

Topic Section 502 Loan Section 504 Loan

PROGRAM PURPOSES AND PRIORITIES

Program Purpose Assist applicants who are not 

homeowners to become 

homeowners.

Assist current homeowners with 

necessary improvements and 

repairs.

Processing Priorities Applications will be selected 

for processing using the 

priorities specified in 

Paragraph 3.13. Applications 

that meet special criteria are 

processed immediately.

Multiple priorities apply, but 

applications for assistance to 

remove health and safety hazards 

receive first priority processing.

Veterans’ preference is used for 

applications with the equivalent 

priority status received on the 

same day.

LOAN PURPOSES

Eligible Purposes In general, funds may be used to 

buy, build, rehabilitate, improve, 

or relocate an eligible dwelling 

and provide related facilities for 

the borrower to personally 

occupy.

No initial loansfor repair of 

manufactured homes.

Remove health and safety 

hazards. Repair or remodel 

dwelling to make more accessible 

and useable for a household 

member with a disability.

General repairsto improve or 

modernize a home.

Repair mobile or manufactured 

homes with a permanent 

foundation.

APPLICANT ELIGIBILITY

Income Applicant income must not 

exceed low-income limit at loan 

approval and must not exceed 

moderate-income limit at loan 

closing.

Applicant income must not 

exceed the very low-income limit 

at loan approval and closing.

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607
HB-1-3550

Attachment 12-B 

Page 2 of 4

Topic Section 502 Loan Section 504 Loan

APPLICANT ELIGIBILITY

Credit Requirements Credit history must demonstrate 

ability and willingness to pay. 

Costs for credit reports are 

charged to applicant.

Applicants must have a credit 

history that indicates a 

reasonable ability and 

willingness to meet debt 

obligations. Costs for credit 

reports are not charged to the 

applicant.

Asset Requirements Applicants are required to 

contribute nonretirement assets 

exceeding $15,000 ($20,000 for 

elderly households) toward the 

purchase of the property.

Same as Section 502, except 

nonretirement assetsinclude only 

assets that can be converted to 

cash within 60 days.

Repayment Ability Applicants must show repayment 

ability based on PITI and TD 

ratios.

Applicants mustshow repayment 

ability based on a TD ratio of 

41% or less.

Ownership The applicant need not own the The applicant must own the

property. property.

A leasehold must have an A leasehold must have an

unexpired term of at least 150% unexpired term of at least 2 years

of the term of the mortgage, beyond the loan term.

unlessthe loan is guaranteed by a 

public authority, Indian tribe, or

Indian Housing Authority.

If standard evidence of 

ownership is unavailable, 

exceptions may be made.

No exceptions on ownership

evidence.
HB-1-3550

Attachment 12-B

Page 3 of 4

Topic Section 502 Loan Section 504 Loan

PROPERTY REQUIREMENTS

Area Loan Limit Individual exceptions are 

allowed.

Individual exceptions are 

allowed.

Property Standards The property must meet the 

Agency’s site and dwelling 

standards.

The property: (1) need not be 

brought to Agency development 

standards; (2) need not have all 

hazards removed; but (3) must 

have all major hazardsremoved.

Appraisals An appraisal isrequired when the 

debt is to be secured and prior 

liens exceed $15,000. Applicants 

are required to pay an appraisal 

fee which may be included in the 

loan.

An appraisal is not required

unless an RD lien will secure

the property. An appraisal is 

required when the total

secured indebtedness (RD 

and non-RD) exceeds

$25,000. If under this 

threshold, the Loan Official

will determine if an appraisal 

is needed.

Applicants are required to pay an 

appraisal fee which may be 

included in the loan.

LOAN TERMS

Interest Rate and Loan Terms The applicable Rural Housing 

(RH) Section 502 low or 

moderate interest rate in effect at 

loan approval or closing, 

whichever is lower. Standard 

term is 33 years;some applicants 

may qualify for a 38-year term.

Borrowers may be eligible for 

paymentsubsidiesthat reduce the 

effective interest rate.

1 percent interest rate and a 

standard loan term of 20 years.

Loan Amount Totalsecured indebtedness must 

not exceed the area loan limit.

Total secured indebtedness must 

not exceed the area loan limit or 

the market value limitation.

The outstanding balance on the 

sum of all Section 504 loans 

cannot exceed $40,000.

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607
HB-1-3550

Attachment 12-B 

Page 4 of 4

Topic Section 502 Loan Section 504 Loan

LOAN APPROVAL AND CLOSING

Loan Closing Loans must be closed by a 

closing agent.

Loans $25,000 or less may be 

closed by the Loan Originator or 

a designee.

Security First liens are generally required, 

but Agency interests may be 

subordinated in some 

circumstances.

First lien position is not required.

INSURANCE

Insurance Requirements If indebtedness is greater than

$15,000, property insurance is 

required.

If indebtedness is greater than

$15,000, property insurance is 

required.
HB-1-3550

ATTACHMENT 12-C

504 SINGLE FAMILY HOUSING LOAN AND GRANT CHECKLIST

THIS CHECKLIST DOES NOT REPLACE THE RUNNING RECORD!

This document should be filed in under Folder A for an Electronic Customer File (ECF)

Once clear, readable copies are uploaded and confirmed in ECF, the originals can be destroyed following 

the requirements of RD Instruction 2033-A (e.g., PII must be cross-cut shredded) except for the 

documents identified on the Index of Essential Records which are maintained in locking-type, fireproof 

filing cabinets/safes in accordance with RD Instruction 2033-A, 2033.6(b).

ECF – Electronic Customer File (refer to the ECF Classifications – Quick Reference Guide in SharePoint) 

RP – Responsible Party

LO – Loan Originator

LAO – Loan Approval Official

Attachment 12-C

Page 1 of 6

Applicant: Co-Applicant:

ECF RP DATE

PREQUALIFICATION PROCESSING

Discuss the results with the potential applicant and emphasize that the results are informal and unbinding. As 

applicable, consider the below when discussing the results and refer to Attachment 3-F for guidance on addressing 

negative results.

C LO Form RD 3550-35, “Section 504 Home Repair Loan and Grant Program Intake Form”

and RD 3550-1, “Authorization to Release Information” (HB-1, 3.5)

C LO Check Treasury’s DNP portal, and file in applicant ECF file (HB-1, 4.11, 12.4 B)

C LO Check LoanServ’s “SSN CROSS REFERENCE” softlink key (HB-1, 4.11, 12.9 C)

C LO Infile Credit Report (HB-1, 3.3, 4.11)

C LO Verify eligibility of subject property. (HB-1, 5.1)

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

APPLICATION PROCESSING

Review application for completeness within 3 business days of receipt. Call or write the applicant to request any missing 

information. Follow up with a letter advising applicant of a 15-day deadline for submission or the application will be

withdrawn, or a 30-day deadline to obtain repair bid(s). Mark files as inactive until complete. (HB-1, 3.6)

C LO

Form RD 410-4, “Uniform Residential Loan Application,” include information sheet

similar to Attachment 3-D & RD 3550-1, Authorization to Release Information (HB-1, 3.5)

C LO

If a secured loan application is subject to TRID, forward the following documents as 

applicable to the applicant within 3 business days of receipt of the application (HB-1,

3.8):

HB Letter 5 (3550), Cover Letter to Truth in Lending Disclosure

CFPB’s “Your home loan toolkit: A step-by-step guide”

CFPB’s Non-Purchase Loan Estimate form

Attachment 3-I, Settlement Service Providers List &Mortgage App. 

Related Disclosures

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607
HB-1-3550

Attachment 12-C 

Page 2 of 6

C LO For an unsecured loan, send RD 1940-41,

“Truth in Lending Statement.”

Date 

Returned:

C LO Check Treasury’s DNP portal, and file in applicant ECF file (HB-1, 4.11, 12.4B)

C LO Check LoanServ’s “SSN CROSS REFERENCE” softlink key (HB-1, 4.11, 12.9 C)

C LO Check list for 504 Grant recipients born prior to 1936 for prior assistance and document in 

running record (HB-1, 12.9C)

C LO Check address in LoanServ’s “CUS XREF ID” softlink key for prior grant assistance on the 

dwelling (HB-1, 12.9C)

C LO

Identification and Verification of age (grants only) (HB-1,4.21)

Evidence

of age

Taxpayer’s

ID number

Photo ID

D5 LO If not a citizen, see attachment 4-D (S.A.V.E.) (HB-1, 4.20)

E LO Evidence of homeownership and occupancy: (copy of Deed, RE Tax Bill, etc.) (HB-112.4F)

C LO Verify eligibility of subject property. (HB-1, 5.1)

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

C LO Enter application complete date in stage updating of UniFi and on Form RD410-4

C LO Funds Available; send HB Letter 11, Request Information (HB-1, 3.13)

C LA

O

Funds Not Available; send HB Letter 2, Funds Not Available (HB-1, 3.12)

INCOME

D1 LO

Paycheck stubs (4 most recent & consecutive weeks)-Only for employment which is not seasonal in

nature. Seasonal employment is verified using the last two years of complete tax returns with W-2s and 

applicable schedules. (HB-1, 4.3)

D1 LO Oral Verification of Employment – if applicable (HB-1,3.15 A.3.)

D1 LO

Form RD 1910-5, “Request for Verification of Employment” – if paystubs are not available LO

(HB-1, 4.3):

If no response in 14 days, call employer to follow up and document the discussion

D1 LO

Other Income/ documentation (HB-1, 4.3, 4.5):

Public Assistance Self-employment income

Child Support /Alimony Social Security/ VA

Benefits

Unemployment Benefits Pensions/ 

Annuities

Latest two Federal Income Taxes with W-2s and applicable schedules

Tax transcripts directly requested and obtained by applicant using IRS Form 4506-T, 

Request for Transcript of Tax Return, if additional income validation was needed.

Other

D1 LO Form RD 3550-4, “Employment and Asset Certification”

D1 LO Separation/Divorce/Paternity/Property Settlement Agreement, if applicable

DEDUCTIONS

D2 LO

Deduction documentation (HB-1,4.4):

Childcare Disability Assistance Expense

Elderly/Disabled (RD 1944-4, if 

applicable)

Full-Time Student Status

Medical Expenses Minor Dependent

Other
HB-1-3550

Attachment 12-C

Page 3 of 6

C LO If changed circumstances occur, issue revised Loan Estimate within 3 business days of receiving

new information, but no later than 4 business days prior to loan consummation.

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607

ASSETS

D3 LO

Most recent bank account statements covering at least a two-month period – statements 

must include the transaction history,reviewany recurring deposits or debits, and obtain explanation

forlarge deposits(HB-1, 4.5)

D3 LO Form RD 1944-62 “Request for Verification of Deposit” – if statements are not available or the 

accuracy of the applicant’s self-certification or statements are questioned (HB-1, 4.3)

D5 LO Form RD 3550-2 “Request for Verification of Gift/Gift Letter,” if applicable (HB-1, 4.3)

D3 LO Land and Other Real Estate, if applicable (HB, 4.5, Exhibit 4-3)

D3 LO Most recent retirement fund statements cover at least a two-month period (considered for 

income calculations, but not for down payment) (HB-1, 4.6, 4.7)

D3 LO Other Assets (HB-1, 4.5, Exhibit 4-3)

CREDIT

C LO Infile Credit Report (HB-1, 3.3, 4.11)

D4 LO

Tri-Merge Credit Report (TMCR) documentation (Only loans$7,500 or greater) [no grants] – no 

charge to the applicant) (HB-1, 4.12 & 12.4):

Report: Requested Received

Document in item 19 of RD 410-4

Credit 

Scores:

Applicant CoApplicant

D4 LO

Creditscore is less than 620 (HB-1,12.4B):

Nontraditional credit verifications

Applicant Reference Letter (RD410-8)

Credit History Worksheet (1944-61)

Credit Letter of Explanation, if applicable (HB-1, 4.12)

OTHER

D1 LO Automated Worksheet for Computing Income and 504 Eligibility

D5 LO Document repayment ability, TD ratio does not exceed 41% without documented compensating 

factors (HB-1, 12.7).

D5 LO Document applicant lacks personal resources and meets non-retirement asset limitations

($15,000; $20,000 for elderly households) (HB-1, 4.6, 6.10, and 12.4 C)

F LAO If applicant is not eligible, send HB Letter 15 (3550), Standardized Adverse Decision Letter 

with review and appeal rights (must be signed by the LOA) (HB-1, 1.9)

D5 LAO Document Eligibility on originally submitted Application - item 17. Update UniFi/Stage 

Updating

D5 LAO Handbook Letter 16B, Self-Help Applicant Eligibility-Owner Occupied Rehabilitation issued 

when loan and/or grant eligibility has been determined.

D5 LO Form RD 3550-23, “Applicant Orientation Guide” (HB-1, 4.26 loans only)
HB-1-3550

Attachment 12-C 

Page 4 of 6

PROPERTY ELIGIBILITY

D1 LAO

Property eligibility determination (document with Automated Worksheet forComputing Income 

and 504 Eligibility) (HB-1, 12.3) Method used: (site visit, online resources)

Online Resources can be uploaded to Property Visit & Documentation for Repair

F LAO If denying property, send HB Letter 15 (3550), Standardized Adverse Decision Letter

with Review and appeal rights (must be signed by the LOA) (HB-1, 1.9 & 8.2)

E LO

Verify the subject property’s address using the USDA address verification site. Result code

must be 1 or 2; or researched, verified, and documented if not. Enter verified Address in 

UniFi. (HB-1, 5.1)

(http://eligibility.sc.egov.usda.gov/eligibility/addressVerification)

E LO Checklist for Evaluation of Existing Dwelling (HB-1, 12.3, Attachment 12-D), if applicable.

E LO Photographs of property and essential repairs (before and after). (HB-1, 12.12)

E LO Appraisal Report, or document Statement of Value (HB-1, 12.5B)

E LAO Form RD 1922-15, “Administrative Appraisal Review for Single Family Housing” - within 7

days of appraisal (HB-1, 5.19); Reviewed and Accepted (initial and date)

E LO

Notify Applicant of appraisal results and provide a copy of the appraisal. If making

an adverse decision on the appraisal, send either HB Letter 17 or HB Letter 18, as applicable, 

along with a copy of the appraisal.

E LO Lead Based Paint (LBP) Compliance Key and Print Out (houses built prior to 1978) 

(https://leadpaint.sc.egov.usda.gov/LBPWeb/lbpQuestionaire)

E LO/

LAO

RD Instruction 1970-B, Exhibit D, “Environmental Checklist for Categorical Exclusions” or 

RD Instructions 1970-C, Exhibit E “Guide for Reviewing Environmental Assessments (as 

applicable) (1970-B & HB-1, 5.8)

E LO FEMA’s Standard Flood Hazard Determination Form (HB-1, 5.8 & 1970-F) 

(https://www.floodcert.com)

E LO

FEMA’s Elevation Certificate Form, (HB-1, 5.8 & 1970-F), ifsubstantial rehabilitation 

(https://www.fema.gov/media-library/assets/documents/160)

Private Party Notice Regarding Flood Hazards, as applicable (HB-1, 5.8 &1970-F)

E LO

Form RD 3550-6, “Notice of Special Flood Hazards, Flood Insurance Purchase

Requirements, and Availability of Federal Disaster Relief Assistance,” as applicable (mail 10 

days prior to closing) (HB-1, 5.8)

CONSTRUCTION

E2 LO Check contractor(s) in the DNP portal whose contracts are equal to or greater than $25,000 and

place copies in file (1940-M)

E2 LO Attachment 12-F. Pre-Construction Conference (HB-1, 12.3) (at or before closing)

E2 LAO Form RD 1924-7, “Contract Change Order,” if applicable

CONTRACTS $10,000 OR LESS

E2 LO

Review detailed bid(s) from contractor(s) itemized costs to include labor and materials (HB-1,

5.25) or use 1924-6, Construction Contract and RD 1924-7, Contract Change Order, if 

applicable.

E2 LO Form RD 1924-1, “Development Plan”

E2 LO Form RD 1924-9, “Certificate of Contractor’s Release”
HB-1-3550

Attachment 12-C

Page 5 of 6

E2 LO Form RD 1924-10, “Release by Claimants” if applicable

E2 LO Form RD 1924-11, “Statement of Labor Performed for each worker involved in

performing borrower method paid labor

E LO Pictures of repairs before and after

E2 LO Form RD 1924-19, “Builder’s Warranty” (HB-1, 5.27), if construction contract used 

and the loan is secured (HB-1, 12.12 C)

CONTRACTS GREATER THAN $10,000

E2 LO Form RD 1924-6, “Construction Contract”

E2 LO Ex C, RD Inst. 1901-E (HB-1, 12.11) DOL within 10 days,DOL

website (https://www.dol.gov/agencies/ofccp/contact/regional-offices)

E2 LO “400 Series” (400-1, 400-3, 400-6, posters) (HB-1,5.25)

E2 LO Form RD 402-1, “Deposit Agreement” and RD 402-2, “Statement of Deposits and

Withdrawals,” if applicable

E2 LO Form RD 1924-12,Inspection Report. Third Party Inspections, or alternative method

(HB-1, 12.12)

E2 LO Form RD 1924-9, “Certificate of Contractor’s Release”

E2 LO Form RD 1924-10, “Release by Claimants,” if applicable

E2 LO Form RD 1924-11, “Statement of Labor Performed” (borrower method only)

E2 LO Form RD 1924-19, “Builder’s Warranty” (HB-1, 5.27), if construction contract used

UNDERWRITING/APPROVAL

D1 LO Reverify income - if over 120 days old (HB-1, 8.6)

DI LO Automated Worksheet for Computing Income and 504 Eligibility-if income reverified

LO Verify UniFi Program Type Code (must match 

income type)

Program Type 

Code:

F LO Update all screens in LoanServ before uploading file; check Display History Screen for 

correct loan / grant amount

F LO Direct-US Findings Report (optional)

F LAO If rejected, use HB Letter 15 (3550), Standardized Adverse Decision Letter, and attach 

review & appeal rights (HB-1, 1.9 & 8.2)

F LAO

Form RD 3550-7, “Funding Commitment and Notification of Loan Closing” – issued

when

secured loan funds are obligated in LoanServ (if not accepted and returned in 15 days, 

deobligate) (HB-1, 8.2)

F LAO Handbook Letter 12 (3550), Notification of Approval – issued when unsecured loan

and/or grant funds are obligated in LoanServ.

F LO Obligate through LoanServ (HB-1, 8.7).

F LO If changed circumstances occur, issue revised Loan Estimate within 3 business days of 

receiving new information, but no later than 4 business days prior to loan consummation.

CLOSING

G LO Check Treasury’s DNP portal for closing agent (Label as Closing Agency using ECF Title 

field) (HB-1, 4.11, 12.4B)

G LO Form RD 1927-4, “Transmittal of Title Information” (HB-1,8.4)

G LO Title Insurance required for loans if the total outstanding balance on Section 504 loans is 

greater than $25,000 (HB-1, 8.4)

G LO Form RD 1927-9, “Preliminary Title Opinion” (if the total outstanding balance on

Section 504 loans is greater than $25,000), as applicable (HB-1, 8.4)

(01-23-03) SPECIAL PN

Revised (03-08-24) PN 607
HB-1-3550

Attachment 12-C 

Page 6 of 6

G LO Hazard Insurance Binder & Receipt for 1st year premium for loans $15,000 or 

greater (HB- 1, 7.12)

G LO Flood Insurance Binder & Receipt for 1st year premium required for properties 

located in Special Flood Hazard Area (Loans and grants with substantial 

improvement)

G LO Review Title Insurance Binder/Preliminary Title Opinion and verify legal description is 

correct If exceptions noted affect the security value, loan cannot close (HB-1, 8.5)

G LAO Form RD 3550-15, “Tax Information” – loans $15,000 or greater (HB-1, 7.10)

G LO Form RD 3550-9, Initial Escrow Account Disclosure Statement, loans $15,000 or greater

(HB-1, 7.5 & 12.10)

G LO

/ 

LAO

Form RD 3550-25, Loan Closing Instructions and Loan Closing Statement – if the total 

outstanding balance on Section 504 loans is greater than $25,000 (should include 

documents

to be signed at closing) (HB-1, 8.11)

G LO Form RD 3550-17, Funds Transmittal Report for tax service & appraisal fees, escrow 

funds, etc. (copy in Collections Operational File) (1951-B, if applicable)

G LO Form RD 3550-19, Transmittal-Closing Documents & Attachments, as applicable (Grant 

documents are not sent to Servicing Office) (HB-1, 8.11)

G LO Form RD 410-4, Uniform Residential Loan Application - PRINTED FROM UniFi

G LO Form RD 1927-5 “Affidavit Regarding Work of Improvement” (if required by State 

Supplement)

send blank to closing (1927-B, 1927.58)

G LO Form RD 1940-16, “Promissory Note” (original in safe) - all loans (HB-1, 8.9)

G LO Non-Purchase Closing Disclosure (HB-1, 8.5), review for compliance with tolerance limits

(secured loans)

G LO Form RD 1940-41, “Truth in Lending Statement,” if applicable for an unsecured loan 

(HB-1, 3.8B)

G LO Form RD 1940-43, “Notice of Right to Cancel” - if secured loan (HB-1, 8.6)

G LO Form RD 3550-14, “Real Estate Mortgage or Deed of Trust for (State)” – ($7,500 or 

greater – sent blank) (HB-1, 8.11)

G LO Form RD 1927-10, “Final Title Opinion,” if applicable

G LO Form RD 1927-8, “Agreement with Prior Lienholder, “if applicable (HB-1, 8.6)

G LAO Form RD 3550-24, Grant Agreement (original in safe; copy in case file) (HB-1, 12.9)

G LO Form RD 3550-29, “Document Errors and Omissions Agreement” (HB-1. Attachment 8-

A)

G LO Forms RD 3550-10, “Condominium Rider” or RD 3550-11, “Planned Unit Development

Rider” (if applicable)

POST CLOSING

G LO

Verify closing documents faxed to Servicing Office in required time frame (HB-1, 8.11)

Verify proper lien position.

Post 1 month follow-up for recorded Real EstateMortgage.

Post follow-up for Title Insurance Policy (60 days) or Final Title Opinion (14 

days). (If not received, contact Closing Agent by mail with a copy of the

letter to the insurance company.)

H LO Activate loan (wait until the rescission period has expired, if applicable)

H LO Review final Loan Estimate & Closing Disclosure for tolerance violations. Cure violation 

within 60 days of closing.

H LAO Form RD 3550-25 – “Loan Approval Official” approves after all forms are returned,

reviewed, and correct (HB-1, 8.11 secured loans)

H LO Delinquent/Lienholder Screen – complete LoanServ screen for each leveraged partner –

Include forgivable loans from CDCs and Non-Profits
ATTACHMENT 12-D

HB-1-3550

Attachment 12-D

Page 1 of 2

CHECKLIST FOR EVALUATION OF EXISTING DWELLING

Owner-Occupant Name Property Address

Co-Owner Occupant Name AccountNumber 

Mark the appropriate box to indicate the condition of each element.

Yes No

Health / 

Safety 

Hazard

Element

1. Entry, Exit, Walkway and Driveway. Porches, stairs, decks are sound and free of 

deterioration. Handrails are required for extended stairs generally four or more 

consecutive steps. Walkways, porches, and decks pose no safety hazards and provides 

adequate accessibility for a household member with a disability, if applicable.

Comments:

2. Exterior Walls. Exterior walls do not exhibit signs of structural fatigue, failure, 

or excessive bowing. The siding is free of any rot or paint that is loose, peeling, 

chipping, scaling, or cracking. Vinyl or aluminum siding is free of mildew. Brick 

or stone veneer is sound and exhibits no displacement.

Comments:

3. Utilities. The property is connected to a water/septic system that is approvable by 

an appropriate public agency. The system is adequate for the size of the property 

and is performing satisfactorily. The dwelling has adequate, safe, dependable

utilities with no evidence of malfunction.

Comments:

4. Foundation. The foundation is structurally sound with no evidence of defects such 

as cracks, bowing or moisture intrusion. If a deficiency is noted, describe the nature of 

the deficiency and report necessary repairs, alterations or required inspections to 

alleviate the deficiency. Gutters, downspouts and grading are functioning adequately 

and provide proper drainage, if applicable.

Comments:

5. Roof. The roof is satisfactory and free of serious defects such as buckling, 

sagging, holes, leaking and is expected to last a minimum of 2 years.

Comments:

(01-23-03) SPECIAL PN

Revised (10-05-17) PN 504
HB-1-3550

Attachment 12-D 

Page 2 of 2

Yes No

Health / 

Safety 

Hazard

Element

6. Interior walls, framing and trim. Structurally sound and are

exhibiting no signs of bowing, sagging, or deterioration.

Comments:

7. Windows. Windows are functional, adequate and energy 

efficient exhibiting no obvious signs of deterioration.

Comments:

8. Framing. Floor, subflooring, ceiling joists and partition framing are 

sound and exhibit no structural deficiencies.

Comments:

9. Floor covering. Structurally sound and without presence of cracks, 

holes, buckling, damage, heavily worn or soiled.

Comments:

10. Plumbing. Functionally adequate water pressure, flow and waste 

removal. Water heater and sump pump are functional. Plumbing 

fixtures exhibits no evidence of leaks, damage.

Comments:

11. Heating and Air Conditioning. Functionally adequate

Comments:

12. Electrical Wiring. Functionally adequate.

Comments:

Additional Comments: 

Reviewer Signature Date
HB-1-3550

Attachment 12-E 

Page 1 of 2 

ATTACHMENT 12-E 

CHECKLIST OF ITEMS TOACCOMPANY

APPLICATION FOR HOME REPAIR LOAN OR GRANT FUNDS

You, as the applicant, need to simultaneously submit the applicable items below when applying for 

the Single-Family Housing (SFH) 504 Repair program. All applicable items requested below should be 

submitted. If any item, information and/or signature is missing, your application will be considered 

incomplete, and you will be contacted to provide the missing items. If the missing items are not 

provided within the specified timeframe 15 days (30 days for bids), your application will be 

considered incomplete and will be withdrawn from consideration. To avoid delay or withdrawal, 

please verify that your loan application is fully complete prior to submission. 

Check the boxes below when completed: 

 This checklist with the applicable and included items checked.

 Form 410-4, “Uniform Residential Loan Application” you must complete all sections and

sign/date pages 5 & 8.

 Verification of identity: you must provide a copy of your government-issued picture

identification (ID) along with evidence of age. Standard verifications are a driver’s license or

a passport. Contact us if you do not have these standard verifications to discuss possible

alternatives.

 Verification of taxpayer ID number: you must provide verification of your full taxpayer ID

number (i.e., no hidden or suppressed numbers) using evidence such as your pay stubs or tax

returns. A copy of your social security card is only needed if you do not have any other

evidence of your full taxpayer ID number.

 Form 3550-1 “Authorization to Release Information”. Each adult member of the household must

sign/date a separate release form.

 Form 3550-4, “Employment & Asset Certification” for each adult household member.

 List your personal email address(es) below if you authorize the Agency to contact you via email.

The Agency password protects emails containing personal identifiable information.

INCOME: 

 Verification of all household income. To qualify for the program, a household’s adjusted

income must be within the established income limit based on size and location. Below are

some examples of income that may be applicable to all household members and what should

be provided to the Agency.

 Last four consecutive weeks of pay stubs.

 Recent benefit statements for regular unearned income (such as social security,

public assistance, retirement income, etc.).

 Last 12-month payment history of alimony and/or child support received as

provided by the court appointed entity responsible for handling payments. If this

is not available, a copy of the separation agreement or divorce decree.

(01-23-03) SPECIAL PN 

Revised (03-08-24) PN 607
HB-1-3550

Attachment 12-E 

Page 2 of 2

INCOME (continued):

 Your last two signed Federal Income Tax Returns with all applicable tax return 

schedules. Also provide:

• All W-2s, 1099s, and other forms attached to the returns

• If filed electronically, include a copy of the signature page with the SelfSelect PIN, confirmation that the return was accepted, or evidence that it 

was filed by an authorized E-File provider.

 For each non-retired applicant, a written explanation of employment history of less 

than two years or employment gaps in excess of 30 days within the last two years.

ASSETS, CREDIT, OTHER DOCUMENTATION:

 For each household member, a copy of their two most recent asset/bank statements. (Note 

that if you are obtaining this information through online banking, you should print your bank 

statement, as opposed to printing the online transaction history.)

 For each applicant, a written explanation for late payments, collections, judgments, or other 

derogatory items in their credit history of which they may be aware. If applicants are 

unsure what their credit history looks like, they can obtain a free credit report by calling 1-

877-322- 8228 or logging into https://www.annualcreditreport.com. Individuals are entitled

to receive one free credit file disclosure every week from each of the nationwide consumer 

credit reporting companies – Equifax, Experian and TransUnion. This free 

report cannot replace the credit report that the Agency will obtain to determine eligibility.

 For a household member who is a full-time student and 18 years of age or older, a copy of 

their school transcript.

 If applicable, provide written evidence of childcare expenses for dependents 12 years of age 

or younger.

 If applicable, evidence of out-of-pocket annual medical expenses (for applicants 62 years of 

age and older, or individuals with a disability) who wish to be considered for a deduction to 

household income.

PROPERTY INFORMATION:

 Evidence of Ownership: Copy of Deed, or other documentation.

 Tax Statement: Most recent property tax assessment and annual statement, if applicable.

 Insurance: Evidence of homeowner’s hazard or flood coverage, if applicable.

 Repair Bid(s) including an itemized description of repairs, material, labor, and a copy of 

Contractor’s license, if applicable.

 Mortgage Statement: Most recent copy of mortgage statement, if applicable.

 Photos of the areas requested for repair(s), as well as the front and back of the dwelling.
HB-1-3550

ATTACHMENT 12-F

PRE-CONSTRUCTION CONFERENCE

Attachment 12-F

Page 1 of 2

Owner Name(s): Contractor: 

A Pre-Construction Conference was held ( ) in person, ( ) by telephone on

to review the contract/bid and/or specifications dated for work to be completed and 

performed at the property address, .

The Contractor will start work on , and will complete the work by .

• Although Rural Development (RD) is interested in the proper completion of the work, RD is 

not and will not become a party to the contract nor incur any liability thereunder.

• Parties involved have reviewed the plans and specifications/bid and understand the scope of 

work, construction standards, environmental requirements, materials, liquidated damages, 

inspections, change orders and payment procedures.

• The Contractor will submit evidence (i.e. unconditional lien waivers) that all payrolls, labor, 

equipment and material bills, and other indebtedness connected with the work have been paid 

and at completion of the Contract, will furnish and sign Form RD 1924-10 “Release of 

Claimants”, Form RD 1924-9 “Certificate of Contractor’s Release”, and RD 1924-19 

“Builders Warranty” (or similar documentation).

• Acceptance by the Owner will not relieve the Contractor of obligation to the Owner to 

discharge any and all liens for the benefit of subcontractors, laborers, material, person, or any 

other persons performing labor upon the work or furnishing material or machinery for the 

work covered by this contract, which have attached to or may subsequently attach to the 

property, or interest of the Owner.

• All notices, consents, or other acts to be given or done hereunder shall be valid only if in 

writing.

• Disputes in the construction and/or completion of the contract will be resolved between the 

Owner and the Contractor with RD remaining informed by both parties.

• Should a dispute arise between the Contractor and Owner, the Contractor will have 90 

days to complete court proceedings. If these actions are not taken within this timeframe, 

RD will return funding obligated toward the project and the Owner will be responsible for 

the decision rendered by the judge.

Responsibilities:

• Owner is responsible to monitor progress of proposed repairs, approve payments to 

contractor as specified in contract, and attend final inspection. Owners are responsible 

for property inspections, to address any faulty or defective work or nonconformance with 

the contract and provide written notice to RD to protect their own interests.

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
HB‐1‐3550

Attachment 12-F 

Page 2 of 2

• Contractor’s responsibilities include obtaining and displaying posters and permits as 

required, perform work in accordance with approved plans, specifications and apply 

for preapproval of contract change orders if necessary. Notify owner and RD when 

work is complete. It is the Contractor’s responsibility to obtain and furnish RD with 

all permits, inspections and approvals required by the local code department. Be 

advised that should human remains, historic or cultural resources be uncovered during 

excavation or site development, all work must be stopped until an additional 

environmental analysis is completed.

• RD’s responsibility is to protect the government’s interest, monitor progress of repairs, 

authorize partial payments, final payments, and authorize contract change orders. RD 

inspections do not create or imply duty or obligation to the owner and are conducted to 

determine whether the property provides adequate security and dwelling requirements.

Check the applicable:

Contract is in excess of $10,000 and subject to Executive Order 11246, as amended. Form RD 

400-1 has been executed by the Owner, Form RD 400-3 has been issued by the Agency along with 

applicable posters to be displayed at the job site, and Form RD 400-6 has been executed by the 

Contractor. Established affirmative action goals for women and minority construction 

participation are included in the contract, or;

Contract is not in excess of $10,000 and is not subject to EO 11246.

Contractor and subcontractors (if applicable) greater than $25,000 sums haveexecuted Form AD 

1048, “Certification Regarding Debarment, Suspension, Ineligibility” in accordance with EO 

12549; or

Contract sum is $25,000 or less and Form AD 1048 is not required.

Form RD 1924-25, “Plan Certification” is required and has been completed;or

Form RD 1924-25, “Plan Certification” is not required.

Contractor will obtain applicable building and occupancy permits;or

No building or occupancy permits are required.

The presence of Lead-Based Paint (LBP) is presumed. Contractor will use EPA certified Safe 

Work Practices in accordance with 24 CFR 35.1350, HUD LBP regulations during completion of 

work to be performed. Upon completion of the contract, the area in which the work was 

performed will be subject to an LBP Clearance Test, as performed by a licensed LBP Inspector or 

Risk Assessor. Should the test results indicate an unacceptable level of LBP residue, the 

Contractor will be responsible for additional cleanup, and providing an acceptable clearance 

report from an LBP Inspector or Risk Assessor to RD. No payment for work will be made until 

an acceptable clearance report is provided; or

No LBP Clearance Test isrequired.

No subcontractors will be utilized; or

A list of subcontractors will be provided by theContractor and is attached.

Sign below if the conference was held in person or acknowledge the conference via email if held by 

telephone/virtual.

Owner: Co-Owner:

Contractor: RD Representative
HB-1-3550

13.1 INTRODUCTION

This chapter provides guidance about the role of Field Staff in servicing loans that are 

under the jurisdiction of the Servicing and Asset Management Office (Servicing Office) and the 

liquidation process after a loan has been accelerated. Servicing is mostly the role of the Servicing 

Office; however, Field Staff participation is important to maintain quality customer service and 

to protect the Government’s interest.

Whenever local assistance is needed to support a Servicing Office servicing action, the 

Servicing Office will request Field Staff support through the LoanServ work queue or via 

phone. These requests will provide direction about the work to be accomplished. Appendix 13 

contains a Field Office Reference Guide with helpful information on working effectively with 

the Servicing Office.

Several servicing functions have been permanently assigned to Field Staff. These include 

certain borrower actions requiring approval, assessing the borrower’s ability to refinance with 

private credit, managing Real Estate Owned (REO) and custodial property, the disposition of 

REO property, and providing satisfactions when loans are paid off. Borrower actions requiring 

approval and loan satisfactions are discussed in this chapter. The remaining functions are 

described in detail in the chapters that follow.

Section 1 of this chapter describes servicing actions in which the Servicing Office may 

request assistance from Field Staff. This servicing action is the responsibility of the Servicing 

Office; however, assistance may be needed from the Field so that the Servicing Office can 

adequately service the loan. 

Section 2 deals with servicing actions which are the responsibility of Field Staff with 

Field Staff making the final decision. Section 3 involves liquidation responsibilities after the 

Servicing Office accelerates a loan.

13-1 

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

CHAPTER 13: SERVICING AND LIQUIDATION 

FUNCTIONS
4

HB-1-3550

13.2 TRANSITION TO THE SERVICING OFFICE

New borrowers know the Agency only through the Field Staff they have dealt with 

directly during the loan approval process. After loan closing, those borrowers must make the 

transition to dealing with the Servicing Office. Field Staff can help borrowers with this transition 

by discussing the post-closing role of the Servicing Office with the applicant throughout the 

origination process, and emphasizing, during the applicant orientation, the importance of dealing 

directly with the Servicing Office. Once the loan is closed, the Servicing Office will contact the 

borrower in writing before the first billing statement to explain its role as servicer.

13-2
HB-1-3550

SECTION 1: WORKING WITH THE SERVICING OFFICE

13.3 REGULAR SERVICING

A. Newly-Activated Borrower Account

When the Servicing Office receives a new borrower’s loan docket, it will be reviewed to 

ensure that the documents are correct, and that the information contained in the legal documents 

matches the information that has been entered into LoanServ. 

This will provide a check on the accuracy of all data entry, as well as offering an 

opportunity to identify and correct clerical errors that could otherwise result in unauthorized 

assistance. When the Servicing Office encounters apparent discrepancies, Field Staff may be 

asked to assist in correcting problems. 

B. Payments

Field Staff should help borrowers understand the importance of dealing directly with the 

Servicing Office, while still providing appropriate levels of assistance. If a borrower brings a 

payment to the Field Office, Field Staff should remind the borrower that payments must be sent 

to the lockbox. Field Staff can forward a payment to the lockbox on the borrower’s behalf; 

however, the borrower should be advised that bringing the payment to the Field Office will only 

delay arrival at the correct destination, and the borrower will be more likely to incur a late fee 

than if the payment is sent directly. Late fees are set at 4 percent of the borrower’s scheduled 

payment for principal and interest and are assessed if the scheduled payment is more than 15 

days past due.

Fees on payments accepted by the Field Office will be recorded on Form RD 1951-49, 

“Register of Collections,” and will be safeguarded in accordance with RD Instruction 1951-B 

and Form RD 1951-44, “Management Control and Review of Field Office Collection Activities, 

and related Forms Manual Insert.

C. Approval Actions

The Servicing Office must approve a variety of actions borrowers may wish to take 

during the course of their loans, including leasing mineral rights, obtaining a partial release of 

security, transferring title to someone who will assume the indebtedness, and obtaining Agency 

consent to temporarily not occupy the property or subordinate the Agency loan. In some 

circumstances, these actions may require on-site expertise.

13-3 

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
4

13-4

HB-1-3550

Paragraph 13.3 Regular Servicing

If the borrower requests a partial release of security or authorization to lease mineral 

rights, Field Staff may be asked to examine the site to determine whether the proposed action 

will have an adverse effect on the security property. A local perspective may be particularly 

useful, for example, if Field Staff are familiar with nearby properties that have experienced 

similar mineral activity.

The Servicing Office is responsible for most subordination requests and may request 

assistance from the Field Office. The Field Office may approve a subordination in the case of a 

borrower who is obtaining private credit for repairs to the security property, and the lender 

requires a prior lien.

In accordance with RD Instruction 1970-A, 1970.8 (e), “servicing actions are directly 

related to financial assistance already provided, do not require separate NEPA review, and are 

not actions for the purposes of this part”.

D. Appraisals

Field Staff may be asked to conduct appraisals for the Servicing Office. In these cases, 

Field Staff also are responsible for conducting administrative and technical reviews of these 

appraisals.

Section 5 of Chapter 5 provides detailed guidance on conducting appraisals. All appraisals 

done as part of a servicing action must include the appropriate level of due diligence, which 

includes completing Attachment 5-B.

E. Insurance Claims

Borrowers with insurance claims must contact the Servicing Office to establish a plan 

to repair or rehabilitate the security property. If the insurance claim proceeds will not be used 

to redevelop the security property, the amount received must be applied to the account. The 

responsibilities placed upon the Field Staff and the Servicing Office in the administering of an 

insurance claim fall within one of the following three categories, which consider the amount of 

the insurance claim, the repair or rehab cost and the risk to the government:

• Total claim of $7,500 or less and the borrower’s account is current: Field Staff 

endorses the check to the borrower after reviewing the adjuster’sworksheet.

• Total claim exceeding $7,500 but less than $30,000 or claims of $7,500 or less and 

the borrower’s account is not current: Field Staff forwards insurance proceedsto 

the Servicing Office’s insurance escrow, and inspects the work as requested by the 

Servicing Office. Field Staff should contact the SFH Assistance Section at 314-457-

5200 for further guidance.
HB-1-3550

Paragraph 13.3 Regular Servicing

13-5

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

• Total claim of more than $30,000: Field Staff establishes a supervised bank account or 

forwards insurance proceeds to the Servicing Office’s escrow. The Field Staff also 

manages allsteps of construction planning and performance in the same manner they 

would development funded by loan proceeds following the standards contained in RD 

Instruction 1924-A. Work is inspected prior to any disbursements.

For construction contracts exceeding $10,000, Department of Labor requirements also

apply.

1. Administering Insurance Proceeds

In cases where the amount of the insurance loss claim check is $7,500 or less and the 

account is current, Field Offices are authorized to endorse insurance claim checks without 

recourse provided the borrower provides a copy of the adjuster’s worksheet and documentation 

that repairs will be made or has been completed. If the borrower does not have this 

documentation, the Field Office will contact the SFH Assistance Section at 1-314-457-5200

for further guidance. Field Offices should first review the adjuster’s worksheet to ensure that 

the check is the total claim disbursement.

When Field Offices have endorsed an insurance check for $7,500 or less, they will cue 

the Servicing Office utilizing Task 285 and provide the claim check amount and date of the

loss. If a borrower notifies a Field Office of an uninsured loss, the Field Office will cue the 

Servicing Office utilizing Task 285 and provide the estimated amount of damage to the property 

and the date of loss.

The Servicing Office may force place insurance and submit a claim to the carrier. The Servicing 

Office will cue the Field Office if further actions are needed at the Field Office level.

For significant rehabilitation (a total claim of more than $30,000) all development will 

be completed under the supervision of the local Field Office. The insurance proceeds may be 

provided to the Field Office to establish a supervised bank account or retained for disbursement 

at the Servicing Office. Development will be managed by the Field Office in a like manner as 

development funded by loan proceeds. This should include Form RD 1924-2, Description of 

Materials, and Form RD 1924-25, Plan Certification, or a building permit issued by the local 

jurisdiction. All repairs and replacements will be planned, performed, inspected, and paid for in 

accordance with RD Instruction 1924-A. Payment schedules will be established in the 

individual repair plan.
4

HB-1-3550

Paragraph 13.3 Regular Servicing

13-6

Written contracts, using Form RD 1924-6, Construction Contract, are strongly 

recommended for all rehabilitation-related construction, and are required if there is 

construction involved that would affect the dwelling’s structural integrity. Otherwise, Form 

RD-1924-1, Development Plan, or similar form, with cost estimates and specifications, may be 

used. Unless the borrower method is used, funds will not be advanced for materials or other 

purposes until work is completed.

2. Inspecting Repairs and Authorizing Payments

As noted above, all repairs and replacements will be planned, performed, inspected, and 

paid for in accordance with RD Instruction 1924-A. Section 6 of Chapter 5 further provides 

guidance regarding how inspections should be conducted and documented. Payment schedules 

will be established in the individual repair plan and the construction contract (if applicable).

When the insurance loss claim is under the purview of the Servicing Office, Field Offices 

will be asked to inspect the repair work and complete Form RD 1924-12, Inspection Report.

Before each inspection related to a progress payment, Field Staff should request a check from the 

Servicing Office. The check should be made payable to the borrower and the contractor. If work 

has been satisfactorily completed, Field Staff will instruct the borrower to endorse the check and 

give it to the contractor. If the inspection reveals that the work was not completed satisfactorily, 

Field Staff will void the check and return it to the Servicing Office. After each periodic 

inspection, Field Staff will send the inspection report to the Servicing Office and maintain a

copy in the borrower’s case file. Field Staff will follow up on the adjustment of all losses until 

satisfactory settlement has been made.

When all work has been satisfactorily completed, Field Staff will release the final check 

to the borrower and submit to the Servicing Office all documents required in RD Instruction 

1924-A, including: a final Form RD 1924-12, Inspection Report; Form RD 1924-9, Certificate 

of Contractor’s Release; Form RD 1924-10, Release By Claimants; and Form RD 1924-19, 

Builder’s Warranty.
HB-1-3550

Paragraph 13.3 Regular Servicing

13-7

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Exhibit 13-1

Administration of Insurance Proceeds 

when Redevelopment Work is to be Performed

Total Claims Account Status Rehab Components Insurance Claims 

Administration 

Procedure

$7,500 or less Current Not considered Field Staff endorses check 

to borrower after

reviewing the adjuster’s 

worksheet.

$7,500 or less Not current Not considered Field Staff forwards 

insurance proceeds to 

the Servicing Office’s 

insurance escrow, and 

inspects the work as 

requested by the 

Servicing Office.

More than $7,500 but less 

than $30,000

All accountsregardless of 

status

Single component

More than $7,500 but 

less than $30,000

All accounts 

regardless of 

status

More than one 

component

Field Staff establishes a 

supervised bank 

account or forwards 

insurance proceeds to 

the Servicing Office’s 

escrow, and manages 

allsteps of construction 

planning and 

performance in a like 

manner as development 

funded by loan

proceeds. Work is 

inspected prior to any 

disbursements.

More than $30,000 All accounts 

regardless of 

status

All rehab work
4 

HB-1-3550

Paragraph 13.3 Regular Servicing

13-8

F. Reamortizations and Other Documents Requiring Borrower Signature

Certain servicing actions may require that a borrower sign a loan document which is 

imperative to continue servicing the loan. Most times, the Servicing Office will mail such 

documents to the borrower. In some cases, especially when the document will remain in the 

Field Office, executing the document locally makes better sense. In these cases, the Servicing 

Office will advise the borrower to call and make an appointment with the local Field Office to 

sign the documents. 

The Servicing Office will also notify the Field Office and will provide specific instructions on 

what actions must be taken. For example, when a loan is reamortized, the borrower must 

execute Form RD 3550-18, Reamortization Agreement. The Servicing Office will prepare the 

form and contact both the borrower and Field Office with instructions on executing this form. 

Since the form modifies some terms of the promissory note, upon execution, the Field Office 

would file Form RD 3550- 18 with the borrower’s original promissory note, provide a copy to 

the borrower, and notify the Servicing Office that the borrower has executed the document. 

For reamortizations, the Field Office will type the following statement below the 

signatures on the original note or assumption agreement: 

“A Reamortization Agreement dated in the principal sum of $ 

has been given to modify the payment schedule of this note.” 

G. Payoffs

Generally, a request for a loan payoff balance is made directly to the Servicing Office. In 

certain cases, Field or State Offices may need to obtain a payoff statement on a borrower’s 

account. When needed, Field /State Offices should submit Attachment 13-A, Request for Payoff 

Statement, to the Payoff Unit at the Servicing Office. If the payoff statement is to be used for 

internal purposes only, the documentation for determining market value, capital improvements, 

and closing costs should be maintained in the Field State Office. If the payoff statement is to be 

provided to a third party, all documentation should be faxed to the Servicing Office along with 

the attachment.

Attachment 13-A along with supporting documentation must be reviewed by a person 

other than the Rural Development employee making the request. The reviewer should be the 

first line supervisor, or designee, of the Rural Development employee making the request. The 

name and initials of the person making the request and the reviewer must be on the attachment.
HB-1-3550

Paragraph 13.3 Regular Servicing

H. Final Payments and Satisfactions

When a borrower makes a final payment, the Servicing Office will notify the Field 

Office. Since the methods and forms for releasing security instruments vary by State, the Field 

Office is responsible for preparing the necessary satisfaction or other release documents. When 

the account is fully satisfied, including any subsidy recapture, the Field Office will submit these 

documents to the borrower, along with the satisfied note and mortgage, unless requested to

submit them to another lender or closing agent, as appropriate. In States where the security 

instruments are not released when the borrower refinances their debt (including an Agency 

refinance as a special servicing action), but are assigned to the new lender, Field Staff may 

execute the necessary documents to authorize the assignment. The borrower’s case file must be 

retained for 1 full fiscal year after the account is satisfied.

In cases where the account is not fully satisfied, such as in the case of a borrower who 

has elected to defer the repayment of recapture, the security instruments are not released. In 

these cases, the Servicing Office may advise the Field Office to prepare a subordination of the 

security instruments. Field Offices need to follow the Servicing Office instructions carefully to 

ensure that the correct documents are executed when releasing any security. Satisfaction 

documents are never sent to a borrower who has deferred payment of recapture until the 

recapture amount is paid in full.

I. Recapture Receivable Accounts

Delinquent tax notices/pending tax sale notices from taxing authorities on recapture 

receivable accounts should be forwarded to the Tax Unit at the Servicing Office for handling. 

The notices can be faxed to (314) 457-4535. Upon receipt of a notice of pending tax sale, the 

Servicing Office will review the recapture receivable account to determine if it is in the best 

interest of the Agency to pay the taxes to avoid the tax sale and protect the Government’s 

interest in the property. The Servicing Office may request assistance from the Field Staff when 

making this decision. A visit to the property may be necessary to determine the condition of 

the property and an estimated market value. If the taxes are paid the Servicing Office will 

demand payment from the borrower. If payment is not made a foreclosure action will pursue.

13.4 SPECIAL SERVICING ACTIONS

A. Borrower Counseling

If a borrower notifies Field Staff that there may be a problem with loan repayment, Field 

Staff must not offer special servicing options or counsel the borrower about specific alternatives. 

Instead, Field Staff should help the borrower place a call to the Servicing Office to obtain this 

type of assistance.

13-9

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
4

HB-1-3550

13-10

Paragraph 13.4 Special Servicing Actions

It is important for Field Staff to understand the servicing tools available to the Servicing 

Office in order to be able to refer borrowers most effectively. However, it is the responsibility 

of the Servicing Office to provide specific information and counseling to borrowers. Field Staff 

must use extreme caution in providing information to borrowers, since detailed information 

about changes in servicing procedures will be disseminated primarily at the Servicing Office.

The Rural Development portion of a leveraged/participation loan is eligible for the same 

servicing actions as Section 502 and 504 loans. However, servicing strategies may be different 

because of the Agency’s lien position and the need to coordinate servicing actions with the 

leveraged/participation lender.

The Servicing Office has the primary responsibility of servicing these accounts. On 

occasion, it may be necessary to request the Field Office to provide information on the 

leveraged/participation lender that is otherwise not available. Likewise, if the 

leveraged/participation lender contacts the Field Office regarding a specific account, they may 

wish to refer the lender to the Servicing Office for assistance.

B. Protective Advances

When the Servicing Office is contemplating a protective advance for physical repairs 

based on a borrower’s report that the property is in need of repairs, Field Staff may be asked 

to visit the property to determine whether the repair is actually needed, and whether the 

condition of the property warrants additional investment. The Servicing Office also may 

request that Field Staff conduct inspections of work completed with a protective advance.

Field Staff who notice significant damage or deterioration in a property that secures an 

Agency loan should report that information to the Servicing Office. The Servicing Office can 

then contact the borrower to discuss the condition of the property and determine whether 

additional action is warranted. Potential contamination from hazardous substances, hazardous 

wastes, or petroleum products should be reported promptly to the State Environmental 

Coordinator for further evaluation and guidance.

C. Refinancing

Borrowers with Agency nonprogram loans (nonprogram assumptions or credit sales), 

above-moderate loans, or initial Section 502 program loans with a term less than 25 years are not 

eligible for payment subsidy. If a borrower with one of these types of loans experiences 

difficulty, is in danger of losing the home, and it appears that the borrower would otherwise 

qualify for payment subsidy, Field Staff may be asked by the Servicing Office to consider 

refinancing the loan.
HB-1-3550

Paragraph 13.3 Regular Servicing

Agency debt, including subsidy recapture, may be refinanced as a special servicing action 

including, but not limited to, at the end of a moratorium. When an existing Agency loan is being 

refinanced as a special servicing action, the household’s adjusted income must not exceed the 

applicable moderate-income limit for the area at the time of loan approval and closing. The 

Agency may limit the number of direct loans made for refinancing purposes based on the 

availability of funds and Agency priorities.

D. Subsequent Loans

Originating subsequent loans is always the responsibility of Field Staff. However, there 

may be times when the Servicing Office becomes aware the borrower may need a subsequent 

loan and will refer the borrower to the Field Office.

E. Bankruptcies

If a borrower’s bankruptcy petition is received in the Field Office, it should be forwarded 

immediately to the Servicing Office.

F. Missing Borrowers

When the Servicing Office is unable to locate a borrower, Field Staff may be asked to 

use local connections in an effort to find them. This might include checking with neighbors or 

friends, contacting local utilities, or checking with area schools. If the borrower cannot be 

located, Field Staff may be asked to take custody of the property to protect the Government’s 

interest.

Procedures for managing custodial property are described in Chapter 15.

G. Payment Subsidy Renewals

Payment subsidy renewals are the responsibility of the Servicing Office. On occasion, it 

may be necessary to request that the Field Office make a personal contact with the borrower to 

assist with the payment subsidy renewal process. Personal contact by the field is necessary when 

the Servicing Office has not received required documentation from the borrower to renew the 

payment subsidy and the Servicing Office has been unable to make a personal contact. A 

personal contact is made when verbal communication is made with the borrower either by phone 

or through a face-to-face meeting or through written communication from the borrower.

The Servicing Office sends a renewal request to the borrower 90 days prior to the 

expiration date of the subsidy agreement. When the borrower fails to send the necessary 

paperwork to renew the subsidy, the Servicing Office attempts to contact the borrower by phone 

and mail. Approximately 45 days prior to the expiration of the current subsidy agreement, if the 

Servicing Office is unsuccessful in obtaining the required documentation, the Field Office will 

be requested through Task # 526 to contact the borrower. This task should be completed within 

30 days. When this task is received, the Field Office will make a personal contact with the 

borrower or determine that a personal contact is not necessary.

13-11

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
4

HB-1-3550

Paragraph 13.4 Special Servicing Actions

13-12

Within 30 days of receipt, the Field Office should close Task # 526 and clearly 

document the contact or reason why contact is not necessary through Task # 115 entering the 

“message” in the task or by using “GLOBAL NOTES.”

If the Field Office determines the borrower is not eligible for subsidy or no longer desires 

subsidy, close Task # 526 and clearly document in “GLOBAL NOTES” why the borrower does 

not want or qualify for payment subsidy. A personal contact is also not required if the property 

is abandoned. If the property is abandoned, close Task # 526 and respond to the Servicing 

Office with Task # 100.

A monthly report which provides information on Field Office tasks that were not 

completed is available in Hyperion. State Directors will be responsible for monitoring 

incomplete tasks within their state jurisdiction.
HB-1-3550

Paragraph 13.4 Special Servicing Actions

H. Preacceleration Personal Contact

To ensure that a personal contact has 

been made with a borrower prior to an 

acceleration, the Field Office may be requested 

to personally contact the borrower. Exhibit 

13-2 provides an overview of the Personal 

Service Review process. The Field Office will 

be requested to contact the borrower when the 

Servicing Office has been unable to make a 

personal contact with the borrower within the 

last 60 days and all required servicing letters 

have been sent, attempted phone contacts have 

been made, and monthly billing statements 

have been mailed to the borrower. A personal 

contact is made when verbal communication is 

reached with the borrower either by phone or 

through a face-to-face meeting or through 

written communication from the borrower.

Field offices may be able to obtain financial 

information which can be used to recommend 

actions to the Servicing Office such as 

reamortization, moratorium, debt settlement 

or acceleration.

In cases where the Servicing Office’s 

attempts to make a personal contact have been 

unsuccessful, the Field Office will be 

requested to contact the borrower using Task # 

8. Field Offices should complete Task 8 within 

30 days. When Task # 8 is received, the Field 

Office must review the “DEL/LOAN/HISTORY” and “DIS/HISTORY” screens before contacting 

the borrower. Once the screen is displayed, tab to the “DSP” field and type the word “ALL.” This 

will provide information on all letters, calls, and notes. Prior to closing the task all contacts and 

attempts must be documented in “GLOBAL NOTES.” If it appears that additional servicing 

options are needed, the “Account Issue and Suggested Resolution Sheet” shown as Attachment 

13-B will be used to notify the Servicing Office that servicing assistance is needed.

13-13

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Exhibit 13-2

Personal Service Review Process

Account Review

• Review for correct delinquency status and that 

all monies have been applied.

• Ensure that payment subsidy has been offered 

and that there are no outstanding documents.

• Ensure moratorium processing is not 

outstanding.

• Ensure a reamortization is not in process.

• Ensure the Servicing Office has no open 

research tasks.

Contact Review

• Determine if the Servicing Office has spoken 

to the customer since the account was 60 days 

past due and three attempts have been made 

within the last 60 days.

Resolution

• A task or callback is requested to ensure the 

servicing needs of the customer have been 

met. If the Servicing Office cannot contact 

the customer, a task is opened to the Field 

to make a personal attempt.

• A Personal Contact will be made by the 

Servicing Office or the Field Office prior to 

referral for foreclosure.
4

HB-1-3550

Paragraph 13.4 Special Servicing Actions

If the Field Office has attempted contacts (either by phone or mail) and left a message 

through a door hangar or a business card, the Servicing Office will be notified using Task # 18 

which will allow the borrower 15 days to make a call back to the Field Office or the Servicing 

Office. If after 15 days no attempt is made by the borrower to contact the Field Office or the 

Servicing Office, and the defaults have not been cured, the Servicing Office will direct the 

account to the acceleration unit.

If after reviewing the account the Field Office believes that personal contact is not 

necessary and the account should be accelerated, the Servicing Office will be tasked using Task

# 17 to indicate the account has been reviewed and “Acceleration is necessary” and document 

why acceleration of the account is necessary, and a personal contact is not necessary by entering 

the “message” in the task or by using “GLOBAL NOTES.” An example of when personal 

contact is not necessary is when the security property has been abandoned. In abandonment cases 

the field will notify the Servicing Office using Task # 100.

A monthly report will be provided to State Directors showing the number of tasks not 

completed. State Directors will be responsible for monitoring incomplete tasks within their state 

jurisdiction.

13.5 VOLUNTARY SALE

Sale of security property is generally the most desirable option for both the Agency and a 

borrower who is unable to continue the loan. For the Agency, a sale to another party avoids the 

potential costs of liquidation, as well as costs related to owning and disposing of a property. For 

the borrower, it offers the best opportunity for being released from the debt without a major 

credit history blemish. A borrower may sell a property to a third party even after the account is 

accelerated. Field Offices may become aware of a borrower who desires to sell their property 

through notification from the Servicing Office or directly from the borrower. If the initial contact 

was not made through the Servicing Office, the Field Office should notify the Servicing Office 

of the proposed sale. If it appears that the sale of the property may not pay the debt in full, the 

Field Office should provide the borrower with a Debt Settlement Packet.

If a borrower proposes to sell the property for an amount which may be insufficient to 

pay the Agency debt, prior liens, and authorized selling expenses, the Agency may consent to the 

sale when it is determined to be in the best interests of the Agency. For states included in the 

REO/foreclosure centralization, the Servicing Office may consent to the sale. In non-centralized 

states, the Field Office may consent to the sale. The Agency may also advance authorized selling 

expenses to facilitate the sale. To determine if the proposed sale is in the Agency’s best interest, 

a copy of the sales contract, appraisal, and sales expenses are needed. Another lender’s appraisal 

may be used if it meets Agency appraisal guidelines.

13-14
HB-1-3550

13-15

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Paragraph 13.5 Voluntary Sale

Whether the short sale request is 

approved for less than the debt or if the request 

is denied, the approving official should provide 

their decision in writing to the homeowner. 

Handbook Letter 20 provides sample language 

for letters that may be used.

At a minimum, the approval letter 

should include the approved sale price, amount 

of net proceeds due to the Agency and a Debt 

Settlement Package with instructions to return

the completed package to the Servicing Office. The homeowner is to be made fully aware that 

while the Agency is agreeing to release the lien they are still responsible for any remaining 

debt, which can be settled through the debt settlement process. 

The denial letter should state, at a minimum, that the Agency has reviewed the request for 

consent to sell the property for the proposed sale price and provide specific reasons why the 

Agency does not consent to the sale. The Field Office should be listed as the contact.

In cases where a junior lien exists, the State Director may approve settlement of a junior 

lien to effect sale of the property when it is determined to be in the Agency’s best interest. Field 

Staff will negotiate the lowest cost to have the junior lien released from the security property, 

bearing in mind the Agency only seeks to have the lien released (and not necessarily satisfied). 

The junior lienholder may still seek recovery from the debtor, if permitted by State law.

The Agency’s objective is to 

minimize any potential loss to the 

Government and to the borrower. The 

Agency may consent to a sale for as low as 

the market value of the property, minus the 

prior liens and authorized sales expenses. 

When the proposed sales price is less than the 

market value, a net recovery valuation is 

required. Either action is handled in the Field 

Office and the final decision to concur with

the proposed sale lies with a Loan Approval Official.

Example - Sale for Less Than Debt

A borrower’s debt is $30,000, the sales price of the 

property is $28,000, authorized sales expenses are

$3,000, and the market value is $28,000. In this case, 

the Loan Approval Official may consent to the proposed 

sale since it will net the Agency $25,000 ($28,000

minus $3,000 in authorized selling expenses). If the 

proposed sales price was less than the market value 

($28,000), a net recovery valuation would be required.

Authorized Selling Expenses 

Authorized selling expenses are those which a seller 

customarily and legally pays to convey title and 

includes such items as a typical real estate 

commission, up to three points to enable the buyer 

to secure credit (but not to reduce the interest rate), 

real estate taxes, junior liens, deed preparation, 

abstract and title fees, termite and related 

inspections, title insurance, surveys, and deed and 

revenue stamps.
4 

HB-1-3550

Paragraph 13.5 Voluntary Sale

When sales proceeds will not fully satisfy the debt, the Servicing Office will make the 

determination of whether the borrower will be released from personal liability. This 

determination is based upon a Debt Settlement Package completed by the borrower and 

forwarded to the Servicing Office for review and approval. A completed Debt Settlement 

Package is required to be submitted at or before loan closing for all sales for less than the debt, 

and sales proceeds must be submitted by certified or cashier’s check. In cases where the 

borrower is not able or willing to complete the Debt Settlement Package, the Field Office may 

still release the mortgage when it is determined to be in the best interest of the Agency. This 

generally occurs when the borrower has moved out of the area or failure to close the loan will 

result in liquidation and the Agency receiving less than the anticipated net recovery value. The 

Debt Settlement Package, if available, and proceeds from the sale will be transmitted to the 

Cash Section of the Loan Administration Branch in the Servicing Office. Form RD 3550-17, 

Funds Transmittal Report, with the final 

payment coded “00” will be used to transmit 

the loan proceeds.

The Field Office will enter in 

GLOBAL/NOTES the date of the sale or 

assumption, purchase price, outstanding 

vouchers, and the date funds were submitted

to the Servicing Office. On accounts which 

were accelerated, the Field Office will also 

update the FCL/INFO screens with third 

party information. When proceeds have been 

posted or the assumption processed, the 

Servicing Office will notify the Field Office

of such action through Task #86, “Approved 

short sale, release mortgage/deed only,” and 

will provide further guidance on release of 

the promissory note or debt settlement 

action, as appropriate.

13.6 DEBT SETTLEMENT

Debt settlement procedures are 

implemented when there are debts owed the 

Agency, including balances remaining on an 

account after liquidation, debt remaining after 

a sale, subsidy recapture receivable or grant 

repayment amounts due, or unauthorized 

assistance due. Debt settlement begins when

13-16

Debt Settlement

A Debt Settlement Package consists of:

• Form RD 3550-20, Application for 

Settlement of Indebtedness

• Form RD 3550-21, Payment Subsidy Renewal 

Certification

• Copies of last two months bank statements 

for all accounts

• Verification of Income (last 2 pay 

stubs, benefit letter, etc.)

• Copy of most recent Federal Income 

Tax Return

• Copy of Net Recovery Worksheet, 

if applicable

• Estimated selling expenses

• Any other relevant information

A Debt Settlement Package can be requested from 

the Servicing Office by utilizing Task 569 or 

assembled in the Field Office. For emergency 

releases on debt settlement cases, the above 

information may be faxed to the Special 

Assistance Section, ATTN: QR Debt Settlement, 

in the Servicing Office at (314) 457- 4451 or

(314) 457-4551. Please ensure the borrower’s 

telephone number is provided. Non emergency 

cases should be sent to the aforementioned section 

in the Servicing Office.
HB-1-3550

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Paragraph 13.6 Debt Settlement

the security has been disposed of. An account may be debt settled through compromise, 

adjustment, charge off, or cancellation.

The Servicing Office handles debt settlement, but Field Staff may be asked to assist in 

efforts such as locating missing borrowers or joint debtors or checking local records to identify a 

debtor’s assets. The Servicing Office will generally send the satisfaction to the Field Office with 

instructions to return the satisfaction and satisfied note to the debtor.

13.7 ADDITIONAL INPUT

Even when the Servicing Office has the 

primary responsibility for servicing, Field Staff 

have an obligation to report information that 

comes to their attention indicating risks to the 

security property or changes in borrower 

circumstances. Such items might include

knowledge of hazardous dwelling conditions, environmental hazards, nonoccupancy, 

abandonment, or changes in income. Field Staff who learn of borrower difficulties also may 

recommend that the borrower contact the Servicing Office for assistance.

13-17

Using Personal Knowledge

Field Staff must consistently report 

information that comes to their attention if it is 

relevant to Agency loans or security properties 

to ensure that all borrowers are treated equally.
4

HB-1-3550

SECTION 2: BORROWER ACTIONS REQUIRINGAPPROVAL

[7 CFR 3550.159]

13.8 OVERVIEW

A borrower must obtain approval from the Agency before taking actions that may affect 

the security value of the property. Since these actions involve security property, they are 

handled in Field Offices. Key actions that require approval from the Agency include 

subordination, lease of mineral rights, partial release of security, lease of security property, and 

assumption of indebtedness.

When the Servicing Office becomes aware of borrower actions requiring approval, they 

will cue the local Field Office and provide any necessary information to facilitate processing of 

the borrower’s request. Field Offices will approve or disapprove the actions outlined in this 

section and will cue the Servicing Office with the outcome.

This section first covers general guidelines and procedures for evaluating a borrower’s 

request for approval of an action, with the exception of assumptions of indebtedness. Specific 

guidelines for each of the actions, including assumptions, follow the discussion of general 

guidelines.

13.9 GENERAL GUIDELINES

A. Reviewing Requests

To request approval for subordination, mineral leases, partial release of security, and 

lease of security property, a borrower must submit Form RD 465-1, Application for Partial 

Release, Subordination, or Consent. If the information provided is not sufficient to allow for a 

thorough evaluation, the Field Office must request additional information from the borrower.

B. Obtaining an Appraisal and an Environmental Review

An appraisal is required for the Agency to subordinate its interests or to approve a partial 

release of security if the amount of consideration exceeds $5,000. The borrower must pay for the 

appraisal, although the cost for an appraisal can be charged to the borrower’s account.

An existing appraisal may be used if it is less than 1 year old and appears to reflect 

market value. An Agency appraisal is not required if a lender is involved and can provide an 

appraisal that adequately reflects market value.

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Paragraph 13.9 General Guidelines

Actions requiring Agency approval of mineral leases are subject to the environmental 

requirements of RD Instruction 1970 series “Environmental” prior to approval.

C. Evaluating and Approving the Request

Once the information needed to evaluate the request has been submitted, the Field Office 

must analyze the effect of the proposed action on the security property and document the 

conclusions on Form RD 465-1. Some factors to consider in the analysis include:

• The market value of the property before and after the transaction;

• The physical effects of the action on the security property; and

• The assignment of initial and subsequent payment proceeds.

If the analysis indicates that the Agency’s security will not be put at risk by the action, an 

approval official may sign Form RD 465-1. The Office of the General Counsel (OGC) or the 

State Office may need to provide relevant forms needed to complete the approval. Signed copies 

of Form RD 465-1 should be distributed to the Servicing Office, the borrower, and the lender, as 

appropriate. The original should be maintained in the borrower’s case file at the Field Office.

D. Using Proceeds

Proceeds that arise from the sale of a portion of the security, granting an easement or 

right-of-way, damage compensation, and all similar transactions should be used in the following 

order.

• To pay customary and reasonable costs related to the transaction that must be paid by 

the borrower, such as:

◊ Real estate taxes that must be paid to conclude the transaction;

◊ Cost of title examination, survey, abstract, and reasonable attorney’s fees; and

◊ Costs necessary to determine a reasonable price, such as appraisal of minerals, 

when the necessary appraisal cannot be obtained without costs.

• To be applied on a prior lien debt, if any.

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HB-1-3550

Paragraph 13.9 General Guidelines

• To be applied to the Agency indebtedness or used for improvements to the security 

property in keeping with the purposes and limitations applicable for the use of 

Agency loan funds. Proposed development will be planned 

and performed in accordance with RD Instruction 1924-A and supervised to ensure 

that the proceeds are used as planned.

The use of proceeds should be reflected on Form RD 465-1 and agreed to by the 

borrower and the Agency. Proceeds from the transaction to be applied to the Agency 

indebtedness will be remitted to the Cash Management Branch in the Servicing Office using 

Form RD 3550- 17, Funds Transmittal Report, with Reason Code “00,” together with a brief 

statement as to the source of the proceeds, a copy of Form RD 465-1, and any related 

documentation. The Field Office will also notify the Servicing Office using Task 178, “Legal 

Description Correction.” 

13.10 SUBORDINATION [7 CFR 3550.159(b)]

Subordinations are generally handled by the Servicing Office. The Field Office may 

approve a subordination of the Agency’s security interests to allow a borrower to obtain a 

subsequent loan with private credit to make needed repairs or improvements to the property. 

A. Criteria for Subordination

Requests for subordination can be 

approved if: 

• The other lender verifies that the 

funds will be used for Agencyeligible purposes;

• Based on repayment ratios, the prior lien debt will be on terms and conditions that the 

borrower can reasonably be expected to meet without jeopardizing repayment of the 

Agency indebtedness; 

• Any proposed development will be planned and performed in accordance with 

Agency construction standards, as described in RD Instruction 1924-A or directed 

by the other lender in a manner that is consistent with that subpart; and 

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Nonprogram Borrowers

Subordination cannot be authorized for 

nonprogram loans.
HB-1-3550

Paragraph 13.10 Subordination [7 CFR 3550.159(b)]

• The prior lien holder agrees in writing to provide at least 30 days prior written notice 

to the Agency before initiating any foreclosure action on the prior lien.

To document that the subordination conforms to the Agency’s requirements, the borrower 

should ask the other lender to provide the Agency with a memorandum that states the purpose of 

the loan, along with its terms and conditions. 

B. Amount of Subordination

The maximum amount of subordination is the market value of the security property 

minus the unpaid balance of all Agency loans (exclusive of recapture). 

13.11 MINERAL LEASES [7 CFR 3550.159(a)]

Borrowers must obtain Agency authorization before leasing mineral rights on their 

security property. Such requests are rare but do occur in situations such as a property in a town 

located above a coal mine or a property located on a water source. OGC should be involved in 

mineral lease decisions because State and local laws vary. In addition, an environmental review 

is required in accordance with RD Instruction 1970 series “Environmental”, prior to approval. 

Subordination of an Agency loan to a mineral lease does not entitle the leaseholder to any 

proceeds from the sale of the security property. If the lease of mineral rights is approved, rental 

proceeds not assigned to the Agency are treated as income and any payment subsidy must be 

adjusted accordingly. 

The Agency should consent to the lease of mineral rights and the subordination of its 

liens to the lessee’s rights and interests in the mineral activity if the security property will remain 

suitable as a residence, and the Government’s security interest will not be adversely affected.

To make this determination, the Agency must consider the effects of leasing on the 

security property including the potential for the lessee’s rights of surface entry on the property. 

The Agency also must ensure that the property remains decent, safe, and sanitary and the value 

of the security property is not decreased below the amount of the loan. 

• No decrease in value. If the proposal is not likely to decrease the value of the 

security property, the lease may be approved if the borrower agrees: (1) to use any 

damage compensation received from the lessee to repair damage to the site or 

dwelling; or (2) to assign it to the Agency to be applied to reduce principal.

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(01-23-03) SPECIAL PN

Revised (02-02-18) PN 508
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HB-1-3550

Paragraph 13.11 Mineral Leases

• Likely decrease in value. If the proposed activity is likely to decrease the value of 

the security property, the Agency should consent to the lease of mineral rights only if:

(1) the borrower assigns 100 percent of the lease income to the Agency to be applied 

to reduce principal; and (2) the rent to be paid is at least equal to the estimated 

decrease in market value.

When an assignment of income is required, the borrower must submit an assignment of 

income in a format that is designed to comply with State law and approved by OGC.

13.12 PARTIAL RELEASE OF SECURITY [7 CFR3550.159(c)]

A borrower may request a partial release of security to accommodate a need to sell or 

exchange part of the property or grant a right-of-way across the security property. For example, 

the owner of an adjoining property may want to trade 10 feet of the side yard for 10 feet of the 

back yard, or the local government may wish to purchase land that borders a highway slated for 

widening.

The Agency may consent to transactions affecting the security and grant a partial release 

of security if the following conditions are met.

• The borrower will receive adequate compensation:

◊ The sale of any part of the security property must result in a payment equal to the 

value of the security being released or rights granted;

◊ The exchange of security property must result in another parcel of property 

acquired that has value equal to or greater than that being released; or

◊ The granting of an easement or right-of-way must result in benefits that are equal 

to or greater than the value of the security property being released.

• The security property, after the transaction is completed, must be adequate, decent, 

safe, and sanitary. For a program loan, the security after the transaction is completed 

must also remain modest.

• Repayment of the Agency debt must not be jeopardized.

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13-23

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Paragraph 13.12 Partial Release of Security [7 CFR 3550.159(c)]

To process a partial release, the Field Office must complete the following actions.

• Complete any required State release forms. The unrecorded documents will be 

uploaded to the imaging repository as “Loan Documents Class – Deeds of Trust 

Mortgages” as part of the borrower’s permanent record. The party requesting a partial 

release is responsible for recording costs.

• For an exchange of all or a portion of the security property, obtain title clearance for 

the new security before the release of the existing security. Security instruments must 

be obtained for the new property.

• For a sale of all or a portion of the security property, deliver the release when full 

payment is received.

• Update the legal descriptions of the property, as necessary.

The Field Office may approve, after notifying the Servicing Office of the approval, 

the following releases:

• Additional security. At any time prior to payment of the loan in full, the Agency 

may authorize a release from the Agency’s lien any real estate taken as additional 

security. This is authorized provided the market value of the remaining security is 

adequate to secure the loan balance. Additional security does not include any part of 

the tract purchased with Section 502 loan funds or part of the minimum adequate site 

on which the dwelling is located.

• Mutual Mistake. The Agency may authorize the release of property from the 

Agency’s lien caused through mutual mistake when substantiated by facts and when 

the Agency can determine, with the advice of OGC, that a mutual error existed at the 

time the property was included in the security instrument.

• No evidence of indebtedness. The Agency’s lien may be released in situations 

where there is no evidence of an existing secured indebtedness in the Field Office or 

in the Servicing Office. Before releasing the lien, the Field Office should consult 

with the SFH Assistance Section (fka Field Assistance Desk) in the Servicing 

Office.
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Paragraph 13.12 Partial Release of Security [7 CFR 3550.159(c)]

• Valueless Lien. In liquidation cases, if a net recovery valuation indicates the 

Agency’s lien is valueless (that is, there is no or a negative potential recovery), the 

lien may be released. The Field Office should immediately contact the SFH 

Assistance Section at the Servicing Office. This is necessary to ensure that taxes and 

insurance are no longer paid by the Agency, and a debt settlement package is sent to 

the borrower by the Servicing Office.

13.13 LEASE OF SECURITY PROPERTY [7 CFR 3550.159(d)]

Program borrowers must notify the Agency if they lease the property. If the Agency 

becomes aware of a borrower who is leasing their property, the borrower is not eligible for 

payment subsidy or special servicing benefits during the period of the lease. Field Offices will 

notify the Servicing Office and provide any applicable documentation. If they become aware 

that a borrower has leased the security property, the Agency also should assess the borrower’s 

ability to refinance with private credit. If the lease is for a term of more than 3 years or contains 

an option to purchase, the Agency may liquidate the loan. Nonprogram borrowers are free to 

lease their properties without restriction.

13.14 ASSUMPTION OF INDEBTEDNESS [7 CFR 3550.163]

A. New Rates and TermsAssumptions

When purchasing a property currently financed by a Section 502 loan, the new borrower 

will typically receive new loan funds. However, new rates and terms assumptions must be used 

when funding is limited (e.g. in September as a fiscal year is coming to a close and in October 

when a new fiscal year begins). In limited funding situations, the debt is assumed on new rates 

and terms as part of loan origination and is addressed in other chapters of this Handbook. Field 

Offices are authorized to release the former borrower from personal liability for the amount of 

debt being assumed utilizing Form RD 3550-16, Release from Personal Liability. In cases where 

the debt is not being assumed in full, the Servicing Office will handle the settlement of the 

remaining debt and any release of liability for the portion of debt not being assumed.

B. Same Rates and TermsAssumptions

In certain limited cases, generally those involving transfers of title between family 

members, a standard industry assumption is permitted. It is known in the Section 502 program 

as a same rates and terms assumption. Under this type of assumption, the existing note and 

terms, including the interest rate and the remaining repayment period, do not change. Same rates 

and terms assumptions are handled and approved in the Field Office. However, a recorded deed 

is required prior to submitting the account to the Servicing Office for processing. If the account 

is past due at the time an assumption is executed, the new borrower will be referred to the 

Servicing Office to resolve the delinquency.

Same rates and terms assumptions are permitted for the following types of transfers:

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Paragraph 13.14 Assumption of Indebtedness [7 CFR 3550.163]

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

• A transfer from the borrower to a spouse or children not resulting from the death of 

the borrower;

• A transfer to a relative, joint tenant, or tenant by the entirety resulting from the death 

of the borrower;

• A transfer to a spouse or ex-spouse resulting from a divorce decree, legal separation 

agreement, or property settlement agreement;

• A transfer to a person, other than a deceased borrower’s spouse, who wishes to 

assume the loan for the benefit of persons who were dependent on the deceased 

borrower at the time of death, if the dwelling will be occupied by and or more persons 

who were dependent on the borrower at the time of death and there is a reasonable 

prospect of repayment;

• A transfer into an inter vivos trust in which the borrower does not transfer rights of 

occupancy in the property; and

• Any subsequent transfer of title, except upon death of the inheritor or between 

inheritors to consolidate title, will be treated as a sale.

C. Agency Approval

The due-on-sale clause contained in all Agency mortgages stipulates that the borrower 

must obtain approval from the Agency before the title of a security property can be transferred 

with an assumption of the indebtedness. Prior approval is not required for same rates and terms 

assumptions or when financed using new loan funds.

The Agency will approve a transfer of title and assumption of indebtedness if it is in the 

best interest of the Government. The new owner will be liable for the loan, and the terms and 

conditions of the assumption depend upon the eligibility of the new purchaser and the property’s 

characteristics.

Unauthorized assistance will not be pursued when an individual who is eligible for a

same rates and terms assumption has been occupying the security property, receiving subsidy 

based on their household income and executes a same rates and terms assumption. As these cases 

are identified, the Servicing Office will notify the individuals occupying the security property in 

writing that unauthorized assistance will be pursued unless an assumption agreement is signed 

within 90 days.
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HB-1-3550

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Paragraph 13.14 Assumption of Indebtedness [7 CFR 3550.163]

A task will be sent to the Field Office informing them of the unauthorized assistance and 

a request to have the individuals execute a same rates and terms assumption. If the assumption is 

not executed within 90 days and the Field Office has not requested an extension to complete the 

processing of the assumption, collection of the unauthorized assistance will be pursued.

The new owner need not have a low or moderate income. However, payment subsidy 

can be continued for the new owner only if he or she is eligible for assistance and only at the 

level for which the new household qualifies. If the transferee is a very low- or low-income 

person, it may be more beneficial for the transferee to assume the loan under new rates and 

terms. For example, if current interest rates are lower or a longer repayment period is necessary, 

a new rates and terms assumption may be of benefit to the new owner. In those cases, if the new 

owner applies and is program-eligible, the loan will be assumed under new rates and terms or 

financed with new loan funds. In cases where the assuming party has a moderate- or above 

moderate-income, the party will be informed of the Agency’s refinancing requirements, and if 

applicable, the loan will be reviewed for refinancing.

In most cases, if the borrower sells a security property with a due-on-sale clause without 

obtaining prior authorization from the Agency, the assumption will not be approved, and the 

loan may be liquidated. If the Agency determines it is in the best interest of the Government to 

continue the loan, the account will be serviced in the original borrower’s name, and the original 

borrower will remain liable for the loan under the terms of the security instrument.

A new owner who obtains property through a transaction eligible for a same rates and 

terms assumption is not required to obtain Agency approval or assume the loan. The Agency is 

not permitted to liquidate the loan if the new owner continues to make scheduled payments and 

meets all other obligations of the loan. However, a new owner who does not assume the loan is 

not eligible for payment assistance or a moratorium.

D. Procedural Requirements

The new owner must sign Form RD 3550-22, Assumption Agreement - Single Family 

Housing. For assumptions, the original note is not returned to the seller. Instead, the note is 

filed with other original notes, with the original Form RD 3550-22 attached.

E. Releasing a Departing Borrower from Liability

Changes in household composition may trigger the need to adjust who is responsible for 

repayment of the loan. The need for a change most often occurs when one party to the note 

wishes to be released of liability. For example, after a divorce the departing spouse may wish to 

be relieved of responsibility for the balance of the mortgage. The Agency will authorize such a 

release only when:
HB-1-3550

Paragraph 13.14 Assumption of Indebtedness [7 CFR 3550.163]

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

• The divorce decree or property settlement document did not make the departing 

borrower responsible for loan payments;

• The departing borrower’s interest in the security property is conveyed to the person 

with whom the loan will be continued; and

• The remaining borrower meets the maximum total debt ratio requirements and credit 

history requirements.

Form RD 3550-16 is used to release the departing borrower from liability. The Servicing 

Office generally handles these releases but may cue the Field Office for assistance.

The following items need to be submitted to apply for a release of liability:

1. A written request from the departing borrower to be released of liability;

2. New address and phone number of the departing borrower;

3. Divorce decree and property settlement, as applicable;

4. Prepared and/or filed quit claim deed;

5. Financial statement of remaining borrower;

6. Verification of Employment/Income for remaining borrower; and

7. Copy of latest Federal income tax return, including W2 form, for remaining borrower.

13.15 PROTECTIVE ADVANCES [7 CFR 3550.206]

The Agency may advance funds to pay for fees and services that are needed to protect the 

Government’s interest in either program or nonprogram property. Protective advances are only 

considered when the Agency cannot provide a subsequent loan for such purpose to the borrower. 

This could occur because the borrower does not meet current eligibility standards, lack of funds, 

or unwillingness of the borrower to cooperate. The Agency recovers the amounts advanced by 

charging the borrower’s account. Amounts advanced are due with the next scheduled payment. 

If the borrower is unable to repay the advance in a lump sum, the Field Office may request that 

the Servicing Office schedule repayment consistent with the borrower’s ability to pay or 

reamortize the loan.

A. Advances for Property Repairs

Protective advances for property repairs are made only to protect the Government’s 

interest in the security property and should be considered only if the repairs cannot be financed 

through a subsequent loan. Advances will bear interest at the promissory note rate of the loan 

against which they are charged. Advances for borrowers with multiple loans secured by the 

same property should be charged against the largest loan.

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HB-1-3550

13-28

Paragraph 13.15 Protective Advances [7 CFR 3550.206]

1. Determining the Need for Repairs

The need for repairs may be identified by the borrower, Field Office, or the Servicing 

Office. Field Offices are responsible for completing an inspection of the property, 

developing a description of the work required, preparing a cost estimate, and approving 

the protective advance.

2. Alternative Sources of Funding

Before processing the advance, the Field 

Office must first determine whether it appears 

that the borrower qualifies for a subsequent loan. 

If a subsequent loan appears feasible, a loan 

application will be processed immediately. If the 

need for a protective advance is so urgent, clearly

apparent that the borrower would not qualify for a loan, is uncooperative, or that a 

protective advance is more appropriate, the Field Office must document why alternatives 

were not feasible and why the repairs are needed to protective the Government’s interest 

when processing an advance. Protective advances will be reported to the IRS as income 

to the vendor and IRS Form 1099 will be generated. In no case will the borrower or a RD 

employee be listed as the vendor.

B. Advances for Other Purposes

In order to protect the Government’s interest, protective advances also may be used for 

other purposes. These types of advances will be processed and approved by Field Offices or the 

Servicing Office, as appropriate. Field Staff will coordinate efforts with the Servicing Office for 

any loan which is still under the jurisdiction of the Servicing Office. Protective advances for 

other purposes include such items as:

• Paying off a senior lien holder who intends to foreclose in cases where the Agency is 

a junior lien holder;

• Paying taxes or insurance premiums; or

• Paying for local assessments.

Review and Approval

The decision to use a protective 

advance for essential repairs must be 

reviewed and approved by the 

Housing Program Director.
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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

13.16 OVERVIEW

SECTION 3: LIQUIDATION

The decision to liquidate a loan is made at the Servicing Office. After acceleration and 

any ensuing appeals, the case is sent to the State Office for completion of the liquidation. Once 

legal proceedings have concluded, the property will be sold at a foreclosure sale. To complete 

the foreclosure process, the State Office must determine how much to bid and enter that bid at 

the sale. A net recovery valuation is required. Estimated net recovery value represents the 

amount that the Agency could expect to recover from a property if it was liquidated after 

considering all costs associated with liquidating, holding, and selling the property. Handbook-2- 

3550, Attachment 6-A contains a net recovery value worksheet to aid in this calculation. Actual 

net recovery value is the amount the Agency in fact does recover from the sale of a property, 

after accounting for all costs.

13.17 NET RECOVERY VALUE

A. Establishing Market Value

The market value of the property is the 

fundamental basis for establishing the estimated net 

recovery value. All calculations undertaken on the net 

recovery value worksheet provide additions or 

deductions from market value. In no case will a

“distressed sale” or similar reduced value be used, resulting in a “double discount” and less 

recovery for the Government. Costs of liquidation and ownership are considered as deductions 

from the market value in the net recovery value calculation. Conversely, likely major costs, such 

as lead-based paint assessment and abatement on an older home or other major repairs, must be 

included to accurately determine the Government’s costs of ownership.

B. Environmental Considerations

The estimate of market value must take into consideration potential environmental 

hazards that may pose a liability issue for the Agency and the presence of environmental 

resources for which the Agency will have an affirmative responsibility to take protective 

measures once it owns the property. Exhibit 13-3 provides a partial list of environmental factors 

for consideration. 

In order to minimize Agency liability, the Agency must ensure, prior to acquiring 

property through foreclosure, that the property has been examined for potential contamination 

from hazardous substances, hazardous wastes, and petroleum products, including underground 

13-29

Calculation of Net Recovery Value

Market value (less) Costs 

(plus) Income

Net recovery value
4

HB-1-3550

Paragraph 13.17 Net Recovery Value

storage tanks. This should be accomplished by requesting that Field Staff complete Attachment 

5-B. If the completed attachment raises any concerns, it should be submitted to the State 

Environmental Coordinator for further evaluation and guidance.

The Agency also should examine the property prior to acquisition and consider any costs 

associated with environmental resources the Agency might be required to protect.

For additional information, refer to Chapter 16 and to RD Instruction 1970.

Exhibit 13-3

Environmentally Sensitive Land Uses and 

Resources

Extraordinary Circumstances

• Historic properties

• Federally listed threatened or 

endangered species, critical habitat, 

Federally proposed or candidate species

• Wetlands

• Floodplains

• Any violation of applicable Federal, state, or local statutory, 

regulatory, or permit requirements for environment, safety, and 

health.

• Any proposal that is likely to cause uncontrolled or unpermitted 

releases of hazardous substances, pollutants, contaminants, or 

petroleum and natural gas products.

• An adverse effect on the following environmentalresources:

o Historic properties;

o Federally listed threatened or endangered species, 

critical habitat, Federally proposed or candidatespecies;

o Wetlands;

o Floodplains;

o Areas having formal Federal or state designations such 

as wilderness areas, parks, or wildlife refuges; wild and 

scenic rivers; or marine sanctuaries;

o Special sources of water (such as sole source aquifers, 

wellhead protection areas, and other water sources that 

are vital in a region);

o Coastal barrier resources or, unless exempt, coastal 

zone management areas; and

o Coral reefs.

• The existence of controversy based on effects to the human 

environment brought to the Agency’s attention by a Federal, 

tribal, state, or local government agency.

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Paragraph 13.17 Net Recovery Value

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(01-23-03) SPECIAL PN

Revised (01-06-17) PN 492

It is important to note that development on Tribal land or dependent Indian communities 

may require additional coordination with the Tribe to determine if the proposal has an effect on 

the human environment or an adverse impact on cultural resources and the Section 106 review. 

In accordance with RD Instruction 1970-H, Exhibit B “when an applicant’s proposal is located 

on tribal lands, defined in 36 CFR § 800.16(x) as all lands within the exterior boundary of any 

Indian reservation and all dependent Indian communities, and that tribe has designated a Tribal 

Historic Preservation Officer (THPO) in accordance with Section 101(d)(2) of NHPA, the SHPO 

participates only under the conditions specified in 36 CFR § 800.2(c)(1)(ii). If the Indian tribe 

has not designated a THPO, then the SHPO participates in Section 106 review pursuant to 36 

CFR § 800.2(c)(2)(i)(B).” Exhibit D of RD Instruction 1970-H provides guidance on working 

with Indian Tribes in the Section 106 review.

C. Ordering an Appraisal

Information about conducting appraisals is contained in Chapter 5. The point at which a 

formal appraisal is actually conducted will vary.

1. Valueless Lien

If the net recovery valuation suggests that the lien may be valueless, an appraisal should be 

obtained immediately. If the appraisal indicates that the lien is in fact valueless, it should be 

released without incurring servicing costs.

2. Deed in Lieu of Foreclosure

If, after acceleration, the borrower offers a deed in lieu of foreclosure, an appraisal should be 

obtained immediately so the Servicer can determine whether it is in the Government’s interest to 

accept the deed.

3. Foreclosure

If the property will be going to foreclosure, no appraisal should be obtained until shortly 

before the sale is scheduled to take place. In areas where the foreclosure process can be lengthy, 

the value of the property could change before the sale if it is conducted too far in advance.
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Paragraph 13.17 Net Recovery Value

D. Holding Period

Nearly all costs and income used in the net recovery value calculation are affected by the 

holding period. For estimated net recovery value, the length of the holding period is estimated 

differently, depending on the likely method of disposition. The holding period should be 

estimated as the time between the date the net recovery worksheet is being filled out and the 

anticipated date for:

• Filing of the deed and the expiration of redemption rights(foreclosure);

• Filing the warranty deed (deed-in-lieu of foreclosure);

• Filing the release (release of valueless lien); or

• Payoff and release (debt settlement offer subsequent to acceleration).

The time for marketing and disposition, if acquired, should also be considered when 

estimating the holding period.

E. Deductions from Market Value

Costs associated with liquidation and ownership of the property must be considered when 

determining the net recovery value, including the following costs.

• Prior liens to be paid by the Agency. In a case where a prior lien is involved, the 

amount required to repay the prior lien holder must be included in the calculation.

• Junior liens to be paid by the Agency. If the Agency pursues foreclosure, junior 

liens are not paid. However, in the case of a deed in lieu of foreclosure, it may be to 

the Agency’s advantage to pay off a junior lien holder. The Field Office should 

conduct a title search to identify the position and the amount of each lien against the 

property.

• Selling expenses to be paid by the Agency. All of the transaction costs involved in 

selling the property including advertising, commissions for selling agents, required 

seller certifications, surveys, points, and closing costs paid by the Agency, whether on 

behalf of the borrower in a voluntary liquidation, or as an Agency expense for an Real 

Estate Owned (REO) sale, must be included in the calculation.

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Paragraph 13.17 Net Recovery Value

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

• Holding costs. During the time that the Agency owns the property, the monthly 

interest accrued is multiplied by the number of months in the holding period.

• Depreciation during the holding period. The property may depreciate in value 

while it is being held by the Agency.

• Administrative costs. The administrative burden associated with holding a property 

includes the cost of liquidation, such as attorney, filing, recordation, advertising, and 

document service fees that are customarily incurred in a foreclosure action.

• Management costs. During the period the Agency holds the property it will accrue 

costs related to cleaning, securing, and maintaining the property such as utilities and 

real estate taxes. Management costs will also include any major repair costs not 

considered in the market value, such as lead-based paint (LBP) assessment and 

abatement, which the Government would be required to incur but not considered as a 

detriment to value by the typical buyer in establishing the market value. While an 

LBP assessment is not completed for the NRV calculation, a reasonable cost estimate 

may be included, based on age and condition of the property and known local coststo 

abate similar properties.

F. Additions to Market Value

Although most of the adjustments to market value involve deductions to reduce the 

recovery amount, there are a few factors that can increase the market value.

• Appreciation during the holding period. In markets that are strong, the property 

may appreciate while it is being held by the Agency.

• Income during the holding period. In general, the Agency does not lease 

properties. However, REO properties may be leased in limited circumstances, such 

as a property located in an area where keeping the property occupied could greatly 

reduce vandalism.
4 

HB-1-3550

13.18 BASIC SECURITY LOSS

The basic security loss is the difference 

between the property’s market value and the 

outstanding Agency debt on the property, 

including principal, subsidy subject to recapture, 

and other recoverable costs. Exhibit 13-4 

provides the basic security loss formula. 

It is important for the Agency to consider 

the basic security loss in determining how to 

work with the borrower. For example, the debt 

settlement arrangements the Agency agrees to might be more lenient in the case of a borrower 

with a property that lost value through no fault of the borrower. More important, this 

information can be used for portfolio analysis to help the Agency originate loans more 

effectively in the future.

13.19 DEED IN LIEU OF FORECLOSURE

A deed in lieu of foreclosure is a method of liquidation by which title to the security 

property is conveyed to the Agency by the borrower. The Agency must not consider a 

borrower’s offer to convey the title to the security property until after the account is accelerated, 

and then only when it is in the best interest of the Government based upon the estimated net 

recovery value. After an account has been accelerated, a deed in lieu of foreclosure is processed 

and approved by Field Offices. In exceptional cases where a borrower offers to convey title to 

the property at a Field Office when the account has not been accelerated, the Field Office will 

immediately contact the Servicing Office to determine an appropriate course of action.

To process a deed in lieu of foreclosure, Field Offices will obtain the following items 

from the borrower: (1) a warranty deed; (2) Form RD 1955-1, Offer to Convey Security; and (3) 

copies of any leases or other documents affecting the title to the property. The borrower should 

be informed that the deed will not be recorded unless the conveyance is accepted.

Generally, borrowers will be required to satisfy liens and real estate taxes or assessments 

before conveyance is accepted. However, if the borrower is unwilling to do so, the Agency may 

elect to satisfy or settle these debts if it is in the best interest of the Government.

13-34

Exhibit 13-4 

Calculation of Basic Security Loss

Gross Investment

A. $ Principal

B. $ Subsidy Recapture

C. $ Recoverable Costs 

Market Value (use current appraisal) 

Basic Security Loss
HB-1-3550

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Paragraph 13.19 Deed In Lieu of Foreclosure

A deed in lieu of foreclosure does not automatically release the borrower from liability 

for any outstanding debt. The borrower’s account will be credited with the actual net recovery 

value. If the actual net recovery value does not satisfy the debt, the remaining debt must be debt 

settled by the Servicing Office.

The borrower should be reminded that under a deed in lieu of foreclosure:

• Foreclosure action will not be suspended while the offer for a deed in lieu of 

foreclosure is considered;

• All costs related to the conveyance paid by the Agency will be added to the debt;

• A credit equal to the actual net recovery value will be applied to the debt;

• If the borrower does not satisfy the debt, the borrower will not automatically be 

released from liability; and

• The borrower will be required to provide a title insurance policy or a final title 

opinion from an Agency-approved title company or attorney.

13.20 FORECLOSURE

State laws pertaining to acceleration and foreclosure will affect the

procedures the Agency is required to follow. The Servicing Office will consult with OGC to 

ensure that appropriate procedures are followed.

A. Making the Acceleration Decision

The Servicing Office must decide whether to accelerate the account and begin the 

foreclosure process. The decision to accelerate involves numerous considerations, many of 

which will vary case-by- case. The following issues should always be considered.

1. OGC Concurrence

The Servicing Office obtains OGC concurrence before beginning the foreclosure 

process if:

• The foreclosure is based on a nonmonetary default;

• The borrower obtained the loan while a civilian and entered military service after the 

loan was closed; or

13-35
4

HB-1-3550

Paragraph 13.20 Foreclosure

• The property also serves as security for a loan under another United States 

Department of Agriculture (USDA) Agency program such as the Farm Service 

Agency (FSA), since this may trigger liquidation of the other loan.

2. Role of Other Lien Holders

Depending upon the status of other liens on the security property, the Agency may 

invite other lien holders to join in the foreclosure action or join in a foreclosure action 

initiated by another lien holder.

When the Field Office becomes aware of a prior lienholder foreclosure, a 

determination must be made if it is advantageous to pay the prior lienholder in full before 

the foreclosure sale. When making this determination the Field Office must consider if 

the government will obtain a greater recovery on the secured debt than it could by 

bidding at the foreclosure sale based on the net recovery value and whether the agency 

wishes to continue with the borrower. If the decision is made to pay off the prior 

lienholder a title opinion must be obtained. Field Offices will note the account and fax a 

copy of the foreclosure notice to the Servicing Office, Direct Loss Mitigation Section at 

314-457- 4553. The Field Office will need to track the progress of the prior lienholder’s 

foreclosure manually until the time of the sale. Once the foreclosure template is 

established, the Field Office is responsible for updating the tasks on the template, using 

the date provided by the lender. If a third party purchases the property at the sale, the 

proceeds are shown in the sale amount field. Attachment 13-D provides guidance for 

obtaining funds to pay off the lienholder.

When the Servicing Office becomes aware that a prior lienholder has initiated 

foreclosure action, the State and Field Office will be notified by fax and telephone call. 

When the Agency becomes aware of a prior lienholder foreclosure, a determination must 

be made whether the Form RD 1927-8, “Agreement with Prior Lienholder” or similar 

state form was executed in connection with a leveraged loan. When the Prior Lienholder 

Agreement was executed, and the lender failed to give notice, the Agency will consult 

with the Office of General Counsel to protect the Government’s interest. The Agency 

will also consult with the Lender about compliance with the Prior Lienholder Agreement 

and Lenders who fail to comply with the prior notice requirements will be counseled.

Lenders who are unable to comply with the prior notice requirements should not be 

considered for future leveraged packages.

Assignment of promissory notes and security instruments is authorized where a junior 

lienholder is foreclosing its lien and is paying the Agency in full.

13-36
HB-1-3550

Paragraph 13.20 Foreclosure

Revised (03-09-22) SPECIAL PN

Recapture will be calculated if the junior lienholder provides the necessary 

information.

B. Acceleration

1. The Acceleration Notice

If the Servicing Office determines that the appropriate approach to liquidation is 

foreclosure, the process begins with an acceleration notice. The acceleration notice 

demands full payment of the account including unpaid principal and interest, advances, 

and subsidy subject to recapture. It notifies the borrower of: (1) the reason for the 

acceleration; (2) the amount due; (3) the method of payment; (4) the opportunity for an 

informal discussion with the decision maker; and (5) the process for requesting an 

administrative appeal hearing. The notice gives the borrower 30 days to pay in full or 

request a hearing.

The notice must be sent to the borrower and any cosigners simultaneously by both 

regular mail and certified mail. If the property address is different from the address of 

the borrower, the notice should be sent to the property address as well. 

2. Treatment of Payment Subsidy

If a borrower is receiving payment subsidy, the payment subsidy agreement will not 

be canceled when the debt is accelerated, but the agreement will not be renewed when it 

expires unless the account is reinstated.

3. Special Servicing

After a borrower’s account has been accelerated, the borrower is no longer eligible 

for any of the special servicing actions described in Chapter 5.

4. Assignment of SecurityInstruments

Assignment of promissory notes and security instruments is authorized when an 

account has been accelerated, all appeals have been exhausted, the case has been 

accepted by OGC for foreclosure, and the Agency is being paid at least the net recovery 

value of the security property.

5. Offers to Pay

Field Offices will refer offers to cure the default to the Servicing Office. The 

borrower is permitted to cure the default and retain the loan under the following 

conditions:

13-37

(01-23-03) SPECIAL PN
4

HB-1-3550

Paragraph 13.20 Foreclosure

• The Agency is required by state law to reinstate the loan; or

• The agency is required by a decision from National Appeals Division (NAD) to 

reinstate the loan; or

• At the sole discretion of the Agency, when it is in the Government’s best financial 

interest.

For borrowers whose accounts have been accelerated 45 days or less, the cure amount 

will be quoted by the Servicing Office (unless the account is noted as a no cure account). 

The borrower will be instructed to send certified funds to the retail lockbox or use 

Western Union Quick Collect or Money Gram 45 days from acceleration.

Borrowers whose accounts have been accelerated more than 45 days will be referred 

by the Servicing Office to the appropriate State/Field Office. If appropriate, the 

State/Field Office will interact with the Office of the General Counsel/U.S. Attorney’s 

office to determine if a cure can be accepted and document the recommendation in global 

notes. State/Field Offices may calculate the cure amount or if assistance is needed, 

contact the Servicing Office, SFH Assistance Section. All funds to cure an account must 

be certified or remitted using electronic funds (Western Union Quick Collect or Money 

Gram). The use of Customer Initiated Payments (CIP) or “check by phone” will not be 

used to cure an account, as these funds are not guaranteed.

When an offer is made to pay less than the full amount to cure the default, 

Attachment 13-C must be completed. The attachment, including concurrence by the 

State Director will be sent to the Deputy Administrator, the Servicing Office, for 

approval along with any supporting documentation. A request to reamortize the account 

must also be submitted at this time if the borrower is unable to pay the shortage within 

30 days from acceptance of the offer. The request for approval of the offer should be 

submitted to the Servicing Office, SFH Assistance Section.

If approved, the State/Field Office will submit the certified funds agreed upon along 

with a payment assistance package (if payment assistance has expired). If the borrower 

can pay the shortage within 30 days and a reamortization is not necessary, this should be 

noted on the funds transmittal. The State/Field Office is responsible for ensuring the 

borrower pays the approved cure amount as agreed. If the account is reamortized, an 

escrow will be established, if not already in place.

When the State/Field Office determines it is not in the best interest of the Agency to 

accept a cure, Task #802 will be sent to the Servicing Office to have the account coded 

to prevent future cures. In mandatory cure states, offers to cure the default and 

associated charges will not be refused.

13-38
HB-1-3550

Paragraph 13.20 Foreclosure

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

• Submission of Funds - For accounts accelerated more than 45 days, the State/Field 

Office will collect and forward the funds to the wholesale lockbox on a Form RD 

3550-17, Funds Transmittal Report. The lockbox address is USDA/RHS, P.O. Box 

790300, St. Louis, MO 63179. If the borrower wishes to cure the account using 

electronic funds (Western Union Quick Collect or Money Gram), the State/Field 

Office should make sure the account is thoroughly noted with the control number for 

tracking purposes.

• Payment Assistance - If the payment assistance has expired or the borrower’s income 

has changed, at the time the borrower cures the account, the State/Field Office should 

assist the borrower in completing a new payment assistance package. The payment 

assistance certification with the supporting documentation should be forwarded with 

Form RD 3550-17 and the cure funds to the wholesale lockbox. If the account was 

cured via Western Union Quick Collect or Money Gram, the payment assistance 

information should be sent to the SFH Assistance Section with a cover letter 

explaining that the account was cured via electronic funds. The payment assistance 

agreement will be made effective with the first due date following the cure date, if a 

complete package is received within 30 days from the date of the cure.

Funds submitted by a borrower to a Field Office should be sent to the lockbox on 

Form RD 3550-17, “Funds Transmittal Report.”

C. Review of the Acceleration Decision

Several remedies are available to borrowers who believe their accounts should not have 

been accelerated. These include an informal administrative review at the Servicing Office, 

mediation or a formal appeal with the NAD. Paragraph 1.9 describes the appeal and review 

process in detail.

D. Initiating Legal Proceedings

Field Offices should continue the foreclosure process 30 days after the acceleration notice 

is sent if the borrower does not request an informal review or appeal the acceleration decision, or 

as soon as NAD upholds the Agency’s decision to foreclose.

The Agency will only seek a deficiency judgment (in those States where available) when 

foreclosure is initiated and the Agency determines the borrower has or will have assets from 

which a deficiency judgment could be recovered. Deficiency judgments will never be sought in 

the following situations: (1) acceleration is due to an unpaid recapture amount; (2) the borrower 

was granted a moratorium at any time during the course of the loan and faithfully tried to meet 

the loan obligations; (3) State law does not permit a personal deficiency; (4) in nonjudicial 

foreclosure States, the United States Attorney will not accept a referral for the deficiency; or (5) the 

Agency has determined after consultation with OGC that it is not cost effective to seek a deficiency 

on a particular case.

13-39
4 

HB-1-3550

Paragraph 13.20 Foreclosure

If the security property is located on tribal allotted or trust land, liquidation may not proceed 

until after the State Director has offered, in writing, to transfer the account to an eligible tribal 

member, the tribe, or the Indian Housing Authority servicing the tribe or tribes. This offer is made 

after the account has been accelerated, the appeals process has been concluded and the case sent to 

the respective State Office.

E. The Foreclosure Sale

Once legal proceedings have concluded, the property will be sold at a foreclosure sale. To 

complete the foreclosure process, Field Offices must determine how much to bid and enter that bid at 

the sale.

1. Establishing a Bid Amount

The Agency’s bid will be the lesser of the Agency’s gross investment or the estimated net 

recovery value of the security property. 

Gross investment is the sum of:

• The unpaid balance, defined as:

◊ In states with judicial foreclosure, the judgment account established as a result of the 

foreclosure judgment. 

◊ In states with non-judicial foreclosure, the borrower’s account balance reflecting 

secured loans and advances. 

• All outstanding advances and fees charged to the borrower’s account.

• Total subsidy received.

• Bidding at the Foreclosure Sale

Procedures for bidding at a sale will vary by locality and a local presence may be 

required. If the Agency is the high bidder, the property will become REO property, which 

will be managed and disposed of by the Field Office. In order to acquire the property 

through the LoanServ System, send Task #229 to the Servicing Office noting the Agency 

was the successful bidder at the sale. The Servicing Office will then create the foreclosure 

template to allow the field to acquire the property. The Field Office will be responsible for 

updating the tasks on the template. 

If the amount received through the foreclosure sale is less than the borrower’s 

outstanding debt, the Servicing Office will handle the debt settlement procedures.

1 

13-40
HB-1-3550

Revised (03-09-22) SPECIAL PN

REQUEST FOR PAYOFF STATEMENT

(This form to be used for Field/State Office functions only.)

Attachment 13-A 

Page 1 of 1 

ATTACHMENT 13-A

Type of Payoff Statement

Statement of Loan Balance (includes total subsidy received)

Final Payoff w/recapture

Sale Refinance Other 

Other (explain) 

Account Information

Account Number(s): 

Borrower Name: 

Property Address: 

Payoff Information

$ Market Value/ (sales price, appraised value, or assessment)*

$ Value of Capital Improvements*

$ Closing Costs*

$ Amount of Original Equity

Percent of Original Equity

$ Effective Date of Payoff

If payoff statement will be used for internal purposes only, documentation should be maintained in the 

Field/State Office. If payoff statement is to be provided to a third party, include documentation along 

with this request.

Foreclosure Accounts: unapplied/unprocessed vouchers to be added to the payoff quote.

Amount of Charge Type of Charge

$ 

$ 

$ 

[ ] Check here if additional fees have been confirmed through the State Office. If this box is checked, the 

Servicing Office will not send a Task 94 to the State Office for additional fees.

Field/State Office Information (all fields are required)

Person Making Request 

Phone Number 

Fax Number 

Reviewed By 

The Servicing Office Payoff Department FAX # (314) 457-4433

(01-23-03) SPECIAL PN
4 

HB-1-3550

Attachment 13-B 

Page 1 of 1 

ATTACHMENT 13-B

Servicing and Asset Management Office (the Servicing Office)

Field Support Services

Phone (314) 457-5200 fax (314) 457-4441

ACCOUNT ISSUE AND SUGGESTED RESOLUTION SHEET

State County Code Date Submitted

Contact Person

Phone Number ext. 

Fax Number

Account 

Number

Account Name Account Issue Field Office Suggested 

Resolution

MOTI %

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

Attachment 13-C

Page 1 of 3

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Name of Borrower:

Name of Co-Borrower:

Address of Borrower:

Customer Account #:

Number of Times Customer Cured account in past 24 months and dates cured:

1. Reason for Delinquency:

2. Documentation to Support proof of payments being made (home repairs, medical expenses, other obligations:

3. Recommendation to cure:

Borrower:

(Wages, tips, overtime, etc.)

$

Co-Borrower:

(Wages, tips, overtime, etc)

$

Other:

(Social Security, retirement, alimony, 

child support, AFDC, other income, etc.)

$

ATTACHMENT 13-C

CURE AND FINANCIAL STATEMENT

Part 1 Delinquency Information

Part 2 Household Income
4 

HB-1-3550

Attachment 13-C 

Page 2 of 3

SHORT CURE REAM CHECKLIST

BORROWER INFORMATION ACCOUNT #

1  Borrower(s) Name

2  Property Address

3  Short Cure Approval Date:

4  Total Short Cure Amount

5  Date Funds Received

6  Preparer and Contact 

Information

7  Local/State Office Phone # 

8  Date Submitted to the 

Servicing Office

The documents listed below are needed to complete the Short Cure Ream. Please fax these 

documents to SFH Assistance Section @ (314) 457-4441. Please note TOTAL SHORT 

CURE AMOUNT and DOCUMENTS must be received in order to begin the Ream process. 

The Servicing Office will not accept partial cures or funds directly from the borrower.

Short Cure Documents Needed Comments

9  Signed Approval Letter from the State 

Office

Letter must be signed by State Director or Designee

10 Complete Payment Assistance Packet 

(Form RD 3550-21)

If the account is eligible for subsidy, a completed 

Payment Assistance packet must be included and 

faxed to Field Assistance.

11 Copy of completed Funds Transmittal 

Report (FTR) (Form RD 3550-17) and 

Cashier Check or Money Order.

Please indicate on the FTR that funds are for SHORT 

CURE REAM.

Note: The Servicing Office will not accept anything 

less than the total short cure amount listed on FTR.

12 Please remit the total Short Cure 

amount in form of a Cashier Check or 

Money Order along with the original 

Funds Transmittal Report (Form RD 

3550-17)

Please advise borrower not to send fundsto the 

Servicing Office. The Servicing Office will not post 

partial funds, any amount less than the short cure 

amount will be returned. The total short cure 

amount must be received and posted to the account

USDA RD

P.O. Box 790300

ST. LOUIS, 63179-0300

13 Cure & Financial Statement document 

HB-1 Attachment 13-C

Required
HB-1-3550

Attachment 13-C

Page 3 of 3

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

INSTRUCTIONS FOR COMPLETING SHORT CURE REAM 

CHECKLIST

1 Required - Enter all Borrower Names (First, Middle and Last)

2 Required - Enter the full Property Address

3 Required - Enter the date the Short Cure was approved (Month, Day and Year)

4 Required - Enter the Total Short Cure Amount agreed upon

5 Required - Enter the Date Total Short Cure Amount was received

6 Required - List the name of the contact person approving the Short Cure

7 Required - Provide the phone number of the contact person

8 Required - Date mailed (submitted) to National Financial and Accounting Operations

9 Required - Signed Approval Letter from the State Office: Letter must be signed by 

State Office Director or Designee

10 Optional - Complete Payment Assistance Packet (Form RD 3550-21): Required if

the account is eligible for subsidy, a completed Payment Assistance packet must be 

included and faxed to SFH Assistance Section. 

11 Required - Copy of completed Funds Transmittal Report (FTR) (Form RD 3550-17) 

and copy of the Cashier Check or Money Order: Please indicate on the FTR that funds 

are for SHORT CURE REAM. Note: The Servicing Office will not accept anything less 

than the total cure amount listed on FTR.

12 Required - Please remit the total Short Cure amount in form of a Cashier’s Check 

or Money Order along with the original Funds Transmittal Report (Form RD 3550-17) 

USDA RD

P.O BOX 790300

ST. LOUIS, 63179-0300

Please advise borrower not to send funds to the Servicing Office. The total short cure 

amount must be received and posted to the account prior to beginning the ream process. 

The Servicing Office will not post partial funds, any amount less than the short cure 

amount will be returned.

13 Cure & Financial Statement document HB-1 Attachment 13-C.

Required documentation
4 

RUSH FUNDS PROCESSING

HB-1-3550

Attachment 13-D 

Page 1 of 2 

ATTACHMENT 13-D

Notice of Foreclosure Sale – At least two weeks prior to sale, the Field Office must contact 

Prior Lien Holder to determine the procedure for bidding at sale:

• If the Agency is the successful bidder, how soon must funds be submitted?

• Is a deposit required on day of sale? What is the minimum deposit amount?

• Must the entire bid amount be paid the day of sale?

Securing of Funds – The State Office must assure that sufficient funds are available in the 

State’s R/L funds bucket. If the State exceeds 90% of the entire State’s allocation, authorization 

of the proposed voucher must be obtained. Procedures for acquiring additional funds can be 

found in RD Instruction 2024-A, Exhibit D. 

Vouchering for Funds – When requesting emergency funds, the following information must be 

faxed to USDA St. Louis, Missouri at (314) 457-4374, ATTN: Team 3: 

• RD Instruction 2024-A, Exhibit K, “Request for Emergency Payment”

• Form RD 2024-30, “Non-Contractual Program Loan Cost Expense (PLCE) 

Certification”

• Form AD-838, “Purchase Order”

• Form AD-838-B, “Invoice-Receipt Certification”

[COPIES OF ABOVE FORMS ATTACHED]

(01-23-03) SPECIAL PN

Revised (04-26-12) PN 456
HB-1-3550

Attachment 13-D 

Page 2 of 2

Determining Voucher Amount – Based on information received from Prior Lien Holder, the 

amount of voucher will be: 

If a deposit is required The voucher amount will be 10% of the 

Net Recovery Value amount as 

determined by a current appraisal and 

the NRV worksheet or the minimum 

amount required by Lender. 

If the full amount is required If the Agency is the successful bidder, 

the amount of the voucher will be an 

amount that exceeds the Prior Lien 

Holder’s bid but not to exceed the Net 

Recovery Value.

Delivery of Funds – It is imperative that vouchers for emergency funds are submitted to St. 

Louis, Missouri, as soon as possible. All efforts will be made to have funds available to Field 

Offices as required for Foreclosure Sale. Funds will primarily be sent via Electronic Funds 

Transfer (EFT) based on submission time to St. Louis, Missouri.

• If the funding request is made in accordance with RD Instructions 2024-A, Exhibit K, and 

received in St. Louis, Missouri, before 12:30 p.m. CST, funds will be sent the sameday. 

• If the funding request is received in St. Louis, Missouri, after 12:30 p.m. CST, funds will 

be sent the next business day.

• If there are no electronic funds transfer facilities available, funds will be overnight 

expressed the next day.

Questions pertaining to emergency funds requests should be e-mailed to dcfo-fcb2@stl.usda.gov.
HB-1-3550 

(This chapter removed 06-09-04, PN 375) 

____________________________________________________________________________________________ 

CHAPTER 14: [RESERVED]
15.1 OVERVIEW

The Agency assumes management responsibility for 2 types of properties: custodial and 

real estate owned (REO). Custodial property is borrower-owned property which has been 

abandoned. REO is Agency-owned property to which the Agency has acquired title, either as a 

result of foreclosure or conveyance by deed in lieu of foreclosure. This chapter outlines the 

requirements for management of each type of property.

Current responsibilities of on-site management activities are split between the Field 

Offices and the Servicing and Asset Management Office (Servicing Office) during the 

liquidation process for custodial properties. The Servicing Office continues to be responsible for 

the financial management.

Responsibilities for oversight of on-site management is now referred to the Responsible 

Party. The Responsible Party may be both the Servicing Office, the Field Office or an 

independent authorized government contractor.

The goal of property management is to protect the Government’s interest; consequently, 

efforts to secure property should begin as soon as the Agency has control.

SECTION 1: PROPERTY MANAGEMENT METHODS AND ACTIVITIES

15.2 MANAGEMENT METHODS ANDCONTRACTS

The Agency may conduct the management activities discussed in this chapter using 

Agency staff or may contract with qualified entities to perform them. The method of management 

depends on such factors as the number of properties to be managed, their location, condition, the 

necessary maintenance, and the availability of qualified staff. In some cases, a simple maintenance 

contract is all that is needed; in others, the Agency may require a complete management contract 

where a contractor provides all property management services, including, but not necessarily 

limited to securing and cleaning up the structure, yard work, arranging for and inspecting repairs, 

paying utilities, and coordinating with contractors, potential buyers or brokers for access to the 

property.

A. Selecting a ManagementContractor

Management contractors must be selected in accordance with Agency procurement procedures 

under RD Instruction 2024-A.

15-1

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

CHAPTER 15: MANAGING CUSTODIAL AND 

REO PROPERTY

HB-1-3550
HB-1-3550

Paragraph 15.2 Management Methods and Contracts

B. Management Contract Requirements

At a minimum, management contracts must:

• Allow for properties to be added or removed from the contractor’s assignment, 

whenever necessary, such as when a property is taken into custody, acquired or sold 

during the period of a contract; and

• Prohibit the preparer or his/her associates from doing any of the repair work when a 

contract calls for specification writing services.

If a contract includes marketing or broker services and involves management of 5 or more 

single family homes in the same subdivision, the contractor must develop and obtain Agency 

approval of an Affirmative Fair Housing Marketing Plan, as described in RD Instruction 1901-E. 

The contracting official approves the plan, however, any questions that might arise with respect to 

an Affirmative Fair Housing Marketing Plan should be directed to the Civil Rights Coordinator in 

the State Office.

15.3 TAKING POSSESSION

A. Taking Custodial Possession

The Agency may need to take custody of security property when a borrower becomes 

incapacitated, dies or has abandoned a security property. When the Servicing Office is unable to 

contact a borrower, the Responsible Party will be requested to inspect the property to determine 

its status and to attempt to contact the borrower. When the Field Office believes that a property 

may be abandoned, it will report to the Servicing Office.

1. Determining Whether A Property Has Been Abandoned

The determination that a property has been abandoned requires significant 

investigation and documentation. In addition to the actions described in this 

paragraph, the Responsible Party must follow any procedures required by State or 

local law in order to confirm the determination of abandonment and to take custodial 

possession. A property is not considered abandoned if the borrower occupies the 

property, even if it is not being well maintained. Similarly, a property is not 

considered abandoned when the borrower does not occupy the dwelling but has made 

arrangements for its care. The Agency cannot act to obtain possession of a property as 

long as a lien holder has possession of the property, or the borrower or the lien holder 

has a right to lease proceeds. As a minimum, the Responsible Party must:

15-2
(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

HB-1-3550

Paragraph 15.3 Taking Possession

• Attempt to determine whether the security property is occupied, and if not by the 

borrower, what are the rights of the occupant; if any;

• Attempt to determine the location of and/or contact the borrower through sources such 

as neighbors, the postal service, utility companies, last-known employers, and relatives; 

and

• Determine whether there are other liens on the property and if liens exist, whether the 

lien holder(s) are willing to work with the Agency to secure the property.

2. Recommendation for Taking Custody

The Responsible Party will submit a report of its finding to the Servicing Office with a 

copy to the State Director advising that it appears the property has been abandoned and the 

Agency needs to assume responsibility for it in order to protect the security. Alternatively, 

if the Responsible Party reports that the property is occupied, the report will give details as 

to whether the occupant is under a lease or is unauthorized. The Responsible Party will 

provide any other relevant details and make the decision to take custodial possession of 

the property, as appropriate. The Responsible Party will notify the Servicing Office when 

the action has been taken.

3. Liquidation

The need to take custodial possession of a property may occur before or after a loan has 

been accelerated. If liquidation is not already in progress, taking custodial possession 

should initiate the process. The responsibility for conducting liquidation activities remains 

with the Servicing Office, supported by Field Office staff as required.

B. Acquisition of an REOProperty

Once the Agency acquires a property a new REO case file should be created from the 

original case file by removing and placing into the new file the title to the property, and recent 

inspection reports, appraisals, or other documentation related to the physical condition or value of 

the property. No information related to the borrower is needed in the REO file. Any documents 

relating to due diligence and response actions (clean-up activities) should also be placed in the 

REO file; however, these documents must be retained indefinitely to minimize Agency liability 

and should be so labeled.

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15.4 INSPECTING AND SECURING CUSTODIAL AND REOPROPERTY

Inspection should be made of acquired property as soon as feasible after the foreclosure 

sale or other means of acquisition—usually within seven days. The Responsible Party must 

inspect the property to:

• Determine what steps need to be taken to further ensure its security and maintain its 

value.

• Identify whether the property is occupied and, if occupied, the intent of the occupants.

• Classify the property as program and nonprogram and evaluate the need forrepairs.

A. Inspecting and Classifying the Property [7 CFR 3550.251(c)(1)]

The Responsible Party must designate REO property as program or nonprogram (NP) 

property after considering factors such as size, design, possible health and/or safety hazards, and 

obsolescence due to functional, economic, or locational conditions. A property that meets the 

requirements for program property, as described in Chapter 5, is classified as program property. 

Property that has been enlarged or improved, so that its value is clearly above program standards, 

or a property that would require major redesign or renovation to be brought to program standards, 

should be classified as NP property. REO property in an area no longer designated rural is treated 

as if it were still in a rural area.

For program property, a listing of needed repairs or improvements will be prepared. For 

NP properties, a listing should be prepared of any health and safety hazards which must be 

removed to release deed restriction. Repairs, if required, are typically a condition of sale and 

repair lists should be incorporated with the sale listing for all REO.

If the REO is occupied, preparation of the repair list may need to be delayed until the 

property is vacated, depending on the cooperation of the occupants. In this case, the status of the 

property should be monitored regularly.

The basis for classification as program or nonprogram must be thoroughly documented.

Improper classification of the REO could result in an unsound loan if, for example, the remaining 

life of the property is less than the term of the loan. (A manufactured home with 15-20 years 

remaining life is not sound security for a subsidized loan with a minimum term of 25 years.) 

Classification as NP may significantly reduce the amount the Government could recover 

(especially if the REO is then leased) or could deprive a program-eligible family of an affordable 

home.

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Revised (03-09-22) SPECIAL PN

HB-1-3550

Paragraph 15.4 Inspecting and Securing Custodial and REO Property

B. Securing Custodial and REO Property

When the Agency assumes management responsibility and takes possession of either a 

custodial or REO property, immediate steps must be taken to inspect and secure the property 

whether by the Responsible Party.

1. Physical Security of Vacant Properties

If the property is vacant, it should be locked or otherwise secured and a no trespassing 

notice should be posted to prevent entry by unauthorized persons. For REO only, after an 

inspection determines utility systems are in safe operable condition, utility companies 

should be contacted to maintain or reinstate utility service. An inventory should be made 

of any nonsecurity personal property left on the premises and efforts made to identify any 

owners or lien holders.

2. Occupied REO Properties

REO property may be occupied by a tenant under a lease with the former borrower or 

by the borrower. The Agency may decide to honor an existing lease if it is in the 

Government’s interest, or it may have to evict an unauthorized tenant.

When an REO property is under an existing lease and the Agency decides to continue 

the lease, the lessee must be notified, in writing, that the Agency has acquired the former 

lessor’s rights under the lease and that all payments should be remitted to the Servicing 

Office. If a lease is to be terminated, the lessee must be notified, in writing, that their 

lease is being terminated in 30 days, and they must vacate.

Lease payments due, payable, and received before the date the Agency acquired the 

property are applied to the borrower’s account. If there is a surplus, it is refunded to the 

former borrower. Lease payments due and payable after the date the Agency acquired the 

property are applied to a lease account established by the Servicing Office in the name of the 

lessee.

The Office of the General Counsel (OGC) should be contacted for advice and 

assistance when it is necessary to evict a tenant in order to obtain possession of REO 

property particularly if it is leased. A State Supplement will provide explicit instructions.

15.5 DISPOSITION OF NONSECURITYPROPERTY

The Agency has no legal claim on nonsecurity property. State or local law may affect 

procedures for disposing of property left on the premises
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15-6

Paragraph 15.5 Disposition of Nonsecurity Property

of a custodial or REO property. The Responsible Party must comply with any State or local 

requirements, as well as the procedures discussed in this paragraph. If the owner or lien holder of 

any personal property that remains in custodial or REO property can be identified and located, the 

Responsible Party must offer them a reasonable opportunity to remove the property. Any verbal 

conversations with the owner of the property should be confirmed in writing.

A. Custodial Property

The Agency cannot remove nonsecurity personal property from custodial properties, unless 

it cannot be safely stored, there are hazards that threaten the personal property (such as a leaking 

roof), or the personal property itself presents a hazard (such as flammables or explosives).

B. REO Property

1. Notice to Owners or Lien Holders of Personal Property

If the property is not retrieved after the initial notification, a certified letter should be 

sent, return receipt requested, notifying the owner or lien holder of the date on which the 

Agency will dispose of the property, that the property may be retrieved before the 

disposition upon payment of any expenses incurred by the Agency related to the personal 

property, such as advertisement or storage.

2. Disposal of UnclaimedProperty

The Responsible Party will dispose of unclaimed property in accordance with its 

value and conforming with local practices. For example, if there are items of significant 

value, an advertisement may be placed in the local newspaper.

3. Income from Disposition

Proceeds from the sale of items under lien should be paid to any owner or lien holder 

after deducting Agency selling expenses. If there is no known owner or lien holder, 

proceeds are applied to the REO account.

15.6 TAXES AND INSURANCE

A. Taxes

REO property is subject to Real Estate taxation by State and local political jurisdictions in the same 

manner and to the same extent as other properties, unless State law specifically exempts property owned by 

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

the Federal Government. If a jurisdiction changes the law to begin taxing Government-owned property, 

only taxes accruing after the effective date of the change will be paid. The Responsible Party will 

notify the taxing authority, in writing, when title to real estate is acquired

Paragraph 15.6 Taxes and Insurance

and provide the Servicing Office address to which tax bills should be sent during Agency ownership.

If the value of the property is significantly less than the value at which it is being taxed, as 

soon as it is acquired, the Agency may request a new assessment by the local taxing authority.

If property is acquired subject to a prior lien, before the Agency pays taxes, the 

Responsible Party will contact the prior lien holder to determine if that lien holder will pay the 

taxes. Taxes on program property are paid when due. Taxes on nonprogram property may be 

deferred until the property is sold if the taxes that accrue before disposition may exceed the value 

of the property. If the taxing authority schedules a tax sale before the Agency can sell the property, 

the Responsible Party should calculate and compare the net recovery values that would result from 

paying the taxes and continuing sales efforts or letting the property be sold for delinquent taxes to 

determine which approach is in the Government’s best interest. See Handbook-2-3550, 

Attachment 6-A for a net recovery value worksheet.

B. Insurance

1. Custodial Property

Insurance on custodial property will not be canceled. The Agency will not pay 

additional premiums to continue coverage.

2. REO Property

Insurance will not be canceled when property is acquired. However, the Agency will 

not pay additional premiums to continue coverage. If it is necessary to file a claim, 

Responsible Party should submit the claim and direct that insurance proceeds be 

forwarded to the Servicing Office.

15.7 ENVIRONMENTAL REQUIREMENTS

The Agency must complete the appropriate level of environmental review under the 

National Environmental Policy Act for proposed management activities involving custodial and 

REO properties in accordance with RD Instruction 1970 series “Environmental”

Paragraph 15.6 Taxes and Insurance
Paragraph 15.7 Environmental Requirements

Management activities subject to environmental review include conducting 

repair/maintenance activities, selling, or leasing Agency-owned real property.

Conducting repair/maintenance activities, selling, or leasing of custodial and REO 

property will normally qualify as a categorical exclusion provided no extraordinary 

circumstances exist (see RD Instruction 1970-B, section 1970.52) and the proposed action will 

not result in a change in use of the property in the reasonably foreseeable future. Refer to RD 

Instruction 1970 series “Environmental” for further direction.

When certain environmental resources are present, or when certain extraordinary 

circumstances exist, specific limitations or constraints are imposed by environmental law on the 

Agency’s repair and maintenance, selling and leasing activities. In such cases, an Environmental 

Assessment (EA) rather than a categorical exclusion, may be required to address the situation 

properly. Consultation with RD Instruction 1970 series “Environmental”, as well as the State 

Environmental Coordinator, is recommended before proceeding in the following circumstances.

A. Circumstances Necessitating an EnvironmentalAssessment

1. Coastal Barrier Resources System(CBRS)

Any action proposed to be taken on a custodial or REO property within a CBRS must 

be coordinated with the State Environmental Coordinator and the Regional Director of 

the U.S. Fish and Wildlife Service (USFWS). In emergency situations to prevent 

imminent loss of life, imminent substantial damage to the inventory property, or the 

disruption of utility services, minimum steps necessary to prevent such loss or damage 

may be taken without first consulting the USFWS as long as the Regional Director of the 

Service is immediately notified of the emergency action taken.

Maintenance or repair is prohibited for property located within a CBRS if:

• The action goes beyond maintenance, replacement-in-kind, reconstruction, or 

repair and would result in the expansion of any roads, structures or facilities;

• The action is inconsistent with the purposes of the Coastal Barrier Resources Act

(CBRA) 16 U.S.C. 3501. et. seq.; or

• The property to be repaired or maintained was initially the subject of a financial 

transaction that violated the CBRA.

The Administrator should be asked to review any cases where the Agency and the 

USFWS disagree on the effect of a plan of action or where otherwise prohibited 

maintenance and repair must be undertaken.

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Paragraph 15.7 Environmental Requirements

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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Approval for action will not be granted unless the Administrator determines, through 

consultation with the Department of Interior, that the proposed action does not violate the 

provisions of the CBRA.

2. Historic and Archaeological Resources

Properties that are listed or eligible for listing on the National Register of Historic Places, 

in whole or in part, will be repaired as necessary to protect their historic integrity after 

consultation with the State Historic Preservation Officer (SHPO) and the Advisory Council on 

Historic Preservation. If a property is listed or eligible for listing on the Register and also is 

located within the CBRS, the property cannot be repaired without the prior approval of the 

USFWS.

The Responsible Party will review the current Register to determine if the property is 

listed. If the property is not listed, the Responsible Party will consult with the SHPO when the 

property is considered potentially eligible for the Register. A property is considered potentially 

eligible if it contains a structure more than 50 years of age or, regardless of age, if the property is 

known to be of historic or archeological importance, or has apparent significant architectural 

features.

Additionally, for properties located on Tribal land or in Indian country, consultation will 

be made with the Tribal Historic Preservation Officer (THPO) to determine if the property is 

known to be of historic or archeological importance.

3. Floodplains andWetlands

If the Agency is considering a substantial improvement or repair to custodial or REO 

property located in a flood plain or wetland, the Agency must first consider whether there 

are practicable alternatives to such further investment in the floodplain or wetland area.

For example:

• Could the property be sold “as is” with notice of floodplain/wetland hazard?

• Could the property be sold “as is” with a requirement that the structure be removed 

from the site?

• Could the Agency remove the structure first and sell the land with notice ofhazard?

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Paragraph 15.7 Environmental Requirements

____________________________________________________________________________________________

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If there are no practical alternatives to the substantial improvements, then the Agency 

may proceed with the improvements, provided it includes any practical mitigation measures. On 

an existing structure, mitigation will generally involve some form of floodproofing, such as 

elevating hot water tanks, or heating and ventilation units.

A substantial improvement is defined as any improvement the cost of which equals or 

exceeds 50 percent of the market value of the structure either (1) before the repair is started, or (2) 

if the structure has been damaged, before the damage occurred. The cost of compliance with 

health, sanitary and safety codes is not included in the calculation of the substantial improvement 

cost, nor is the cost of repair to an historic structure included. If the repairs do not qualify as 

substantial, the Agency does not need to search for alternatives or mitigation measures.

4. Reportable Underground StorageTanks

Properties that contain certain types of underground storage tanks must be reported to 

the State agency identified by the Environmental Protection Agency (EPA) within 30 

days of Agency acquisition. Attachment 15-A provides a list of those underground 

storage tanks which must be reported and those which are exempt from reporting 

requirements. A State Supplement will provide the necessary EPA forms or acceptable 

State forms that may be used to accomplish the reporting, as well as detailing any 

additional State reporting requirements. A copy of the report must be maintained in the 

REO file, and any prospective buyers of the property must be furnished with a copy of 

the report.

B. Lease or ManagementContract

1. Historic and Archaeological Resources

A property that is listed or eligible for listing on the National Register of Historic 

Places may be leased or operated by management contract only after the Agency and the 

SHPO (or THPO) determine that the lease or contract will adequately ensure the property’s 

condition and historic character.

2. Floodplains andWetlands

Before executing a lease for a property containing wetlands or located in a special flood 

or mudslide hazard area identified by the Federal Emergency Management Agency 

(FEMA), Field Staff must provide written notice of the hazard to the lessee. The notice 

must be attached to the lease. Any management contract must require the contractor to 

fulfill this obligation.

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Paragraph 15.7 Environmental Requirements

HB-1-3550

The lease or management contract for custodial or REO property containing wetlands 

or located in a floodplain area will also specify any uses of the property by the lessee or 

tenant that are restricted under any Federal, State or local floodplain and wetland 

regulations, as well as other appropriate restrictions. Examples of use restrictions would 

include prohibition of draining or filling of floodplain or wetland areas, and prohibitions of 

new above-ground construction on that portion of the property located in the floodplain or 

wetland area.

3. Hazardous Substance Activity -Notification

All property considered for lease must be evaluated for possible hazardous substance 

contamination. To do this, the Responsible Party completes Attachment 5-B, Single Family 

Housing Site Checklist. (If Attachment 5-B was completed prior to acquisition of the property, 

the Responsible Party must determine if the attachment should be updated.) If the completed 

or updated attachment indicates potential contamination, it will be sent promptly to the State 

Environmental Coordinator for further evaluation and guidance. All clean-up actions will be 

taken under the guidance of the State Environmental Coordinator. For further information or 

notification, refer to Paragraph 16.18.

15.8 MANAGEMENT OF HAZARDOUS SUBSTANCES

A reasonable and prudent attempt will be made to minimize the Agency’s liability under 

hazardous substance and hazardous waste laws, and a diligent effort will be made to evaluate economic 

risks to real estate posed by the presence of contamination from hazardous substances, hazardous 

wastes, and petroleum products, including underground storage tanks. The elements of potential 

liability and economic risk are addressed by the Agency by performing due diligence.

Due diligence is the process of inquiring into the environmental condition of real estate in the 

context of a real estate transaction to determine the presence of contamination from hazardous 

substances, hazardous wastes, and petroleum products, and what impact such contamination may have 

on the market value of the property.

The Responsible Party initiates due diligence by completing Attachment 5-B. If the 

completed attachment indicates a potential for contamination, it will be sent promptly to the State 

Environmental Coordinator for further evaluation and guidance.

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Revised (03-09-22) SPECIAL PN
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Paragraph 15.8 Management of Hazardous Substances

For all servicing actions that require a determination of market value, the appropriate level of 

due diligence will be performed in conjunction with the appraisal. Due diligence also must be 

performed in conjunction with any servicing action that may lead to acquisition of security property.

The Responsible Party should be aware of suspicious situations during security inspections of 

custodial and REO property. If unauthorized dumping of potentially hazardous material is noted, due 

diligence will be performed.

To minimize the Agency’s liability, any response action taken by the Agency in responding to 

a release or threatened release of hazardous substances or petroleum products on inventory property 

will be taken in consultation with and at the recommendation of the appropriate environmental 

regulatory authority. In the case of custodial property, the State Environmental Coordinator may 

initiate, as necessary, limited emergency response actions to stabilize an emergency or imminent and 

substantial threat to human health and the environment.

If the Agency is notified or made aware of the presence of an underground storage tank on 

custodial or REO property, the Responsible Party will ensure that the tank complies with appropriate 

environmental regulatory authority requirements or is removed. When reinstalling a fuel storage system, 

aboveground storage tanks should be used where feasible.

15.9 PHYSICAL MAINTENANCE AND REPAIR

Custodial property will be maintained and repaired only as needed to protect the security of 

the property and to prevent deterioration. In the event of damage or theft, the procedures described 

under Paragraph 15.9 A. should be followed.

REO property will be broom swept, free of trash and debris outside and maintained and 

repaired as needed to ensure the safety of potential buyers or contractors. Other repairs, including 

but not limited to those that improve the property to decent, safe, and sanitary (DSS) standards, or 

are needed to mitigate a negative effect on neighboring property may be made if the Responsible 

Party determine them to be necessary to market the property expediently, and they increase the 

market value by approximately the cost of the repairs.

A. Vandalism and Theft

Responsible Party will report willful damage or theft to the local law enforcement 

authorities and in whatever manner necessary, to attempt to resolve the incident, including signing 

complaints and testifying at hearings or trials. The Responsible Party should send a written report 

of the incident to the Servicing Office.
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(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Paragraph 15.9 Physical Maintenance and Repair

Damage to REO program property as a result of vandalism and theft may be repaired as 

necessary to continue marketing. Repairs may include cost-effective improvements to minimize 

the likelihood of future damage, such as increased lighting, security fencing and removal of shrubs 

that limit visibility. Nonprogram property should be broom swept but generally will not be 

repaired unless necessary to prevent deterioration. Custodial property should be repaired only to 

protect the security and to prevention deterioration.

B. Off-Site Repairs or Improvements

The Agency may require off-site repairs or improvements to protect property from damage, 

to protect the Government’s interest, or to enhance the marketability of property. In the case of 

multiple REO units in a subdivision, such improvements may include construction or 

reconstruction of roads, sewers, utility lines, subdivision entries, street signs, or central mail 

receptacles.

Off-site improvements must be approved by the Deputy Administrator, Single Family 

Housing. To obtain approval, the Responsible Party must prepare a justification that demonstrates 

failure to make the improvements would likely result in a property net recovery value loss greater 

than the expenditure and that there are no other feasible means with State or local entities, to 

accomplish the same result.

To obtain off-site improvements, the Agency may enter into a contract with a private 

company or enter into a cooperative agreement with a State or local government or other entity to 

obtain repairs or improvements. Under a cooperative agreement, the entity will provide money, 

property, services, or other items of value to the entity to accomplish a public purpose. While 

cooperative agreements are not a contract action, the authority, responsibility, and administration 

of a cooperative agreement must be consistent with contract action. The OGC should be consulted 

when a cooperative agreement is considered.
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Paragraph 15.9 Physical Maintenance and Repair

C. Lead-Based Paint Disclosure

The Residential Lead Based Paint Hazard Reduction Act of 1992, 42 U.S.C. 4822 et seq., 

requires lessors of housing built before 1978 who receive Federal assistance to provide the lessees 

with information about the housing’s lead history and general information on lead exposure 

prevention.

Specifically, before the lessee becomes obligated under any contract to lease the housing, 

Field Staff must:

• Complete the Lead-Based Compliance Key, which can be found at: 

https://leadpaint.sc.egov.usda.gov/LBPWeb/lbpQuestionaire..

• Provide the lessee with the lead hazard information pamphlet, Protect Your Family 

from Lead in Your Home, available from the National Lead Information Clearinghouse 

at 1-800-424-LEAD, or a similar EPA-approved pamphlet developed by the State; and

• Disclose the presence of known lead-based paint and/or lead-based hazards in such 

housing and provide the lessee with any lead hazard evaluation report available to the 

Agency.

• Make sure that the requirements of 24 CFR Part 35, Subparts A, B, and C have been 

met.
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Revised (03-09-22) SPECIAL PN

SECTION 2: SPECIAL USES

15.10 LEASING CUSTODIALS AND REO

Generally, neither REO nor custodial property is leased. However, in special cases, such as 

when custodial property is subject to lengthy liquidation proceedings or legal problems prohibit the 

immediate sale of an REO property, the property may be leased. Custodial property cannot be 

leased if extensive repairs are necessary in order for it to be inhabitable. Properties subject to 

redemption rights cannot be leased unless the Responsible Party obtains prior approval from OGC. 

Property which does not meet decent, safe and sanitary standards will not be leased.

It is preferable to lease the property to an intended buyer. The Agency may require a 

prospective renter to make a purchase offer, and submit an application for credit and a credit report 

paid for by the applicant. The rent charged should be a market rent equivalent to rents of similar 

properties in the area. If the lessee is a program applicant, the monthly rent may be based on the 

estimated monthly loan payment taking into consideration any payment assistance, plus 1/12 the 

sum of the estimated real estate taxes, property insurance, and maintenance payable by a 

homeowner. In no case will a lease be for a token amount, even if the tenant is willing to barter for 

maintenance or repair services.

A lease form approved by OGC will be used. A copy of the lease should be sent to the 

Servicing Office, where a lease account will be established in the lessee’s name.

When a lease is terminated, or when the property is sold before expiration of the term 

shown on the lease submitted to the Servicing Office, the Responsible Party must notify the 

Servicing Office of the termination and the effective date of the termination.

A. Security Deposits

The Agency requires a security deposit of one month’s rent, except from nonprofit 

organizations or public bodies. Security deposits are remitted to the Servicing Office. When a 

tenant vacates the property, the Responsible Party sends a memorandum to the Servicing Office

asking for the return of the deposit to the Responsible Party for delivery to the lessee. If the 

deposit is to be retained by the Agency, it is applied to the borrower’s account for custodial 

property or to the REO account, as appropriate.

B. Costs and Income

Expenditures on leased custodial properties are charged to the borrower’s account. 

Expenditures on REO property are charged to the REO account. The Agency does not pay 

utilities or any other costs of operation of leased property. Lease proceeds for custodial 

properties are applied to the borrower’s account. Proceeds for custodial properties are 

applied to the borrower’s account.
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15.11 SPECIAL USES OF REO

A. Transitional Housing for the Homeless

The Agency has entered into a Memorandum of Understanding with the U.S. Department 

of Health and Human Services (HHS) (see Attachment 15-B) that states that HHS will direct 

community groups to the Agency to identify specific REO properties that may be available as 

shelter projects. REO property may be leased for up to 10 years to nonprofit organizations as 

transitional housing for the homeless for $1.00 with prior approval from the Deputy 

Administrator, Single Family Housing in accordance with 42 U.S.C 11408a. The lessee assumes 

responsibility for real estate taxes on the leased property, any needed repairs to the property, and 

regular maintenance of the property.

Leases executed under this program must make the local nonprofit organization responsible 

for all liabilities and costs arising out of the habitation of the property. The Agency must inspect 

the property after the lease is executed to ensure that property is being maintained and used for its 

intended purposes. Inspections should be made at least yearly thereafter.

Attachment 15-C includes a fact sheet that can be used by both the Agency and entities 

interested in using REO property for the homeless and Attachment 15-D contains a sample lease.

B. Use by Federal Emergency Management Agency (FEMA)

By a Memorandum of Understanding between the Agency and FEMA (see Attachment 15-

E), REO property which is not under lease or sales agreement is available to shelter disaster 

victims in an area designated as a major disaster area by the President. In such an event, FEMA 

assumes responsibility for all costs associated with inhabiting the dwelling.

FEMA and the Agency must sign a “Letter of Assignment,” (see Attachment 15-F) which 

includes a mutually agreed upon inspection report outlining the condition of the property being 

assigned to FEMA. Field Staff should retain the Letter of Assignment in the REO file. No rent is 

paid by FEMA for the first 12 months from the date of the letter of assignment of the housing.

Beyond that, FEMA pays the monthly fair market rental value as determined by the Agency.

C. Mineral Leases

When it is in the best interest of the Government, the Agency may lease mineral rights.

OGC should be contacted for assistance in preparing the lease agreement. The appropriate level of 

environmental review must be completed prior to any agreement to lease mineral rights. Since 

such actions may be controversial and may have the potential for significant impact on the 

environment, prior consultation with the State Environmental Coordinator is required.
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ATTACHMENT 15-A

Attachment 15-A

Page 1 of 2

UNDERGROUND STORAGE TANKS THAT MUST BE REPORTED

A. Underground storage tanks that meet the following criteria must be reported in 2 types of 

situations.

1. Situation 1

• A tank, or combination of tanks (including pipes which are connected thereto), of 

which the volume is 10 percent or more beneath the surface of the ground, including 

the volume of the underground pipes; and

• The tank is not exempt from reporting requirements under Paragraph B. of this 

attachment, and

• The tank contains petroleum or substances defined as hazardous under section 

101(14) of the Comprehensive Environmental Response Compensation and Liability 

Act, 42 U.S.C. 9601. The State Environmental Coordinator should be consulted 

whenever there is a question regarding the presence of a regulatedsubstance.

2. Situation 2

• It is known that the tank contained a regulated substance, was taken out of operation 

by the Agency since January 1, 1974, and remains in the ground.

B. Underground storage tanks that are exempt from the Environmental Protection Agency 

(EPA) reporting include:

• Farm or residential tanks of 1,100 gallons or less capacity used for storing motor fuel 

for noncommercial purposes;

• Tanks used for storing heating oil for consumptive use on the premises where stored;

• Septic tanks;

• Pipeline facilities (including gathering lines) regulated under: (1) the Natural Gas 

Pipeline Safety Act of 1968; (2) the Hazardous Liquid Pipeline Safety Act of 1979; or

(3) for an intrastate pipeline facility, regulated under State laws comparable to the 

provisions of law referred to in (1) or (2);

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
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Attachment 15-A 

Page 2 of 2

• Surface impoundments, pits, ponds, or lagoons;

• Storm water or wastewater collection systems;

• Flow-through processtanks;

• Liquid traps or associated gathering lines directly related to oil or gas production and 

gathering operations; or

• Storage tanks situated in an underground area (such as a basement, cellar, 

mineworking, drift, shaft, or tunnel) if the tank is situated upon or above the surface 

of the floor.

Even if a storage tank does not need to be reported according to these criteria, if the 

Agency has reason to believe there has been a release of petroleum or other regulated substance 

from an underground storage tank on a real estate owned (REO) property, this incident must be 

reported to the appropriate State Agency and the State Environmental Coordinator who will inform 

the Responsible Party of the appropriate action to take.
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Revised (03-15-19) PN 522

ATTACHMENT 15-B

Attachment 15-B

Page 1 of 2

MEMORANDUM OF UNDERSTANDING BETWEEN UNITED STATES DEPARTMENT 

OF AGRICULTURE (USDA) AND DEPARTMENT OF HEALTH AND HUMAN 

SERVICES (HHS)

For the efficient and orderly implementation of this agreement it is mutually agreed:

1. HHS will request the support of the Farmers Home Administration (FmHA), an Agency of 

USDA to lease or otherwise make available vacant rural single family homes or like 

facilities to community nonprofit organizations interested in initiating shelter projects.

2. The FmHA will identify necessary actions to be taken to implement the program. 

Therefore, HHS will notify community groups of the program and of the required 

procedures.

3. FmHA and HHS have agreed on the following policy guidelines to properly structure the 

program:

a. HHS will identify and respond to community interest and initiatives;

b. HHS will request local government support;

c. HHS will direct community groups to FmHA County Supervisors to identify specific 

facilities within the FmHA inventory; and

d. FmHA County Supervisors will be given the authority, as deemed appropriate by 

FmHA, to process lease agreements and increase or decrease the number of facility 

units available forlease.

4. Leases executed under this program shall be with local nonprofit community organizations 

and shall make such organizations responsible for all liabilities arising out of the habitation 

of the particular facility and for all costs incident to and associated with the habitation of 

the particular facility (e.g., renovation, maintenance, security, etc.).

5. The FmHA will provide the criteria for leasing rural facilities in accordance with FmHA 

housing regulations.
HB-1-3550

Attachment 15-B 

Page 2 of 2

6. Any documentation required to measure or assess the results of the program will be the 

responsibility of HHS. Such information will be made available to FmHA upon request.

/s/ Margaret M. Heckler /s/ John R. Block

Department of Health and Human Services United States Department of Agriculture
HB-1-3550

Attachment 15-C

Page 1 of 3

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN

ATTACHMENT 15-C 

FACT SHEET

THE FEDERAL INTERAGENCY TASK FORCE ON FOOD 

AND SHELTER FOR THE HOMELESS

In April 1984, a Task Force on Food and Shelter for the Homeless was established under 

the President’s Council on Private Sector Initiatives. This Task Force, which includes 

representation from several Government Agencies including the Rural Housing Service (RHS) 

(formerly FmHA), is responsible for developing and examining Federal resources such as 

Government inventory properties which may be utilized by the homeless. A Memorandum of 

Understanding was established between the Department of Agriculture and the Department of 

Health and Human Services to make available vacant single family houses, by lease, to public 

bodies and nonprofit organizations for transitional housing for the homeless. In lieu of cash rent, 

the entity is required to maintain the property, pay real estate taxes and maintain property 

insurance.

RHS is committed to working with community based organizations in this regard to the 

extent practicable.

General Guidelines

1. Program and nonprogram RHS real estate owned (REO) properties are available for lease 

in accordance with 42 U.S.C. 11408a. 

2. Leases of REO properties will be for a period of up to 10 years. A 10-year lease may 

be necessary for the public body or nonprofit organization to obtain transitional 

housing funds from the Department of Housing and Urban Development (HUD).

RHS Responsibilities

1. Upon request from a public body or nonprofit organization, RHS will provide a list of all 

REO properties available for sale. The list will clearly identify which properties are 

classified as “program” “nonprogram.” The list will be provided regardless of whether 

the properties are listed for sale with real estate brokers.
HB-1-3550

Attachment 15-C 

Page 2 of 3

2. If a public body or nonprofit organization approaches RHS to lease a specific property, 

upon written notification of intent to lease, RHS will withdraw the property from sale for a 

period not to exceed 30 days to provide such entity with the opportunity to execute a 

formal lease. RHS will make a determination as to repairs and/or renovations necessary for 

the property to meet “decent, safe and sanitary” (DSS) standards. Repairs/renovations will 

be limited to those necessary to remove health and safety hazards and provide adequate, 

safe and operable heating, plumbing, electrical, water and waste disposal systems. 

Cosmetic repairs such as painting, landscaping, floor covering, etc., will not be considered 

unless they present health or safety hazard. If RHS determines the proposed 

repairs/renovations are reasonable in cost, RHS will contract to have said work performed 

upon after execution of a formal lease. If repairs/renovations costs are excessive the public 

body or nonprofit organization will be asked to select another property for lease. If no such 

properties are available, and none are expected in the foreseeable future, the State Office 

will obtain further guidance from the Single Family Housing Direct Loan Division 

(SFHDLD) in the NationalOffice.

3. RHS will inspect the property after the lease is executed to ensure the property is being 

maintained and used for its intended purposes. Inspections will be made at least yearly.

Public Body or Nonprofit Organization Responsibilities

1. Contact RHS when interested in leasing or purchasing RHS REO property to provide 

transitional housing or turnkey housing for tenants of such transitional housing in 

accordance with 42 U.S.C. 11408a.

2. When leasing is contemplated, provide RHS with documentation of the need for this type 

housing in the community and planned use. Documentation should include verification of 

the need for the type housing, financial statements verifying the entity’s ability to make 

cosmetic repairs, if needed, maintain the property, pay utilities, real estate taxes, 

insurance, etc., proposed use of the property, sample lease or occupancy agreement for 

potential occupants, nondiscrimination policy, etc. The public body or nonprofit 

organization should provide all necessary documentation to RHS to assure success of the 

project.

3. Use any property in a prudent manner for its intended purpose. Maintain the property in 

good condition, ensuring the exterior and lot are maintained consistent with other 

properties in the area. Comply with all State and local laws, ordinances, etc. regarding use 

of residential property. Maintain adequate records relating to the use of the property. 

Allow RHS to inspect the property annually at reasonable times and review records to 

ensure the property is being utilized for its intended use.
HB-1-3550

Attachment 15-C

Page 3 of 3

(01-23-03) SPECIAL PN 

Revised (02-01-18) PN 508

4. When the need for such property no longer exists, advise RHS of the intent to terminate 

the lease. Return the property in the same or better condition than when the lease was 

executed.
HB-1-3550

Attachment 15-D

Page 1 of 3

(01-23-03) SPECIAL PN

ATTACHMENT 15-D

LEASE OF SINGLE FAMILY DWELLING

THIS LEASE is made and entered into this day of , 20 , by and

between the United States of America acting through the Rural Housing Service (RHS) of the Rural 

Development mission area (hereinafter referred to as “LESSOR”) and

(hereinafter referred to as

“LESSEE”).

RECITALS:

UNDER PROVISIONS OF the Housing Act of 1949, as amended, and in keeping with agreements with the 

Federal Interagency Task Force on Food and Shelter for the Homeless to provide transitional housing for 

the homeless in rural areas, AND, in consideration of the covenants and agreements herein contained to be 

done, kept and performed, the parties hereto agree as follows:

(1) Premises. LESSOR hereby leases the PREMISES, known as 

City of , County of , State of , to LESSEE

and LESSEE hereby leases the PREMISES from LESSOR for the term and upon the covenants and 

conditions set forth herein.

(2) Term. The term of this lease shall be for a period of ( ) year(s) commencing on the

day of , 20 , and ending on the last calendar year of

, 20 , unless sooner terminated under any applicable provisions of this

Lease. This lease may be extended on a month-to-month basis after the termination date of this lease with 

prior written consent of the LESSOR and LESSEE.

(3) Payments. In consideration of ONE DOLLAR, in hand paid at the time of execution of the lease, 

and the following requirements to be performed by LESSEE, LESSOR agrees it will have received 

adequate compensation from LESSEE, and LESSEE agrees to the following:

a. LESSEE shall be responsible for all taxes and assessments levied on the PREMISES as of the 

date of this LEASE. The LESSEE shall reimburse the LESSOR for any taxes and 

assessments which have or will be prepaid by the LESSOR through a proration of such taxes 

and assessments. LESSEE shall pay taxes and assessments directly to the payee and provide 

documentation of such payment to the LESSOR, or may provide such funds directly to the 

LESSOR at least 30 days prior to the due date. LESSEE will pay all taxes and assessments in 

a timely manner.
HB-1-3550

Attachment 15-D 

Page 2 of 3

b. Within forty-five (45) days after execution of this Lease, or other reasonable time period 

mutually agreed to in writing between the parties herein, the LESSEE, at the LESSEE’s sole 

expense, shall make any further repairs, with prior approval of the LESSOR, as LESSEE 

determines necessary to make the property habitable.

c. LESSEE, at its sole expense, shall ensure the PREMISES are maintained, repaired, and kept 

in a clean sanitary condition during the term of this Lease.

d. LESSEE shall be responsible for all utility costs incurred on the PREMISES during the term 

of this Lease.

(4) Use. The LESSEE shall utilize the premises only for the purpose of providing transitional housing 

for homeless persons and will not charge such persons a rental or occupancy charge greater than the costs 

incurred by LESSEE in compliance with the provisions of paragraph 3, plus a reasonable amount for 

administrative costs.

(5) Hold Harmless. The LESSEE shall indemnify and save harmless the LESSOR, its officers, agents, 

servants and employees from all liability under the Federal Tort Claims Act (62 Stat. 869, 982; 28 U.S.C. 

Sec. 2071, 2680) or otherwise, for death or injury to all persons, or less or damage to the property of all 

persons resulting from use of the premises by the LESSEE, its sublessees or licensees. Further, LESSEE 

will save the LESSOR harmless from all fines, penalties, and costs for violation or noncompliance with any 

of said laws, requirements, or regulations, and from all liability arising out of any such violation or 

noncompliance.

(6) Damage or Destruction. In the event any damage or destruction to the property shall be caused by 

its acts or neglect of its sublessees or licensees, the LESSEE shall forthwith repair such damage at its own 

expense, and should the LESSEE fail or refuse to make such repairs within a reasonable time after the 

occurrence of such damage, the LESSOR may at Lessor’s option terminate this lease, make such repairs 

and charge the cost thereof to the LESSEE, and the LESSEE, shall thereupon reimburse the LESSOR for 

the total cost of all damages so caused. In the event LESSEE insures the PREMISES against loss by fire 

and other hazards, LESSOR shall be named as a co-beneficiary. Further, in the event that the PREMISES 

are damaged or destroyed through no act nor neglect of LESSEE its sublessees and licensees and are 

reentered untenable, this Lease shall be terminated upon receipt of written notice of either party to the other.

(7) Delivery of Possession. At the end of the term of this Lease, LESSEE shall surrender said premises 

vacant to the LESSOR and in a habitable condition as defined in paragraph 3.b. except if the lessor so 

directs it will be boarded up and secured. No alteration, addition, or improvements shall be made in or to 

the premises without the consent of the LESSOR in writing, except for maintenance items, and all additions 

and improvements by the LESSEE shall belong to the LESSOR. All goods and chattels placed or stored in 

or about the premises are at the risk of the LESSEE.
HB-1-3550

Attachment 15-D

Page 3 of 3

(01-23-03) SPECIAL PN

(8) Lessor’s Remedies. The LESSEE further agrees that if it should fail to comply with any other all 

provisions of this agreement, then in any of said cases, it shall be lawful for the LESSOR, at its election or 

option, to re-enter and take possession, the LESSEE hereby expressly waiving any and all notices to vacate 

said premises, and thereupon this lease shall absolutely terminate; however, the failure of the LESSOR to 

insist upon the strict performance of the terms, covenants, agreements and conditions herein contained, or 

any of them, shall not constitute or be construed as a waiver or relinquishment of the Lessor’s right 

thereafter to enforce any such term, covenant, agreement, or condition, but the same shall continue in full 

Force and effect.

(9) No Member of Congress to Benefit. No member of, or Delegate to Congress, or Resident 

Commissioner shall be admitted to any share or part of this lease or to any benefit that may arise therefrom.

(10) Warranty Against Use of Agents. The LESSEE warrants that it has not employed any person to 

solicit or secure this lease upon any agreement for a commission, percentage, brokerage or contingent fee. 

Breach of this warranty shall give the LESSOR the right to annual this lease or in its discretion to recover 

from the LESSEE the amount of such commission, percentage, brokerage or contingent fee in addition to 

the condition herein set forth.

(11) Nondiscrimination. The LESSEE agrees not to discriminate against any employee or applicant for 

employment, or against any individual seeking housing, because of race, color, religion, national origin, 

sex, marital status, handicap, or age.

THIS LEASE contains the entire agreement between the parties hereto, and neither party is bound by any 

representations or agreements of any kind except as herein contained.

By:

USDA, RURAL DEVELOPMENT 

RURAL HOUSING SERVICE, LESSOR

By:

State Director

(Typed Name) (Title) (Typed Name)

(Address) (Address)

Telephone: ( ) Telephone: ( )
HB-1-3550

Attachment 15-E

Page 1 of 4

(01-23-03) SPECIAL PN

ATTACHMENT 15-E

MEMORANDUM OF UNDERSTANDING BETWEEN THE 

FEDERAL EMERGENCY MANAGEMENT AGENCY AND THE 

FARMERS HOME ADMINISTRATION

Purpose

This Memorandum of Understanding establishes authorities and procedures whereby the Federal 

Emergency Management Agency (FEMA) may utilize both single family and multiple housing 

units which are habitable, and to which the Farmers Home Administration (FmHA), an Agency of 

the U.S. Department of Agriculture (USDA), has title and possession. The housing units assigned 

to FEMA by FmHA are to provide temporary housing to victims of major disasters or emergencies 

declared by the President, in accordance with sections 302(a) and 404(a) of Public law 93-288, the 

Disaster Relief Act of 1974.

Effective Date of this Memorandum

This memorandum shall be effective on the date of the last signature hereto.

Duration of Agreement

This memorandum shall continue to be in effect for a period coinciding with the authority under 

which it is entered.

Modifications

This Memorandum of Understanding and its attachments may be modified in writing by mutual 

consent of the parties.

Responsibilities

FmHA shall make available to FEMA on request habitable single family and multiple housing 

units in its inventory that are located in designated disaster areas and that are not under lease or 

under agreement of sale. FEMA will reimburse FmHA for authorized expenses, as set out herein, 

resulting from utilization of assigned housing units.
HB-1-3550

Attachment 15-E 

Page 2 of 4

Implementation

This memorandum shall be implemented in accordance with the following general procedures. 

FEMA and/or FmHA may prepare other detailed operating procedures as necessary for internal use 

of the agencies. These latter procedures will be in compliance with the provisions of this 

Memorandum.

(a) Delegation of Authority. The signatories to this agreement will delegate authority to 

implement this agreement to their respective employees, in writing. When a disaster occurs, the 

persons to whom this authority has been delegated shall identify employees, contractors, and 

agents authorized to implement the appropriate provisions of this Memorandum of Understanding 

and other FEMA and/or FmHA detailed operating procedures. FEMA and FmHA will exchange a 

list containing names, addresses, and telephone numbers of such employees, contractors and 

agents, who will implement the agreement with respect to the specific major disaster. Other 

references to FEMA and FmHA in the following paragraphs will be interpreted to include 

contractors, agents, and employees designated to implement the provisions of this Memorandumof 

Understanding.

(b) Assignment of FmHA Housing Units to FEMA

(1) Upon declaration by the President of a major disaster or emergency, FEMA may 

request from the appropriate FmHA State Director a list of all habitable housing units 

available in designated disaster areas indicating the county or counties where housing is 

needed.

(2) At its discretion, FmHA may sell or lease until directly to displaced FmHA borrowers 

instead of providing them to FEMA. FmHA will provide FEMA a list of such sales or 

leases for information purposes and to prevent duplication of benefits.

(3) During the period of occupancy of a housing unit by a disaster victim, FEMA will 

inform the occupant that FmHA lending assistance may be available for purchase of the 

housing unit as permanent housing.

(4) Before assignment to FEMA and occupancy by a disaster victim, each housing unit 

under consideration will be inspected jointly by FmHA and FEMA. The agencies will 

then execute a Letter of Assignment for each habitable housing unit assigned to FEMA. 

A Preoccupancy and Termination Joint Inspection report(FEMA

Form 90-11) will be prepared, signed by both agencies, and attached to the letter of 

assignment. The FmHA advice number will be noted prominently on this form.
HB-1-3550

(01-23-03) SPECIAL PN

Attachment 15-E

Page 3 of 4

(5) FmHA will remove all RHS signs, such as “no trespassing,” “for sale,” etc. from 

housing units assigned toFEMA.

Management of Housing Units

(a) Necessary maintenance on housing units assigned to FEMA shall be performed by FEMA 

at its expense, or FEMA shall reimburse FmHA for accomplishing such maintenance as agreed 

upon by local agency representatives.

(b) FEMA shall furnish to FmHA the names and mailing addresses of unit occupants, the 

property designation, the beginning occupancy date, and notice of changes in occupancy.

(c) During business hours FmHA authorized employees may inspect housing units. Advance 

notice of forty-eight (48) hours will be given to FEMA, who will, in turn, advise theoccupant.

(d) FEMA shall not permit a disaster victim to occupy a housing unit beyond the period of 

eligibility in accordance with 44 CFR 205.52.

(e) There shall be no rental charge to FEMA by FmHA for assigned housing units for the first 

twelve (12) months from the date of the letter of assignment. If a housing unit is assigned to 

FEMA for more than one year after the date of the letter of assignment, FEMA shall pay FmHA 

the fair market rental value as determined by FmHA for each subsequent month.

(f) If an occupancy fails to vacate a housing unit after housing benefits are terminated,FEMA 

shall conduct the predetermination procedures in 44 CFR 205.52 and shall, if appropriate, 

undertake eviction action.

Return of Housing Units to FmHA

(a) When a housing unit is vacated and FEMA determines that it is no longer needed,FEMA 

shall notify FmHA.

(b) FEMA and FmHA authorized employees, contractors, or agents will jointly inspect the 

vacated housing unit to determine maintenance, cleanup, and repairs required to return the housing 

unit to a physical condition comparable to that existing at the time of the initial joint inspection. 

Necessary maintenance and repairs shall be performed by FEMA at its expense, or FEMA shall 

reimburse FmHA for accomplishing such repairs as agreed upon by local agency representatives. 

Repairs shall be in accordance with local, State, or Federal codes.
HB-1-3550

Attachment 15-E 

Page 4 of 4

(c) FEMA shall return the keys to, custody of, and responsibility for units to FmHA when 

needed maintenance, cleanup and repairs are completed. FmHA shall prepare a receipt and 

provide a copy to FEMA.

Approvals

This agreement is executed by the Administrator, Farmers Home Administration, USDA and the 

Associate Director, State and Local Programs and Support, FEMA, by virtue of their general 

authorities to do so.

/s/ Charles W. Shuman . /s/ Lee M. Thomas .

Administrator Associate Director

Farmers Home Administration State and Local Programs and Support

U.S. Department of Agriculture Federal Emergency Management Agency

Date: 11/3/82 . Date: 10/4/82 .
HB-1-3550

(01-23-03) SPECIAL PN

Attachment 15-F

Page 1 of 1

ATTACHMENT 15-F

FEDERAL EMERGENCY MANAGEMENT AGENCY AND THE RURAL HOUSING 

SERVICE FEMA-RHS LETTER OF ASSIGNMENT

STATE: 

COUNTY: 

Under the Memorandum of Understanding between the Federal Emergency Management Agency 

(FEMA) and the Farmers Home Administration (now the Rural Housing Service [RHS]) effective 

November 3, 1982, the habitable housing unit identified on the attached inspection report is made 

available by RHS for use by FEMA or its Agent as temporary housing for victim(s) located within 

the following described designated disaster area and who are eligible for such assistance under the 

provisions of the Disaster Relief Act of 1974:

This Letter of Assignment shall become effective on the date signed by the authorized employees, 

contractors, or agents. This assignment is for the housing unit identified by the attached inspection 

report and having the following advice number: .

FEMA RHS

NAME:

TITLE:

DATE: 
HB-1-3550

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN

SECTION 1: PRICING AND LISTING PROPERTIES

16.1 OVERVIEW

The Agency will make every effort to sell Real Estate Owned (REO) properties quickly 

and at the best possible price. Whenever possible, preference will be given to selling REO 

program property to buyers eligible for Direct or Guaranteed SFH programs. The authorized RD 

official mentioned throughout this chapter will depend on whether the state has centralized their 

foreclosure and REO processing with the Servicing and Asset Management Office (Servicing 

Office). For those states that have centralized their foreclosure and REO processing, the 

Servicing Office is the authorized RD official. For those states that have retained those 

functions, the State Director or designee is the authorized RD official.

Responsibilities for oversight of disposing of REO Properties is now referred to the 

Responsible Party identified by the Agency. The Responsible Party may be both the 

Servicing Office, the Field Office or an independent authorized government contractor.

A. Sale Methods and Pricing

Most REO properties are sold through real estate brokers. However, the Responsible Party 

may sell properties through sealed bid, auction, negotiation, or agreements with other Federal 

agencies, such as the Department of Housing and Urban Development (HUD).

REO housing for program eligible borrowers is initially priced for sale based upon its “as 

is” market value with adjustments made based on the Agency’s liquidation value factors which 

can be found in the SFH Direct SharePoint site. Administrative price reductions are to be taken 

over time to facilitate sale of the property (see Paragraph 16.3 B. for a discussion of price 

reductions). A schedule is published that restricts sales of program property to program-eligible 

buyers for a period of time before any offering to the general public.

An Affirmative Fair Housing Marketing Plan, as described in Paragraph 16.4 A., must be 

prepared when 5 or more REO properties are for sale in the same market area at the same time.

16-1

CHAPTER 16: DISPOSING OF 

REAL ESTATE OWNED PROPERTY
16-2

HB1-3550

Paragraph 16.1 Overview

B. Financing

When funds are available, the Agency may offer financing to buyers of REO property. 

When program credit is offered, the loan is processed following the loan origination procedures 

described in this handbook. If an REO property is sold for less than the appraised value to a 

program borrower, the equity credited to the borrower in the Form RD 3550-12, Subsidy 

Repayment Agreement is the difference between the selling price and the loan amount.

Nonprogram credit terms may be offered to investors or when the buyer is not eligible for 

Section 502 assistance or the property does not qualify as a program property. Investors and 

other nonprogram applicants are not subject to income eligibility, asset, citizenship or occupancy 

requirements to be extended credit. Chapter 11 provides instructions for processing loans on 

nonprogram terms. Buyers who receive financing on nonprogram terms must be advised that 

they are not eligible for payment subsidies or moratoriums.

C. Warranty

The Agency does not provide a warranty of either the title or the physical condition of 

any REO property except with regard to contamination from hazardous substances or petroleum 

products. Section 4 of this chapter provides additional guidance for managing hazardous 

substances when disposing of REO property.

D. LoanServ Processing for REO Sales

LoanServ tracks the progress of REO sales and activities. Agency staff will access 

LoanServ and update activity on specific properties.

16.2 CONTRACTING FOR SALESSERVICES

Agency personnel may sell REO property when staffing and workload permit, but sales 

are normally handled through the services of real estate brokers. The preferred method for 

obtaining broker services is to enter into an exclusive contract with a single broker. However, 

the Agency also may enter into open listing agreements that permit any licensed real estate 

broker to provide sales services. Once a broker has been employed, the Agency will refer all 

inquiries to that broker or to the list of participating brokers.
HB-1-3550

Paragraph 16.2 Contracting for Sales Services

A. Selecting Exclusive Brokers

Exclusive broker contracts are awarded on a competitive basis. In order to do business 

with the Agency, brokers must be properly licensed in the State in which they do business.

Attachment 16-A provides a sample solicitation package, sample broker qualifications, and 

criteria that may be used to evaluate offers from prospective brokers.

B. Announcing Open Listing

When an open listing method is used to obtain broker services, any licensed real estate 

broker can offer to provide the services. At least annually, the Agency should announce that 

sales services are being requested by advertising in a newspaper of general circulation or sending 

notices to all real estate brokers in the counties affected. Attachment 16-B provides a sample 

advertisement.

Brokers who respond in writing and are determined to be qualified will be designated as 

“participating brokers.” Each participating broker must execute Form 1955-42, Open Real 

Property Master Listing Agreement, which provides the terms and conditions under which the 

sales services are to be provided.

C. Commissions

Broker’s commissions will be negotiated as part of the selection process and are not paid 

until the sale has closed and title has passed to the purchaser. Commissions should not exceed 

the typical commissions paid for comparable services.

D. Broker Purchases of REOProperties

Participating brokers must notify the Agency whenever a participating real estate broker, 

the broker’s salesperson, a member of the broker’s or salesperson’s household, or a legal entity 

in which the broker or salesperson has an interest, buys REO property.

If Agency credit is required, no commission will be paid to participating brokers who 

purchase an REO property, and only half of the standard commission will be paid to a nonparticipating broker who purchases an REO property.

16-3

(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505
HB-1-3550

16-4

16.3 PRICING AND SALES SCHEDULES

REO pricing for program properties is based upon the as-is market value stated in the 

appraisal multiplied by the liquidation value factors posted on SharePoint. The liquidation value 

factors on SharePoint should not be applied to an appraisal report’s liquidation value, if 

applicable. Nonprogram properties are offered for sale at the lower of Net Recovery Value 

(NRV) or the appraised value multiplied by the applicable liquidation value factor. Additional 

administrative price reductions may reduce the offering price to facilitate the sale. Mineral, 

water, and similar rights are generally sold with the property and are not sold separately except 

when the Government’s security interest will not be jeopardized. Lease or royalty interests that 

do not pass by deed are assigned to the buyer.

A. Appraisals

To determine the property’s present market value, the Agency must arrange for an 

appraisal using the procedures described in Section 5 of Chapter 5. If repair or improvement is 

planned, the appraisal must provide both as-is and as-improved values. Each as-improved 

appraisal must include a list of the planned repairs. Any special flood or mudslide hazard areas 

or wetlands and any flood plain or wetland use restrictions must be reflected in the appraisal. All 

REO property considered for disposal or lease must be evaluated for possible contamination 

from hazardous substances or petroleum products through the process of due diligence and 

completion of Attachment 5-B as described in Paragraph 16.18. This will normally be 

completed at the same time as the appraisal.

A property must be reappraised whenever its condition has deteriorated, it has been 

significantly damaged or vandalized, additional repairs and improvements have been made, or 

there has been a change in market conditions. Be especially alert to potential contamination 

from unauthorized dumping while the property is owned by the Agency and, if necessary, update 

Attachment 5-B and the appraisal prior to sale or lease. The need for reappraisal should be 

established as quickly as possible so that the property is based upon its true value. Appraised 

value is not affected by administrative price reductions.

An appraisal with interior inspection should be ordered immediately after the Agency is 

informed that the foreclosure sale was unsuccessful, and the Agency has made a determination 

that the property will be offered initially to program eligible buyers. The appraisal must have an 

“as-is” market value and may include an “as-improved” value if repairs to the property are 

needed.
HB-1-3550

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN

Paragraph 16.3 Pricing and Sales Schedules

B. Sales Schedules and Administrative Price Reductions [7 CFR 3550.251(c)(4)]

The sale of REO program property is reserved for sale to eligible Direct or Guaranteed 

SFH applicants or for sale or lease to nonprofit organizations or public bodies providing 

transitional housing and turnkey housing for tenants of such transitional housing, when a 

property is first offered for sale, for no less than 30 days after listing. Exhibit 16-1 provides the 

sales schedule for program property; Exhibit 16-2 provides the sales schedule for nonprogram 

properties. The sales price is fixed when a sales contract is executed and does not decrease 

further based upon scheduled price reductions.

16-5

Exhibit 16-1

Sales Schedule for Single Family Housing REOProperty 

Program Property

DATES ACTION

Days 1-30 Available for sale exclusively to eligible Direct or Guaranteed SFH buyers for the “as-is” 

appraisal value multiplied by the applicable liquidation factor percentage found on the SFH 

SharePoint.

If the property is not under contract before the 31st day then the case will be referred to the authorized RD official 

and offered for sale as a nonprogram property. The authorized RD official will be consulted to determine the best 

sales method: public auction, sealed bid, continued listing, etc. If it continues as a listing, then it will enter the 

schedule outlined in Exhibit 16-2 as a day 31 property at 95% of the initially offered price.
HB-1-3550

16-6

Paragraph 16.3 Pricing and Sales Schedules

Exhibit 16-2

Sales Schedule for Nonprogram REO Property

DATES ACTION

Days 1-30 Available for sale to anyone at the lower of the NRV or the “as-is” value of the appraisal

multiplied by the liquidation value factor onSharePoint.

Days 31-60 Available for sale to anyone following the preceding terms with an additional discount of 5%.

Days 61-120+ Available for sale to anyone for 10 percent less than then initial listed price. An additional 

discount of 5% occurs monthly until the property is under contract or it is determined that an 

alternative sales method is more likely to result in a sale.

Day 121 If not done already, discuss marketing efforts and consult with the authorized RDofficial for 

further advice on sales initiatives, to reappraise, or to authorize a sealed bid or public auction.

As a reminder, properties are available to eligible public bodies or nonprofits for transitional housing for the 

homeless at an additional discount of 10% with a term of 30 years and no required down payment. See

Paragraphs 16.10 B and C.

REO properties that do not sell after four months should be referred to the authorized RD 

official for consideration of other sale methods or to determine whether additional marketing 

efforts and incentives are needed.
HB-1-3550

Revised (03-09-22) SPECIAL PN 

(This page was intentionally left blank.)

16-7

01-23-03) SPECIAL PN
16-8

HB-1-3550

SECTION 2: MARKETING

16.4 MARKETING AND ADVERTISEMENT

A good marketing plan is the key to 

reaching the maximum number of potential 

buyers and to ensuring that eligible Direct or 

Guaranteed SFH loan applicants have an 

opportunity to purchase REO properties. The 

Agency may advertise directly or contract for 

advertising services. Exclusive broker contracts 

may include advertising services. All 

advertisements must state occupancy or 

environmental restrictions.

A. Fair Housing and Affirmative Fair Housing Marketing Plan

All advertising must meet equal housing opportunity requirements and contain the equal 

housing opportunity statement and logo. An Affirmative Fair Housing Marketing Plan is 

required whenever there are 5 or more REO properties for sale in the market area at the same 

time. The plan remains in effect for 1 year or until all properties covered under the plan are sold, 

whichever is later. When an exclusive broker contract is used, the plan is prepared by the broker 

and approved by the State Director or Servicing Office. When a sale is conducted by the 

Agency or under an open listing agreement, the plan is prepared by the Agency and must be 

approved by the State Director or Servicing Office. RD Instruction 1901-E provides more 

guidance on civil rights requirements.

B. Truth in Lending Act (TILA) and Real Estate Settlement Procedures 

Act (RESPA) Integrated Mortgage Disclosures rule (TRID)

If the availability of Agency financing will be advertised, marketing efforts must conform 

to the requirements of the TRID. Exhibit 16-3 highlights these requirements.

C. Advertising and Marketing Methods

Advertising efforts should be designed to reach a broad audience. The Agency should 

identify appropriate marketing efforts and tailor them for each market area. At a minimum, the 

property should be posted on the USDA REO Sales website or designated site provided by 

Responsible Party and posted on the Agency office bulletin board. Other marketing efforts that 

may be appropriate include:

Property on Tribal Allotted or Trust Land 

[7 CFR 3550.251(c)(3)]

REO property located on tribal allotted or trust land 

will be sold or otherwise disposed of only to an 

eligible tribal member, the tribe, or to the Indian 

Housing Authority serving the tribe. Attachment 16-

C may be used as a guide in notifying these entities 

of an available property.
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(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

HB-1-3550

Paragraph 16.4 Marketing and Advertisement

• Posting advertisements in public 

locations accessible to prospective 

purchases, including community 

bulletin boards and major 

employment sites;

• Informing current and potential 

program applicants or investors of the 

availability of REO properties.

• Ensuring that the listing broker has 

the property listed (with pictures) on

popular internet home search sites such as the Multiple Listing Service, Realtor.com, 

Zillow, Redfin, or other popular sites in the local geographic area.

• Inform loan application packagers, nonprofits, and other stakeholders working in the 

property’s service area.

Sample advertisements are included in Attachment 16-D.

D. Review of Marketing for Unsold Properties

At least quarterly, the State Director or Servicing Office must review the status of 

unsold REO property to ensure that acquired properties are being placed on the market 

promptly, properties on the market are selling within a reasonable time frame, and that 

properties under contract are closed promptly. Of particular concern are properties:

• Acquired more than 30 days ago that have not yet been made available for sale;

• That have been available for sale for 3 months or more and are not under contract; 

and

• That have been under contract for more than 30 days and have not closed.

Exhibit 16-3 

TRID Highlights

• Advertisements that state specific credit 

terms must state only terms that will actually 

be offered.

• Any finance charge listed must be stated as 

an annual percentage rate.

• Key terms related to financing used in the 

advertisement must be defined.
HB-1-3550

16.5 SPECIAL MARKETING TECHNIQUES

A. Buyer Incentives

The State Director or Servicing Office may authorize buyer incentives when a specific 

market area is depressed and the incentives are commonly offered to stimulate buyer interest. To 

authorize buyer incentives, describe past efforts to sell similar properties and explain why the 

proposed incentives are expected to produce improved results. Incentives, such as offering to 

provide one or more home appliances or to pay closing costs, may be appropriate for any 

property. Seller concessions for program applicants should not create overages where the buyer 

receives cash at closing beyond their out-of-pocket expenses such as the earnest money, 

inspection costs, homeowner’s insurance, etc. Amortization schedules longer than the standard 

term may be offered for nonprogram properties.

B. Broker Incentives

When an additional broker incentive is needed, such as when a very low-value property 

offers an inadequate commission, the State Director or Servicing Office may authorize a 

minimum commission or fixed-amount sale bonus. To authorize broker incentives, describe 

the past efforts to sell the property and justify the amount and the purpose of the incentive. 

Upon the approval of the State Director or Servicing Office, a written offer of the incentive 

that specifies the requirements and circumstances in which the incentive will be given must be 

provided to the broker.

C. Acquisition of Land, Easements, or Rights-of-Way to EffectSale

When it will help the sale of REO property and it is in the best interest of the 

Government, the State Director or Servicing Office may authorize the acquisition of adjacent 

land, easements, or rights-of-way in order to cure title defects or encroachments. Additional land 

may not be acquired at a cost in excess of its appraised market value.

16.6 REO PROPERTY NOT MEETING AGENCYSTANDARDS 

[7 CFR 3550.251(c) (2)]

When REO property does not meet the Agency’s standards of being decent, safe and 

sanitary (DSS) and it is not economically feasible for the Government to repair it, the property is 

listed, advertised, and sold with specific occupancy restrictions.

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HB-1-3550

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(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505

Paragraph 16.6 REO Property Not Meeting DSS Standards [7 CFR 3550.251(c) (2)]

DSS housing is defined as housing that meets the requirements described in RD

Instruction 1924-A for existing construction. If the housing does not meeting the 

requirements, it still may be considered DSS if it:

• Is structurally sound and habitable;

• Has a potable water supply;

• Has functionally adequate, safe, and operable heating, plumbing, electrical and 

sewage disposal systems;

• Is energy efficient; and

• Is safe - that is, a hazard does not exist that would endanger the health or safety of 

occupants.

The deed by which such a property is conveyed will contain a covenant restricting it from 

residential use until it meets the Agency’s dwelling standards, as discussed in Section 2 of 

Chapter 5. Property that is not DSS must still meet the Agency’s environmental requirements, 

including the management of hazardous substance requirements discussed in Section 4 of this 

chapter.

In the event that the Agency has acquired property that is unsafe and cannot feasibly be 

made safe, for reasons that are environmental in nature or relate to contamination from 

hazardous substances or petroleum products, the Agency will provide appropriate information to 

the State Environmental Coordinator or Program Support Staff for their review and guidance.

A. Notice of OccupancyRestriction

The notice of sale and sale contract must describe the specific conditions that prohibit 

occupancy and the items necessary for the property to meet DSS standards, using Form RD 

1955-44, Notice of Residential Occupancy Restriction or language similar to the following:

“Pursuant to section 510(e) of the Housing Act of 1949, as amended, 42 U.S.C. 1480(e), 

RHS has determined the dwelling on this property inadequate for residential occupancy. The 

quitclaim deed by which this property will be conveyed will contain a covenant restricting it 

from residential use until the dwelling is repaired or renovated as follows:” (Insert those 

items necessary for the property to meet DSS standards.)
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16-12

Paragraph 16.6 REO Property Not Meeting DSS Standards [7 CFR 3550.251(c) (2)]

For purposes of advertising, the list of specifications may be replaced with a statement to 

contact the Agency, or the real estate broker under an exclusive listing contract or “any real 

estate broker” for open listing agreements, whichever is relevant, for a list of specific items 

necessary for the property to meet DSS standards.

B. Quitclaim Deed Restrictive Covenant

The quitclaim deed must contain a covenant restricting residential occupancy which 

describes the conditions which prohibit occupancy and the specific items necessary for the 

property to meet DSS standards, using Form RD 1955-44 or language in a State Supplement, 

similar to the following:

“Pursuant to Section 510(e) of the Housing Act of 1949, as amended, 42 U.S.C. 1480(e), the 

purchaser (‘Grantee’ herein) of the above described property (‘subject property’ herein) 

covenants and agrees with the United States acting by and through the U.S. Department of 

Agriculture (‘Grantor’ herein) that the dwelling unit located on the subject property as of the 

date of this quitclaim deed will not be occupied or used for residential purposes until the 

item(s) listed at the end of this paragraph have been accomplished. This covenant shall be 

binding on Grantee and Grantee’s heirs, assigns and successors and will be construed as both 

a covenant running with the subject property and as equitable servitude.

This covenant will be enforceable by the United States in any court of competent jurisdiction. 

When the existing dwelling unit on the subject property complies with the aforementioned 

standards of the U.S. Department of Agriculture in accordance with its regulations, the 

subject property may be released from the effect of this covenant and the covenant will 

thereafter be of no further force or effect. The property must be repaired as follows:” (Insert 

the items referenced in the notice of sale and sale contract, necessary for the property to meet 

DSS standards.)

C. Release of Restrictive Covenant

When the owner requests a release of the restrictive covenant, the Agency inspects the 

property. The Agency will provide to the owner a release of the covenant if the conditions which 

prohibited occupancy have been corrected, the specific items necessary for the property to meet 

DSS standards have been provided, or the structure necessitating the restrictive covenant has 

been removed from the site. The owner will be responsible to file such release and any related 

filing costs.
(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

HB-1-3550

16-13

SECTION 3: SALE METHODS

16.7 REGULAR SALE METHOD

No offers to purchase an REO property will be accepted until the property is officially 

offered for sale. Any offers received before the property is offered for sale must be returned to 

the offeror. 

The Responsible Party shall follow the standards and procedures in 42 U.S.C. 11408a 

for the sale or lease of an REO property to a public agency or nonprofit organization. The 

terms of the sale and lease, and the entity seeking to purchase or lease the REO property, must 

meet the requirements in 42 U.S.C. 11408a.

A. Listing the Property

REO property is offered for regular 

sale using Form RD 1955-43, Notice of Real 

Property for Sale (Single Family Housing). 

The date indicated on Form RD 1955-43 is the 

effective date of the offer. An offer may be 

submitted at any time after the effective date 

listed in the notice.

When an offer is accepted, the notice 

of sale is revised to indicate that only back-up 

offers will be taken. The notice is not 

withdrawn until the sale is closed, except 

when the offer is from a nonprofit 

organization or a public body for transitional 

housing for the homeless.

B. Submission Requirements

An offer to buy must be submitted on Form 1955-45, Standard Sales Contract, Sale 

of Real Property by the United States. Offers received in any other form must be returned to 

the offeror. Any offer that is made contingent upon Agency credit should be accompanied 

by a completed Form RD 410-4, Application for Rural Assistance (Nonfarm Tract) 

Uniform Residential Loan Application.

C. Receiving and Considering Offers

Each offer must be date stamped when it is received. For no less than 30 days after a

REO Property Subject to Redemption Rights

REO property subject to redemption rights 

may still be sold if the Agency determines that 

there is low probability of its redemption and 

State law permits its sale. In States where such 

sales are permitted, a State Supplement will be 

issued with the specific State law requirements. 

The buyer must sign a statement acknowledging 

sale conditions under State law. The original 

signed statement will be filed in the REO file and 

transferred to the borrower’s case file if it is 

Agency financed.

program REO property is listed for sale, the property will be reserved for sale to eligible Direct or 

Guaranteed single family housing very-low, low, or moderate income applicants and for sale or lease to 

nonprofit organizations or public bodies providing transitional housing and turnkey housing for tenants 

of such transitional housing in accordance with 42 U.S.C. 11408a.
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16-14

Any offer on a program property from a person or organization, other than a Direct or 

Guaranteed SFH applicant or an organization or public body providing transitional housing,

during the 30-day reservation period will be held and considered received on the 31st day.

Offers received on the same business day are selected in the following order:

1. An offer from an eligible Direct or Guaranteed SFH loan-applicant with a request for 

credit on program terms. All program offers are evaluated as if they were submitted 

at the listed price, regardless of the offering price. Priority of offers received the 

same day from eligible Direct or Guaranteed single family housing applicants will 

be given to applicants qualifying for veterans’ preference. 

2. An offer from a nonprofit or public body for conversion to use as transitional 

housing, multifamily housing, or for other special purposes as specified in 7CFR Part 

3550, Section 3550.251(d).

3. A cash offer, from the highest to the lowest.

4. A nonprogram credit offer, from the highest to the lowest. 

Acceptable offers of equal priority received on the same business day are selected by 

lot. When selection is by lot, offers drawn after the first are held as back-up and the offeror so 

notified.

The Responsible Party selects the first minimum acceptable offer received and executes 

Form RD 1955-45. Form RD 1955-45 is sent to the bidder along with Handbook Letter 

10(3550), ‘Status of Offer to Buy Single Family Housing REO Property,’ and Handbook Letter 

10(3550) is sent to the bidder’s broker. Handbook Letter 10(3550) also is used to notify all 

unsuccessful bidders of the status of their offers.

D. Earnest Money

The notice of sale must specify any earnest money requirements. No earnest money will 

be collected when Agency staff conduct the sale. In broker assisted sales, an earnest money 

deposit in an amount that is customary for the market, is required when the sales contract is 

signed. Earnest money is held by real estate brokers and is applied to the purchaser’s closing 

costs.

E. Cancellation of Sales Contracts

If an offer contingent upon obtaining Agency financing on program terms is selected and 

the credit request is subsequently rejected, the next offer is considered.

Paragraph 16.7 Regular Sale Method
HB-1-3550

16-15

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

Paragraph 16.7 Regular Sale Method

Property is not held off the market pending the outcome of an appeal. If there are no back-up 

offers, the notice of sale is revised to indicate the new status of the property.

When a sales contract is canceled due to offeror default, any earnest money collected is 

forwarded to the local Agency office where it will in turn be forwarded to the Servicing Office 

for application to the General Fund.

16.8 DISPOSITION BY SEALED BID ORAUCTION

The Responsible Party may authorize the sale of an REO property by sealed bid or 

public auction when it is in the best interest of the Government. 

A. Establishing the Minimum Acceptable Offer

The Responsible Party must develop and document the recommendation for the 

minimum acceptable bid or sales price using the Net Recovery Value worksheet provided in 

Handbook-2- 3550, Attachment 6-A.

B. Publicizing the Sale

The Responsible Party solicits sealed bids or publicizes an auction by public notice. The 

notice must include the date, time, and place of the bid opening or auction, describe how bids 

are to be made, the required percentage of bid deposit, the maximum credit terms, the cash 

preference percentage described in Paragraph 16.8 C.3., and other pertinent information, such as 

occupancy restrictions, or notice of special flood or mudslide hazard area or wetland.

C. Sealed Bid Procedures

Sealed bids must be made on Form RD 1955-46, Invitation Bid and Acceptance-Sale of 

Real Property by the United States and be accompanied by a deposit provided in the form 

specified in the bidding instructions. No deposit is required from bidders who are eligible 

program purchasers. A minimum deposit of 10 percent is required for nonprogram loans.
HB-1-3550

16-16

Paragraph 16.8 Disposition by Sealed Bid or Auction

1. Receiving and Opening Bids

All bids will be date and time stamped when they are received. Sealed bids will be 

held in a secured file before bid opening. The bid opening will be held publicly at the 

place and time specified in the notice with at least 2 Agency employees present. Each 

bid received will be recorded showing the name and address of the bidder, the amount of 

the bid, the amount and form of deposit, and any conditions of the bid. The record of 

bids will be signed by the staff person conducting the bid opening and retained in the 

REO file.

2. Reviewing and Accepting Bids

Only responsive bids will be considered. To be considered responsive, bids must be 

signed and dated by the offeror, include any required deposit, and be for an amount at 

least equal to the established minimum bid. Minor deviations or defects in the bid 

submission may be waived by the Responsible Party so long as the bid meets these 

minimum requirements.

Generally, the highest bid will be selected. However, cash bids will be given preference 

over bids that are contingent upon the offeror obtaining financing if the cash offer is at least 

equal to a specified percentage of the highest offer. Exhibit B of RD Instruction 440.1 

specifies the applicable percentage.

In the case of identical bids for a program property eligible Direct or Guaranteed SFH 

loan, purchasers will be selected by lot before bidders who are not eligible for a Direct or 

Guaranteed SFH loan.

3. No Acceptable Bid

If no acceptable bids are received, the Responsible Party may negotiate a sale at the 

best price possible in accordance with Paragraph 16.9. All bidders must be informed, in 

writing, of any anticipated negotiations. Deposits must be returned to all bidders by 

certified mail, return receipt requested.

4. Notification to Bidders

The Responsible Party sends Handbook Letter 10 (3550) to notify unsuccessful 

bidders that their bids were not accepted and who the successful bidder was. 

Deposits must be returned to all unsuccessful bidders by certified mail, return receipt 

requested.

When a bid is accepted, the Responsible Party executes Form RD 1955-46 and sends 

Handbook Letter 10 (3550), Status of Offer to Buy Single Family Housing REO 

Property.
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(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN

Paragraph 16.8 Disposition by Sealed Bid or Auction

5. Failure to Close

If a successful bidder fails to perform under the terms of the offer for any reason other 

than denial of credit by the Agency, the bid deposit will be forfeited and forwarded to the 

Servicing Office for application to the General Fund.

Upon determination that the successful bidder will not close, the Responsible Party

may authorize direct negotiations with the next highest bidder, authorize another sealed 

bid sale, or authorize negotiations with other interested parties, as described in 

Paragraph 16.9.

D. Auction Procedures

The Responsible Party will determine who will conduct the auction or whether the 

complexity of the sale requires the services of a professional auctioneer. Form 1955-46, 

Invitation Bid and Acceptance-Sale of Real Property by the United States, is used for auction 

sales.

1. Selecting a Professional Auctioneer

Auctioneers are selected through the procurement process as described in RD 

Instruction 2024-A. The commission will be set as part of the auctioneer solicitation. If an 

auctioneer submits a bid with a commission rate that is significantly lower than other bids, 

detailed documentation will be provided attesting that they have successfully sold properties 

at the lower rate with no compromise in service.

2. Bid Deposits

Successful bidders will be required to make a bid deposit of 10 percent of the sales 

price, except this fee will be waived for eligible Direct or Guaranteed SFH bidders, 

pending final determination of eligibility. Deposits should be in the form of cashier’s 

check, certified check, postal or bank money order, or bank draft payable to the Agency. 

Cash and/or personal check may be accepted only if deemed necessary for a successful 

auction to occur by the person conducting the auction.
HB-1-3550

16-18

Paragraph 16.8 Disposition By Sealed Bid or Auction

3. Accepting Bids

When the highest bid is lower than the minimum amount acceptable to the Agency, 

negotiations should be conducted with the highest bidder or, in turn, the next highest 

bidder(s) or other persons known to be interested to obtain an executed bid at the 

predetermined minimum.

4. Purchaser’s Default

Upon purchaser’s default, the Agency will retain the bid deposit as a Miscellaneous 

Collection. The property may then be disposed of through a negotiated sale.

16.9 NEGOTIATED SALE

If no acceptable bid is received either from a sealed bid sale or at a public auction, the 

Responsible Party may negotiate a sale at the best price possible without further public notice 

by negotiating with interested parties, including previous bidders.

A sale made through negotiation will be documented and accepted by the 

Responsible Party on Form RD 1955-46, Invitation Bid and Acceptance-Sale of Real 

Property by the United States and must be accompanied by a bid deposit of 10 percent of the 

negotiated sales price, except that the deposit will be waived for program-eligible buyers.

16.10 DISPOSAL OF PROPERTY FOR SPECIAL PURPOSES [7 CFR 3550.251(d)]

REO properties may benefit people in need of housing who can be reached in cooperation 

with other programs or Federal agencies. Cooperative agreements with other Federal or Stateassisted housing programs will be announced and updated with Administrative Notices.

A. Multifamily Housing

Multiple units of REO property may be sold as multifamily housing. In this case, the 

properties and the applicants must meet the requirements for the loan program under which the 

sale is proposed.

B. Transitional Housing for the Homeless

Upon request from a public body or nonprofit organization, the Agency provides a list of 

available REO property. Upon receipt of written notice from the entity of its intent to buy or 

lease the property, the Agency withdraws the property from the market for a period not to 

exceed 30 days for the purpose of negotiations. If negotiations are unsuccessful, the REO 

property will be relisted and sold in the best interest of the Government. 
(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN

16-19

HB-1-3550

Paragraph 16.10 Disposal of Property for Special Purposes [7 CFR 3550.251(d)]

An earnest money deposit is not required.

1. Price

If the entity wants to buy a property, the currently listed price is discounted by an 

additional 10 percent. 

2. Repairs to Meet DSS Standard

If the entity wants to buy a nonprogram property that does not meet DSS standards, 

the Agency repairs it to remove health or safety hazards unless cost of the repairs is 

prohibitive. Cosmetic repairs such as painting, floor covering, landscaping, and repairs to 

improve thermal performance are the responsibility of the buyer. All repairs or 

renovations to make the property habitable and to meet DSS standards should be 

discussed, put in writing, and made part of the sale contract. However, the environmental 

requirements, including the requirements for management of hazardous substances and 

petroleum products, discussed in Section 4 of this chapter must be followed. The Agency 

shall abate all identified lead based paint hazards in all REO properties built before 1960.

C. Affordable Housing [7 CFR 3550.251(c)(4)]

REO property may be sold under special provisions to nonprofit organizations or public 

bodies for the purpose of providing affordable housing to very low and low-income families in 

accordance with 42 U.S.C. 11408a. Organizations that purchase REO property for transitional 

housing purposes may do so at a discount of no more than ten percent (10%) of the currently 

offered price. For any REO property, no earnest money deposit is required. Further, the 

Agency will offer financing on nonprogram rates and up to 30 year terms, with no down 

payment required. Special terms, listed in Chapter 11, can be considered, depending upon the 

planned use of the property and repayment ability.

Properties will be reserved for sale to eligible Direct or Guaranteed single family housing 

very-low, low, or moderate income applicants and for sale or lease to nonprofit organizations or 

public bodies providing transitional housing for tenants of such transitional housing in 

accordance with 42 U.S.C. 11408a. After receiving a written request from an organization for 

the purchase of an REO property, the Agency will withdraw the property from the market for up 

to 30 days in order to negotiate a purchase agreement.
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16-20

16.11 DISPOSAL AS CHATTEL ORSALVAGE

If the Agency is unable to sell nonprogram property by regular sale, sealed bid, or public 

auction, the structure may be sold as chattel or salvage to be removed from the site. Form RD 

1955-47, Bill of Sale “A” is used to transfer title of real property converted to chattel to the 

purchaser.

If no offer is received to remove the structure, the Responsible Party may contract or 

arrange to have it demolished, in exchange for the salvaged materials or otherwise as determined 

appropriate. For example, the local firefighting unit may be permitted to use a structure slated for 

demolition as a burn for firefighting practice. Once the structure is disposed of, the lot will be 

offered for sale as nonprogram REO property.

For example, the local firefighting unit may be permitted to use a structure slated for 

demolition as a burn for firefighting practice. Once the structure is disposed of, the lot will be 

offered for sale as nonprogram REO property.

If REO property is a vacant lot, the lot is offered for sale as nonprogram property.
(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505

HB-1-3550

SECTION 4: ENVIRONMENTAL REQUIREMENTS

16.12 OVERVIEW

The Agency must complete the appropriate level of environmental review under the 

National Environmental Policy Act for disposal of REO property in accordance with RD 

Instruction 1970 series “Environmental”. The proposed disposal of REO property will normally 

qualify as a categorical exclusion. However, an environmental assessment, and when necessary an 

EIS, is required for any proposed disposal of REO property that meets one of the following 

criteria:

• The Agency has reason to believe the transaction would result in a change in use of 

the REO property within the reasonably foreseeable future.

• There is a violation of applicable Federal, state, or local statutory, regulatory, or 

permit requirements for environment, safety, and health.

• Conditions on the site are likely to cause uncontrolled or unpermitted releases of 

hazardous substances, pollutants, contaminants, or petroleum and natural gas 

products.

• There is an existence of controversy based on effects to the human environment 

brought to the Agency’s attention by a Federal, tribal, state, or local government 

agency.

• The property has an adverse effect on the following environmentalresources:

o Historic properties;

o Federally listed threatened or endangered species, critical habitat, Federally 

proposed or candidate species;

o Wetlands (those actions that propose to convert or propose new construction in 

wetlands will require consideration of alternatives to avoid adverse effects and 

unwarranted conversions ofwetlands);

o Floodplains (those actions that introduce fill or structures into a floodplain or 

propose substantial improvements to structures within a floodplain will require 

consideration of alternatives to avoid adverse effects and incompatible 

development in floodplains. Actions that do not adversely affect the hydrologic 

character of a floodplain, such as buried utility lines or subsurface pump stations, 

would not create an extraordinary circumstance; or purchase of existing structures 

within the floodplain will not create an extraordinary circumstance but may 

require consideration of alternatives to avoid adverse effects and incompatible 

development in floodplains when determined appropriate by the Agency);

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HB-1-3550

Paragraph 16.12 Overview

o Areas having formal Federal or state designations such as wilderness areas, parks,

or wildlife refuges; wild and scenic rivers; or marine sanctuaries;

o Special sources of water (such as sole source aquifers, wellhead protection areas,

and other water sources that are vital in a region);

o Coastal barrier resources or, unless exempt, coastal zone management areas; and

o Coral reefs.

This section summarizes the basic environmental information that pertains to disposal of 

REO properties. For more detailed information and assistance, refer to RD Instruction 1970 

series “Environmental” or consult the State Environmental Coordinator.

16.13 PROPERTY LOCATED WITHIN A SPECIAL FLOOD ORMUDSLIDE 

HAZARD AREA OR CONTAINSWETLANDS

REO property located in a special flood or mudslide hazard area will not be sold for 

residential purposes unless it is determined safe—that is, any danger that exists by virtue of the 

floodplain location is not likely to endanger the health or safety of the occupants—and prior 

written notice of the specific hazard is given. 

Form RD 1955-46, “Invitation Bid and Acceptance-Sale of Real Property by the United 

States,” must include notice of special flood or mudslide hazard areas or wetlands and related use 

restrictions. Prospective purchasers, auctioneers, and brokers must be informed and 

acknowledge receipt of notice of these circumstances, and all advertisements need to reference 

them.

The conveyance instrument for disposal of REO property containing wetlands or located 

in a special flood or mudslide hazard area must specify those uses of the property that are 

restricted under any Federal, State or local floodplain and wetland regulations, as well as other 

appropriate restrictions. Use restrictions will relate to the use of the property by the purchaser 

and any successors as determined by the Agency. Examples of use restrictions include 

prohibition of draining or filling of floodplain or wetland areas, prohibition of new above-ground 

construction on that portion of the property located in the floodplain or wetland area, and 

prohibition against subdividing floodplain or wetland property into building lots. 

16.14 COASTAL BARRIER RESOURCES SYSTEMS [7 CFR 1955.137(a)] 

REO property located within a Coastal Barrier Resources System (CBRS) will not be sold 

until the State Environmental Coordinator has consulted with the appropriate Regional Director of 

the U.S. Fish and Wildlife Service, and the Regional Director concurs that the proposed sale does 

not violate the provisions of the Coastal Barrier Resources Act (CBRA).

16-22
(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505

HB-1-3550

Paragraph 16.14 Coastal Barrier Resources System 7 CFR 1955.137(a)

No Federal financing is permitted for REO properties located within a CBRS, since flood 

insurance under the National Flood Insurance Program is not available for properties within the 

CBRS.

16.15 NATIONAL REGISTER OF HISTORICPLACES

When REO property has been determined to be listed on (or eligible to be listed on) the 

National Historic Register, the Loan Approval Official responsible for conveyance must consult 

with the State Historic Preservation Officer (SHPO) in order to establish any necessary 

restrictions on the use of the property so that the future use will be compatible with preservation 

objectives as long as it does not result in an unreasonable economic burden to public or private 

interest. The Advisory Council on Historic Preservation must be consulted by the Loan 

Approval Official after the discussions with the SHPO are concluded.

Any restrictions that are developed on the use of the property as a result of the above 

consultations must be made known to potential bidders or purchasers through all advertisements 

and notices regarding the property, as well as in writing when the prospective purchaser signs the 

bid or offer to purchase. Acknowledgment of receipt of this notice will be obtained from the 

purchaser at that time and kept in the file.

If the property is located on Tribal land or in Indian country, additional consultation with 

the Tribal Historic Preservation Officer should also be initiated.

16.16 PROTECTIVE COVENANTS ANDEASEMENTS

The Agency has an affirmative responsibility to take actions to protect environmental 

resources located on REO property before that property is disposed of. “Affirmative 

responsibility” refers to the fact that there are certain protections that are required by Federal, 

State, or local environmental laws. Frequently, such protective actions or mitigation measures 

will take the form of a covenant or conservation easement. In addition to floodplains, wetlands, 

coastal barriers, and historic places, this affirmative responsibility also extends to the following 

resources:

• Listed or proposed endangered or threatened species;

• Listed or proposed critical habitat;

• Designated or proposed wilderness areas;

16-23
16-24

HB-1-3550

Paragraph 16.16 Protective Covenants and Easements

• Designated or proposed wild or scenic rivers;

• Natural landmarks listed in the National Register of Natural Landmarks;

• Sole source aquifer recharge areas designated by EPA;

• Designated national trails;

• Important farmland; or

• Areas of high water quality.

The State Environmental Coordinator should be consulted if it appears that the proposed 

disposal of REO property may involve any of these resources.

16.17 REPORTABLE UNDERGROUND STORAGETANKS

When disposing of REO property containing reportable underground storage tanks as 

described in Paragraph 15.7 A.4., the Agency, if it has not already done so, must file the 

appropriate report with the State agency identified by the Environmental Protection Agency 

(EPA). The potential purchaser of the property will be informed by the Loan Approval Official 

of the reporting requirement and provided a copy of the filed report.

16.18 MANAGEMENT OF HAZARDOUS SUBSTANCES ANDPETROLEUM 

PRODUCTS

All REO property considered for disposal must be evaluated for possible hazardous 

substance contamination. To do this, the Loan Approval official completes Attachment 5-B as 

the initial level of inquiry in the due diligence process.

If Attachment 5-B was completed prior to acquisition of the property, the RD Official 

must determine if the document should be updated. If the completed or updated Attachment 5-B 

indicates potential contamination, it will be sent promptly to the State Environmental 

Coordinator for further evaluation and guidance. All clean-up actions will be taken under the 

guidance of the State Environmental Coordinator.

If Attachment 5-B was completed prior to acquisition of the property, the RD Official 

must determine if the document should be updated. If the completed or updated Attachment 5-B 

indicates potential contamination, it will be sent promptly to the State Environmental 

Coordinator for further evaluation and guidance. All clean-up actions will be taken under the 

guidance of the State Environmental Coordinator.
(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505

HB-1-3550

Paragraph 16.18 Management of Hazardous Substance and Petroleum Products

When disposing of REO property, prospective purchasers, lessees, or tenants will be 

notified of any possible contamination of the property by releases of hazardous substances, 

hazardous wastes or petroleum products, as well as any information concerning any clean-up 

activities by attaching to the deed or lease:

A statement that a report of the Agency’s investigation into potential contamination at the 

site (the due diligence report) and a description of any clean-up activities is available for public 

review or has been made available to the purchaser or lessee; and

A statement that the Agency does not provide warranty regarding the accuracy of the 

information in the due diligence report or the effectiveness of any clean-up activities.

16.19 LEAD-BASED PAINT

The Agency’s Lead-Based Compliance Key must be utilized for all REO properties. The 

Agency has adopted the following subparts of the lead based paint regulation, 24 CFR part 35:

Subpart A, “Disclosure of Known Lead Based Paint Hazards Upon Sale or Lease of 

Residential Property”

Subpart B, “General Lead Based Paint Requirements and Definitions”

Subpart C, “Disposition of Residential Property owned by a Federal Agency other than 

HUD”

Subpart D, “Project-Based Assistance Provided by a Federal Agency Other than HUD” 

Subpart J, “Rehabilitation (applicable sections)”

Subpart R, “Methods and Standards for Lead Based Paint Hazard Evaluation and Hazard 

Reduction Activities.”

The requirements of these subparts are applicable to all housing constructed prior to 1978 

that is financially assisted by the Agency or is being sold by the Agency.

16-25
HB-1-3550

SECTION 5: PROCESSING AND CLOSING

16.20 OVERVIEW

If the Agency is closing the sale with program financing, the sale is closed in accordance 

with program closing instructions provided in Chapter 8. If other financing is being used, the 

financing agent’s closing procedures should be followed. Cash sales are closed by the Agency 

collecting the sale price and delivering the Quitclaim Deed to the buyer.

Title clearance and property insurance requirements for a program financed sale are the 

same as for a program loan.

16.21 SPECIAL NOTICES AT SALE

A. HUD Insured Financing

If necessary to effect a sale with HUD-insured financing, the Agency may execute a sales 

contract amendment containing the following language:

“It is expressly agreed that, notwithstanding any other provisions of the contract, the 

purchaser shall not be obligated to complete the purchase of the property described herein or 

to incur any penalty by forfeiture of earnest money deposits or otherwise unless the seller has 

delivered to the purchaser a written statement issued by the Federal Housing Commissioner 

setting forth the appraised value of the property (excluding closing costs) of not less than $ 

(insert sales price) which statement the seller hereby agrees to deliver to the purchaser 

promptly after such appraised value statement is made available to the seller. The purchaser 

shall, however, have the privilege and option of proceeding with the consummation of the 

contract without regard to the amount of the appraised valuation made by the Federal 

Housing Commissioner. The appraised valuation is arrived at to determine the maximum 

mortgage the Department of Housing and Urban Development (HUD) will insure. HUD 

does not warrant the value nor the condition of the property. The purchaser shall satisfy 

himself/herself that the price and condition of the property are acceptable.”

B. Disclosure of Lead-Based Paint or Hazards

In accordance with the Residential Lead-Based Paint Hazard Reduction Act of 1992, 

sellers of housing receiving Federal assistance built before 1978 must provide the purchasers of 

such housing with specific information about the housing’s lead history and general information 

on lead exposure prevention. As seller the Agency must:

• Provide the buyer with the lead hazard information pamphlet, Protect Your Family 

from Lead in Your Home, available from the National Lead Information 

Clearinghouse at 1-800-424-LEAD, or a similar EPA-approved pamphlet developed 

by the State;

16-26
(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

HB-1-3550

Paragraph 16.21 Special Notices At Sales

• Permit the buyer a 10-day opportunity to conduct a risk assessment or inspection for 

the presence of lead-based paint hazard; and

• Include in the sales contract: (1) For a property constructed after 1959 and before 

1978, a disclosure of any lead-based paint hazard; (2) a list of any information about 

the hazard available to the seller and passed on to the buyer; and (3) a Lead Warning 

Statement and acknowledgment, signed by the buyer. A sample disclosure format, 

including the required Lead Warning Statement, is provided in Appendix 12.

• For a program property constructed before 1960, abate all identified lead-based paint 

hazards in accordance with 40 CFR 745.227.

• For a nonprogram property containing lead-based paint hazards constructed before 

1960, the use of an occupancy restriction is authorized in accordance with 16.6. The 

purchaser will meet the requirements of 24 CFR 35.210(b) and provide the Agency 

with a clearance exam that shows all lead-based paint hazards have been abated prior 

to occupancy. Nonprogram REO properties located on Tribal allotted or trust land, or 

sold to a nonprofit organization or public body to provide transitional housing for the 

homeless are not authorized to be sold with an occupancyrestriction.

16.22 INSPECTION

An inspection of the property by the buyer should be scheduled immediately before 

closing to ensure the condition of the property and the resolution of any problems or 

discrepancies.

16.23 PRORATING REAL ESTATE TAXES AND/ORASSESSMENTS

When REO property is subject to taxation and/or assessments, they are pro rated between 

the Agency and the buyer, as of the date the title is conveyed. The Agency is responsible for all 

taxes and assessments accrued as of the settlement date, and the buyer is responsible for all taxes 

and assessment which accrue after the closing date. The Agency’s pro rata share is deducted from 

the proceeds of the sale at closing, if sufficient funds are available, or is paid under RD Instruction 

2024-A.

16.24 DOWN PAYMENT

When a down payment is made, it is collected at closing, identified by property 

identification number, purchaser’s name and case number, and remitted in accordance with 

program instructions.

16-27
HB-1-3550

16.25 PAYMENT OF POINTS

When a buyer is financing the purchase of property with another lender, the Agency may 

pay not more than 3 points if it is a customary requirement of the lender for payment by the 

seller and points are not paid (or increased) to reduce the interest rate.

The specific number of points to be paid by the Agency must be in the sales contract, and fixed 

as of the date the Agency accepts the contract. Payment is deducted from the funds due the 

Agency at closing and is reflected in the Closing Disclosure.

16.26 CLOSING EXPENSES

Agency expenses are deducted from sale proceeds when sufficient funds are available, and 

the sale is subject to the Truth in Lending Act and Real Estate Settlement Procedures Act Integrated 

Mortgage Disclosures (TRID) requirements, that is, an Agency financed sale or a cash sale 

financed by another lender. Sales subject to TRID requirements, whether by the Agency or another 

lender, are settled by a third-party closing agent who provides a Closing Disclosure to the seller, 

buyer and lender to document the distribution of sale proceeds and closing costs. When sufficient 

funds are not available or when the transaction is a cash sale, which is not subject to TRID 

requirements and therefore no Closing Disclosure is required, expenses are paid under RD 

Instruction 2024-A.

In program-financed sales, bid deposit and earnest money is applied to the buyer’s 

closing costs. Under a nonprogram credit sale, the buyer pays all closing costs.

16.27 COMMISSIONS

Commissions are paid at closing if there is sufficient cash from sale proceeds to cover the 

commission. If not, the Agency will pay the commission and charge it to the REO account as a 

recoverable cost.

16.28 TRANSFERRING TITLE

The Agency conveys the property to the buyer by Form RD 1955-49, Quitclaim Deed or 

other form of non-warranty deed approved by OGC. The Responsible Party signs the 

conveyance instrument, a copy of which is retained in the REO property case file. The buyer is 

responsible for recording the instrument.

16.29 REPORTING SALE

When the transaction is closed and the conveying instrument has been delivered, record 

disposition in the REO system. Real property which has been disposed of by means other than 

sale, including total loss or destruction, will also be reported in the REO System. Sale proceeds 

are forwarded to the Servicing Office to the General Fund.

16-28
HB-1-3550

Attachment 16-A

Page 1 of 1

ATTACHMENT 16-A 

SAMPLE SOLICITATION PACKAGE

• Financial capability.

I. BROKER QUALIFICATIONS

• Licensing in the State in which broker will be doing business.

II. RANKING CRITERIA FOR SELECTINGBROKERS

• Previous experience with REO properties.

• Membership in Multiple Listing Service (MLS).

• Advertising plans and proposed innovative promotion methods.

• Proximity to REO properties.

• Staffing commitment to sale of properties.

• Commission Rate. If a broker submits a bid with a commission rate that is 

significantly lower than other bids, detailed documentation will be provided attesting 

that they have successfully sold properties at the lower rates with no compromise in 

service.

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

HB-1-3550

ATTACHMENT 16-B

SAMPLE ADVERTISEMENT FOR BROKERS

Attachment 16-B

Page 1 of 1

Broker Solicitation: Advertisements for real estate broker services will be placed at 

least yearly in newspapers having general circulation in the area in which the property is located. 

The notice will usually be placed in both the residential property section and the public notice 

section, altered to describe whether the agreement is to be open or exclusive. An example 

follows.

Public Notice

Real Estate 

Brokers

The Rural Housing Service 

(RHS) has from time to time 

various Real Estate Owned 

(REO) properties for sale 

through brokers having 

executed a listing agreement 

with the agency. Licensed real 

estate brokers may obtain 

additional information by 

writing or visiting the local 

RHS office located at 32 Penny 

Lane, Madison City, FL 32111 

or telephoning (904) 323-0010.

= EQUAL HOUSING 

OPPORTUNITY
ATTACHMENT 16-C

NOTIFICATION OF AVAILABLE TRIBALPROPERTY

HB-1-3550

Attachment 16-C

Page 1 of 1

Name of Tribe or Indian housing Authority 

Name, Title of Contact Person

Address

RE:

Borrower Name: 

Borrower Address: 

Brief Legal Description of Security

Property:

The above-named Rural Housing Service (RHS) single family housing borrower is in default on 

an Agency loan. The borrower may sell the property and RHS is authorized to transfer the 

account on program terms to an eligible member of the tribe who meets RHS program 

requirements, or on nonprogram terms to any eligible member of the tribe, the tribe, or the Indian 

housing authority servicing the tribe.

We are asking for your help on the borrower’s behalf in locating a buyer for the property.

If the borrower does not sell the property within a reasonable time, RHS may assign the 

promissory note and security instruments to the tribe or the Indian housing authority servicing 

the tribe.

Please let us know if you will be able to assist us in locating a buyer for the property or if 

you are interested in securing your interest in the property by buying the RHS promissory note 

and security instruments. Please contact me for further information.

CONTACT: 

PHONE: 

(01-23-03) SPECIAL PN
HB-1-3550

(01-23-03) SPECIAL PN

Attachment 16-D

Page 1 of 9

ATTACHMENT 16-D 

SAMPLE ADVERTISEMENT OF AVAILABLE REO PROPERTIES

Regular Sale: Advertising is an essential marketing tool in sales by RHS personnel. 

Advertising will be accomplished by the appropriate servicing official in accordance with 

Section 1 of this chapter. Full and extensive use of advertising is recommended with the Agency 

having the discretion to develop creative and eye-appealing advertisements consistent with the 

real estate market and this handbook. Examples of advertisements are attached.

Example 1(A) 

RHS

Investment Buy of the 

Month!

Price Slashed!

965 Della Street 

Anytown, USA

Minimum Price: $25,000

This attractive frame house offers 

tremendous potential for the handyman 

who is looking for a great house at a great 

price.

Financing available on excellent terms.

5% down, 10 year, 10.5% APR to 

nonoccupant/investors

2% down, 30 year term, 10.5% APR to 

owner/occupants.

All rates and terms are subject to change 

without notice.

Contact RHS at 123-4567 or our Exclusive 

Broker “Ace Realty” at 123-9876. 

=EQUAL HOUSING

OPPORTUNITY
HB-1-3550

Attachment 16-D

Page 2 of 9

Example 1(B)

RHS

Home of the Week

Price Slashed!

82 Town Street 

Anytown, USA

=EQUAL HOUSING

OPPORTUNITY

Minimum Price: $30,600

This charming three bedroom, 1 1⁄2 bath 

cape cod is located in an attractive 

neighborhood close to town. This home has 

been repainted throughout, is in excellent 

condition and has new carpeting and 

appliances.

Financing available

To qualified RHS direct and guaranteed 

SFH loan applicants: nothing down, 33/38 

year financing, 10% APR with payment 

assistance available to qualified applicants

To nonprogram applicants: 5% down, 10-

year term, 10.5% APR to 

nonoccupants/investors.

2% down, 30-year term, 10.5% APR to 

owner/occupants.

All rates and terms are subject to change 

without notice.

Contact your local RHS Office at 123-4567 

or any real estate broker.
HB-1-3550

Attachment 16-D

Page 3 of 9

(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505

Example 1(C)

RHS

Attractive RHS 

Homes for Sale

Price Slashed!

82 Town Street 

Anytown, USA 

Minimum Price: $32,000

46 Aim Street 

Anytown, USA

Minimum Price: $29,000

Price Slashed!

22 Bee Street 

Anytown, USA

Minimum Price: $35,000

35 Cat Street See note below

Anytown, USA 

Minimum Price: $33,500

Financing Available on Excellent Terms!

To qualified RHS eligible direct or 

guaranteed SFH applicant:

Nothing down, 33/38-year financing, 10% APR with

Payment Assistance available to 

qualified applicants.

To nonprogram applicants:

5% down, 10-year term, 10.5% APR to 

nonoccupant/investors.

2% down, 30-year term, 10.5% APR to 

owner/occupants.

All rates and terms are subject to change without notice.

Contact your local RHS office at 123-4567 or any real 

estate broker.

=EQUAL HOUSING

OPPORTUNITY
HB-1-3550

Attachment 16-D 

Page 4 of 9

Example 1(D)

RHS

Homes Priced to Sell

PriceSlashed!

82 Town Street 

Anytown, USA 

Minimum Price: $32,000

46 Aim Street 

Anytown, USA

Minimum Price: $29,000 $26,500

Price Slashed!

22 Bee Street 

Anytown, USA

Minimum Price: $35,000

35 Cat Street See note below

Anytown, USA 

Minimum Price: $33,500 $30,250

Financing Available on Excellent Terms!

To qualifiedRHSdirect or guaranteed 

SFHloanapplicants:

Nothing down, 33/38 year financing, 10% APR with

Payment assistance available to 

qualified applicants.

To nonprogram applicants:

5% down, 10 year term, 10.5% APR to 

nonoccupant/investors.

2% down, 30 year term, 10.5% APR to 

owner/occupants.

Allrates and terms are subject to change without notice.

Contact yourlocalRHS office at 123-4567 or any real 

estatebroker.

Note on 35 Cat Street: Available for cash or nonprogram terms only.

This property contains a dwelling unit which RHS has deemed inadequate for 

residential occupancy. The Quitclaim Deed by with the property will be 

conveyed will contain a covenant restricting the residential unit on the 

property from being used for residential occupancy until the dwelling is 

repaired, renovated, or razed. This restriction is imposed pursuant to section 

510(e) of the Housing Act of 1949, as amended 42 U.S.C. 1480. Contact 

RHS or any Realtor for a list of items which must be repaired/renovated.

=EQUAL HOUSING

OPPORTUNITY
HB-1-3550

Attachment 16-D

Page 5 of 9

(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505

Sealed Bid and Auction Sales: Advertising of sealed bid and auction sales is critical for a 

successful sale. Advertising will be consistent with the portions of this handbook governing the 

sale of property by sealed bid or auction. Examples of sealed bid and auction sale 

advertisements are attached.

Example 2(A) RHS

Sealed Bid Sale

Property Address: 123 14th Street, Anytown USA

The subject property has been extensively damaged 

by fire and requires major renovation or demolition. 

The lot contains 10,000 square feet, hookups to 

public water and sewage, and is suitable for 

reconstruction. Sealed bids will be accepted until 

Friday April 1, 1996 at 2:30 p.m. at which time all 

bids will be opened. The property will be sold to 

the highest bidder. All bids must be accompanied 

by a 5% bid deposit in the form of a certified check. 

Financing is available on Nonprogram terms only --

5% down, 10.5% APR, and 10-year repayment (all 

rates and terms are subject to change without 

notice), however preference will be given for cash. 

The government reserves the right to reject any or 

all offers.

The property has been determined by RHS to be 

inadequate for residential occupancy. The Quitclaim 

Deed by which the property will be conveyed will 

contain a covenant restricting the residential unit on 

the property from being used for residential 

occupancy until the dwelling is repaired, renovated, 

or razed. This restriction is imposed pursuant to 

section 510(e) of the Housing Act of 1949, as 

amended 42 U.S.C. 1480. The structure must be 

razed or reconstructed and a Certificate of 

Occupancy issued before the deed restriction can be 

removed.

For a bid package or further information, contact 

RHS at 123-4567 or visit our office at 1955 Main 

Street, Anytown.

=EQUAL HOUSING

OPPORTUNITY
HB-1-3550

Attachment 16-D 

Page 6 of 9

Example 2(B)

RHS

Investment Properties 

for Sale

1955 Lois Lane 114 Maple Street

Anytown, USA Anytown,USA

Minimum Price: $22,000 Minimum Price: $22,000

Financing Available

To Non program applicants:

5% down, 10 year term, 10.5% APR to 

nonoccupant/investors

2% down, 30 year term, 10.5% APR to 

owner/occupants.

ALL RATES AND TERMS ARE SUBJECT TO 

CHANGE WITHOUT NOTICE.

Note: The property located at 114 Maple Street 

contains a dwelling unit which RHS has deemed 

inadequate for residential occupancy. The Quitclaim 

Deed by which the property will be conveyed will 

contain a covenant restricting the residential unit on 

the property from being used for residential 

occupancy until the dwelling is repaired, renovated, 

or razed. This restriction is imposed pursuant to 

section 510(e) of the Housing Act of 1949, as 

amended 42 U.S.C. 1480(e). Contact RHS or any 

realtor for a list of items which must be 

repaired/renovated.

Contact your local RHS Office at 

123-4567 or any real estate 

broker.

=EQUAL HOUSING 

OPPORTUNITY
HB-1-3550

Attachment 16-D

Page 7 of 9

(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505

Templates for developing Advertisements
HB-1-3550

Attachment 16-D 

Page 8 of 9

More Templates

Headings and logos for use withtemplates
HB-1-3550

Attachment 16-D

Page 9 of 9

= =

(01-23-03) SPECIAL PN 

Revised (11-03-17) PN 505

OPPORTUNITY

EQUAL HOUSING 

OPPORTUNITY EQUAL HOUSING 

OPPORTUNITY

OPPORTUNITY

EQUA

=

L HOUSING 

OPPORTUNITY

OPPORTUNITY

Investment 

Properties 

for Sale

Financing 

Available

Investment Buy 

of the Month

Home

of the Week

Sealed Bid Sale Farm for Sale Attractive USDA 

Homes for Sale

Homes 

Priced to Sell Price Slashed!!! Financing Available on

Excellent Terms

Farm Property 

for Auction

All Rates and Terms 

Subject to Change 

without Notice

USDA Is An

Equal Opportunity

Lender

EQUA=L HOUSING

EQUA

=

L HOUSING

EQUA

=

L HOUSING
HB-1-3550

Glossary, Page 1 of 12

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Acceleration. Demand for immediate repayment of the entire balance of a debt if the security 

instruments are breached.

Adjusted income. Used to determine whether an applicant is income-eligible. Adjusted income is based 

on annual income and provides for deductions to account for varying household circumstances and 

expenses.

Adjustment. An agreement to release a debtor from liability generally upon receipt of an initial lump 

sum representing the maximum amount the debtor can afford to pay and periodic additional payments 

over a period of up to 5 years.

Administrator. The official of the Rural Housing Service within the Rural Development mission area 

(or official of its successor agency) delegated authority by the Secretary of the U.S. Department of 

Agriculture to administer the Agency and its programs.

Adverse decision. An administrative decision made by an officer, employee or committee of the Agency 

that has a negative impact on the applicant or borrower.

Affordable Housing Product. Any form of participating funds which have limited restrictions and 

repayment terms. These can include subordinate liens, grants, silent mortgages, forgivable loans and 

community land trusts.

Agency. The Rural Housing Service within the Rural Development mission area of the U.S. Department 

of Agriculture or its successor agency, which administers Section 502 loans and Section 504 loans and 

grants.

Allowable excess costs. The cost of the appraisal fee, tax service fee, homeownership education fee, and 

initial contribution to the escrow account. These costs can be financed even if they cause the total loan 

amount to exceed the area loan limit or the property’s market value.

Amortized payment. Equal monthly payments under a fully amortized mortgage loan that provides for 

the scheduled payment of principal and interest over the term of the loan.

Annual Income. Used to determine an applicant’s eligibility for assistance. All amounts, monetary or 

not, of the applicant’s household not specifically excluded by regulations, and amounts derived from 

assets any members of the family have access to.

Applicant. An adult member of the household who will be responsible for repayment of the loan.

GLOSSARY
HB-1-3550

Glossary, Page 2 of 12

Assumption. The procedure whereby the transferee becomes liable for all or part of the debt of the 

transferor. An assumption may be at the same rates and terms or at new rates and terms, depending on the 

circumstances.

Borrower. A recipient who is indebted under the Section 502 or 504 programs.

Cancellation. A decision to cease collection activities and release the debtor from personal liability for 

any remaining amounts owed.

Case File. A file established for each application to contain all documents used for loan origination.

Certificate of Eligibility. A document issued by the Agency to an applicant that confirms that the 

applicant is eligible for Agency assistance and shows the maximum loan amount for which the applicant 

qualifies.

Closing costs. Various fees required to conclude a real estate transaction.

Community land trust. A not-for-profit organization that acquires land and transfers it to eligible lowand moderate-income households, retaining for itself a pre-emptive option to purchase the land upon sale 

in order to transfer it to another low- or moderate-income household.

Compensating factors. Information that indicates that an applicant may be able to make larger regular 

loan payments than a ratio analysis indicates.

Compromise. An agreement to release a debtor from liability upon receipt of a specified lump sum that 

is less than the total amount due.

Conditional commitment. A determination that a proposed dwelling will qualify as a program-eligible 

property. The conditional commitment does not reserve funds, nor does it ensure that a program-eligible 

applicant will be available to buy the dwelling.

Consummation: An event that occurs when the consumer becomes contractually obligated to the creditor 

on the loan. Consummation is not the same as closing or settlement.

Cosigner. An individual or entity that joins in the execution of a promissory note to compensate for any 

deficiency in the applicant's repayment ability. The cosigner becomes jointly liable to comply with the 

terms of the promissory note in the event of the borrower's default but is not entitled to any interest in the 

security or borrower rights.

Cross-collateralized loan. A situation in which a single property secures both Agency and Farm 

Service Agency (FSA) loans.

Custodial property. Borrower-owned real property that serves as security for a loan that has been 

taken into possession by the Agency to protect Government’s interest.
HB-1-3550

Glossary, Page 3 of 12

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

Daily simple interest. A method of establishing borrower payments based on daily interest charged on 

the outstanding principal balance of the loan. Principal is reduced by the amount of payment in excess of 

the accrued interest.

Dealer-contractor. A person, firm, partnership, or corporation in the business of selling and servicing 

manufactured homes and developing sites for manufactured homes. A person, firm, partnership, or 

corporation not capable of providing the complete service is not eligible to be a dealer-contractor.

Debarment. A determination that a party is ineligible to participate in, or receive assistance under, the 

Agency’s programs. A person who is debarred by another Agency also is ineligible.

Debt instrument. A collective term encompassing obligating documents for a loan, including any 

applicable promissory note, assumption agreement, or a grant agreement.

Debt settlement. Actions undertaken to collect at least a portion of debt owed to the Agency in 

conjunction with a voluntary liquidation, forced liquidation, or after the debt is fully matured. Debt 

settlement, when complete, closes the account.

Declaration page. A short form provided by an insurance company outlining pertinent information about 

an insurance policy, such as the insured party’s name and address, amount of coverage, terms, and 

additional provisions.

Dedicated Loan Origination and Servicing System (DLOS). The overall automated system used by 

the Agency for originating and servicing loans, which includes UniFi and LoanServ. It is designed to 

expedite loan making, standardize information collection and record keeping, and facilitate 

communication between the Field Office and Servicing Office.

Deed in lieu of foreclosure. A method of liquidation by which title to the security property is conveyed 

to the Agency by the borrower.

Deficient housing. A dwelling that lacks complete plumbing; lacks adequate heating; is dilapidated or 

structurally unsound; has an overcrowding situation that will be corrected with loan funds; or that is 

otherwise uninhabitable, unsafe, or poses a health or environmental threat to the occupant or others.

Deficiency judgment. A personal judgment against a debtor for the amount remaining due after 

foreclosure.

Delinquency workout agreement. An agreement establishing a new repayment plan for a borrower who 

has delinquent Agency debt.
HB-1-3550

Glossary, Page 4 of 12

Do Not Pay (DNP) portal. The Presidential Memorandum dated June 18, 2010, on enhancing payment accuracy 

through a “Do Not Pay List” led to the creation of the Department of Treasury’s DNP portal. The Improper 

Payments Elimination and Recovery Improvement Act of 2012 further intensified the effort to identify, prevent, and 

recover payment error, waste, fraud, and abuse within Federal spending by requiring that certain databases be 

reviewed prior to issuing any payment and award. For the direct single family housing programs, the following 

databases will be checked through the DNP portal: 1) Social Security Administration’s Death Master File, 2) 

General Services Administration’s Excluded Parties List System, 3) Department of the Treasury’s Debt Check 

Database of the Department of the Treasury, and 4) Department of Housing and Urban Development’s Credit Alert 

System. The DNP portal allows users to check the above databases using a single-entry point web-based 

application.

Draw schedule. A schedule of payments agreed to by the borrower, Agency and contractor under which 

the contractor will receive payments for work completed.

Due Diligence. The process of inquiring into the environmental condition of real estate in the context of 

a real estate transaction to determine the presence of contamination from hazardous substances,hazardous 

wastes, and petroleum products, and what impact such contamination may have on the market value of 

the property.

Easement. The legal right to use land, or a portion of land, owned by another for a limited purpose.

Elderly family. An elderly family consists of one of the following:

A. A person who is the head, spouse, or sole member of a family and who is 62 years of age or older, or 

who is disabled, and is an applicant or borrower; or

B. Two or more persons who are living together, at least one of whom is age 62 or older, or disabled, and 

who is an applicant or borrower; or

C. In the case of a family where the deceased borrower or spouse was at least 62 years old or disabled, 

surviving household members shall continue to be classified as an elderly family for the purpose of 

determining adjusted income, even though the surviving members may not meet the definition of 

elderly family on their own, provided:

1. They occupied the dwelling with the deceased family member at the time of thedeath;

2. If one of the surviving family members is the spouse of the deceased family member, the 

family shall be classified as an elderly family only until the remarriage of the surviving spouse; 

and

3. At the time of the death of the deceased family member, the dwelling was financed undertitle 

V of the Housing Act of 1949.

Environmental review. An analysis of the potential for environmental impacts from a proposed action 

by the Agency and an examination of alternatives to avoid or minimize adverse impacts on the 

environment.
HB-1-3550

Equivalent interest rate (EIR). The interest rate charged by the Agency to program borrowers who 

receive payment assistance via method 1. The interest rate varies according to the borrower’s income.

Escrow account. An account to which the borrower contributes monthly payments to cover the 

anticipated costs of real estate taxes, hazard and flood insurance premiums, and other related costs.

Existing dwelling or unit. A dwelling or unit that has either been previously owner-occupied or has 

been completed for more than 1-year as evidenced by an occupancy permit, certificate of occupancy or 

similar document issued by the local authority.

False information. Information that the recipient knew was incorrect or should have known was 

incorrect that was provided or omitted for the purposes of obtaining assistance for which the recipient was 

not eligible.

Fee simple ownership. A form of ownership under which the owner has absolute title to a piece of 

property.

Field Office. An Agency office that originates loans.

First-time homebuyer. Any individual who (and whose spouse) has had no present ownership in a 

principal residence during the 3-year period ending on the date of purchase of the property acquired with 

a Section 502 direct loan. A first-time homebuyer includes displaced homemakers and single parents 

even though they might have owned or resided in a dwelling with a spouse.

Floor payment. A minimum amount that the borrower must pay for Principal, Interest, Taxes, and 

Insurance (PITI) when payment assistance method 1 is used. The payment amount is determined by the 

borrower’s adjusted income, and its relation to the applicable adjusted median income in the area in 

which the security property is located.

Full-time student. A person who carries at least the minimum number of credit hours considered to be 

full-time by the college or vocational school in which the person is enrolled.

Hazard. A condition of the property that jeopardizes the health or safety of the occupants or members of 

the community, that does not make it unfit for habitation (see also the definition of major hazard).

Household. All persons expected to be living in the dwelling, except for live-in aids, foster children, and 

foster adults.

Housing Act of 1949, as amended. The Act which provides the authority for the direct single family 

housing programs. It is codified at 42 U.S.C. 1471, et seq.

HUD. The U.S. Department of Housing and Urban Development.

Glossary, Page 5 of 12

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN
HB-1-3550

Inaccurate information. Incorrect information inadvertently provided, used, or omitted without intent to 

obtain benefits for which the applicant was not eligible.

Indian reservation. All land located within the limits of any Indian reservation under the jurisdiction of 

the United States notwithstanding the issuance of any patent and including rights-of-way running through 

the reservation; trust or restricted land located within the boundaries of a former reservation of a Federally 

recognized Indian tribe in the State of Oklahoma; or all Indian allotments, the titles to which have not

been extinguished if such allotments are subject to the jurisdiction of a Federally recognized Indiantribe.

Interest credit. A payment subsidy available to certain eligible Section 502 borrowers that reduces the 

effective interest rate of the loan. Borrowers receiving interest credit will continue to receive it on all 

current and future loans for as long as they remain eligible for and continue to receive a subsidy.

Borrowers who cease to be eligible for interest credit can never receive interest credit again but may 

receive payment assistance method 2 if they again qualify for a payment subsidy.

Junior lien. A security instrument or a judgment against the security property to which the Agency debt 

instrument is superior.

Legal alien. For the purposes of these programs, legal alien refers to any person lawfully admitted to the 

country who meets the criteria in Section 214 of the Housing and Community Development Act of 1980, 

as amended, 42 U.S.C. 1436a.

Leveraged loan. An affordable housing product loan or grant to an Agency borrower property, closed 

simultaneously with an RHS loan. Affordable leveraged loans are characterized by long term (not less 

than 30 years), amortized payments with a note interest rate equal to or less than 3 percent.

Liquidation. A forced sale or voluntary disposition of the security property to obtain funds to repay 

outstanding debt. The proceeds from the sale are given to lien holders in order of priority, with any 

remaining funds returned to the borrower.

Live-in aide. A person who lives with an elderly person or disabled person and is essential to that 

person’s care and well-being, not obligated for the person’s support, and would not be living in the unit 

except to provide the support services.

Loan Approval Official. An Agency employee who has the authority to approve loans. Unless 

otherwise indicated, each State Director may determine which approval actions may be made by the Loan 

Approval Official, and which must come to the State Office for approval.

Loan docket. The legal documents and forms developed during loan origination that must be provided 

to Servicing Office for servicing purposes.

Loan Originator. An Agency employee who works with the loan applicant, conducts the basic 

underwriting analysis, and makes the loan approval or credit denial recommendation to the 

Loan Approval Official.

Glossary, Page 6 of 12
HB-1-3550

Loan-to-Value (LTV) Ratio. LTV ratio is the relationship between the amount to be financed and the 

market value of the security property.

LoanServ. The mainframe-based computer application that is used by the Field Office to electronically 

communicate with, and transmit information to Servicing Office, and by Servicing Office to service 

and track a borrower’s loan.

Lockbox. The service that receives and processes borrower payments.

Loss draft. A payment from an insurance company to a borrower to cover the borrower’s adjusted losses 

due to damages covered under the insurance policy.

Low income. An adjusted income developed in consultation with HUD under 42 U.S.C. 

1437a(b)(2)(D).

Major hazard. A condition so severe that it makes the property unfit for habitation. (See also the 

definition of hazard.)

Manufactured home. A structure that is built to Federally Manufactured Home Construction and Safety 

Standard (FMHCSS) and Agency Thermal Performance Standards (TPS). It is transportable in one or 

more sections, which in the traveling mode is 10-body feet (3.048 meters) or more in width, and when 

erected on site is 400 or more square feet (37.16 square meters), and which is built on a permanentchassis 

and designed to be used as a dwelling with or without a permanent foundation when connected to the 

required utilities. It is designed and constructed for permanent occupancy by a single family and contains 

permanent eating, cooking, sleeping, and sanitary facilities. The plumbing, heating, and electrical 

systems are contained in the structure. A permanent foundation isrequired.

Market value. The most probable price which a property should bring in a competitive and open market 

under all conditions requisite to a fair sale, the buyer and seller each acting prudently and 

knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the 

consummation of a sale as of a specified date and the passing of title from seller to buyer under 

conditions whereby: 

1. Buyer and seller are typically motivated;

2. Both parties are well informed or well advised, and acting in what they consider their own 

best interests; 

3. A reasonable time is allowed for exposure in the open market; 

4. Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements 

comparable thereto; and 

5. The price represents the normal consideration for the property sold unaffected by special 

or creative financing or sales concessions granted by anyone associated with the sale. 

Metropolitan Statistical Area (MSA). MSA is a county or group of counties of 50,000 people or more, 

or “twin cities” with a combined population of at least 50,000. In addition to the county containing such a 

city, contiguous counties are included in a metro area according to commuting patterns. In New England 

states, metro areas consist of towns and cities instead of counties, otherwise the rules are similar.

Glossary, Page 7 of 12

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN
HB-1-3550

Glossary, Page 8 of 12

Mineral lease. A granting of rights to a third party to mine, drill or otherwise access oil, gas or 

other valuable natural resources on a property.

Mobile home. A manufactured unit often referred to as a “trailer,” designed to be used as a dwelling, but 

built prior to the enactment of Pub. L. 96-399 (October 8, 1980).

Moderate income. An adjusted income that does not exceed the moderate income limit for the 

guaranteed single family housing loan program authorized by Section 502(h) of the Housing Act of 

1949, as amended.

Modest housing. A property that is considered modest for the area, with a market value that does not 

exceed the applicable area loan limit as established by RHS in accordance with §3550.63. In addition, the 

property must not be designed for income producing activities. Existing properties with in-ground pools 

may be considered modest; however, in-ground pools with new construction or with properties which are 

purchased new are prohibited.

Modular or panelized home. Housing, constructed of one or more factory-built sections or panels 

which, when completed, meets or exceed the requirements of the recognized development standards 

(model building codes) for site-built housing, and which is designed to be permanently connected to a 

site-built foundation.

Moratorium. A period of up to two years during which scheduled payments are not required, but are 

subject to repayment at a later date.

Mortgage. A form of security instrument or consensual lien on real property including a real estate 

mortgage or deed of trust.

National Appeals Division (NAD). The organization within the United States Department of 

Agriculture that is responsible for the Department’s administrative appeals procedures which must be 

followed by participants who desire to appeal an adverse decision made by the Agency.

National Office. The headquarters of the Agency located in Washington, DC where the Administrator’s 

office and the national policy-making staff are located.

Net family assets. The value of assets available to a household that could be used towards housing 

costs. Net family assets are considered in the calculation of annual income and are used to determine 

whether the household must make additional cash contributions to improve or purchase the property.

Net recovery value. The market value of the security property minus anticipated expenses of liquidation, 

acquisition, and sale as determined by the Agency.

New dwelling or unit. A dwelling that is to be constructed, or a dwelling that is less than one year old as 

evidenced by an occupancy permit, certificate of occupancy or similar document issued by the local 

authority and has never been occupied.
HB-1-3550

New rates and terms assumption. A transfer of Agency debt whereby a new borrower agrees to take 

responsibility for repaying the debt of an existing Agency borrower according to a new amortization 

schedule.

Nonprogram interest rate. The interest rate offered by the Agency for loans made on nonprogram 

terms.

Nonprogram property. Property that does not meet the program’s requirements.

Nonprogram terms. Credit terms available from the Agency when the applicant or property is not 

program-eligible.

Note only loan. See “unsecured loan.”

Note rate. See “promissory note rate.”

Offset. Deductions to pay a debt owed to the Agency from a borrower’s retirement benefits, salary, 

income tax refund, or payments from other Federal agencies to the borrower. Deductions from retirement 

benefits and salary generally apply only to current and former Federal employees.

Overcrowding. An occupancy situation in which a household has more than 2 people per bedroom.

Packager. An individual or organization that assembles and prescreens application packages.

Partial release of security. An action by the Agency under which it releases a portion of the security 

property from the security instrument.

Participant. For the purpose of reviews and appeals, a participant is any individual or entity who has 

applied for or whose right to participate in or receive a payment, loan, or other benefit is affected by an 

Agency decision.

Payment assistance. A payment subsidy available to eligible Section 502 borrowers that reduces the 

effective interest rate of a loan.

Payment shock. A term representing the applicant’s projected increase in housing expenses.

Payment subsidy. A general term for subsidies which reduce the borrower’s scheduled payment. It 

refers to either payment assistance method 1 or 2, or interest credit.

Person with a disability. Any person who has a physical or mental impairment that substantially limits 

on or more major life activities, including functions such as caring for one’s self, performing manual 

tasks, walking, seeing, hearing, speaking, breathing, learning and working; has a record of such an 

impairment; or is regarded as having such an impairment.

Glossary, Page 9 of 12

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

Glossary, Page 10 of 12

PITI ratio. The amount paid by the borrower for principal, interest, taxes, and insurance, divided by 

repayment income.

Preliminary Application (Pre-App). A general term which includes the required information to 

complete the pre-qualification process.

Principal reduction attributable to subsidy (PRAS). Accelerated principal reduction that may occur 

when a borrower receives a reduced interest rate through interest credit assistance.

Principal Residence. The home domicile 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.).

Prior lien. A security instrument or a judgment against the security property that is superior to the 

Agency’s debt instrument.

Program-eligible applicant. Any applicant meeting the eligibility requirements of the Section 502 or 

Section 504 programs.

Program-eligible property. A property eligible to be financed under the Section 502 or Section 504 

programs.

Program terms. Credit terms that are available only to program-eligible applicants for program-eligible 

properties.

Promissory note rate. The unsubsidized interest rate offered by the Agency for loans made on program 

terms.

Property. The land, dwelling, and related facilities for which the applicant will use Agency assistance.

Protective advances. Costs incurred by the Agency to protect the security interest of the Government 

that are charged to the borrower’s account.

Real Estate Owned (REO). Property for which the Agency holds title (formerly known by the Agency 

as “inventory property”).

Real estate taxes. Taxes and the annual portion of assessments estimated to be due and payable on the 

property, reduced by any available tax exemption.

Reamortization. The establishment of a new, revised schedule of equal monthly payments of principal 

and interest over the remaining term of a mortgage loan.

Recapture amount. An amount of subsidy to be repaid by the borrower upon disposition or 

nonoccupancy of the property.

Recipient. An individual who has received an Agency loan or grant.
HB-1-3550

Glossary, Page 11 of 12

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN

Refinancing with private credit. An Agency requirement under which program borrowers who appear 

to qualify for private credit must seek such credit (formerly known by the Agency as “graduation”).

Repayment income. Used to determine whether an applicant has the ability to make monthly loan 

payments. Repayment income is based only on the income attributable to parties to the note and includes 

some income sources excluded for the purpose of adjusted income.

Rural area. An area defined in section 520 of the Housing Act of 1949, as amended.

Same rates and terms assumption. A transfer of Agency debt whereby a new party agrees to continue 

to repay the debt of the initial borrower according to the same amortization schedule.

Scheduled payment. The monthly or annual installment on a promissory note plus escrow (if required), 

as modified by any payment subsidy agreement, delinquency workout agreement. other documented 

agreements between the Agency and the borrower, or protective advances.

Secured loan. A loan that is collateralized by property so that in the event of a default on the loan, the 

property may be sold to satisfy the debt (see also “unsecured loan”).

Security instrument. The written instrument that legally records the Agency’s security interest in the 

property.

Security property. All the property that serves as collateral for an Agency loan.

Servicing and Asset Management Office (Servicing Office). The Agency branch located in St. Louis, 

Missouri that is responsible for servicing Section 502 and 504 loans.

Special Flood Hazard Area (SFHA). An area having special flood, mudslide and/or flood related 

erosion hazards as shown on Federal Emergency Management Agency (FEMA) floodplain maps.

State Director. The highest Agency decision making official at the State level.

State Supplement. Additional guidance provided by the State Director when State, local or tribal laws 

affect how Agency requirements are implemented in a particular State.

Subordination. Moving a lien position to a lower priority.

Subsequent loans. Additional Agency credit that is extended to an existing program borrower.

Subsidy. Interest credit, payment assistance method 1, payment assistance method 2, or deferred 

mortgage assistance received by a borrower under the Section 502 program.
HB-1-3550

Glossary, Page 12 of 12

Subsidy repayment agreement. An agreement under which a borrower agrees to repay to the Agency any 

subsidy received under the Section 502 program upon disposition or non-occupancy of the security 

property.

Supervised funds. Funds deposited in an Agency supervised bank account on behalf of a borrower.

Tax service. A contractor hired by the Agency to secure tax information about borrower properties.

Total debt ratio. The amount paid by the borrower for principal, interest, taxes, and insurance and any 

recurring monthly debt, divided by repayment income.

Tribal allotted land. Tribal land allotted to individual tribal members which is held in trust.

Tribe. Any Federally recognized tribe, band, pueblo, group, community, or nation of Indians or Alaska 

natives.

Trust land. Land held in trust by the United States on behalf of an Indian tribe.

Unauthorized assistance. Any loan, payment subsidy, deferred mortgage payment, or grant for which 

there was no regulatory authorization or for which the recipient was not eligible.

UniFi. A personal computer-based application located in each Field Office that is used by Loan 

Originators. It retains applicant information, calculates maximum loan amounts, and generates loan 

approval and closing forms.

United States (U.S.) citizen. An individual who resides as a U.S. citizen in any of the 50 states, the 

District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, American 

Samoa, the Commonwealth of the Northern Marinas, the Federated States of Micronesia, the Republic of 

Palau, or the Republic of the Marshall Islands.

Unsecured loan. A loan, also known as a “note only loan,” evidenced only by the borrower’s promissory 

note (see also “secured loan”).

Very low income. An adjusted income limit developed in consultation with HUD under 42 U.S.C. 

1437a(b)(2)(D).

Veterans’ preference. A preference extended to a veteran applying for a loan or grant under this part, or the 

families of deceased servicemen, who meet the criteria in 42 U.S.C. 1477.
HB-1-3550 

ACRONYMS USED IN THIS HANDBOOK 

ACE Active Corps of Executives 

ADR Alternative Dispute Resolution 

ARM Adjusted Rate Mortgage 

BPA Blank Purchase Agreement 

CO Contracting Officer 

CBMC Community-Based Mediation Center 

CBRA Coastal Barrier Resources Act 

CBRS Coastal Barrier Resources System 

CFPB Consumer Financial Protection Bureau 

CFR Code of Federal Regulations 

COLA Cost of Living Adjustment 

COR Contracting Officer Representative 

CRA Community Reinvestment Act 

DLOS Dedicated Loan Origination and Servicing System 

DNP Do Not Pay portal 

DSS Decent, Safe, and Sanitary 

____________________________________________________________________________________

Acronyms, Page 1of 4 

(01-23-03) SPECIAL PN 

Revised (03-15-19) PN522 
HB-1-3550 

EA Environmental Assessment 

ECOA Equal Credit Opportunity Act 

EIR Equivalent Interest Rate 

EIS Environmental Impact Statement 

EPA Environmental Protection Agency 

FEMA Federal Emergency Management Agency 

FHA Federal Housing Administration 

FMHCSS Federal Manufactured Home Construction and Safety Standards 

GRH Guaranteed Rural Housing 

HHS Health and Human Services 

HUD Department of Housing and Urban Development 

INA Immigration and Nationality Act 

IRA Individual Retirement Account 

IRS Internal Revenue Service 

LTV Loan-to-Value Ratio 

MCC Mortgage Credit Certificates 

MLS Multiple Listing Service 

MSA Metropolitan Statistical Area 

NAD National Appeals Division 

NEPA National Environmental Policy Act 

____________________________________________________________________________________

Acronyms, Page 2 of 4 
HB-1-3550 

NFAOC National Financial and Accounting Operations Center 

NFIP National Flood Insurance Program 

NRCS Natural Resources Conservation Service 

NWA NeighborWorks America 

NFHC National Federation of Housing Counselors 

NAIHC National American Indian Housing Council 

NOFA Notice of Funding Availability 

OGC Office of General Counsel 

OIG Office of Inspector General 

PI Principal and Interest 

PITI Principal, Interest, Taxes, and Insurance 

PUD Planned Unit Development 

RD Rural Development 

REO Real Estate Owned 

RESPA Real Estate and Settlement Procedures Act 

RH Rural Housing 

RHS Rural Housing Service 

SBA Small Business Administration 

SCORE Service Corps of Retired Executives 

SF Standard Form 

SFH Single Family Housing 

_____________________________________________________________________________________________

Acronyms, Page 3 of 4 

(01-23-03) SPECIAL PN 

Revised (03-15-19) PN522 
HB-1-3550 

SFHA Special Flood Hazard Area 

SHFA State Housing Finance Agency 

SHPO State Historic Preservation Officer 

SPM Servicing and Property Management 

SOW Statement of Work 

TD Total Debt 

TDD Telecommunications Device for the Deaf 

TMCR Tri-Merge Credit Report 

TRID Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Mortgage 

Disclosures 

TSR Title Status Report 

TSQ Transaction Screen Questionnaire 

U.S.C. United States Code 

USPAP Uniform Standards of Professional Appraisal Practice 

USDA United States Department of Agriculture 

USFWS U.S. Fish and Wildlife Service 

VA Department of Veterans Affairs 

VISTA Volunteers in Service to America 

WWD Water and Waste Disposal 

_____________________________________________________________________________________________

Acronyms, Page 4 of 4 
7 CFR Part 3550 

Table of Contents 

Appendix 1 - Page 1 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

Appendix 1 

7 CFR PART 3550 - DIRECT SINGLE FAMILY HOUSING LOANS AND GRANTS 

Subpart A - General 

TABLE OF CONTENTS 

Sec. Page 

3550.1 Applicability. 11 

3550.2 Purpose. 11 

3550.3 Civil rights. 11 

3550.4 Review and appeals. 12 

3550.5 Environmental requirements. 12 

(a) Policy. 12 

(b) Regulatory references. 12 

3550.6 State law or state supplement. 12 

3550.7 Demonstration programs. 12 

3550.8 Exception authority. 12 

3550.9 Conflict of interest. 13 

(a) Objective. 13 

(b) Applicant or borrower responsibility. 13 

(c) RHS employee responsibility. 13 

3550.10 Definitions. 13 

3550.11 State Director Assessment of Homeownership Education. 22 

3550.12 - 3550.49 [Reserved] 24 

3550.50 OMB control number. 24 

Subpart B - Section 502 Origination 

3550.51 Program objectives. 24 

3550.52 Loan purposes. 24 

(a) Purchases from existing RHS borrowers. 24 

(b) Refinancing non-RHS loans. 25 

(c) Refinancing RHS debt. 25 

(d) Eligible costs. 25 

(e) Loan restrictions. 27 
7 CFR Part 3550 

Table of Contents 

Appendix 1 - Page 2 

Sec. Page 

3550.53 Eligibility requirements. 27 

(a) Income eligibility. 27 

(b) Citizenship status. 27 

(c) Principal residence. 27 

(d) Eligibility of current homeowners. 28 

(e) Legal capacity. 28 

(f) Suspension or debarment. 28 

(g) Repayment ability. 28 

(h) Credit qualifications. 29 

(i) Homeownership Education. 30 

3550.54 Calculation of income and assets. 31 

(a) Repayment income. 31 

(b) Annual income. 31 

(c) Adjusted income. 32 

(d) Net family assets. 32 

3550.55 Applications. 34 

(a) Application submissions. 34 

(b) Application processing. 34 

(c) Selection for processing. 34 

(d) Applicant timeframe. 35 

3550.56 Site requirements. 35 

(a) Rural areas. 35 

(b) Site standards. 36 

3550.57 Dwelling requirements. 36 

(a) Modest dwelling. 36 

(b) New dwellings. 36 

(c) Existing dwellings. 36 

3550.58 Ownership requirements. 37 

(a) Fee-simple ownership. 37 

(b) Secure leasehold interest. 37 

(c) Life estate interest. 37 

(d) Undivided interest. 37 

(e) Possessory rights. 37 
7 CFR Part 3550 

Table of Contents 

Appendix 1 - Page 3 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

Sec. Page 

3550.59 Security requirements. 38 

(a) Adequate security. 38 

(b) Guaranteed payment. 38 

3550.60 Escrow account. 38 

3550.61 Insurance. 39 

(a) Customer responsibility. 39 

(b) Amount. 39 

(c) Flood insurance. 39 

(d) Losses. 39 

3550.62 Appraisals. 40 

(a) Requirement. 40 

(b) Fees. 40 

3550.63 Maximum loan limit. 40 

(a) Area loan limit. 41 

(b) Market value limitation. 42 

3550.64 Down payment. 42 

3550.65 [Reserved] 42 

3550.66 Interest rate. 42 

3550.67 Repayment period. 42 

3550.68 Payment subsidies. 43 

(a) Eligibility for payment subsidy. 43 

(b) Determining type of payment subsidy. 43 

(c) Calculation of payment assistance. 44 

(d) Calculation of interest credit. 46 

(e) Annual review. 46 

3550.69 Deferred mortgage payments. 46 

(a) Eligibility. 46 

(b) Amount and terms. 47 

(c) Annual review. 47 
7 CFR Part 3550 

Table of Contents 

Appendix 1 - Page 4 

Sec. Page 

3550.70 Conditional commitments. 47 

(a) Eligibility. 47 

(b) Limitations. 48 

(c) Conditional period. 48 

(d) Conditional commitments involving packaging of applications. 48 

(e) Fees. 49 

(f) Failure of conditional commitment applicant or dwelling to qualify. 49 

(g) Changes in plans, specifications, or commitment price. 49 

(h) Builder’s warranty. 49 

3550.71 Special requirements for condominiums. 49 

3550.72 Community land trusts. 51 

3550.73 Manufactured homes. 51 

(a) Eligible costs. 51 

(b) Loan restrictions. 52 

(c) Dealer-contractors. 52 

(d) Loan term. 52 

(e) Construction and development. 52 

(f) Contract requirements. 52 

(g) Lien release requirements. 52 

(h) Warranty requirements. 53 

3550.74 Nonprogram loans. 53 

(a) Purpose. 53 

(b) Terms. 53 

(c) Additional requirements. 54 

(d) Reduced restrictions. 54 

(e) Waiver of costs. 54 

3550.75 Certified loan application packaging process. 54 

3550.76 - 3550.99 [Reserved] 58 

3550.100 OMB control number. 59 

Subpart C - Section 504 Origination and Section 306C 

Water and Waste Disposal Grants 

3550.101 Program objectives. 59 
7 CFR Part 3550 

Table of Contents 

Appendix 1 - Page 5 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

Sec. Page 

3550.102 Grant and loan purposes. 59 

(a) Grant funds. 59 

(b) Loan funds. 59 

(c) Eligibility of mobile and manufactured homes. 59 

(d) Eligible costs. 60 

(e) Restrictions on uses of loan or grant funds. 60 

3550.103 Eligibility requirements. 61 

(a) Owner-occupant. 61 

(b) Age (grant only). 61 

(c) Income eligibility. 61 

(d) Citizenship status. 61 

(e) Need and use of personal resources. 61 

(f) Legal capacity. 61 

(g) Suspension or debarment. 61 

(h) Repayment ability (loans only). 61 

(i) Credit qualifications. 62 

3550.104 Applications. 63 

(a) Application submissions. 63 

(b) Application processing. 63 

(c) Processing priorities. 63 

3550.105 Site requirements. 64 

(a) Rural areas. 64 

(b) Not subdividable. 64 

3550.106 Dwelling requirements. 64 

(a) Modest dwelling. 64 

(b) Post-repair condition. 64 

(c) Construction standards. 64 

3550.107 Ownership requirements. 64 

(a) Full fee ownership. 64 

(b) Secure leasehold interest. 64 

(c) Life estate interest. 65 
7 CFR Part 3550 

Table of Contents 

Appendix 1 - Page 6 

Sec. Page 

(d) Undivided interest. 65 

(e) Possessory rights. 65 

(f) Land purchase contract. 65 

(g) Alternative evidence of ownership. 65 

3550.108 Security requirements (loans only). 66 

3550.109 Escrow account (loans only). 66 

3550.110 Insurance (loans only). 66 

(a) Borrower responsibility. 66 

(b) Amount. 67 

(c) Flood insurance. 67 

(d) Losses. 67 

3550.111 Appraisals (loans only). 68 

3550.112 Maximum loan and grant. 68 

(a) Maximum loan permitted. 68 

(b) Maximum loan based upon ability to pay. 68 

(c) Maximum grant. 68 

3550.113 Rates and terms (loans only). 69 

(a) Interest rate. 69 

(b) Loan term. 69 

3550.114 Repayment agreement (grants only). 69 

3550.115 WWD grant program objectives. 69 

3550.116 Definitions applicable to WWD grants only. 69 

(a) Colonia. 69 

(b) Individual. 69 

(c) Rural areas. 69 

(d) System. 69 

(e) WWD. 69 

3550.117 WWD grant purposes. 70 

3550.118 Grant restrictions. 70 

(a) Maximum grants. 70 

(b) Limitation on use of grant funds. 70 

3550.119 Eligibility requirements. 70 

3550.120 - 3550.149 [Reserved] 71 

3550.150 OMB control number. 71 
7 CFR Part 3550 

Table of Contents 

Subpart D - Regular Servicing 

Sec. Page 

3550.151 Servicing goals. 71 

3550.152 Loan payments. 72 

(a) Payment terms. 72 

(b) Application of payments. 72 

(c) Multiple loans. 72 

(d) Application of excess payments. 72 

3550.153 Fees. 72 

3550.154 Inspections. 72 

3550.155 Escrow account. 73 

3550.156 Borrower obligations. 73 

3550.157 Payment subsidy. 73 

(a) Borrowers currently receiving payment subsidy. 73 

(b) Borrowers not currently receiving payment subsidy. 74 

(c) Cancellation of payment subsidy. 74 

3550.158 Active military duty. 74 

(a) Amount of assistance. 74 

(b) Change of active military status. 74 

3550.159 Borrower actions requiring RHS approval. 75 

(a) Mineral leases. 75 

(b) Subordination. 75 

(c) Partial release of security. 76 

(d) Lease of security property. 77 

3550.160 Refinancing with private credit. 77 

(a) Objective. 77 

(b) Criteria for refinancing with private credit. 77 

(c) Notice of requirement to refinance with private credit. 77 

(d) Failure to refinance with private credit. 78 

(e) Subordination of recapture amount. 78 

(f) Application for additional credit. 79 

Appendix 1 - Page 7 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 
7 CFR Part 3550 

Table of Contents 

Sec. Page 

3550.161 Final payment. 79 

(a) Payment in full. 79 

(b) Release of security instruments. 79 

(c) Payoff statements. 79 

(d) Suitable forms of payment. 79 

(e) Recording costs. 79 

3550.162 Recapture. 79 

(a) Recapture policy. 79 

(b) Amount to be recaptured. 80 

(c) Option to defer payment of recapture amounts. 81 

(d) Borrower ceases to occupy the property. 81 

(e) Assumed loans. 81 

3550.163 Transfer of security and assumption of indebtedness. 82 

(a) General policy. 82 

(b) RHS approval of assumptions. 82 

(c) Exception to due-on-sale clauses. 82 

(d) Requirements for an assumption. 83 

3550.164 Unauthorized assistance. 84 

(a) Definition. 84 

(b) Unauthorized assistance due to false information. 84 

(c) Unauthorized assistance due to inaccurate information. 85 

(d) Unauthorized grants. 86 

(e) Account servicing. 86 

(f) Accounts with no security. 86 

3550.165 - 3550.199 [Reserved] 86 

3550.200 OMB control number. 86 

Subpart E - Special Servicing 

3550.201 Purpose of special servicing actions. 86 

3550.202 Past due accounts. 87 

(a) Late fee. 87 

(b) Liquidation. 87 

Appendix 1 - Page 8 
7 CFR Part 3550 

Table of Contents 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 

Sec. Page 

3550.203 General servicing actions. 87 

3550.204 Payment assistance. 87 

3550.205 Delinquency workout agreements. 88 

3550.206 Protective advances. 88 

(a) Advances for taxes and insurance. 88 

(b) Advances for costs other than taxes and insurance. 88 

(c) Repayment arrangements. 88 

3550.207 Payment moratorium. 89 

(a) Borrower eligibility. 89 

(b) Review of borrower eligibility. 89 

(c) Resumption of scheduled payments. 90 

(d) Borrowers unable to resume scheduled payments. 90 

3550.208 Reamortization using promissory note interest rate. 90 

(a) Permitted uses. 90 

(b) Payment term of reamortized loan. 91 

3550.209 [Reserved] 91 

3550.210 Offsets. 91 

(a) IRS offset. 91 

(b) Salary offset. 91 

(c) Administrative offset. 91 

(d) Offset by other federal agencies. 91 

3550.211 Liquidation. 91 

(a) Policy. 91 

(b) Tribal allotted or trust land. 92 

(c) Acceleration and foreclosure. 92 

(d) Voluntary liquidation. 92 

(e) Bankruptcy. 92 

(f) Junior lienholder foreclosure. 92 

(g) Payment subsidy. 92 

(h) Eligibility for special servicing actions. 93 

(i) Reporting. 93 

3550.212 - 3550.249 [Reserved] 93 

3550.250 OMB control number. 93 

Appendix 1 - Page 9 
7 CFR Part 3550 

Table of Contents 

Appendix 1 - Page 10 

Sec. Page 

Subpart F - Post-Servicing Actions 

3550.251 Property management and disposition. 93 

(a) Policy. 93 

(b) Custodial property. 93 

(c) REO property. 94 

(d) Special purposes. 95 

3550.252 Debt settlement policies. 96 

(a) Applicability. 96 

(b) Judgment. 96 

(c) Multiple loans. 96 

(d) Cosigners and claims against estates. 96 

(e) Reporting. 96 

(f) Settlement during legal or investigative action. 97 

(g) Offsets. 97 

(h) Escrow funds. 97 

3550.253 Settlement of a debt by compromise or adjustment. 97 

(a) Compromise. 97 

(b) Adjustments. 97 

(c) Timing of offers. 97 

(d) Retention of security property. 97 

3550.254 - 3550.299 [Reserved] 98 

3550.300 OMB control number. 98 
7 CFR Part 3550 

Appendix 1 - Page 11 

(01-23-03) SPECIAL PN 

Revised (01-06-17) PN 492 

7 CFR PART 3550 - DIRECT SINGLE FAMILY HOUSING LOANS AND GRANTS 

Subpart A - General 

§ 3550.1 Applicability. 

This part sets forth policies for the direct single family housing loan programs operated by 

the Rural Housing Service (RHS) of the U.S. Department of Agriculture (USDA). It addresses 

the requirements of sections 502 and 504 of the Housing Act of 1949, as amended, and 

includes policies regarding both loan and grant origination and servicing. Procedures for 

implementing these regulations can be found in program handbooks, available in any Rural 

Development office. Any provision on the expenditure of funds under this part is contingent 

upon the availability of funds. 

§ 3550.2 Purpose. 

The purpose of the direct RHS single family housing loan programs is to provide low- and 

very low-income people who will live in rural areas with an opportunity to own adequate but 

modest, decent, safe, and sanitary dwellings and related facilities. The section 502 program 

offers persons who do not currently own adequate housing, and who cannot obtain other credit, 

the opportunity to acquire, build, rehabilitate, improve, or relocate dwellings in rural areas. The 

section 504 program offers loans to very low-income homeowners who cannot obtain other 

credit to repair or rehabilitate their properties. The section 504 program also offers grants to 

homeowners age 62 or older who cannot obtain a loan to correct health and safety hazards or 

to make the unit accessible to household members with disabilities. 

§ 3550.3 Civil rights. 

RHS will administer its programs fairly, and in accordance with both the letter and the 

spirit of all equal opportunity and fair housing legislation and applicable executive orders. 

Loans, grants, services, and benefits provided under this part shall not be denied to any person 

based on race, color, national origin, sex, religion, marital status, familial status, age, physical or 

mental disability, receipt of income from public assistance, or because the applicant has, in 

good faith, exercised any right under the Consumer Credit Protection Act (15 U.S.C. 1601 et 

seq.). All activities under this part shall be accomplished in accordance with the Fair Housing 

Act (42 U.S.C. 3601-3620), Executive Order 11246, and Executive Order 11063, as amended 

by Executive Order 12259, as applicable. The civil rights compliance requirements for RHS are 

in 7 CFR part 1901, subpart E. The nondiscrimination requirements also originate from the 

Equal Credit Opportunity Act (ECOA), 15 USC 1601 as amended and its Regulation B, 12 CFR 

202, as amended. 
7 CFR Part 3550 

Appendix 1 - Page 12 

§ 3550.4 Reviews and appeals. 

Whenever RHS makes a decision that is adverse to a participant, RHS will provide the 

participant with written notice of such adverse decision and the participant’s rights to a USDA 

National Appeals Division hearing in accordance with 7 CFR part 11. Any adverse decision, 

whether appealable or non-appealable may be reviewed by the next-level RHS supervisor. 

§ 3550.5 Environmental requirements. 

(a) Policy. RHS will consider environmental quality as equal with economic, social, and 

other relevant factors in program development and decision-making processes. RHS will 

take into account potential environmental impacts of proposed projects by working with 

RHS applicants, other federal agencies, Indian tribes, State and local governments, and 

interested citizens and organizations in order to formulate actions that advance the 

program’s goals in a manner that will protect, enhance, and restore environmental quality. 

(b) Regulatory references. Processing or servicing actions taken under this part must 

comply with the environmental review requirements in accordance with 7 CFR part 1970, 

and 7 CFR part 1924, which addresses lead-based paint. 

§ 3550.6 State law or state supplement. 

State and local laws and regulations, and the laws of federally recognized Indian tribes, 

may affect RHS implementation of certain provisions of this regulation, for example, with respect 

to the treatment of liens, construction, or environmental policies. Supplemental guidance may 

be issued in the case of any conflict or significant differences. 

§ 3550.7 Demonstration programs. 

From time to time, RHS may authorize limited demonstration programs. The purpose of 

these demonstration programs is to test new approaches to offering housing under the statutory 

authority granted to the Secretary. Therefore, such demonstration programs may not be 

consistent with some of the provisions contained in this part. However, any program 

requirements that are statutory will remain in effect. Demonstration programs will be clearly 

identified as such. 

§ 3550.8 Exception authority. 

An RHS official may request, and the Administrator or designee may make, an exception 

to any requirement or provision of this part or address any omission of this part that is 

consistent with the applicable statute if the Administrator determines that application of the 

requirement or provision, or failure to take action in the case of an omission, would adversely 

affect the Government’s interest. 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 

§ 3550.9 Conflict of interest. 

(a) Objective. It is the objective of RHS to maintain the highest standards of honesty, 

integrity, and impartiality by employees. To reduce the potential for employee conflict of 

interest, all processing, approval, servicing, or review activity will be conducted in 

accordance with 7 CFR part 1900, subpart D by RHS employees who: 

(1) Are not themselves the applicant or borrower; 

(2) Are not members of the family or close known relatives of the applicant or 

borrower; 

(3) Do not have an immediate working relationship with the applicant or borrower, 

the employee related to the applicant or borrower, or the employee who would 

normally conduct the activity; or 

(4) Do not have a business or close personal association with the applicant or 

borrower. 

(b) Applicant or borrower responsibility. The applicant or borrower must disclose any 

known relationship or association with an RHS employee when such information is 

requested. 

(c) RHS employee responsibility. An RHS employee must disclose any known 

relationship or association with a recipient, regardless of whether the relationship or 

association is known to others. RHS employees or members of their families may not 

purchase a Real Estate Owned (REO) property, security property from a borrower, or 

security property at a foreclosure sale. Loan closing agents who have been involved with 

a particular property, as well as members of their families, are also precluded from 

purchasing such properties. 

§ 3550.10 Definitions. 

Acceleration. Demand for immediate repayment of the entire balance of a debt if the 

security instruments are breached. 

Adjusted income. Used to determine whether an applicant is income-eligible. Adjusted 

income provides for deductions to account for varying household circumstances and 

expenses. See § 3550.54 for a complete description of adjusted income. 

Adjustment. An agreement to release a debtor from liability generally upon receipt of an 

initial lump sum representing the maximum amount the debtor can afford to pay and 

periodic additional payments over a period of up to 5 years. 

Appendix 1 - Page 13 
7 CFR Part 3550 

§ 3550.10 (Con.) 

Agency-approved intermediary. An affordable housing nonprofit, public agency, or State 

Housing Finance Agency approved by RHS to perform quality assurance reviews on 

packages prepared by Agency-certified loan application packagers through their qualified 

employers. See § 3550.75 for further details. 

Agency-certified loan application packager. An individual certified by RHS under this 

subpart to package section 502 loan applications while employed (either as an employee 

or as an independent contractor) by a qualified employer. See § 3550.75 for further 

details. 

Amortized payment. Equal monthly payments under a fully amortized mortgage loan that 

provides for the scheduled payment of interest and principal over the term of the loan. 

Applicant. An adult member of the household who will be responsible for repayment of 

the loan. 

Assumption. The procedure whereby the transferee becomes liable for all or part of the 

debt of the transferor. 

Borrower. A recipient who is indebted under the section 502 or 504 programs. 

Cancellation. A decision to cease collection activities and release the debtor from 

personal liability for any remaining amounts owed. 

Compromise. An agreement to release a debtor from liability upon receipt of a specified 

lump sum that is less than the total amount due. 

Conditional commitment. A determination that a proposed dwelling will qualify as a 

program-eligible property. The conditional commitment does not reserve funds, nor does 

it ensure that a program-eligible applicant will be available to buy the dwelling. 

Cosigner. An individual or an entity that joins in the execution of a promissory note to 

compensate for any deficiency in the applicant's repayment ability. The cosigner 

becomes jointly liable to comply with the terms of the promissory note in the event of the 

borrower's default, but is not entitled to any interest in the security or borrower rights. 

Cross-collateralized loan. A situation in which a single property secures both RHS and 

Farm Service Agency loans. 

Custodial property. Borrower-owned real property that serves as security for a loan that 

has been taken into possession by the Agency to protect the Government’s interest. 

Daily simple interest. A method of establishing borrower payments based on daily 

interest charged on the outstanding principal balance of the loan. Principal is reduced by 

the amount of payment in excess of the accrued interest. 

Appendix 1 - Page 14 
7 CFR Part 3550 

§ 3550.10 (Con.) 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 

Dealer-contractor. A person, firm, partnership, or corporation in the business of selling 

and servicing manufactured homes and developing sites for manufactured homes. A 

person, firm, partnership, or corporation not capable of providing the complete service is 

not eligible to be a dealer-contractor. 

Debt instrument. A collective term encompassing obligating documents for a loan, 

including any applicable promissory note, assumption agreement, or grant agreement. 

Deferred mortgage payments. A subsidy available to eligible, very low-income borrowers 

of up to 25 percent of their principal and interest payments at 1 percent for up to 15 years. 

The deferred amounts are subject to recapture on sale or nonoccupancy. 

Deficient housing. A dwelling that lacks complete plumbing; lacks adequate heating; is 

dilapidated or structurally unsound; has an overcrowding situation that will be corrected 

with loan funds; or that is otherwise uninhabitable, unsafe, or poses a health or 

environmental threat to the occupant or others. 

Elderly family. An elderly family consists of one of the following: 

(1) A person who is the head, spouse, or sole member of a family and who is 62 

years of age or older, or who is disabled, and is an applicant or borrower; 

(2) Two or more persons who are living together, at least 1 of whom is age 62 or 

older, or disabled, and who is an applicant or borrower; or 

(3) In the case of a family where the deceased borrower or spouse was at least 62 

years old or disabled, the surviving household member shall continue to be 

classified as an elderly family for the purpose of determining adjusted income, even 

though the surviving members may not meet the definition of elderly family on their 

own, provided: 

(i) They occupied the dwelling with the deceased family member at the time 

of the death; 

(ii) If one of the surviving family members is the spouse of the deceased 

family member, the family shall be classified as an elderly family only until the 

remarriage of the surviving spouse; and 

(iii) At the time of the death of the deceased family member, the dwelling was 

financed under title V of the Housing Act of 1949, as amended. 

Escrow account. An account to which the borrower contributes monthly payments to 

cover the anticipated costs of real estate taxes, hazard and flood insurance premiums, 

and other related costs. 

Appendix 1 - Page 15 
7 CFR Part 3550 

§ 3550.10 (Con.) 

Existing dwelling or unit. A dwelling that has either been previously owner-occupied or 

has been completed for more than 1 year as evidenced by an occupancy permit, 

certificate of occupancy or similar document issued by the local authority. 

False information. Information that the recipient knew was incorrect or should have 

known was incorrect that was provided or omitted for the purposes of obtaining 

assistance for which the recipient was not eligible. 

Full-time student. A person who carries at least the minimum number of credit hours 

considered to be full-time by college or vocational school in which the person is enrolled. 

Hazard. A condition of the property that jeopardizes the health or safety of the occupants 

or members of the community, that does not make it unfit for habitation. (See also the 

definition of major hazard in this section.) 

Household. All persons expected to be living in the dwelling, except for live-in aids, foster 

children, and foster adults. 

Housing Act of 1949, as amended. The Act which provides the authority for the direct 

single family housing programs. It is codified at 42 U.S.C. 1471, et seq. 

HUD. The U.S. Department of Housing and Urban Development. 

Inaccurate information. Incorrect information inadvertently provided, used, or omitted 

without the intent to obtain benefits for which the recipient was not eligible. 

Indian reservation. All land located within the limits of any Indian reservation under the 

jurisdiction of the United States notwithstanding the issuance of any patent and including 

rights-of-way running through the reservation; trust or restricted land located within the 

boundaries of a former reservation of a federally recognized Indian tribe in the State of 

Oklahoma; or all Indian allotments, the titles to which have not been extinguished, if such 

allotments are subject to the jurisdiction of a federally recognized Indian tribe. 

Interest credit. A payment subsidy available to certain eligible section 502 borrowers that 

reduces the effective interest rate of a loan (see § 3550.68(d)). Borrowers receiving 

interest credit will continue to receive it on all current and future loans for as long as they 

remain eligible for and continue to receive a subsidy. Borrowers who cease to be eligible 

for interest credit can never receive interest credit again, but may receive payment 

assistance if they again qualify for a payment subsidy. 

Junior lien. A security instrument or a judgment against the security property to which the 

RHS debt instrument is superior. 

Legal alien. For the purposes of this part, legal alien refers to any person lawfully 

admitted to the country who meets the criteria in section 214 of the Housing and 

Community Development Act of 1980, 42 U.S.C. 1436a. 

Appendix 1 - Page 16 
7 CFR Part 3550 

§ 3550.10 (Con.) 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

Leveraged loan. An affordable housing product loan or grant to an Agency borrower 

property, closed simultaneously with an RHS loan. Affordable leveraged loans are 

characterized by long term (not less than 30 years), amortized payments with a note 

interest rate equal to or less than 3 percent. 

Live-in aide. A person who lives with an elderly or disabled person and is essential to that 

person’s care and well-being, not obligated for the person’s support, and would not be 

living in the unit except to provide the support services. 

Low income. An adjusted income limit developed in consultation with HUD under 42 

U.S.C. 1437a(b)(2)(D). 

Major hazard. A condition so severe that it makes the property unfit for habitation. (See 

also the definition of hazard in this section.) 

Manufactured home. A structure that is built to Federally Manufactured Home 

Construction and Safety Standards and RHS Thermal Performance Standards. It is 

transportable in 1 or more sections, which in the traveling mode is 10-body feet (3.048 

meters) or more in width, and when erected on site is 400 or more square feet (37.16 

square meters), and which is built on a permanent chassis and designed to be used as a 

dwelling with or without a permanent foundation when connected to the required utilities. 

It is designed and constructed for permanent occupancy by a single family and contains 

permanent eating, cooking, sleeping, and sanitary facilities. The plumbing, heating, and 

electrical systems are contained in the structure. A permanent foundation is required. 

Market value. The value of the property as determined by a current appraisal, RHS may 

authorize the use of a Broker’s Price Opinion or similar instrument to determine market 

value in limited servicing situations. 

Mobile home. A manufactured unit often referred to as a “trailer,” designed to be used as 

a dwelling, but built prior to the enactment of the Housing and Community Development 

Act of 1980 (Pub. L. 96-399) enacted October 8, 1980. 

Moderate income. An adjusted income that does not exceed the moderate income limit 

for the guaranteed single family housing loan program authorized by Section 502(h) of the 

Housing Act of 1949, as amended. 

Modest housing. A property that is considered modest for the area, has a market value 

that does not exceed the applicable maximum loan limit as established by RHS in 

accordance with §3550.63, and is not designed for income producing activities. 

Existing properties with in-ground pools may be considered modest; however, inground pools with new construction or with properties which are purchased new are 

prohibited. 

Appendix 1 - Page 17 
7 CFR Part 3550 

§ 3550.10 (Con.) 

Modular or panelized home. Housing, constructed of one or more factory-built sections or 

panels, which, when completed, meets or exceed the requirements of the recognized 

development standards (model building codes) for site built housing, and which is 

designed to be permanently connected to a site-built foundation. 

Moratorium. A period of up to 2 years during which scheduled payments are not required 

but are subject to repayment at a later date. 

Mortgage. A form of security instrument or consensual lien on real property including a 

real estate mortgage or a deed of trust. 

National average area loan limit. Across the nation, the average area loan limit as 

specified in § 3550.63 (a). The national average is considered when determining the 

maximum packaging fee permitted under the certified loan application packaging process 

under the section 502 program. 

Net family assets. The value of assets available to a household that could be used 

towards housing costs. Net family assets are considered in the calculation of annual 

income and are used to determine whether the household must make additional cash 

contributions to improve or purchase the property. 

Net recovery value. The market value of the security property minus anticipated 

expenses of liquidation, acquisition, and sale as determined by RHS. 

New dwelling or unit. A dwelling that is to be constructed, or a dwelling that is less than 1 

year old as evidenced by an occupancy permit, certificate of occupancy or similar 

document issued by the local authority and has never been occupied. 

Nonprogram (NP) interest rate. The interest rate offered by RHS for loans made on NP 

terms. 

NP property. Property that does not meet the program eligibility requirements outlined in 

§§ 3550.56 and 3550.57. 

NP terms. Credit terms available from RHS when the applicant or property is not 

program-eligible. 

Offset. Deductions to pay a debt owed to RHS from a borrower’s retirement benefits, 

salary, income tax refund, or payments from other federal agencies to the borrower. 

Deductions from retirement benefits and salary generally apply only to current and former 

federal employees. 

Participant. For the purpose of reviews and appeals, a participant is any individual or 

entity who has applied for, or whose right to participate in or receive a payment, loan, or 

other benefit is affected by an RHS decision. 

Appendix 1 - Page 18 
7 CFR Part 3550 

§ 3550.10 (Con.) 

Appendix 1 - Page 19 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

Payment assistance. A payment subsidy available to eligible section 502 borrowers that 

reduces the effective interest rate of a loan (see § 3550.68(c)). Borrowers eligible for a 

payment subsidy receive payment assistance unless they are currently eligible for and 

receive interest credit. There are two methods of payment assistance. Payment 

Assistance Method 1 is found at §3550.68(c)(2). Payment Assistance Method 2 is found 

at §3550.68(c)(1). 

Payment subsidy. A general term for subsidies which reduce the borrower’s scheduled 

payment. It refers to either payment assistance or interest credit. 

Person with disability. Any person who has a physical or mental impairment that 

substantially limits one or more major life activities, including functions such as caring for 

one’s self, performing manual tasks, walking, seeing, hearing, speaking, breathing, 

learning and working, has a record of such an impairment, or is regarded as having such 

an impairment. 

PITI ratio. The amount paid by the borrower for principal, interest, taxes, and insurance 

(PITI), divided by repayment income. 

Principal reduction attributed to subsidy (PRAS). Accelerated principal reduction that can 

occur when a borrower receives a reduced interest rate through a payment subsidy. 

Principal residence. The home domicile 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.). 

Prior lien. A security instrument or a judgment against the security property that is 

superior to the RHS debt instrument. 

Program-eligible applicant. Any applicant meeting the eligibility requirements described in 

§3550.53. 

Program-eligible property. A property eligible to be financed under this part, as 

determined by the criteria listed in §§3550.56 through 3550.59. 

Program terms. Credit terms that are available only to program-eligible applicants for 

program-eligible properties. 

Property. The land, dwelling, and related facilities for which the applicant will use RHS 

assistance. 

Protective advances. Costs incurred by the Agency to protect the security interest of the 

Government that are charged to the borrower’s account. 

Qualified employer. An affordable housing nonprofit organization, public agency, tribal 

housing authority, or State Housing Finance Agency that meets the requirements outlined 

in § 3550.75 (b)(2) and is involved in the certified loan application packaging process 

under the section 502 program. 
7 CFR Part 3550 

§ 3550.10 (Con.) 

Appendix 1 - Page 20 

Real estate taxes. Taxes and the annual portion of assessments estimated to be due and 

payable on the property, reduced by any available tax exemption. 

Recapture amount. An amount of subsidy to be repaid by the borrower upon disposition 

or nonoccupancy of the property. 

Recipient. Any applicant, borrower, or grant recipient who applies for or receives 

assistance under the section 502 or 504 programs. 

REO. The acronym for “Real Estate Owned.” It refers to property for which RHS holds 

title. 

Repayment income. Used to determine whether an applicant has the ability to make 

monthly loan payments. Repayment income includes amounts excluded for the purpose 

of determining adjusted income. See § 3550.54 for a complete description. 

RHS. The Rural Housing Service of the U.S. Department of Agriculture, or its successor 

agency, formerly the Rural Housing and Community Development Service (RHCDS), a 

successor agency to the Farmers Home Administration (FmHA). 

RHS employee. Any employee of RHS, or any employee of the Rural Development 

mission area who carries out grant or loan origination or servicing functions for the section 

502 or 504 programs. 

RHS interest rate. The unsubsidized interest rate offered by RHS for loans made on 

program terms. 

Rural area: An area defined in section 520 of the Housing Act of 1949, as amended. 
Appendix 1 - Page 21 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

7 CFR Part 3550 

§ 3550.10 (Con.) 

Rural Development. A mission area within USDA which includes RHS, Rural Utilities 

Service (RUS), and Rural Business-Cooperative Service (RBS). 

Scheduled payment. The monthly or annual installment on a promissory note plus 

escrow (if required), as modified by any payment subsidy agreement, delinquency 

workout agreement, other documented agreements between RHS and the borrower, or 

protective advances. 

Secured loan. A loan that is collateralized by property so that in the event of a default on 

the loan, the property may be sold to satisfy the debt. 

Security property. All the property that serves as collateral for an RHS loan. 

Subsidy. Interest credit, payment assistance, or deferred mortgage assistance received 

by a borrower under the section 502 or 504 programs. 

Total debt ratio. The amount paid by the borrower for PITI and any recurring monthly 

debt, divided by repayment income. 

Unauthorized assistance. Any loan, payment subsidy, deferred mortgage payment, or 

grant for which there was no regulatory authorization or for which the recipient was not 

eligible. 

U.S. citizen. An individual who resides as a citizen in any of the 50 States, the District of 

Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, American 

Samoa, the Commonwealth of the Northern Marianas, the Federated States of 

Micronesia, the Republic of Palau, or the Republic of the Marshall Islands. 

USDA. The United States Department of Agriculture. 

Unsecured loan. A loan evidenced only by the borrower’s promissory note. 
Appendix 1 - Page 22 

7 CFR Part 3550 

§ 3550.10 (Con.) 

Value appreciation. The current market value of the property minus: the balance due 

prior lienholders, the unpaid balance of the RHS debt, unreimbursed closing costs (if 

any), principal reduction, the original equity (if any) of the borrower, and the value added 

by capital improvements. 

Very low income. An adjusted income limit developed in consultation with HUD under 42 

U.S.C. 1437a(b)(2)(D).. 

Veterans’ preference. A preference extended to any person applying for a loan or grant 

under this part, or the families of deceased servicemen, who meet the criteria in 42 

U.S.C. 1477. 

§ 3550.11 State Director Assessment of Homeownership Education. 

(a) State Directors will assess the availability of certified homeownership education in 

their respective states on an as-needed basis but at a minimum every three years and 

maintain an updated listing of providers and their reasonable costs.

(b) The order of preference for homeownership education formats will be determined by 

the Agency based on factors such as industry practice and availability.: 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

§ 3550.11 (b) (Con.) 

(c) Homeownership education must include a letter or certificate of completion and be 

provided by homeownership education counselors that are certified by any of the 

following: 

(1) The Department of Housing and Urban Development (HUD); 

(2) NeighborWorks America (NWA); 

(3) The National Federation of Housing Counselors (NFHC) ; 

(4) National American Indian Housing Council (NAIHC); or 

(5) The State Housing Finance Agency or other qualified organization approved by 

the State Director. 

(d) The provider will issue a letter or certificate of completion to document that the 

borrower has satisfactory knowledge of these minimum topics: 

(1) Preparing for homeownership (evaluate readiness to go from rental to 

homeownership), 

(2) Budgeting (pre and post-purchase), 

(3) Credit counseling, 

(4) Shopping for a home, 

(5) Lender differences (predatory lending), 

(6) Obtaining a mortgage (mortgage process, different types of mortgages), 

(7) Loan closing (closing process, documentation, closing costs), 

(8) Post-occupancy counseling (delinquency and foreclosure prevention), 

(9) Life as a homeowner (homeowner warranties, maintenance and repairs). 

Appendix 1 - Page 23 
Appendix 1 - Page 24 

7 CFR Part 3550 

§ 3550.11 (Con.) 

(e) The provider may tailor the homeownership education training to the needs of the 

borrower to ensure satisfactory knowledge of the topics listed in paragraph (d) of this 

section. 

§§ 3550.12 - 3550.49 [Reserved] 

§ 3550.50 OMB control number. 

The information collection requirements contained in this regulation have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control number 

0575-0172. Public reporting burden for this collection of information is estimated to vary from 5 

minutes to 3 hours per response, with an average of 1 1/2 hours per response, including time 

for reviewing instructions, searching existing data sources, gathering and maintaining the data 

needed, and completing and reviewing the collection of information. You are not required to 

respond to this collection of information unless it displays a currently valid OMB control number. 

Subpart B - Section 502 Origination 

§ 3550.51 Program objectives. 

Section 502 of the Housing Act of 1949, as amended authorizes the Rural Housing 

Service (RHS) to provide financing to help low- and very low-income persons who cannot obtain 

credit from other sources obtain adequate housing in rural areas. Resources for the section 

502 program are limited, and therefore, applicants are required to use section 502 funds in 

conjunction with funding or financing from other sources, if feasible. Sections 3550.52 through 

3550.73 set forth the requirements for originating loans on program terms. Section 3550.74 

describes the differences for originating loans on nonprogram (NP) terms. 

§ 3550.52 Loan purposes. 

Section 502 funds may be used to buy, build, rehabilitate, improve, or relocate an eligible 

dwelling and provide related facilities for use by the borrower as a permanent residence. In 

limited circumstances section 502 funds may be used to refinance existing debt. 

(a) Purchases from existing RHS borrowers. To purchase a property currently financed 

by an RHS loan, the new borrower will assume the existing RHS indebtedness or receive 

new loan funds as determined by the Agency. The Agency will periodically determine 

whether assumptions or new loans are appropriate on a program wide basis based on 

the best interest of the government, taking into account factors such as funding 

availability and staff resources. Regardless of the method, loan funds may be used for 

eligible costs as defined in paragraph (d) of this section or to permit a remaining borrower 

to purchase the equity of a departing co-borrower. 
7 CFR Part 3550 

§ 3550.52 (Con.) 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

 (b) Refinancing non-RHS loans. Debt from an existing non-RHS loan may be refinanced 

if the existing debt is secured by a lien against the property, RHS will have a first lien 

position on the security property after refinancing, and: 

(1) In the case of loans for existing dwellings, if: 

(i) Due to circumstances beyond the applicant's control, the applicant is in 

danger of losing the property, the debt is over $5,000 and the debt was 

incurred for eligible program purposes prior to loan application or was a 

protective advance made by the mortgagee for items covered by the loan to 

be refinanced, including accrued interest, insurance premiums, real estate 

tax advances, or preliminary foreclosure costs; or 

(ii) If a loan of $5,000 or more is necessary for repairs to correct major 

deficiencies and make the dwelling decent, safe and sanitary and refinancing 

is necessary for the borrower to show repayment ability, regardless of the 

delinquency. 

(2) In the case of loans for a building site without a dwelling, if: 

(i) The debt to be refinanced was incurred for the sole purpose of purchasing 

the site, 

(ii) The applicant is unable to acquire adequate housing without refinancing, 

and 

(iii) The RHS loan will include funds to construct an appropriate dwelling on 

the site for the applicant's use. 

(3) Debts incurred after the date of RHS loan application but before closing may be 

refinanced if the costs are incurred for eligible loan purposes and any construction 

work conforms to the standards specified in this part. 

(c) Refinancing RHS debt. An existing RHS loan may be refinanced in accordance with § 

3550.204 to allow the borrower to receive payment assistance. In addition, depending on 

the availability of funds and program priorities as determined by RHS, and existing RHS 

loan and the related subsidy recapture may be refinanced as allowed under § 3550.201. 

(d) Eligible costs. Improvements financed with loan funds must be on land which, after 

closing, is part of the security property. In addition to acquisition, construction, repairs, or 

the cost of relocating a dwelling, loan funds may be used to pay for: 

(1) Reasonable expenses related to obtaining the loan, including legal, 

architectural and engineering, technical, title clearance, and loan closing fees; 

and appraisal, surveying, environmental, tax monitoring, and other technical 

services; and personal liability insurance fees for Mutual Self-Help borrowers. 

Appendix 1 - Page 25 
7 CFR Part 3550 

Appendix 1 - Page 26 

§ 3550.52 (d) (Con.) 

(2) The cost of providing special design features or equipment when necessary 

because of a physical disability of the applicant or a member of the household. 

(3) Reasonable connection fees, assessments, or the pro rata installment costs for 

utilities such as water, sewer, electricity, and gas for which the borrower is liable 

and which are not paid from other funds. 

(4) Reasonable and customary lender charges and fees if the RHS loan is being 

made in combination with a leveraged loan. 

(5) Real estate taxes that are due and payable on the property at the time of 

closing and for the establishment of escrow accounts for real estate taxes, 

hazard and flood insurance premiums, and related costs. 

(6) Packaging fees resulting from the certified loan application packaging process 

outlined in § 3550.75. The Agency will determine the limit, based on factors such 

as the level of service provided and the prevailing cost to provide the service, and 

such cap will not exceed two percent of the national average area loan limit.

Nominal packaging fees not resulting from the certified loan application process are 

an eligible cost provided the fee does not exceed a limit determined by the Agency 

based on the level and cost of service factors, but no greater than one half percent 

of the national average area loan limit; the loan application packager is a nonprofit, 

tax exempt partner that received an exception to all or part of the requirements 

outlined in § 3550.75 from the applicable Rural Development State Director; and 

the packager gathers and submits the information needed for the Agency to 

determine if the applicant is eligible along with a fully completed and signed uniform 

residential loan application. 

(7) Purchasing and installing essential equipment in the dwelling, including ranges, 

refrigerators, washers or dryers, if these items are normally sold with dwellings in 

the area and if the purchase of these items is not the primary purpose of the loans. 

(8) Purchasing and installing approved energy savings measures and approved 

furnaces and space heaters that use fuel that is commonly used, economical, 

and dependably available. 

(9) Providing site preparation, including grading, foundation plantings, seeding or 

sodding, trees, walks, yard fences, and driveways to a building site. 

(10) Reasonable fees for homeownership education as determined by the State 

Director under §3550.11 of this subpart. Such fees may be added to the loan 

amount in excess of the area loan limit and appraised value of the house. 
7 CFR Part 3550 

§ 3550.52 (Con.) 

(e) Loan restrictions. Loan funds may not be used to: 

(1) Purchase an existing manufactured home, or for any other purposes prohibited 

in § 3550.73(b). 

(2) Purchase or improve income-producing land or buildings to be used principally 

for income-producing purposes. 

(3) Pay fees, commissions, or charges to for-profit entities related to loan 

packaging or referral of prospective applicants to RHS. 

§ 3550.53 Eligibility requirements. 

(a) Income eligibility. At the time of loan approval, the household’s adjusted income must 

not exceed the applicable low-income limit for the area, and at closing, must not exceed 

the applicable moderate-income limit for the area (see § 3550.54). When an existing 

RHS loan is being refinanced as a special servicing action under § 3550.201, the 

household’s adjusted income must not exceed the applicable moderate-income limit for 

the area at the time of loan approval and closing. 

(b) Citizenship status. The applicant must be a United States citizen or a noncitizen who 

qualifies as a legal alien as defined in § 3550.10. 

(c) Principal residence. Applicants must agree to and have the ability to occupy 

the dwelling in accordance with the definition found in § 3550.10. If the dwelling is 

being constructed or renovated, an adult member of the household must be 

available to make inspections and authorize progress payments as the dwelling is 

constructed. 

Appendix 1 – Page 27 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 
Appendix 1 - Page 28 

7 CFR Part 3550 

§ 3550.53 (Con.) 

(d) Eligibility of current homeowners. Current homeowners are not eligible for initial loans 

except as follows: 

(1) Current homeowners may receive RHS loan funds to: 

(i) refinance an existing loan under the conditions outlined in § 3550.52(b); 

(ii) purchase a new dwelling if the current dwelling is deficient housing as 

defined in § 3550.10; or 

(iii) make necessary repairs to the property which is financed with an 

affordable non-RHS loan. 

(2) Current homeowners with an RHS loan may receive a subsequent loan. 

(e) Legal capacity. Applicants must have the legal capacity to incur the loan obligation, 

or have a court appointed guardian or conservator who is empowered to obligate the 

applicant in real estate matters. 

(f) Suspension or debarment. Applications from applicants who have been suspended or 

debarred from participation in federal programs will be handled in accordance with 2 CFR 

parts 180 and 417. 

(g) Repayment ability. Repayment ability means applicants must demonstrate adequate 

and dependably available income. The determination of income dependability will include 

consideration of the applicant’s past history of annual income. 

(1) An applicant is considered to have repayment ability when the monthly amount 

required for payment of principal, interest, taxes, and insurance (PITI), does not 

exceed thirty-three percent of the applicant’s repayment income (PITI ratio). In 

addition, the monthly amount required to pay PITI plus recurring monthly debts must 

not exceed forty-one percent of the applicant’s repayment income (total debt ratio). 

(2) If the applicant’s PITI ratio and total debt ratio exceed the percentages specified 

by the Agency by a minimal amount, compensating factors may be considered. 

Examples of compensating factors include payment history (if applicant has 

historically paid a greater share of income for housing with the same income and 

debt level), savings history, job prospects, and adjustments for nontaxable income. 

(3) If an applicant does not meet the repayment ability requirements in this 

paragraph (g), the applicant can have another party join the application as a 

cosigner, have other household members join the application, or both. 
7 CFR Part 3550 

§ 3550.53 (g) (Con.) 

(h) Credit qualifications. Applicants must be unable to secure the necessary credit from 

other sources on terms and conditions that the applicant could reasonably be expected to 

fulfill. Applicants must have a credit history that indicates reasonable ability and 

willingness to meet debt obligations. 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 loan or grant from RHS. 

(1) Indicators of unacceptable credit include: 

(i) Payments on any account where the amount of the delinquency exceeded 

one installment for more than 30 days within the last 12 months. 

(ii) Payments on any account which was delinquent for more than 30 days on 

two or more occasions within a 12-month period. 

(iii) A foreclosure which has been completed within the last 36 months. 

(iv) An outstanding Internal Revenue Service tax lien or any other 

outstanding tax liens with no satisfactory arrangement for payment. 

(v) A court-created or court-affirmed obligation or judgment caused by 

nonpayment that is currently outstanding or has been outstanding within the 

last 12 months, except for those excluded in paragraph (h)(2) of this section. 

Appendix 1 - Page 29 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 
7 CFR Part 3550 

§ 3550.53 (h) (Con.) 

(vi) Two or more rent 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. Rent payment history 

requirements may be waived if the RHS loan will reduce shelter costs 

significantly and contribute to an improved repayment ability. 

(vii) Outstanding collection accounts with a record of irregular payment with 

no satisfactory arrangements for repayment, or collection accounts that were 

paid in full within the last 6 months. 

(viii) Non-agency debts written off within the last 36 months unless paid in 

full at least 12 months ago. 

(ix) Agency debts that were debt settled within the last 36 months or are 

being considered for debt settlement. 

(x) Delinquency on a federal debt. 

(2) The following will not be considered indicators of unacceptable credit: 

(i) 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. 

(ii) A judgment satisfied more than 12 months before the date of application. 

(3) When an application is rejected because of unacceptable credit, the applicant 

will be informed of the reason and source of information. 

(i) Homeownership education. Applicants who are first-time homebuyers must agree to 

provide documentation, in the form of a completion certificate or letter from the provider, 

that a homeownership education course from a certified provider under § 3550.11 has 

been successfully completed as defined by the provider. Requests for exceptions to the 

homeownership education requirement in this paragraph (i) will be reviewed and granted 

on an individual case-by-case basis. The State Director may grant an exception to the 

homeownership education requirement for individuals in geographic areas within the 

State where the State Director verifies that certified homeownership education is not 

reasonably available in the local area in any of the formats listed in § 3550.11(b). 

Whether such homeownership education is reasonably available will be determined 

based on factors including, but not limited to: distance, travel time, geographic obstacles, 

and cost. On a case-by-case basis, the State Director also may grant an exception, 

provided the applicant borrower documents a special need, such as a disability, that 

would unduly impede completing a homeownership course in a reasonably available 

format. 

Appendix 1 - Page 30 
7 CFR Part 3550 

§ 3550.54 Calculation of income and assets. 

(a) Repayment income. Repayment income is the annual amount of income from all 

sources that are expected to be received by those household members who are parties to 

the promissory note, except for any student financial aid received by these household 

members for tuition, fees, books, equipment, materials, and transportation. Repayment 

income is used to determine the household’s ability to repay a loan. 

(b) Annual income. Annual income is the income of all household members from all 

sources except those listed in (b)(1) through (b)(12) of this section: 

(1) earned income of persons under the age of 18 unless they are a borrower or a 

spouse of a member of the household, 

(2) payments received for the care of foster children or foster adults, 

(3) amounts granted for or in reimbursement of the cost of medical expenses, 

(4) earnings of each full-time student 18 years of age or older, except the head of 

household or spouse, that are in excess of any amount determined pursuant to 

section 501(b)(5) of the Housing Act of 1949, as amended, 

(5) temporary, nonrecurring, or sporadic income (including gifts), 

(6) lump sum additions to family assets such as inheritances; capital gains; 

insurance payments under health, accident, or worker’s compensation policies; 

settlements for personal or property losses; and deferred periodic payments of 

supplemental security income and Social Security benefits received in a lump sum, 

(7) any earned income tax credit, 

(8) adoption assistance in excess of any amount determined pursuant to section 

501(b)(5) of the Housing Act of 1949, as amended, 

(9) amounts received by the family in the form of refunds or rebates under State or 

local law for property taxes paid on the dwelling, 

(10) 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 at home, 

(11) the full amount of any student financial aid, and 

(12) any other revenue exempted by a Federal statue; a list of which is available 

from any Rural Development office. 

Appendix 1 - Page 31 

(01-23-03) SPECIAL PN 

Revised (07-22-19) SPECIAL PN 
7 CFR Part 3550 

Appendix 1 - Page 32 

§ 3550.54 (Con.) 

(c) Adjusted income. Adjusted income is used to determine program eligibility for 

section 502 and 504 and the amount of payment subsidy for which the household 

qualifies under section 502. Adjusted income is annual income as defined in paragraph 

(b) of this section less any of the following deductions for which the household is eligible. 

(1) For each household member, except the head of household or spouse, who is 

under 18 years of age, 18 years of age or older with a disability, or a full-time 

student, the amount determined pursuant to section 501(b)(5) of the Housing Act of 

1949, as amended. 

(2) A deduction of reasonable expenses for the care of minor 12 years of age or 

under that: 

(i) enable a family member to work or to further a member’s education, 

(ii) are not reimbursed or paid by another source, and 

(iii) in the case of expenses to enable a family member to work do not 

exceed the amount of income earned by the family member enabled to work. 

(3) Expenses related to the care of household members with disabilities that: 

(i) enable a family member to work, 

(ii) are not reimbursed from insurance or another source, and 

(iii) are in excess of three percent of the household’s annual income. 

(4) For any elderly family, a deduction in the amount determined pursuant to 

section 501(b)(5) of the Housing Act of 1949, as amended. 

(5) For elderly households only, a deduction for household medical expenses that 

are not reimbursed from insurance or another source and which in combination with 

any expenses related to the care of household members with disabilities described 

in paragraph (c)(3) of this section, are in excess of three percent of the household’s 

annual income. 

(d) Net family assets. Income from net family assets must be included in the calculation 

of annual income. Net family assets also are considered in determining whether a down 

payment is required. 
7 CFR Part 3550 

§ 3550.54(d)(Con.) 

(1) Net family assets include, but are not limited to: 

(i) equity in real property or other capital investments, other than the dwelling 

or site, 

(ii) cash on hand and funds in savings or checking accounts, 

(iii) amounts in trust accounts that are available to the household, 

(iv) stocks, bonds, and other forms of capital investments that are accessible 

without retiring or terminating employment, 

(v) lump sum receipts such as lottery winnings, capital gains, inheritances, 

and 

(vi) personal property held as an investment. 

(2) Net family assets do not include: 

(i) interest in American Indian restricted land, 

(ii) cash on hand which will be used to reduce the amount of the loan, 

(iii) the value of necessary items of personal property, 

(iv) assets that are part of the business, trade, or farming operation of any 

member of the household who is actively engaged in such operation, 

(v) amounts in voluntary retirement plans such as individual retirement 

accounts (IRAs), 401(k) plans, and Keogh accounts (except at the time 

interest assistance is initially granted); 

(vi) the value of an irrevocable trust fund or any other trust over which no 

member of the household has control; 

(vii) cash value of life insurance policies; 

(viii) the value of tax advantaged college savings plans (529 plan, Coverdell 

Educations Savings Account, etc.); 

(ix) the value of tax advantaged health or medical savings or spending 

accounts; and 

(x) other amounts deemed by the Agency not to constitute net family assets. 

Appendix 1 - Page 33 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 
7 CFR Part 3550 

Appendix 1 - Page 34 

§ 3550.55 Applications. 

(a) Application submissions. All persons applying for RHS loans must file a complete 

written application in a format specified by RHS. Applications will be accepted even when 

funds are not available. 

(b) Application processing. 

(1) Incomplete applications will be returned to the applicant specifying in writing the 

additional information that is needed to make the application complete. 

(2) An applicant may voluntarily withdraw an application at any time. 

(3) RHS may periodically request in writing that applicants reconfirm their interest 

in obtaining a loan. RHS may withdraw the application of any applicant who does 

not respond within the specified timeframe. 

(4) Applicants who are eligible will be notified in writing. If additional information 

becomes available that indicates that the original eligibility determination may have 

been incorrect, or that circumstances have changed, RHS may reconsider the 

application and the applicant may be required to submit additional information. 

(5) Applicants who are ineligible will be notified in writing and provided with the 

specific reasons for the rejection. 

(c) Selection for processing and funding. Applications will be selected for processing 

using the priorities specified in this paragraph (c). Within priority categories, 

applications will be processed in the order that the completed applications are received. 

In the case of applications with equivalent priority status that are received on the same 

day, preference will first be extended to applicants qualifying for a veterans’ preference. 

When funds are limited and eligible applicants will be placed on the waiting list, the 

priorities specified in this paragraph (c) will be used to determine the selection of 

applications for available funds. 
7 CFR Part 3550 

Appendix 1 - Page 35 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

§ 3550.55 (c) (Con.) 

(1) First priority will be given to existing customers who request subsequent loans 

to correct health and safety hazards. 

(2) Second priority will be given to loans related to the sale of an REO property or 

the transfer of an existing RHS financed property. 

(3) Third priority will be given to applicants facing housing related hardships 

including applicants who have been living in deficient housing for more than 6 

months, current homeowners in danger of losing a property through foreclosure, 

and other circumstances determined by RHS on a case-by-case basis to constitute 

a hardship. 

(4) Fourth priority will be given to applicants seeking loans for the construction of 

dwellings in an RHS-approved Mutual Self-Help project, loan application 

packages funneled through an Agency-approved intermediary under the certified 

loan application packaging process, and loans that will leverage funding or 

financing from other sources at a level published in the program handbook. 

(5) Applications from applicants who do not qualify for priority consideration in 

paragraphs (1), (2), (3), or (4) of this section will be selected for processing after 

all applications with priority status have been processed. 

(d) Applicant timeframe. RHS will specify a reasonable timeframe within which eligible 

applicants selected for processing must provide the information needed to underwrite the 

loan. 

§ 3550.56 Site requirements. 

(a) Rural areas. Loans may be made only in rural areas designated by RHS. If an area 

designation is changed to non-rural: 

(1) New conditional commitments will be made and existing conditional 

commitments will be honored only in conjunction with an applicant for a section 502 

loan who applied for assistance before the area designation changed. 
7 CFR Part 3550 

Appendix 1 - Page 36 

§ 3550.56 (a)(Con.) 

(2) REO property sales and transfers with assumption may be processed. 

(3) Subsequent loans may be made either in conjunction with a transfer with 

assumption of an RHS loan or to repair properties that have RHS loans. 

(b) Site standards. Sites must be developed in accordance with 7 CFR part 1924, 

subpart C and any applicable standards imposed by a State or local government. 

(1) The site must not be large enough to subdivide into more than one site under 

existing local zoning ordinances, and 

(2) The site must not include farm service buildings, though small outbuildings such 

as a storage shed may be included. 

§ 3550.57 Dwelling requirements. 

(a) Modest dwelling. The property must be one that is considered modest for the area, 

must not be designed for income providing purposes, or have a market value in excess 

of the applicable maximum area loan limit, in accordance with §3550.63, unless RHS 

authorizes an exception under this paragraph (a). An exception may be granted on a 

case-by-case basis to accommodate the specific needs of an applicant, such as to serve 

exceptionally large households or to provide reasonable accommodation for a household 

member with a disability. Any additional loan amount approved must not exceed the 

amount required to address the specific need. Existing properties with in-ground 

swimming pools may be considered modest; however, in-ground swimming pools with 

new construction or with properties which are purchased new are prohibited. 

(b) New dwellings. Construction must meet the requirements in 7 CFR part 1924, 

subpart A. 

(c) Existing dwellings. Existing dwellings must be structurally sound; functionally 

adequate; in good repair, or to be placed in good repair with loan funds; have adequate 

electrical, heating, plumbing, water, and wastewater disposal systems; and be free of 

termites and other wood damaging pests and organisms. 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

§ 3550.58 Ownership requirements. 

After the loan is closed, the borrower must have an acceptable interest in the property as 

evidenced by one of the following. 

(a) Fee-simple ownership. Acceptable fee-simple ownership is evidenced by a fully 

marketable title with a deed vesting a fee-simple interest in the property to the borrower. 

(b) Secure leasehold interest. A written lease is required. To be acceptable, a leasehold 

interest must have an unexpired term that is at least 150 percent of the term of the 

mortgage, unless the loan is guaranteed, in which case the unexpired term of the lease 

must be at least 2 years longer than the loan term. In no case may the unexpired term be 

less than 25 years. 

(c) Life estate interest. To be acceptable a life estate interest must provide the borrower 

with rights of present possession, control, and beneficial use of the property. Generally, 

persons with any remainder interests must be signatories to the mortgage. All of the 

remainder interests need not be included in the mortgage to the extent that one or more 

of the persons holding remainder interests are not legally competent (and there is no 

representative who can legally consent to the mortgage), cannot be located, or if the 

remainder interests are divided among such a large number of people that it is not 

practical to obtain the signatures of all of the remainder interests. In such cases, the loan 

may not exceed the value of the property interests owned by the persons executing the 

mortgage. 

(d) Undivided interest. All legally competent co-owners will be required to sign the 

mortgage. When one or more of the co-owners are not legally competent (and there is no 

representative who can legally consent to the mortgage), cannot be located, or the 

ownership interests are divided among so large a number of co-owners that it is not 

practical for all of their interests to be mortgaged, their interests not exceeding 50 percent 

may be excluded from the security requirements. In such cases, the loan may not exceed 

the value of the property interests owned by the persons executing the mortgage. 

(e) Possessory rights. Acceptable forms of ownership include possessory rights on an 

American Indian reservation or State-owned land and the interest of an American Indian 

in land held in severalty under trust patents or deeds containing restrictions against 

alienation, provided that land in trust or restricted status will remain in trust or restricted 

status. 

Appendix 1 - Page 37 
7 CFR Part 3550 

Appendix 1 - Page 38 

§ 3550.59 Security requirements. 

Before approving any loan, RHS will impose requirements to secure its interests. 

(a) Adequate security. A loan will be considered adequately secured only when all of the 

following requirements are met: 

(1) RHS obtains at closing a mortgage on all ownership interests in the security 

property or the requirements of § 3550.58 are satisfied. 

(2) No liens prior to the RHS mortgage exist at the time of closing and no junior 

liens are likely to be taken immediately after or at the time of closing, unless the 

other liens are taken as part of a leveraging strategy or the RHS loan is essential 

for repairs. Any lien senior to the RHS lien must secure an affordable non-RHS 

loan. Liens junior to the RHS lien may be allowed at loan closing if the junior lien 

will not interfere with the purpose or repayment of the RHS loan. When the junior 

lien involves a grant or a forgivable affordable housing product, the total debt may 

exceed the market value provided: 

(i) The RHS loan is fully secured (with allowable exceptions for the tax 

service fee, appraisal fee, homebuyer education and initial escrow for taxes 

and insurance); 

(ii) The junior lien is for an authorized loan purpose identified in § 3550.52; 

and 

(iii) The grant or forgivable affordable housing product comes from a 

recognized grant source such as a Community Development Block Grant or 

a HOME Investment Partnerships Program (HOME). 

(3) The provisions of 7 CFR part 1927, subpart B regarding title clearance and the 

use of legal services have been followed. 

(4) Existing and proposed property improvements are totally on the site and do not 

encroach on adjoining property. 

(b) Guaranteed payment. Mortgage insurance guaranteeing payment from a 

Government agency or Indian tribe is adequate security. 

§ 3550.60 Escrow account. 

RHS may require that customers deposit into an escrow account amounts necessary to 

ensure that the account will contain sufficient funds to pay real estate taxes, hazard and flood 

insurance premiums, and other related costs when they are due in accordance with the Real 

Estate Settlement and Procedures Act (RESPA) of 1974 (12 U.S.C. 2601, et seq.) and section 

501(e) of the Housing Act of 1949, as amended. 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (01-15-15) PN 473 

§ 3550.61 Insurance. 

(a) Borrower responsibility. Any borrower with a secured indebtedness in excess of 

$15,000 at the time of loan approval must furnish and continually maintain hazard 

insurance on the security property, with companies, in amounts, and on terms and 

conditions acceptable to RHS including a “loss payable clause” payable to RHS to protect 

the Government’s interest. 

(b) Amount. The borrower is required to insure the dwelling and any other essential 

buildings in an amount equal to the insurable value of the dwelling and other essential 

buildings. However, in cases where the borrower’s outstanding secured indebtedness is 

less than the insurable value of the dwelling and other essential buildings, the borrower 

may elect a lower coverage provided it is not less than the outstanding secured 

indebtedness. If the borrower fails, or is unable, to insure the secured property, RHS will 

force place insurance and charge the cost to the borrower’s account. Force place 

insurance only provides insurance coverage to the Agency and does not provide any 

direct coverage or benefit to the borrower. The amount of the lender-placed coverage 

generally will be the property’s last known insured value. 

(c) Flood insurance. Flood insurance must be obtained and maintained for the life of the 

loan for all property located in a Special Flood Hazard Area (SFHA) as determined by the 

Federal Emergency Management Agency (FEMA). RHS actions will be consistent with 7 

CFR part 1806, subpart B which addressed flood insurance requirements. If flood 

insurance through FEMA’s National Flood Insurance Program is not available in an 

SFHA, the property is not eligible for federal financial assistance. 

(d) Losses. 

(1) Loss deductible clauses for required insurance coverage may not exceed the 

generally accepted minimums based on current industry standards and local market 

conditions. 

(2) Customers must immediately notify RHS of any loss or damage to insured 

property and collect the amount of the loss from the insurance company. 

(3) Depending on the amount of the loss, RHS may require that loss payments be 

supervised. All repairs and replacements done by or under the direction of the 

borrower, or by contract, will be planned, performed, inspected, and paid for in 

accordance with 7 CFR part 1924, subpart A. 

(4) When insurance funds remain after all repairs, replacements, and other 

authorized disbursements have been made, the funds will be applied in the 

following order: 

(i) Prior liens, including delinquent property taxes. 

(ii) Past-due amounts. 

Appendix 1 - Page 39 
7 CFR Part 3550 

§ 3550.61 (d) (Con.) 

(iii) Protective advances due. 

(iv) Released to the customer if the RHS debt is adequately secured. 

(5) If a loss occurs when insurance is not in force, the borrower is responsible for 

making the needed repairs or replacements and ensuring that the insurance is 

reinstated on the property. 

(6) If the borrower is not financially able to make the repairs, RHS may take one of 

the following actions: 

(i) Make a subsequent loan for repairs. 

(ii) Subordinate the RHS lien to permit the borrower to obtain funds for 

needed repairs from another source. 

(iii) Permit the borrower to obtain funds secured by a junior lien from another 

source. 

(iv) Make a protective advance to protect the Government's interest. 

(v) Accelerate the account. 

§ 3550.62 Appraisals. 

(a) Requirement. An appraisal is required when the debt to be secured exceeds $15,000 

or whenever RHS determines that it is necessary to establish the adequacy of the 

security. Appraisals must be made in accordance with the Uniform Standards of 

Professional Appraisal Practices. When other real estate is taken as additional security, it 

will be appraised if it represents a substantial portion of the security for the loan. 

(b) Fees. RHS will charge a fee for each loan application that requires an appraisal, 

except the appraisal fee is not required on appraisals done for subsequent loans needed 

to make minimal, essential repairs or in cases where another party provides an appraisal 

which is acceptable to RHS. Fees collected in connection with a dwelling constructed 

under an approved conditional commitment will be paid to the contractor at closing to 

offset the cost of the real estate appraisal that is included in the conditional commitment 

fee. 

§ 3550.63 Maximum loan limit. 

Total secured indebtedness must not exceed the area loan limit or market value 

limitations specified in paragraphs (a) or (b) of this section, whichever is lower. Any loan 

amount for the RHS appraisal, tax monitoring fee, and the charge to establish an escrow 

account for taxes and insurance will not be subject to the limitations specified below. This 

section does not apply to loans on NP terms. 

Appendix 1 - Page 40 
7 CFR Part 3550 

§ 3550.63 (Con.) 

Appendix 1 - Page 41 

(01-23-03) SPECIAL PN 

Revised (07-22-19) SPECIAL PN 

(a) Area loan limit. (1) The area loan limit is the maximum value of the property RHS will 

finance in a given locality. This limit is based on a percentage(s) of the applicable local 

HUD section 203(b) limit. The percentage(s) will be determined by the Agency and 

published in the program handbook. The area loan limits will be reviewed at least 

annually and posted to the Agency website. 

(2) The maximum loan limit calculated under paragraph (a)(1) will be reduced in the 

following situations: 

(i) When the applicant owns the site or is purchasing the site at a sales price 

below market value, the market value of the lot will be deducted from the 

maximum loan limit, and 

(ii) When an applicant is receiving a housing grant or other form of affordable 

housing assistance for purposes other than closing costs, the amount(s) of such 

grants and affordable housing assistance will be deducted from the maximum 

loan limit. 

(3) The maximum loan limit for self-help housing will be calculated by adding the total of 

the market value of the lot (including reasonable and typical costs of site development), 

the cost of construction, and the value of sweat equity. The total of these three factors 

cannot exceed the limit established in paragraph (a)(1) of this section. 
7 CFR Part 3550 

§ 3550.63 (Con.) 

Appendix 1 - Page 42 

(b) Market value limitation. 

(1) The market value limitation is 100 percent of market value for existing housing 

and for new dwellings for which RHS will receive adequate documentation of 

construction quality and the source of such documentation is acceptable to RHS. 

(2) The market value limitation is 90 percent of market value for new dwellings for 

which adequate documentation of construction quality is not available. 

(3) The market value limitation can be increased by: 

(i) Up to one percent, if RHS makes a subsequent loan for closing costs 

only, in conjunction with the sale of an REO property or an assumption. 

(ii) The amount necessary to make a subsequent loan for repairs necessary 

to protect the Government’s interest, and reasonable closing costs. 

(iii) The amount necessary to refinance an existing borrower’s RHS loans, 

plus closing costs associated with the new loan. 

§ 3550.64 Down payment. 

Elderly families must use any net family assets in excess of $20,000 towards a down 

payment on the property. Non-elderly families must use net family assets in excess of $15,000 

towards a down payment on the property. Applicants may contribute assets in addition to the 

required down payment to further reduce the amount to be financed. 

§ 3550.65 [Reserved] 

§ 3550.66 Interest rate. 

Loans will be written using the applicable RHS interest rate in effect at loan approval or 

loan closing, whichever is lower. Information about current interest rates is available in any 

Rural Development office. 

§ 3550.67 Repayment period. 

Loans will be scheduled for repayment over a period that does not exceed the expected 

useful life of the property as a dwelling. The loan repayment period will not exceed: 

(a) Thirty-three years in all cases except as noted in paragraphs (b), (c), and (d) of this 

section. 
Appendix 1 - Page 43 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

7 CFR Part 3550 

§ 3550.67 (Con.) 

(b) Thirty-eight years: 

(1) For initial loans, or subsequent loans made in conjunction with an assumption, 

if the applicant’s adjusted income does not exceed 60 percent of the area adjusted 

median income and the longer term is necessary to show repayment ability. 

(2) For subsequent loans not made in conjunction with an assumption if the 

applicant’s initial loan was for a period of 38 years, the applicant’s adjusted income 

at the time the subsequent loan is approved does not exceed 60 percent of area 

adjusted median income, and the longer terms is necessary to show repayment 

ability. 

(c) Ten years for loans not exceeding an amount determined by the Agency based on 

factors such as the performance of unsecured loans in the Agency’s portfolio and the 

Agency’s budgetary needs, but not to exceed eight percent of the national average 

area loan limit. 

(d) Thirty years for manufactured homes. 

§ 3550.68 Payment subsidies. 

RHS administers three types of payment subsidies: interest credit, payment assistance 

method 1 and payment assistance method 2. Payment subsidies are subject to recapture when 

the borrower transfers title or ceases to occupy the property. 

(a) Eligibility for payment subsidy. 

(1) Applicants or borrowers who receive loans on program terms are eligible to 

receive payment subsidy if they personally occupy the property and have adjusted 

income at or below the applicable moderate-income limit. 

(2) Payment subsidy may be granted for initial loans or subsequent loans made in 

conjunction with an assumption only if the term of the loan is at least 25 years or 

more. 

(3) Payment subsidy may be granted for subsequent loans not made in conjunction 

with an assumption if the initial loan was for a term of 25 years or more. 

(b) Determining type of payment subsidy. 

(1) A borrower currently receiving interest credit will continue to receive it for the 

initial loan and for any subsequent loan for as long as the borrower is eligible for 

and remains on interest credit. 

(2) If a borrower receiving payment assistance using payment assistance method 1 

receives a subsequent loan, payment assistance method 2 will be used to calculate 

the subsidy for the initial loan and subsequent loan. . 
7 CFR Part 3550 

§ 3550.68 (Con.) 

Appendix 1 - Page 44 

(3) A borrower who has never received payment subsidy, or who has stopped 

receiving interest credit or payment assistance method 1, and at a later date again 

qualifies for a payment subsidy, will receive payment assistance method 2. 

(4) A borrower may not opt to change payment assistance methods. 

(c) Calculation of payment assistance. Regardless of the method used, payment 

assistance may not exceed the amount necessary if the loan were amortized at an 

interest rate of 1 percent. 

(1) Payment Assistance Method 2. The amount of payment assistance granted is 

the lesser of the difference between: 

(i) The annualized promissory note installments for the combined RHS loan 

and eligible leveraged loans plus the cost of taxes and insurance less 24 

percent of the borrower’s adjusted income, or 

(ii) The annualized promissory note installments for the RHS loan less the 

amount the borrower would pay if the loan were amortized at an interest rate 

of 1 percent. 

(2) Payment Assistance Method 1. The amount of payment assistance granted is 

the difference between the installment due on the promissory note and the greater 

of the payment amortized at the equivalent interest rate or the payment calculated 

based on the required floor payment. In leveraging situations, the equivalent 

interest rate will be used. 

(i) The floor payment, which is defined as a minimum percentage of adjusted 

income that the borrower must pay for PITI: 22 percent for very low-income 

borrowers, 24 percent for low-income borrowers with adjusted income below 

65 percent of area adjusted median, and 26 percent for low-income 

borrowers with adjusted incomes between 65 and 80 percent of area 

adjusted median; or 

(ii) The annualized note rate installment and the payment at the equivalent 

interest rate, which is determined by a comparison of the borrower’s adjusted 

income to the adjusted median income for the area in which the security 

property is located. The following chart is used to determine the equivalent 

interest rate. 
7 CFR Part 3550 

§ 3550.68 (c)(2) (Con.) 

PERCENTAGE OF MEDIAN INCOME AND THE EQUIVALENT INTEREST RATE 

When the applicant’s adjusted income is: 

Equal to BUT THEN the equivalent 

or more than: less than: interest rate is* 

00 % 50.01 of adjusted median income 1 % 

50.01 % 55 of adjusted median income 2 % 

55 % 60 of adjusted median income 3 % 

60 % 65 of adjusted median income 4 % 

65 % 70 of adjusted median income 5 % 

70 % 75 of adjusted median income 6 % 

75 % 80.01 of adjusted median income 6.5%

80.01 % 90 of adjusted median income 7.5 % 

90 % 100 of adjusted median income 8.5 % 

100 % 110 % of adjusted median income 9 % 

110 % or more than adjusted median income 9.5 % 

* Or note rate, whichever is less; in no case will the equivalent interest rate be less than 

one percent. 

Appendix 1 - Page 45 

(01-23-03) SPECIAL PN 

Revised (01-15-15) PN 473 
7 CFR Part 3550 

§ 3550.68 (Con.) 

Appendix 1 - Page 46 

(d) Calculation of interest credit. The amount of interest credit granted is the difference 

between the sum of the annual installments due at the promissory note interest rate and 

the greater of: 

(1) Twenty percent of the borrower's adjusted income less the cost of real estate 

taxes and insurance, or 

(2) The amount the borrower would pay if the loan were amortized at an interest 

rate of one percent. 

(e) Annual review. The borrower’s income will be reviewed annually to determine 

whether the borrower is eligible for continued payment subsidy. The borrower must notify 

RHS whenever an adult member of the household changes or obtains employment, there 

is a change in household composition, or if income increases by at least 10 percent so 

that RHS can determine whether a review of the borrower’s circumstances is required. 

§ 3550.69 Deferred mortgage payments. 

For qualified borrowers, RHS may defer up to 25 percent of the monthly principal and 

interest payment at 1 percent for up to 15 years. This assistance may be granted only at initial 

loan closing and is reviewed annually. Deferred mortgage payments are subject to recapture 

when the borrower transfers title or ceases to occupy the property. 

(a) Eligibility. In order to qualify for deferred mortgage payments, all of the following must 

be true: 

(1) The applicant’s adjusted income at the time of initial loan approval does not 

exceed the applicable very low-income limits. 

(2) The loan term is 38 years, or 30 years for a manufactured home. 

(3) The applicant’s payments for principal and interest, calculated at a one percent 

interest rate for the maximum allowable term, plus estimated costs for taxes and 

insurance exceeds: 

(i) For applicants receiving payment assistance, 29 percent of the applicant’s 

repayment income by more than $10 per month, or 

(ii) For applicants receiving interest credit, 20 percent of adjusted income by 

more than $10 per month. 
7 CFR Part 3550 

§ 3550.69 (Con.) 

(b) Amount and terms. 

(1) The amount of the mortgage payment to be deferred will be the difference 

between the applicant’s payment for principal and interest, calculated at one 

percent interest for the maximum allowable term, plus estimated costs for taxes and 

insurance and: 

(i) For applicants receiving payment assistance, 29 percent of the applicant’s 

repayment income. 

(ii) For applicants receiving interest credit, 20 percent of adjusted income. 

(2) Deferred mortgage payment agreements will be effective for a 12-month period. 

(3) Deferred mortgage assistance may be continued for up to 15 years after loan 

closing. Once a borrower becomes ineligible for deferred mortgage assistance, the 

borrower can never again receive deferred mortgage assistance. 

(c) Annual review. The borrower’s income, taxes, and insurance will be reviewed 

annually to determine eligibility for continued deferred mortgage assistance. The 

borrower must notify RHS whenever an adult member of the household changes or 

obtains employment or if income increases by at least 10 percent so that RHS can 

determine whether a review of the borrower’s circumstances is required. 

§ 3550.70 Conditional commitments. 

A conditional commitment is a determination by RHS that a dwelling offered for sale will 

be acceptable for purchase by a qualified RHS loan applicant if it is built or rehabilitated in 

accordance with RHS-approved plans, specifications, and regulations and priced within the 

lesser of the property’s appraised value or the applicable maximum loan limit. The conditional 

commitment does not reserve funds, does not guarantee funding, and does not ensure that an 

eligible loan applicant will be available to buy the dwelling. 

(a) Eligibility. To be eligible to request a conditional commitment, the builder, dealercontractor, or seller must: 

(1) Have an adequate ownership interest in the property, as defined in § 3550.58, 

prior to the beginning of any planned construction; 

Appendix 1 - Page 47 

(01-23-03) SPECIAL PN 

Revised (01-15-15) PN 473 
§ 3550.70 (a) (Con.) 

(2) Have the experience and ability to complete any proposed work in a competent 

and professional manner; 

(3) Have the legal capacity to enter into the required agreements; 

(4) Be financially responsible and have the ability to finance or obtain financing for 

any proposed construction or rehabilitation; and 

(5) Comply with the requirements of 7 CFR part 1901, subpart E and all applicable 

laws, regulations, and Executive Orders relating to equal opportunity. Anyone who 

receives 5 or more conditional commitments during a 12-month period must obtain 

RHS approval of an affirmative marketing plan. 

(b) Limitations. Conditional commitments for new or substantially rehabilitated dwellings 

will not be issued after construction has started. RHS may limit the total number of 

conditional commitments issued in any locality based on market demand. 

(c) Commitment period. A conditional commitment will be valid for 12 months from the 

date of issuance. The commitment may be extended for up to an additional 6 months if 

there are unexpected delays in construction caused by such factors as bad weather, 

materials shortages, or marketing difficulties. Conditional commitments may be canceled 

if construction does not begin within 60 days after the commitment is issued. 

(d) Conditional commitments involving packaging of applications. A conditional 

commitment may be made to a seller, builder, or dealer-contractor who packages an RHS 

loan application for a prospective purchaser. In cases where the dwelling is to be 

constructed for sale to a specific eligible applicant, all of the following conditions must be 

met: 

(1) The conditional commitment will not be approved until the applicant’s loan has 

been approved; 

(2) Construction will not begin until loan funds are obligated for the loan. 

Exceptions may be made when it appears likely that funding will be forth coming 

and as loan as the RHS lien priority is not jeopardized. The sales agreement must 

indicate that the loan has been approved but not funded and must provide that if the 

loan is not closed within 90 days of the date of approval, the contractor may 

terminate the sales agreement and sell the property to another party. If the sales 

agreement is terminated, the conditional commitment will be honored for another 

eligible loan applicant for the remaining period of the commitment; and 

(3) The RHS loan will be closed only after the dwelling is constructed or the 

required rehabilitation completed and final inspection has been made. 
7 CFR Part 3550 

§ 3550.70 (Con.) 

(e) Fees. An application for a conditional commitment must include payment of the 

conditional commitment fee. The fee will be refunded if for any reason preliminary 

inspection of the property or investigation of the conditional commitment applicant 

indicates that a conditional commitment will not be issued. Application fees will not be 

refunded for any property on which the required appraisal has been made. 

(f) Failure of conditional commitment applicant or dwelling to qualify. The conditional 

commitment applicant will be informed if the conditional commitment is denied. 

Conditional commitments will be canceled if the property does not meet program 

requirements. 

(g) Changes in plans, specifications, or commitment price. The holder of the conditional 

commitment must request approval for changes in plans, specifications, and commitment 

price. RHS may approve the changes if the following requirements are met: 

(1) The property price does not exceed the maximum loan limit and increases in 

costs are due to factors beyond the control of the commitment holder, and 

(2) The requested changes are justifiable and appropriate. 

(h) Builder's warranty. The builder or seller, as appropriate, must execute either an RHSapproved "Builder's Warranty," or provide a 10-year insured warranty when construction 

is completed or the loan is closed. 

§ 3550.71 Special requirements for condominiums. 

RHS loans may be made for condominium units under the following conditions: 

(a) The unit is in a project approved or accepted by U.S. Department of Housing and 

Urban Development (HUD), the Federal National Mortgage Association (Fannie Mae), or 

the Federal Home Loan Mortgage Corporation (Freddie Mac). 

(b) The condominium project complies with the requirements of the condominium 

enabling statute and all other applicable laws. Any right of first refusal in the 

condominium documents will not impair the rights of RHS to: 

(1) Foreclose or take title to a condominium unit pursuant to the remedies in the 

mortgage; 

(2) Accept a deed in lieu of foreclosure in the event of default by a mortgagor; and 

(3) Sell or lease a unit acquired by RHS. 

Appendix 1 - Page 49 

(01-23-03) SPECIAL PN 

Revised (01-15-15) PN 473 

7 CFR Part 3550 

§ 3550.71 (Con.) 

Appendix 1 - Page 50 

(c) If RHS obtains title to a condominium unit pursuant to the remedies in its mortgage or 

through foreclosure, RHS will not be liable for more than 6 months of the unit’s unpaid 

regularly budgeted dues or charges accrued before acquisition of the title to the unit by 

RHS. The homeowners association’s lien priority may include costs of collecting unpaid 

dues. 

(d) In case of condemnation or substantial loss to the units or common elements of the 

condominium project, unless at least two-thirds of the first mortgagees or unit owners of 

the individual condominium units have given their consent, the homeowners association 

may not: 

(1) By act or omission seek to abandon or terminate the condominium project; 

(2) Change the pro rata interest or obligations of any condominium unit in order to 

levy assessments or charges, allocate distribution of hazard insurance proceeds or 

condemnation awards, or determine the pro rata share of ownership of each 

condominium unit in the common elements; 

(3) Partition or subdivide any condominium unit; 

(4) Seek to abandon, partition, subdivide, encumber, sell, or transfer the common 

elements by act or omission (the granting of easements for public utilities or other 

public purposes consistent with the intended use of the common elements by the 

condominium project is not a transfer within the meaning of this clause); or 

(5) Use hazard insurance proceeds for losses to any condominium property 

(whether units or common elements) for other than the repair, replacement, or 

reconstruction of the condominium property. 

(e) All taxes, assessments, and charges that may become liens prior to the first mortgage 

under local law relate only to the individual condominium units and not to the 

condominium project as a whole. 

(f) No provision of the condominium documents gives a condominium unit owner or any 

other party priority over any rights of RHS as first or second mortgagee of the 

condominium unit pursuant to its mortgage in the case of a payment to the unit owner of 

insurance proceeds or condemnation awards for losses to or taking of condominium units 

or common elements. 

(g) If the condominium project is on a leasehold the underlying lease provides adequate 

security of tenure as described in § 3550.58(b). 
7 CFR Part 3550 

§ 3550.71 (Con.) 

(h) At least 70 percent of the units have been sold. Multiple purchases of condominium 

units by one owner are counted as one sale when determining if the sales requirement 

has been met. 

(i) No more than 15 percent of the unit owners are more than 1 month delinquent in 

payment of homeowners association dues or assessments at the time the RHS loan is 

closed. 

§ 3550.72 Community land trusts. 

Eligible dwellings located on land owned by a community land trust may be financed if: 

(a) The loan meets all the requirements of this subpart, and 

(b) Any restrictions, imposed by the community land trust on the property or applicant 

are: 

(1) Reviewed and accepted by RHS before loan closing, and 

(2) Automatically and permanently terminated upon foreclosure or acceptance by 

RHS of a deed in lieu of foreclosure. 

§ 3550.73 Manufactured homes. 

With the exception of the restrictions and additional requirements contained in this 

section, section 502 loans on manufactured homes are subject to the same conditions as all 

other section 502 loans. 

(a) Eligible costs. In addition to the eligible costs described in § 3550.52(d), RHS may 

finance the following activities related to manufactured homes when a real estate 

mortgage covers both the unit and the site: 

(1) Purchase of an eligible unit, transportation, and set-up costs, and purchase of 

an eligible site if not already owned by the applicant. 

(2) Site development work in accordance with 7 CFR part 1924, subpart A. 

(3) Subsequent loans in conjunction with an assumption or sale of an REO 

property, or 

(4) Subsequent loans for repairs of units financed under section 502. 

Appendix 1 - Page 51 

(01-23-03) SPECIAL PN 

Revised (01-15-15) PN 473 
7 CFR Part 3550 

§ 3550.73 (Con.) 

Appendix 1 - Page 52 

(01-23-03) SPECIAL PN 

Revised (01-15-15) PN 473 

§ 

(b) Loan restrictions. In addition to the loan restrictions described in § 3550.52(e), RHS 

may not use loan funds to finance: 

(1) An existing unit and site unless it is already financed with a section 502 loan or 

is an RHS REO property. 

(2) The purchase of a site without also financing the unit. 

(3) Alteration or remodeling of the unit when the initial loan is made. 

(4) Furniture, including movable articles of personal property such as drapes, beds, 

bedding, chairs, sofas, divans, lamps, tables, televisions, radios, stereo sets, and 

other similar items of personal property. Furniture does not include wall-to-wall 

carpeting, refrigerators, ovens, ranges, washing machines, clothes dryers, heating 

or cooling equipment, or other similar items. 

(c) Dealer-contractors. No loans will be made on a manufactured home sold by any 

entity that is not an approved dealer-contractor that will provide complete sales, service, 

and site development services. 

(d) Loan term. The maximum term of a loan on a manufactured home is 30 years. 

(e) Construction and development. Unit construction, site development and set-up must 

conform to the Federal Manufactured Home Construction and Safety Standards 

(FMHCSS) and 7 CFR part 1924, subpart A. Development under the Mutual Self-Help 

and borrower construction methods is not permitted for manufactured homes. 

(f) Contract requirements. The dealer-contractor must sign a construction contract, as 

specified in 7 CFR § 1924.6 which will cover both the unit and site development work. 

The use of multi-contracts is prohibited. A dealer-contractor may use subcontractors if 

the dealer-contractor is solely responsible for all work under the contract. Payment for all 

work will be in accordance with 7 CFR part 1924, subpart A, except no payment will be 

made for materials or property stored on site (e.g., payment for a unit will be made only 

after it is permanently attached to the foundation). 

(g) Lien release requirements. All persons furnishing materials or labor in connection 

with the contract except the manufacturer of the unit must sign a Release by Claimants 

document, as specified in 7 CFR part 1924, subpart A. The manufacturer of the unit must 

furnish an executed manufacturer's certificate of origin to verify that the unit is free and 

clear of all legal encumbrances. 

 
7 CFR Part 3550 

Appendix 1 - Page 53 

(h) Warranty requirements. The dealer-contractor must provide a warranty in 

accordance with the provisions of 7 CFR § 1924.12. The warranty must identify the unit 

by serial number. The dealer-contractor must certify that the unit substantially complies 

with the plans and specifications and the manufactured home has sustained no hidden 

damage during transportation and, if manufactured in separate sections, that the sections 

were properly joined and sealed according to the manufacturer's specifications. The 

dealer-contractor will also furnish the applicant with a copy of all manufacturer's 

warranties. 

§ 3550.74 Nonprogram loans. 

NP terms may be extended to applicants who do not qualify for program credit, or for 

properties that do not qualify as program properties, when it is in the best interest of the 

Government. NP loans are originated and serviced according to the requirements for program 

loans except as indicated in this section. 

(a) Purpose. NP terms may be offered to expedite: 

(1) Sale of an REO property. 

(2) Assumption of an existing program loan on new rates and terms. If additional 

funds are required to purchase the property, the applicant must obtain them from 

another source. 

(3) Conversion of a program loan that has received unauthorized assistance. 

(4) Continuation of a loan on a portion of a security property when the remainder is 

being transferred and the RHS debt is not paid in full. 

(b) Terms. 

(1) Rate and term: 

(i) For an applicant who intends to occupy the property, the term will not 

exceed 30 years. 

(ii) For other applicants, the term will not exceed 10 years. If more favorable 

terms are necessary to facilitate the sale, the loan may be amortized over a 

period of up to 20 years with payment in full due not later than 10 years from 

the date of closing. 

7 CFR Part 3550 

§ 3550.74 (b)(1) (Con.) 

Appendix 1 - Page 54 

(iii) An applicant with a NP loan under paragraph (b)(1)(i) of this section who 

wishes to retain the property and purchase a new property with RHS credit 

must purchase the second property according to the terms of paragraph 

(b)(1)(ii) of this section, even if the new property will serve as the applicant’s 

principal residence. 

(2) NP loans are written at the NP interest rate in effect at the time of loan 

approval. 

(3) NP borrowers are not eligible for payment assistance or a moratorium. 

(c) Additional requirements. 

(1) NP applicants other than public bodies and nonprofit organizations must pay a 

nonrefundable application fee. 

(2) NP applicants must make a down payment based upon the purchase price and 

whether the applicant intends to personally occupy the property or use it for other 

purposes. 

(3) NP applicants cannot finance loan closing costs or escrow, tax service, or 

appraisal fees. 

(d) Reduced restrictions. 

(1) NP applicants need not be unable to obtain other credit in order to receive a NP 

loan and are not required to refinance with private credit when they are able to do 

so. 

(2) NP applicants are not required to occupy the property. 

(3) NP applicants are not subject to leasing restrictions. 

(e) Waiver of costs. When the purpose of the loan is the conversion of a program loan 

that has received unauthorized assistance or continuation of a loan on a portion of a 

security property when the remainder is being transferred, the application fee, appraisal 

fee, and down payment may be waived. 

§ 3550.75 Certified loan application packaging process. 

Persons interested in applying for a section 502 loan may, but are not required to, submit 

an application through the certified loan application packaging process. 

(a) General. The certified loan application packaging process involves individuals who 

have been designated as an Agency-certified loan application packager, their qualified 

employers, and, if required by the State Director, Agency-approved intermediaries. 
7 CFR Part 3550 

§ 3550.75 (Con.) 

Appendix 1 - Page 55 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 

(b) Process requirements. To package section 502 loan applications under this 

process, each of the following conditions must be met: 

(1) Agency-certified loan application packager. An individual who wishes to 

acquire RHS certification as a loan application packager must meet all of the 

following conditions: 

(i) Have at least one year of affordable housing loan origination and/or 

affordable housing counseling experience; 

(ii) Be employed (either as an employee or as an independent contractor) by 

a qualified employer as outlined in paragraph (b)(2) of this section; 

(iii) Complete an Agency-approved loan application packaging course and 

successfully pass the corresponding test as specified in paragraph (c) of this 

section; and 

(iv) Submit applications to the Agency via an intermediary if determined 

necessary by a State Director. 

(2) Qualified employer. Individuals who have been designated as an Agencycertified loan application packager must be employed (either as an employee 

or as an independent contractor) by a qualified employer. To be considered a 

qualified employer, the packager’s employer must meet each of the conditions 

specified in paragraphs (b)(2)(i) through (v) of this section. Tribal housing 

authorities and the States’ Housing Finance Agencies are eligible and are 

exempt from the conditions specified in paragraphs (b)(2)(i) through (ii) of this 

section. 

(i) Be a nonprofit organization or public agency in good standing in the 

State(s) of its operation. 

(ii) Be tax exempt under the Internal Revenue Code and be engaged in 

affordable housing per their regulations, articles of incorporation, or bylaws. 

(iii) Notify the Agency and the applicant if they or their Agency-certified 

packager(s) are the developer, builder, seller of, or have any other such 

financial interest in the property for which the application package is 

submitted. The Agency may disallow a particular qualified employer and/or 

Agency-certified packager from receiving part or all of a packaging fee if the 

Agency determines that the financial interest is improper or the qualified 

employer or Agency-certified packager has a history of improperly using its 

position when there has been a financial interest in the property. 
Appendix 1 - Page 56 

7 CFR Part 3550 

§ 3550.75 (b)(2) (Con.) 

(iv) Prepare an affirmative fair housing marketing plan for Agency approval 

as outlined in RD Instruction 1901-E (or in any superseding guidance 

provided in the impending RD Instruction 1940-D). 

(v) Submit applications to the Agency via an intermediary if determined 

necessary by a State Director. 

(3) Agency-approved intermediaries. To become an Agency-approved 

intermediary, an interested party must apply and demonstrate to the Agency’s 

satisfaction that they meet each of the conditions specified below. The States’ 

Housing Finance Agencies, however, are exempt from the conditions specified 

in paragraphs (b)(3)(i) through (v). After the initial application process, the 

Agency may require intermediaries to periodically demonstrate that they still 

meet the following criteria. 

(i) Be a Section 501 (c)(3) nonprofit organization or public agency in good 

standing in the State(s) of its operation with the capacity to serve multiple 

qualified employers and their Agency-certified loan application packagers 

throughout an entire State or preferably throughout entire States and with the 

capacity to perform quality assurance reviews on a large volume of packaged 

loan applications within an acceptable period of time as determined by the 

Agency; 

(ii) Be engaged in affordable housing in accordance with their regulations, 

articles of incorporation, or bylaws; 

(iii) Be financially viable and demonstrate positive operating performance as 

evidenced by an independent audit paid for by the applicant seeking to be an 

intermediary; 

(iv) Have at least five years of verifiable experience with the Agency’s direct 

single family housing loan programs; 

(v) Demonstrate that their quality assurance staff has experience with 

packaging, originating, or underwriting affordable housing loans. 

(vi) Develop and implement quality control procedures designed to prevent 

submission of incomplete or ineligible application packages to the Agency; 
7 CFR Part 3550 

§ 3550.75 (b)(3) (Con.) 

(vii) Ensure that their quality assurance staff complete an Agency-approved 

loan application packaging course and successfully pass the corresponding 

test; 

(viii) Not be the developer, builder, seller of, or have any other such financial 

interest in the property for which the application package is submitted; and 

(ix) Provide supplemental training, technical assistance, and support to 

certified loan application packagers and qualified employers to promote 

quality standards and accountability; and to address areas for improvement 

and any changes in program guidance. 

(c) Loan application packaging courses. Prospective loan application packagers must 

successfully complete an Agency-approved course that covers the material identified in 

paragraph (c)(1) of this section. Prospective intermediaries must also successfully 

complete an Agency-approved course as specified in paragraph (c)(2) of this section. 

(1) Loan application packagers. At a minimum, the certification course for individuals 

who wish to become Agency-certified loan application packagers will provide: 

(i) An in-depth review of the section 502 direct single family housing loan program 

and the regulations and laws that govern the program (including civil rights lending 

laws such as the Equal Credit Opportunity Act, Fair Housing Act, and Section 504 

of the Rehabilitation Act of 1973); 

(ii) A detailed discussion on the program’s application process and 

borrower/property eligibility requirements; 

(iii) An examination of the Agency’s loan underwriting process which includes the 

use of payment subsidies; and 

(iv) The roles and responsibilities of a loan application packager and the Agency 

staff. 

(2) Intermediaries. The required course for an intermediary’s quality assurance staff will 

cover the components described in paragraph (c)(1) of this section and other information 

relevant to undertaking quality assurance, technical assistance, and training functions in 

support of the qualified employers and their Agency-certified loan application packagers. 

Appendix 1 - Page 57 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 
7 CFR Part 3550 

§ 3550.75 (c) (Con.) 

(3) Non-Agency trainers. Prior to offering the required course to packagers and 

intermediaries, non-Agency trainers must obtain approval from designated Agency staff. 

Non-Agency trainers, who will generally be limited to housing nonprofit organizations but 

may in rare cases include public bodies such as public universities, must provide proof 

of relevant experience and resources for delivery; present evidence that their individual 

trainers are competent and knowledgeable on all subject areas; submit course materials 

for Agency review; agree to maintain attendance records, test results, and updated 

course materials; and bear the cost of providing the training though a reasonable tuition 

fee may be charged the course participants. The course content, schedule, and tuition 

must be approved by RHS and a designated Agency staff member will typically 

participate in each training session to ensure accuracy of the program information and to 

serve as a program resource. A list of eligible non-Agency trainers, which is subject to 

change based on non-Agency trainers’ performance, will be published by the Agency. 

(d) Confidentiality. The Agency-certified loan application packager, qualified employer, Agencyapproved intermediary and their agents must safeguard each applicant’s personal and financial 

information. 

(e) Retaining designation. The Agency will meet with the Agency-certified loan application 

packager, their qualified employer, and Agency-approved intermediary (if applicable) at least 

annually to maintain open lines of communication; discuss their packaging activities; identify 

and resolve deficiencies in the packaging process; and stipulate any training requirements for 

retaining designation (including but not limited to civil rights refresher training). 

(f) Revocation. The designation as an Agency-certified loan application packager or Agencyapproved intermediary is subject to revocation by the Agency under any of the following 

conditions: 

(1) The rate of submitted packaged loan applications that receive RHS approval is below 

the acceptable limit as determined by the Agency; 

(2) The rate of submitted packaged loan applications from very low-income applicants is 

below the acceptable level as determined by the Agency; 

(3) Violation of applicable regulations, statutes and other guidance; or 

(4) No viable packaged loan applications are submitted to the Agency in any consecutive 

12-month period. 

§§ 3550.76 - 3550.99 [Reserved] 

Appendix 1 - Page 58 
7 CFR Part 3550 

Appendix 1 - Page 59 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL 

§ 3550.100 OMB control number. 

The information collection requirements contained in this regulation have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control number 

0575-0172. Public reporting burden for this collection of information is estimated to vary from 5 

minutes to 3 hours per response, with an average of 1 1/2 hours per response, including time 

for reviewing instructions, searching existing data sources, gathering and maintaining the data 

needed, and completing and reviewing the collection of information. You are not required to 

respond to this collection of information unless it displays a currently valid OMB control number. 

Subpart C - Section 504 Origination and Section 306C Water and Waste Disposal Grants 

§ 3550.101 Program objectives. 

This subpart sets forth policies for administering loans and grants under section 504(a) of 

title V of the Housing Act of 1949, as amended. Section 504 loans and grants are intended to 

help very low-income owner-occupants in rural areas repair their properties. This subpart also 

covers Water and Waste Disposal grants to individuals authorized by Section 306C(b) of the 

Consolidated Farm and Rural Development Act, (7 U.S.C. 1926c). 

§ 3550.102 Grant and loan purposes. 

(a) Grant funds. Grant funds may be used only to pay costs for repairs and 

improvements that will remove identified health and safety hazards or to repair or remodel 

dwellings to make them accessible and useable for household members with disabilities. 

Unused grant funds must be returned to the Rural Housing Service (RHS). 

(b) Loan funds. Loan funds may be used to make general repairs and improvements to 

properties or to remove health and safety hazards, as long as the dwelling remains 

modest in size and design. 

(c) Eligibility of mobile and manufactured homes. Repairs necessary to remove health 

and safety hazards may be made to mobile or manufactured homes provided: 

(1) The applicant owns the home and site and has occupied the home prior to filing 

an application with RHS, and 

(2) The mobile or manufactured home is on a permanent foundation or will be put 

on a permanent foundation with section 504 funds. 
7 CFR Part 3550 

§ 3550.102 (Con.) 

Appendix 1 - Page 60 

(d) Eligible costs. In addition to construction costs to make necessary repairs and 

improvements, loan and grant funds may be used for: 

(1) Reasonable expenses related to obtaining the loan or grant, including legal, 

architectural and engineering, title clearance, and loan closing fees; and appraisal, 

surveying, environmental, tax monitoring, and other technical services. 

(2) The cost of providing special design features or equipment when necessary 

because of a physical disability of the applicant or a member of the household. 

(3) Reasonable connection fees, assessments, or the pro rata installation costs for 

utilities such as water, sewer, electricity, and gas for which the borrower is liable 

and which are not paid from other funds. 

(4) Real estate taxes that are due and payable on the property at the time of 

closing and for the establishment of escrow accounts for real estate taxes, hazard 

and flood insurance premiums, and related costs. 

(5) Fees to public and private nonprofit organizations that are tax exempt under the 

Internal Revenue Code for the development and packaging of applications. 

(e) Restrictions on uses of loan or grant funds. Section 504 funds may not be used to: 

(1) Assist in the construction of a new dwelling. 

(2) Make repairs to a dwelling in such poor condition that when the repairs are 

completed, the dwelling will continue to have major hazards. 

(3) Move a mobile home or manufactured home from one site to another. 

(4) Pay for off-site improvements except for the necessary installation and 

assessment costs for utilities. 

(5) Refinance any debt or obligation of the applicant incurred before the date of 

application, except for the installation and assessment costs of utilities; or 

subject to the availability of funds and program priorities as determined by 

RHS, refinance of an existing RHS loan in accordance with § 3550.201 as a 

special servicing option, including but not limited to refinancing at the end of a 

moratorium. 

(6) Pay fees, commission, or charges to for-profit entities related to loan packaging 

or referral of prospective applicants to RHS. 
7 CFR Part 3550 

Appendix 1 - Page 61 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL 

§ 3550.103 Eligibility requirements. 

To be eligible, applicants must meet the following requirements: 

(a) Owner-occupant. Applicants must own, as described in § 3550.107, and occupy the 

dwelling. 

(b) Age (grant only). To be eligible for grant assistance, an applicant must be 62 years of 

age or older at the time of application. 

(c) Income eligibility. At the time of loan or grant approval, the household’s adjusted 

income must not exceed the applicable very low-income limit. Section 3550.54 provides 

a detailed discussion of the calculation of adjusted income. 

(d) Citizenship status. The applicant must be a U.S. citizen or a non-citizen who qualifies 

as a legal alien, as defined in § 3550.10. 

(e) Need and use of personal resources. Applicants must be unable to obtain financial 

assistance at reasonable terms and conditions from non-RHS credit or grant sources and 

lack the personal resources to meet their needs. Elderly families must use any net family 

assets in excess of $20,000 to reduce their section 504 request. Non-elderly families 

must use any net family assets in excess of $15,000 to reduce their section 504 request. 

Applicants may contribute assets in excess of the aforementioned amounts to further 

reduce their request for assistance. The definition of assets for the purpose of this 

paragraph (e) is net family assets as described in § 3550.54, less the value of the 

dwelling and a minimum adequate site. 

(f) Legal capacity. The applicant must have the legal capacity to incur the loan obligation 

or have a court appointed guardian or conservator who is empowered to obligate the 

applicant in real estate matters. 

(g) Suspension or debarment. Applications from applicants who have been suspended 

or debarred from participation in federal programs will be handled in accordance with 

FmHA Instruction 1940-M (available in any Rural Development office). 

(h) Repayment ability (loans only). Applicants must demonstrate adequate repayment 

ability as supported by a budget. 

(1) If an applicant does not meet the repayment ability requirements, the applicant 

can have another party join the application as a cosigner. 

(2) If an applicant does not meet the repayment ability requirements, the applicant 

can have other household members join the application. 
Appendix 1 - Page 62 

7 CFR Part 3550 

§ 3550.103 (Con.) 

(i) Credit qualifications. Applicants must be unable to secure the necessary credit from 

other sources under terms and conditions that the applicant could reasonably be 

expected to fulfill. Loan applicants must have a credit history that indicates reasonable 

ability and willingness to meet debt obligations. 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 loan or grant from RHS. 

(1) Indicators of unacceptable credit include: 

(i) Payments on any account where the amount of the delinquency exceeded 

one installment for more than 30 days within the last 12 months. 

(ii) Payments on any account which was delinquent for more than 30 days on 

two or more occasions within a 12-month period. 

(iii) Loss of security due to a foreclosure if the foreclosure has been 

completed within the last 36 months. 

(iv) An outstanding Internal Revenue Service tax lien or any other 

outstanding tax liens with no satisfactory arrangement for payment. 

(v) A court-created or court-affirmed obligation or judgment caused by 

nonpayment that is currently outstanding or has been outstanding within the 

last 12 months, except for those excluded by paragraphs (i)(2)(i) and (i)(2)(ii) 

of this section. 

(vi) Outstanding collection accounts with a record of irregular payment with 

no satisfactory arrangements for repayment, or collection accounts that were 

paid in full within the last 6 months. 

(vii) Non-agency debts written off within the last 36 months or paid in full at 

least 12 months ago. 

(viii) Agency debts that were debt settled within the last 36 months or are 

being considered for debt settlement. 

(ix) Delinquency on a federal debt. 

(2) The following will not be considered indicators of unacceptable credit: 

(i) 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. 
Appendix 1 - Page 63 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL 

7 CFR Part 3550 

§ 3550.103 (i)(2) (Con.) 

(ii) A non-foreclosure judgment satisfied more than 12 months before the 

date of application. 

(3) When an application is rejected because of unacceptable credit, the applicant 

will be informed of the reason and source of information. 

§ 3550.104 Applications. 

(a) Application submissions. All persons applying for section 504 loans or grants must 

file a complete written application in a format specified by RHS. Applications will be 

accepted even when funds are not available. 

(b) Application processing. 

(1) Incomplete applications will be returned to the applicant specifying in writing the 

additional information that is needed to make the application complete. 

(2) An applicant may voluntarily withdraw an application at any time. 

(3) RHS may periodically request in writing that applicants reconfirm their interest 

in obtaining a loan or grant. RHS may withdraw the application of any applicant 

who does not respond within the specified timeframe. 

(4) Applicants who are eligible will be notified in writing. If additional information 

becomes available that indicates that the original eligibility determination may have 

been in error or that circumstances have changed, RHS may reconsider the 

application and the applicant may be required to submit additional information. 

(5) Applicants who are ineligible will be notified in writing and provided with the 

specific reasons for the rejection. 

(c) Processing priorities. When funding is not sufficient to serve all eligible applicants, 

applications for assistance to remove health and safety hazards will receive priority for 

funding. In the case of applications with equivalent priority status that are received on the 

same day, preference will be extended to applicants qualifying for a veterans’ preference. 

After selection for processing, requests for assistance are funded on a first-come, firstserved basis. 
Appendix 1 - Page 64 

7 CFR Part 3550 

§ 3550.105 Site requirements. 

(a) Rural areas. Loans may be made only in rural areas designated by RHS. If an area 

designation is changed to nonrural an existing RHS borrower may receive 504 

assistance. 

(b) Not subdividable. The site must not be large enough to subdivide into more than one 

site under existing local zoning ordinances. 

§ 3550.106 Dwelling requirements. 

(a) Modest dwelling. The property must be one that is considered modest for the area, 

must not be designed for income producing purposes, or have a market value in excess 

of the applicable maximum area loan limit, in accordance with § 3550.63. 

(b) Post-repair condition. Dwellings repaired with section 504 funds need not be brought 

to the agency development standards of 7 CFR part 1924, subpart A, nor must all existing 

hazards be removed. However, the dwelling may not continue to have major health or 

safety hazards. 

(c) Construction standards. All work must be completed in accordance with local 

construction codes and standards. When potentially hazardous equipment or materials 

are being installed, all materials and installations must be in accordance with the 

applicable standards in 7 CFR part 1924, subpart A. 

§ 3550.107 Ownership requirements. 

The applicant must have an acceptable ownership interest in the property as evidenced 

by one of the following: 

(a) Full fee ownership. Acceptable full fee ownership is evidenced by a fully marketable 

title with a deed vesting a fee interest in the property to the applicant. 

(b) Secure leasehold interest. A written lease is required. For loans, the unexpired 

portion of the lease must not be less than 2 years beyond the term of the promissory 

note. For grants, the remaining lease period must be at least 5 years. A leasehold for 

mutual help housing financed by U.S. Department of Housing and Urban Development 

(HUD) on Indian lands requires no minimum lease period and constitutes acceptable 

ownership. 
Appendix 1 - Page 65 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL 

7 CFR Part 3550 

§ 3550.107 (Con.) 

(c) Life estate interest. To be acceptable, a life estate interest must provide the applicant 

with rights of present possession, control, and beneficial use of the property. For secured 

loans, generally persons with any remainder interests must be signatories to the 

mortgage. All of the remainder interests need not be included in the mortgage to the 

extent that one or more of the persons holding remainder interests are not legally 

competent (and there is no representative who can legally consent to the mortgage), 

cannot be located, or if the remainder interests are divided among such a large number of 

people that it is not practical to obtain the signatures of all of the remainder interests. In 

such cases, the loan may not exceed the value of the property interests owned by the 

persons executing the mortgage. 

(d) Undivided interest. An undivided interest is acceptable if there is no reason to believe 

that the applicant's position as an owner-occupant will be jeopardized as a result of the 

improvements to be made, and: 

(1) In the case of unsecured loans or grants, if any co-owners living or planning to 

live in the dwelling sign the repayment agreement. 

(2) In the case of a secured loan, when one or more of the co-owners are not 

legally competent (and there is no representative who can legally consent to the 

mortgage), cannot be located, or the ownership interests are divided among so 

large a number of co-owners that it is not practical for all of their interests to be 

mortgaged, their interests not exceeding 50 percent may be excluded from the 

security requirements. In such cases, the loan may not exceed the value of the 

property interests owned by the persons executing the mortgage. 

(e) Possessory rights. Acceptable forms of ownership include possessory right on an 

American Indian reservation or State-owned land and the interest of an American Indian 

in land held severalty under trust patents or deeds containing restrictions against 

alienation, provided that land in trust or restricted status will remain in trust or restricted 

status. 

(f) Land purchase contract. A land purchase contract is acceptable if the applicant is 

current on all payments, and there is a reasonable likelihood that the applicant will be 

able to continue meeting the financial obligations of the contract. 

(g) Alternative evidence of ownership. If evidence, as described in paragraphs (a) 

through (e) of this section, is not available, RHS may accept any of the following as 

evidence of ownership: 

(1) Records of the local taxing authority that show the applicant as owner and that 

demonstrate that real estate taxes for the property are paid by the applicant. 
7 CFR Part 3550 

§ 3550.107 (g) (Con.) 

(2) Affidavits by others in the community stating that the applicant has occupied the 

property as the apparent owner for a period of not less than 10 years, and is 

generally believed to be the owner. 

(3) Any instrument, whether or not recorded, which is commonly accepted as 

evidence of ownership. 

§ 3550.108 Security requirements (loans only). 

When the total section 504 indebtedness is $7,500 or more, the property will be secured 

by a mortgage on the property, leasehold interest, or land purchase contract. 

(a) RHS does not require a first lien position, but the total of all debts on the secured 

property may not exceed the value of the security, except by the amount of any required 

contributions to an escrow account for taxes and insurance and any required appraisal 

fee. 

(b) Title clearance and the use of legal services generally must be conducted in 

accordance with 7 CFR part 1927, subpart B. These requirements need not be followed 

for: 

(1) Loans where the total section 504 indebtedness does not exceed an amount 

determined by the Agency based on factors such as average costs for title insurance 

and closing agents compared to average housing repair costs, but no greater than 

twenty percent of the national average area loan limit. 

(2) Subsequent loans made for minimal essential repairs necessary to protect the 

Government's interest. 

§ 3550.109 Escrow account (loans only). 

RHS may require that borrowers deposit into an escrow account amounts necessary to 

ensure that the account will contain sufficient funds to pay real estate taxes, hazard and flood 

insurance premiums, and other related costs when they are due in accordance with the Real 

Estate Settlement and Procedures Act of 1974 (RESPA) and section 501(e) of the Housing Act 

of 1949, as amended. 

§ 3550.110 Insurance (loans only). 

(a) Borrower responsibility. Any borrower with a secured indebtedness in excess of 

$15,000 at the time of loan approval must furnish and continually maintain hazard 

insurance on the security property, with companies, in amounts, and on terms and 

conditions acceptable to RHS including a “loss payable clause” payable to RHS to protect 

the Government’s interest. 

(b) Amount. The borrower is required to insure the dwelling and any other essential 

buildings in an amount equal to the insurable value of the dwelling and other essential 

buildings. However, in cases where the borrower’s outstanding secured indebtedness is 

less than the insurable value of the dwelling and other essential buildings, the borrower 

may elect a lower coverage provided it is not less than the outstanding secured 

Appendix 1 - Page 66 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

§ 3550.110 (Con.) 

indebtedness. If the borrower fails, or is unable, to insure the secured property, RHS will 

force place insurance and charge the cost to the borrower’s account. Force place 

insurance only provides insurance coverage to the Agency and does not provide any 

direct coverage or benefit to the borrower. The amount of the lender-placed coverage 

generally will be the property’s last known insured value. 

(c) Flood insurance. Flood insurance must be obtained and maintained for the life of the loan 

for all property located in Special Flood Hazard Areas (SFHA) as determined by the Federal 

Emergency Management Agency (FEMA). RHS actions will be consistent with RD Instruction 

1970, Subpart F, 7 CFR part 1806, Subpart B, and RD Instruction 426.2 which address flood 

documentation and insurance requirements. If flood insurance through FEMA’s National Flood 

Insurance Program is not available in a SFHA, if the lowest floor (including the basement) is not 

above the base flood elevation, or if there are viable alternative housing options outside of the 

floodplain, the property is not eligible for federal financial assistance. 

(d) Losses. 

(1) Loss deductible clauses for required insurance coverage may not exceed the 

generally accepted minimums based on current industry standards and local market 

conditions. 

(2) Borrowers must immediately notify RHS of any loss or damage to insured 

property and collect the amount of the loss from the insurance company. 

(3) RHS may require that loss payments be supervised. All repairs and 

replacements done by or under the direction of the borrower, or by contract, will be 

planned, performed, inspected, and paid for in accordance with 7 CFR part 1924, 

subpart A. 

(4) When insurance funds remain after all repairs, replacements, and other 

authorized disbursements have been made, the funds will be applied in the 

following order: 

(i) Prior liens, including delinquent property taxes. 

(ii) Delinquency on the account. 

(iii) Advances due for recoverable cost items. 

(iv) Released to the borrower if the RHS debt is adequately secured. 

(5) If a loss occurs when insurance is not in force, the borrower is responsible for 

making the needed repairs or replacements and ensuring that the insurance is 

reinstated on the property. 

Appendix 1 - Page 67 
7 CFR Part 3550 

§ 3550.110 (d) (Con.) 

(6) If the borrower is not financially able to make the repairs, RHS may take one of 

the following actions: 

(i) Make a subsequent loan for repairs. 

(ii) Subordinate the RHS lien to permit the borrower to obtain funds for 

needed repairs from another source. 

(iii) Permit the borrower to obtain funds secured by a junior lien from another 

source. 

(iv) Make a protective advance to protect the Government's interest. 

(v) Accelerate the account and demand payment in full. 

§ 3550.111 Appraisals (loans only). 

An appraisal is required when the section 504 debt to be secured exceeds $15,000 or 

whenever RHS determines that it is necessary to establish the adequacy of the security. RHS 

may charge an appraisal fee. Appraisals must be made in accordance with the Uniform 

Standards of Professional Appraisal Practices. When other real estate is taken as additional 

security it will be appraised if it represents a substantial portion of the security for the loan. 

§ 3550.112 Maximum loan and grant. 

(a) Maximum loan permitted. The sum of all outstanding section 504 loans to one 

household for one dwelling may not exceed an amount determined by the Agency based on 

factors such as average loan amounts and repair costs, but no greater than twenty percent of the 

national average area loan limit. 

(1) Transferees who have assumed a section 504 loan and wish to obtain a 

subsequent section 504 loan are limited to the difference between the unpaid 

principal balance of the debt assumed and the maximum loan permitted. 

(2) For a secured loan, the total of all debts on the secured property may not 

exceed the value of the security, except by the amount of any required appraisal 

and tax monitoring fees, and the contributions to an escrow account for taxes and 

insurance. 

(b) Maximum loan based upon ability to pay. The maximum loan is limited to the 

principal balance that can be supported given the amount the applicant has available, as 

determined by RHS, to repay a loan at 1 percent interest with a 20-year term. 

(c) Maximum grant. The lifetime total of the grant assistance to any one household for 

one dwelling may not exceed ten percent of the national average area loan limit. 

Appendix 1 - Page 68 
Appendix 1 - Page 69 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

7 CFR Part 3550 

§ 3550.113 Rates and terms (loans only). 

(a) Interest rate. The interest rate for all section 504 loans will be 1 percent. 

(b) Loan term. The repayment period for all section 504 loans will be 20 years. 

§ 3550.114 Repayment agreement (grants only). 

Grant recipients are required to sign a repayment agreement which specifies that the full 

amount of the grant must be repaid if the property is sold in less than 3 years from the date the 

grant agreement was signed. 

§ 3550.115 WWD grant program objectives. 

The objective of the WWD individual grant program is to facilitate the use of community 

water and waste disposal systems by the residents of colonias along the border between the 

U.S. and Mexico. WWD grants are processed the same as Section 504 grants, except as 

specified in this subpart. 

§ 3550.116 Definitions applicable to WWD grants only. 

(a) Colonia. Any identifiable community designated in writing by the State or county in 

which it is located; determined to be a colonia on the basis of objective criteria including 

lack of a potable water supply, lack of adequate sewage systems, and lack of decent, safe, 

and sanitary housing, inadequate roads, and drainage; and existed and was generally 

recognized as a colonia before October 1, 1989. 

(b) Individual. Resident of a colonia located in a rural area. 

(c) Rural areas. Includes unincorporated areas and any city or town with a population not 

in excess of 10,000 inhabitants according to the most recent decennial census of the United 

States. 

(d) System. A community or central water supply or waste disposal system. 

(e) WWD. Water and Waste Disposal grants to individuals. 
7 CFR Part 3550 

Appendix 1 - Page 70 

§ 3550.117 WWD grant purposes. 

Grant funds may be used to pay the reasonable costs for individuals to: 

(a) Extend service lines from the system to their residence. 

(b) Connect service lines to residence’s plumbing. 

(c) Pay reasonable charges or fees for connecting to a system. 

(d) Pay for necessary installation of plumbing and related fixtures within dwellings lacking 

such facilities. This is limited to one bath tub, sink, commode, kitchen sink, water 

heater, and outside spigot. 

(e) Construction and/or partiting off a portion of the dwelling for a bathroom, not to 

exceed 4.6 square meters (48 square feet) in size. 

(f) Pay reasonable costs for closing abandoned septic tanks and water wells when 

necessary to protect the health and safety of recipients of a grant for a purpose 

provided in paragraph (a) or (b) of this section and is required by local or State law. 

(g) Make improvements to individual’s residence when needed to allow the use of the 

water and/or waste disposal system. 

§ 3550.118 Grant restrictions. 

(a) Maximum grant. Lifetime assistance to any individual for initial or subsequent Section 

306C WWD grants may not exceed a cumulative total of $5,000. 

(b) Limitation on use of grant funds. WWD grant funds may not be used to: 

(1) Pay any debt or obligation of the grantees other than obligations incurred for 

purposes listed in § 3550.117. 

(2) Pay individuals for their own labor. 

§ 3550.119 WWD eligibility requirements. 

In addition to the eligibility requirements of § 3550.103, WWD applicants must meet the 

following requirements: 

(a) An applicant need not be 62 years of age or older. 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 

§ 3550.119 (Con.) 

(b) Own and occupy a dwelling located in a colonia. Evidence of ownership will be 

presented as outlined in § 3550.107. 

(c) Have a total taxable income from all individuals residing in the household that is 

below the most recent poverty income guidelines established by the Department of Health 

and Human Services. 

(d) Must not be delinquent on any Federal debt. 

(e) The household income must be verified at the time they apply for assistance through 

verification of employment and benefits. Federal tax returns are used as further 

verification of household income. 

§§ 3550.120 - 3550.149 [Reserved] 

§ 3550.150 OMB control number. 

The information collection requirements contained in this regulation have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control number 

0575-0172. Public reporting burden for this collection of information is estimated to vary from 5 

minutes to 3 hours per response, with an average of 1 1/2 hours per response, including time 

for reviewing instructions, searching existing data sources, gathering and maintaining the data 

needed, and completing and reviewing the collection of information. You are not required to 

respond to this collection of information unless it displays a currently valid OMB control number. 

Subpart D - Regular Servicing 

§ 3550.151 Servicing goals. 

This subpart sets forth the Rural Housing Service (RHS) policies for managing the 

repayment of loans made under sections 502 and 504 of the Housing Act of 1949, as amended. 

Appendix 1 - Page 71 
7 CFR Part 3550 

Appendix 1 - Page 72 

§ 3550.152 Loan payments. 

(a) Payment terms. Unless the loan documents specify other loan repayment terms, 

borrowers are required to make monthly payments. Borrowers with existing loans 

specifying annual payments may request conversion to monthly payments, and must 

convert to a monthly payment schedule before any subsequent loan or new payment 

assistance is approved. Suitable forms of payment are: check, money order, or bank 

draft. Borrowers who make cash payments will be assessed a fee to cover the cost of 

conversion to a money order. 

(b) Application of payments. If a borrower makes less than the scheduled payment, the 

payment is held in suspense and is not applied to the borrower’s account. When 

subsequent payments are received in an amount sufficient to equal a scheduled payment, 

the amount will be applied in the following order: 

(1) Protective advances charged to the account. 

(2) Accrued interest due. 

(3) Principal due. 

(4) Escrow for taxes and insurance. 

(c) Multiple loans. When a borrower with multiple loans for the same property makes 

less than the scheduled payment on all loans, the payment will be applied to the oldest 

loan and then in declining order of age. Future remittances will be applied beginning with 

the oldest unpaid installment. 

(d) Application of excess payments. Borrowers can elect to make payments in excess of 

the scheduled amount to be applied to principal, provided there are no outstanding fees. 

§ 3550.153 Fees. 

RHS may assess reasonable fees including a tax service fee, fees for late payments, and 

fees for checks returned for insufficient funds. 

§ 3550.154 Inspections. 

RHS or its agent may make reasonable entries upon and inspections of any property 

used as security for an RHS loan as necessary to protect the interest of the Government. RHS 

will give the borrower notice at the time of or prior to an inspection. 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 

§ 3550.155 Escrow account. 

Escrow accounts will be administered in accordance with RESPA and section 501(e) of 

the Housing Act of 1949, as amended. 

(a) Upon creation of the escrow account, RHS may require borrowers to deposit funds 

sufficient to pay taxes and insurance premiums applicable to the mortgage for the period 

since the last payments were made and to fund a cushion as permitted by RESPA. 

(b) Borrowers may elect to escrow at any time during the terms of the loan if the 

outstanding RHS loan balance is over $2,500. 

(c) RHS may require borrowers to escrow in conjunction with any special servicing 

action. 

§ 3550.156 Borrower obligations. 

(a) After receiving a loan from RHS, borrowers are expected to meet a variety of 

obligations outlined in the loan documents. In addition to making timely payments, these 

obligations include: 

(1) Maintaining the security property, and 

(2) Maintaining an adequately funded escrow account, or paying real estate taxes, 

hazard and flood insurance, and other related costs when due. 

(b) If a borrower fails to fulfill these obligations, RHS may obtain the needed service and 

charge the cost to the borrower’s account. 

§ 3550.157 Payment subsidy. 

(a) Borrowers currently receiving payment subsidy. 

(1) RHS will review annually each borrower's eligibility for continued payment 

subsidy and determine the appropriate level of assistance. To be eligible for 

payment subsidy renewal, the borrower must also occupy the property. 

(2) If the renewal is not completed before the expiration date of the existing 

agreement, the effective date of the renewal will be either the expiration date of the 

previous agreement if RHS error caused the delay, or the next due date after the 

renewal is approved in all other cases. 

Appendix 1 - Page 73 
7 CFR Part 3550 

Appendix 1 - Page 74 

§ 3550.157 (a) (Con.) 

(3) The borrower must notify RHS whenever an adult member of the household 

becomes employed or changes employment, there is a change in household 

composition, or if income increases by at least 10 percent. The household may 

also report decreases in income. If the change in the household’s income will 

cause the payment for principal and interest to change by at least 10 percent, the 

household’s payment subsidy may be adjusted for a new 12-month period. The 

new agreement will be effective the due date following the date the borrower's 

information is verified by RHS. 

(b) Borrowers not currently receiving payment subsidy. Payment assistance may be 

granted to borrowers not currently receiving payment subsidy whose loans were 

approved on or after August 1, 1968, whose income does not exceed the applicable lowincome limit for the area, are personally occupying the RHS financed property, and meet 

the requirements of § 3550.53 (b), (e), and (f). In general, to receive payment assistance 

the term of the loan at closing must have been at least 25 years. If an account has been 

reamortized and the initial term of the loan was at least 25 years, payment assistance 

may be granted even though the term of the reamortized loan is less than 25 years. 

Payment assistance may be granted on a subsequent loan for repairs with a term of less 

than 25 years. 

(c) Cancellation of payment subsidy. RHS will cancel a payment subsidy if the borrower 

does not occupy the property, has sold or transferred title to the property, or is no longer 

eligible for payment subsidy. 

§ 3550.158 Active military duty. 

The Soldiers and Sailors Relief Act requires that the interest rate charged a borrower who 

enters full-time active military duty after a loan is closed not exceed six percent. Active military 

duty does not include participation in a military reserve or the National Guard unless the 

borrower is called to active duty. 

(a) Amount of assistance. If a borrower qualifies for payment subsidy after reduction of 

the interest rate to six percent, the amount of payment subsidy received during the period 

of active military duty will be the difference between the amount due at the subsidized 

rate for principal and interest and the amount due at a six percent interest rate. The six 

percent interest rate will be effective with the first payment due after RHS confirms the 

active military status of the borrower. 

(b) Change of active military status. The borrower must notify RHS when he or she is no 

longer on active military duty. RHS will cancel the six percent interest rate and resume 

use of the promissory note interest rate. A new payment subsidy agreement may be 

processed if the borrower is eligible. 
7 CFR Part 3550 

§ 3550.159 Borrower actions requiring RHS approval. 

(a) Mineral leases. Borrowers who wish to lease mineral rights to a security property 

must request authorization from RHS. RHS may consent to the lease of mineral rights 

and subordinate its liens to the lessee's rights and interests in the mineral activity if the 

security property will remain suitable as a residence and the Government's security 

interest will not be adversely affected. Subordination of RHS loans to a mineral lease 

does not entitle the leaseholder to any proceeds from the sale of the security property. 

(1) If the proposed activity is likely to decrease the value of the security property, 

RHS may consent to the lease only if the borrower assigns 100 percent of the 

income from the lease to RHS to be applied to reduce principal and the rent to be 

paid is at least equal to the estimated decrease in the market value of the security. 

(2) If the proposed activity is not likely to decrease the value of the security 

property, RHS may consent to the lease if the borrower agrees to use any damage 

compensation received from the lessee to repair damage to the site or dwelling, or 

to assign it to RHS to be applied to reduce principal. 

(b) Subordination. RHS may subordinate its interests to permit a borrower to defer 

recapture amounts and refinance the loan, or to obtain a subsequent loan with private 

credit. 

(1) When it is in the best interest of the Government, subordination will be 

permitted if: 

(i) The other lender will verify that the funds will be used for purposes for 

which an RHS loan could be made, 

(ii) The prior lien debt will be on terms and conditions that the borrower can 

reasonably be expected to meet without jeopardizing repayment of the RHS 

indebtedness, 

(iii) Any proposed development will be planned and performed in accordance 

with 7 CFR part 1924, subpart A or directed by the other lender in a manner 

which is consistent with that subpart, and 

(iv) An agreement is obtained in writing from the prior lienholder providing 

that at least 30 days prior written notice will be given to RHS before action to 

foreclose on the prior lien is initiated. 

Appendix 1 - Page 75 

(01-23-03) SPECIAL PN 

Revised (01-06-17) PN 492 
7 CFR Part 3550 

Appendix 1 - Page 76 

§ 3550.159 (b) (Con.) 

(2) The total amount of debt permitted when RHS subordinates its interests 

depends on whether the borrower pays off the RHS loan. 

(i) For situations in which the borrower is obtaining a subsequent loan from 

another source and will not pay off the RHS debt, the prior lien debt plus the 

unpaid balance of all RHS loans, exclusive of recapture, will not exceed the 

market value of the security. 

(ii) For situations in which RHS is subordinating only a deferred recapture 

amount, the prior lien debt plus the deferred recapture amount will not 

exceed the market value of the security. 

(c) Partial release of security. RHS may consent to transactions affecting the security, 

such as sale or exchange of security property or granting of a right-of-way across the 

security property, and grant a partial release provided: 

(1) The compensation is: 

(i) For sale of the security property, cash in an amount equal to the value of 

the security being disposed of or rights granted. 

(ii) For exchange of security property, another parcel of property acquired in 

exchange with value equal to or greater than that being disposed of. 

(iii) For granting an easement or right-of-way, benefits derived that are equal 

to or greater than the value of the security property being disposed of. 

(2) An appraisal must be conducted if the latest appraisal is more than 1 year old 

or if it does not reflect market value and the amount of consideration exceeds 

$5,000. The appraisal fee will be charged to the borrower. 

(3) The security property, after the transaction is completed, will be an adequate 

but modest, decent, safe, and sanitary dwelling and related facilities. 

(4) Repayment of the RHS debt will not be jeopardized. 

(5) Environmental requirements are met and environmental documentation is 

submitted in accordance with 7 CFR part 1970. 

(6) When exchange of all or part of the security is involved, title clearance are 

obtained before release of the existing security. 
7 CFR Part 3550 

§ 3550.159 (c) (Con.) 

(7) Proceeds from the sale of a portion of the security property, granting an 

easement or right-of-way, damage compensation, and all similar transactions 

requiring RHS consent, will be used in the following order: 

(i) To pay customary and reasonable costs related to the transaction that 

must be paid by the borrower. 

(ii) To be applied on a prior lien debt, if any. 

(iii) To be applied to RHS indebtedness or used for improvements to the 

security property in keeping with purposes and limitations applicable for use 

of RHS loan funds. Proposed development will be planned and performed in 

accordance with 7 CFR part 1924, subpart A and supervised to ensure that 

the proceeds are used as planned. 

(d) Lease of security property. A borrower must notify RHS if they lease the property. If 

the lease is for a term of more than 3 years or contains an option to purchase, RHS may 

liquidate the loan. During the period of any lease, the borrower is not eligible for a 

payment subsidy or special servicing benefits. 

§ 3550.160 Refinancing with private credit. 

(a) Objective. RHS direct loan programs are not intended to supplant or compete with 

private credit sources. Therefore, borrowers are required to refinance RHS loans with 

private credit sources when RHS determines that the borrower meets RHS criteria. 

(b) Criteria for refinancing with private credit. Borrowers must refinance with private 

credit when RHS determines that the borrower has the ability to obtain other credit at 

reasonable rates and terms based on their income, assets, and credit history. 

Reasonable rates and terms are those commercial rates and terms that borrowers are 

expected to meet when borrowing for similar purposes. Differences in interest rates and 

terms between RHS and other lenders will not be an acceptable reason for a borrower to 

fail to refinance with private credit if the available rates and terms are within the 

borrower's ability to pay. 

(c) Notice of requirement to refinance with private credit. The financial status of all 

borrowers may be reviewed periodically to determine their ability to refinance with private 

credit. A borrower's financial status may be reviewed at any time if information becomes 

available to RHS that indicates that the borrower's circumstances have changed. 

Appendix 1 - Page 77 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 
7 CFR Part 3550 

Appendix 1 - Page 78 

§ 3550.160 (c) (Con.) 

(1) A borrower undergoing review is required to supply, within 30 days of a request 

from RHS, sufficient financial information to enable RHS to determine the 

borrower’s ability to refinance with private credit. Foreclosure action may be 

initiated against any borrower who fails to respond. 

(2) When RHS determines that a borrower has the ability to refinance with private 

credit, the borrower will be required to refinance within 90 days. 

(3) Within 30 days after being notified of the requirement to refinance with private 

credit, a borrower may contest the RHS decision and provide additional financial 

information to document an inability to refinance with private credit. 

(d) Failure to refinance with private credit. 

(1) If the borrower is unable to secure private credit, the borrower must submit 

written statements and documentation to RHS showing: 

(i) The lenders contacted. 

(ii) The amount of the loan requested by the borrower and the amount, if any, 

offered by the lenders. 

(iii) The rates and terms offered by the lenders or the specific reasons why 

other credit is not available. 

(iv) The information provided by the borrower to the lenders regarding the 

purpose of the loan. 

(2) If RHS determines that the borrower's submission does not demonstrate the 

borrower's inability to refinance with private credit, or if the borrower fails to submit 

the required information, foreclosure may be initiated. 

(e) Subordination of recapture amount. RHS may subordinate its interest in any deferred 

recapture amount to permit a borrower to refinance with private credit. The amount to 

which the RHS debt will be subordinated may include: 

(1) The amount required to repay the RHS debt, exclusive of recapture, 

(2) Reasonable closing costs, 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

§ 3550.160 (e) (Con.) 

(3) Up to one percent of the loan amount for loan servicing costs, if required by 

the lender, and 

(4) The cost of any necessary repairs or improvements to the security property. 

(f) Application for additional credit. A borrower who has been asked to refinance with 

private credit will not be considered for additional credit until the refinancing issue is 

resolved unless such additional credit is necessary to protect the Government’s interest. 

§ 3550.161 Final payment. 

(a) Payment in full. Full payment of a borrower’s account includes repayment of principal 

and outstanding interest, unauthorized assistance, recapture amounts, and charges 

made to the borrower’s account. Any supervised funds or funds remaining in a borrower’s 

escrow account will be applied to the borrower’s account or returned to the borrower. 

(b) Release of security instruments. RHS may release security instruments when full 

payment of all amounts owed has been received and verified. If RHS and the borrower 

agree to settle the account for less than the full amount owed, the security instruments 

may be released when all agreed-upon amounts are received and verified. Security 

instruments will not be released until any deferred recapture amount has been paid in full. 

(c) Payoff statements. At the borrower’s request, RHS will provide a written statement 

indicating the amount required to pay the account in full. RHS may charge a fee for 

statements for the same account if more than 2 statements are requested in any 30 

day period. 

(d) Suitable forms of payment. Suitable forms of payment are: check, money order, or 

bank draft. Borrowers who make cash payments will be assessed a fee to cover 

conversion to a money order. 

(e) Recording costs. Recording costs for the release of the mortgage will be the 

responsibility of the borrower, except where State law requires the mortgagee to record 

or file the satisfaction. 

§ 3550.162 Recapture. 

(a) Recapture policy. Borrowers with loans approved or assumed on or after October 1, 

1979, will be required to repay subsidy amounts received through payment subsidy 

(including the former interest credit program) or deferred mortgage assistance in 

accordance with paragraph (b) of this section. Amounts to be recaptured are due and 

payable when the borrower transfers title or ceases to occupy the property, including 

but not limited to, in the event of foreclosure or deed in lieu of foreclosure. 

Appendix 1 - Page 79 
Appendix 1 - Page 80 

7 CFR Part 3550 

§ 3550.162 (Con.) 

Such recapture will include the amount of principal reduction attributed to subsidy (for 

loans subject to recapture that were approved, and received interest credit, between 

October 1, 1979, and December 31, 1989), except in cases of foreclosure and deed in 

lieu of foreclosure. 

(b) Amount to be recaptured. 

(1) General. The amount to be recaptured is determined by a calculation 

specified in the borrower’s subsidy repayment agreement and is based on the 

borrower’s equity in the property at the time of loan pay off. If there is no 

equity based on the recapture calculation, the amount of principal reduction 

attributed to subsidy is not collected. The recapture calculation includes the 

amount of principal reduction attributed to subsidy plus the lesser of: 

(i) The amount of subsidy received; or 

(ii) A portion of the value appreciation of the property subject to recapture. In 

order for the value appreciation to be calculated, the borrower will provide a 

current appraisal, including an appraisal for any capital improvements, or 

arm’s length sales contract as evidence of market value upon Agency 

request. Appraisals must meet Agency standards under § 3550.62. 

(2) Foreclosure or deed in lieu of foreclosure. Notwithstanding paragraph (b) (1) of 

this section, the amount to be recaptured in a foreclosure or deed in lieu of 

foreclosure is the amount of subsidy received, not including any principal 

reduction attributed to subsidy. Foreclosure actions will seek to recover such 

amounts only from the proceeds of the property. Liquidation proceeds (in the 

case of foreclosure) or the net recovery value (in the case of deed in lieu of 

foreclosure) will be applied or credited to the borrower’s debt in accordance 

with the security agreement in the following order: 

(i) Recoverable costs (e.g. protective advances, foreclosure costs, late 

charges). 

(ii) Accrued interest. 

(iii) Principal. 

(iv) Subsidy. 

(3) Value appreciation. The value appreciation of a property with a crosscollateralized loan is based on the market value of the dwelling and lot. If located 

on a farm, the lot size would be a typical lot for a single family housing property. 

(4) Interest reduced from the promissory note rate to six percent under the 

Servicemembers Civil Relief Act (SCRA) is not subject to recapture. 
(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

7 CFR Part 3550 

§ 3550.162 (Con.) 

(c) Deferral of recapture. If the borrower refinances or otherwise pays in full without 

transfer of title and continues to occupy the property, the amount of recapture will be 

calculated in accordance with paragraph (a) but payment of recapture may be deferred, 

interest free, until the property is sold or vacated. If the recapture amount is deferred, the 

Agency mortgage can be subordinated when in the Government’s best interest but will 

not be released nor the promissory note satisfied until the Agency is paid in full. In 

situations where deferral of recapture is an option, recapture will be discounted if paid in 

full at the time of settlement or timely paid after Agency notification to the borrower that 

recapture is due. 

(d) Assumed loans. 

(1) When a loan subject to recapture is assumed under new rates and terms, the 

recapture amount may be paid in full by the seller or included in the principal 

amount assumed by the buyer. 

(2) When a loan is assumed under the same rates and terms as the original 

promissory note, recapture amounts will not be due. When the new borrower 

transfers title or ceases to occupy the property, all subsidy subject to recapture 

before and after the assumption is due. 

(3) When a borrower has deferred payment of recapture amounts, the deferred 

recapture amount may be included in the principal amount of the new loan. 

Appendix 1 Page 81 
7 CFR Part 3550 

Appendix 1 - Page 82 

§ 3550.163 Transfer of security and assumption of indebtedness. 

(a) General policy. RHS mortgages contain due-on-sale clauses that generally require 

RHS consent before title to a security property can be transferred with an assumption of 

the indebtedness. If it is in the best interest of the Government, RHS will approve the 

transfer of title and assumption of indebtedness on program or nonprogram (NP) terms, 

depending on the transferee's eligibility and the property’s characteristics. 

(b) RHS approval of assumptions. 

(1) A borrower with a loan on program terms who wishes to transfer a security 

property restricted by a due-on-sale clause to a purchaser who wishes to assume 

the debt must receive prior authorization from RHS. If RHS authorizes the transfer 

and assumption, the account will be serviced in the purchaser’s name and the 

purchaser will be liable for the loan under the terms of the security instrument. 

(2) If a borrower transfers title to the security property with a due-on-sale clause 

without obtaining RHS authorization, RHS will not approve assumption of the 

indebtedness, and the loan will be liquidated unless RHS determines that it is in the 

Government's best interest to continue the loan. If RHS decides to continue the 

loan, the account will be serviced in the original borrower's name and the original 

borrower will remain liable for the loan under the terms of the security instrument. 

(c) Exceptions to due-on-sale clauses. 

(1) Due-on-sale clauses are not triggered by the following types of transfers: 

(i) A transfer from the borrower to a spouse or children not resulting from the 

death of the borrower. 

(ii) A transfer to a relative, joint tenant, or tenant by the entirety resulting from 

the death of the borrower. 
7 CFR Part 3550 

Appendix 1 - Page 83 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 

§ 3550.163 (c)(1) (Con.) 

(iii) A transfer to a spouse or ex-spouse resulting from a divorce decree, 

legal separation agreement, or property settlement agreement. 

(iv) A transfer to a person other than a deceased borrower’s spouse who 

wishes to assume the loan for the benefit of persons who were dependent on 

the deceased borrower at the time of death, if the dwelling will be occupied 

by one or more persons who were dependent on the borrower at the time of 

death, and there is a reasonable prospect of repayment. 

(v) A transfer into an inter vivos trust in which the borrower does not transfer 

rights of occupancy in the property. 

(2) A transferee who obtains property through one of the types of transfer listed in 

paragraph (c)(1) of this section: 

(i) Is not required to assume the loan, and RHS is not permitted to liquidate 

the loan, if the transferee continues to make scheduled payments and meet 

all other obligations of the loan. A transferee who does not assume the loan 

is not eligible for payment assistance or a moratorium. 

(ii) May assume the loan on the rates and terms contained in the promissory 

note, with no down payment. If the account is past due at the time an 

assumption is executed, the account may be brought current by using any of 

the servicing methods discussed in subpart E of this part. 

(iii) May assume the loan under new rates and terms if the transferee applies 

and is program-eligible. 

(3) Any subsequent transfer of title, except upon death of the inheritor or between 

inheritors to consolidate title, will be treated as a sale. 

(d) Requirements for an assumption. 

(1) Loans secured by program-eligible properties to be assumed by programeligible purchasers may be assumed on program terms. Loans secured by 

nonprogram properties and loans to be assumed by purchasers who are not eligible 

for program terms may be assumed on NP terms. 

(2) The amount the transferee will assume will be either the current market value 

less any prior liens and any required down payment, or the indebtedness, 

whichever is less. 
7 CFR Part 3550 

Appendix 1 - Page 84 

§ 3550.163 (d) (Con.) 

(3) For loans assumed on program terms, the interest rate charged by RHS will be 

the rate in effect at loan approval or loan closing, whichever is lower. For loans 

assumed on nonprogram terms, the interest rate charged by RS will be the rate in 

effect at the time of loan approval. 

(4) If additional financing is required to purchase the property or to make repairs, 

RHS may approve a subsequent loan under subparts B or C of this part. 

(5) If an appraisal is required for an assumption on new terms, the purchaser is 

responsible for the appraisal fee. 

(6) If all or a portion of the borrower’s account balance is assumed, the borrower 

and cosigner, if any, will be released from liability on the amount of the 

indebtedness assumed. If an account balance remains after the assumption, RHS 

may pursue debt settlement in accordance with subpart F of this part. 

(7) Unless it is in the Government’s best interest, RHS will not approve an 

assumption of a secured loan if the seller fails to repay any unsecured RHS loan. 

(8) If a loan is secured by a property with a dwelling situated on more than a 

minimum adequate site and the excess property cannot be sold separately as a 

minimum adequate site for another dwelling, RHS may approve a transfer of the 

entire property. If the excess property can be sold separately as a minimum 

adequate site, RHS will approve assumption of only the dwelling and the minimum 

adequate site. If the value of the dwelling on the minimum adequate site is less 

than the amount of the outstanding RHS debt, the remaining debt will be secured 

by the excess property. The outstanding debt will be converted to an NP loan and 

reamortized over a period not to exceed 10 years or the final due date of the 

original promissory note, whichever is sooner. 

§ 3550.164 Unauthorized assistance. 

(a) Definition. Unauthorized assistance includes any loan, payment subsidy, deferred 

mortgage payment, or grant for which the recipient was not eligible. 

(b) Unauthorized assistance due to false information. 

(1) False information includes information that the recipient knew was incorrect or 

should have know was incorrect that was provided or omitted for the purposes of 

obtaining assistance for which the recipient was not eligible. 
7 CFR Part 3550 

§ 3550.164 (b) (Con.) 

(2) If the recipient receives an unauthorized loan due to false information, RHS will 

adjust the account using the NP interest rate that was in effect when the loan was 

approved. The recipient must pay the account in full within 30 days. 

(3) If the recipient receives unauthorized subsidy due to false information, RHS will 

require the recipient to repay it within 30 days. The account cannot be reamortized 

to include the unauthorized subsidy. If the recipient repays the unauthorized 

subsidy, the loan may be continued. 

(c) Unauthorized assistance due to inaccurate information. 

(1) Inaccurate information includes incorrect information inadvertently provided, 

used, or omitted without the intent to obtain benefits for which the recipient was not 

eligible. 

(2) RHS will permit a recipient who receives an unauthorized loan due to 

inaccurate information to retain the loan under the following conditions. 

(i) If the inaccurate information was related to the purpose of the loan or the 

recipient’s eligibility, with the exception of income, or the income used was 

incorrect, but the recipient still qualified as income-eligible, RHS will allow the 

recipient to continue the loan on existing terms. 

(ii) If a section 502 recipient’s income was above the moderate-income level, 

RHS will convert the loan to an NP loan, using the nonprogram interest rate 

in effect on the date the loan was approved. 

(iii) If a section 504 recipient’s income was above the very low-income level, 

RHS will apply the applicable 502 or nonprogram interest rate in effect on the 

date the loan was approved. 

(iv) If an incorrect interest rate was used, RHS will adjust the account using 

the correct interest rate. 

(3) If the recipient receives unauthorized subsidy due to inaccurate information, 

RHS will require the recipient to repay it within 30 days. If the recipient cannot 

repay it within 30 days, the account may be reamortized. If the recipient repays the 

unauthorized subsidy or reamortizes the loan, the loan may be continued. 

Appendix 1 - Page 85 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 
Appendix 1 - Page 86 

7 CFR Part 3550 

§ 3550.164 (c) (Con.) 

(d) Unauthorized grants. Recipients may either repay the unauthorized assistance in a 

lump sum or execute a promissory note, regardless of whether the unauthorized 

assistance was due to false or inaccurate information. RHS may seek a judgment if the 

recipient refuses to repay the unauthorized assistance. 

(e) Account servicing. RHS will adjust all accounts retroactively to establish the amount 

of unauthorized assistance. If the recipient does not repay the unauthorized assistance 

within 30 days, RHS may accelerate the loan. If the unauthorized assistance is due to 

inaccurate information and the recipient is unable to repay within 30 days, RHS may 

reamortize the loan. 

(f) Accounts with no security. If an unauthorized loan or grant is unsecured, RHS may 

seek the best mortgage obtainable. 

§§ 3550.165 - 3550.199 [Reserved] 

§ 3550.200 OMB control number. 

The information collection requirements contained in this regulation have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control number 

0575-0172. Public reporting burden for this collection of information is estimated to vary from 5 

minutes to 3 hours per response, with an average of 1 1/2 hours per response, including time 

for reviewing instructions, searching existing data sources, gathering and maintaining the data 

needed, and completing and reviewing the collection of information. You are not required to 

respond to this collection of information unless it displays a currently valid OMB control number. 

Subpart E - Special Servicing 

§ 3550.201 Purpose of special servicing actions. 

The Rural Housing Service (RHS) may approve special servicing actions to reduce the 

number of borrower failures that result in liquidation. Borrowers who have difficulty keeping 

their accounts current may be eligible for one or more available servicing options including: 

payment assistance; delinquency workout agreements that temporarily modify payment terms; 

protective advances of funds for taxes, insurance, and other approved costs; and payment 

moratoriums. Subject to the availability of funds and Agency priorities, refinancing may be 

available as a special servicing option in accordance with § 3550.52 (c). 
7 CFR Part 3550 

§ 3550.202 Past due accounts. 

An account is past due if the scheduled payment is not received by the due date. 

(a) Late fee. A late fee will be assessed if the full scheduled payment is not received by 

the 15th day after the due date, or as authorized by State law. 

(b) Liquidation. 

(1) For borrowers with monthly payments. The account may be accelerated 

without further servicing when at least 3 scheduled payments are past due or an 

amount equal to at least 2 scheduled payments is past due for at least 3 

consecutive months. In such cases RHS may pursue voluntary liquidation and 

foreclosure. 

(2) For borrowers with annual payments. The account may be accelerated without 

further servicing when at least 3/12ths of 1 scheduled payment has not been 

received by its due date. In such cases, RHS may pursue voluntary liquidation and 

foreclosure. 

(3) Subsidy recapture. Acceleration under this section will take into account any 

subsidy recapture due under § 3550.162. 

§ 3550.203 General servicing actions. 

Whenever any of the servicing actions described in this subpart result in reamortization of 

the account RHS may: 

(a) Require a borrower who currently makes annual payments, but receives a monthly 

income, to convert to monthly payments.

(b) Require the creation and funding of an escrow account for real estate taxes and 

insurance, if one does not already exist for any borrower with monthly payments. 

(c) Convert the method of calculating interest for any account being charged daily simple 

interest to an amortized payment schedule. 

§ 3550.204 Payment assistance. 

Borrowers who are eligible may be offered payment assistance in accordance with 

subpart B of this part. Borrowers who are not eligible for payment assistance because the loan 

was approved before August 1, 1968, or the loan was made on above-moderate or nonprogram 

(NP) terms, may refinance the loan in order to obtain payment assistance if: 

(a) The borrower is eligible to receive a loan with payment assistance, 

Appendix 1 - Page 87 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 
7 CFR Part 3550 

§ 3550.204 (Con.) 

(b) Due to circumstances beyond the borrower's control, the borrower is in danger of 

losing the property, and 

(c) The property is program-eligible. 

§ 3550.205 Delinquency workout agreements. 

Borrowers with past due accounts may be offered the opportunity to avoid liquidation by 

entering into a delinquency workout agreement that specifies a plan for bringing the account 

current. To receive a delinquency workout agreement, the following requirements apply: 

(a) A borrower who is able to do so will be required to pay the past-due amount in a 

single payment. 

(b) A borrower who is unable to pay the past-due amount in a single payment must pay 

monthly all scheduled payments plus an agreed upon additional amount that brings the 

account current within 2 years or the remaining term of the loan, whichever is shorter. 

(c) If a borrower becomes more than 30 days past due under the terms of a delinquency 

workout agreement, RHS may cancel the agreement. 

§ 3550.206 Protective advances. 

RHS may pay for fees or services and charge the cost against the borrower’s account to 

protect the Government’s interest. 

(a) Advances for taxes and insurance. RHS may advance funds to pay real estate taxes, 

hazard and flood insurance premiums, and other related costs, as well as amounts 

needed to fund the current escrow cycle. 

(b) Advances for costs other than taxes and insurance. Protective advances for costs 

other than taxes and insurance, such as emergency repairs, will be made only if the 

borrower cannot obtain a subsequent loan. 

(c) Repayment arrangements. 

(1) Advances for borrowers with multiple loans will be charged against the largest 

loan. 

(2) Amounts advanced will be due with the next scheduled payment. RHS may 

schedule repayment consistent with the borrower’s ability to repay or reamortize the 

loan. 

(3) Advances will bear interest at the promissory note rate of the loan to which the 

advance was charged. 

Appendix 1 - Page 88 
7 CFR Part 3550 

§ 3550.207 Payment moratorium. 

RHS may defer a borrower’s scheduled payments for up to 2 years. NP borrowers are 

not eligible for a payment moratorium. 

(a) Borrower eligibility. For a borrower to be eligible for a moratorium, all of the following 

conditions must be met: 

(1) Due to circumstances beyond the borrower's control, the borrower is 

temporarily unable to continue making scheduled payments because: 

(i) The borrower's repayment income fell by at least 20 percent within the 

past 12 months, 

(ii) The borrower must pay unexpected and unreimbursed expenses resulting 

from the illness, injury, or death of the borrower or a family member, or 

(iii) The borrower must pay unexpected and unreimbursed expenses 

resulting from damage to the security property in cases where adequate 

hazard insurance was not available or was prohibitively expensive. 

(2) The borrower occupies the dwelling, unless RHS determines that it is 

uninhabitable. 

(3) The borrower's account is not currently accelerated. 

(b) Reviews of borrower eligibility. 

(1) Periodically RHS may require the borrower to submit financial information to 

demonstrate that the moratorium should be continued. The moratorium may be 

canceled if: 

(i) The borrower does not respond to a request for financial information, 

(ii) RHS receives information indicating that the moratorium is no longer 

required, or 

(iii) In the case of a moratorium granted to pay unexpected or unreimbursed 

expenses, the borrower cannot show that an amount at least equal to the 

deferred payments has been applied toward the expenses. 

Appendix 1 - Page 89 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 
7 CFR Part 3550 

Appendix 1 - Page 90 

§ 3550.207(b) (Con.) 

(2) At least 30 days before the moratorium is scheduled to expire, the borrower 

must provide financial information needed to process the re-amortization of the 

loan(s). 

(c) Resumption of scheduled payments. When the moratorium expires or is cancelled, 

the loan will be re-amortized to include the amount deferred during the moratorium and 

the borrower will be required to escrow. If the new monthly payment, after consideration 

of the maximum amount of payment subsidy available to the borrower, exceeds the 

borrower's repayment ability, all or part of the interest that has accrued during the 

moratorium may be forgiven so that the new monthly payment optimizes both affordability 

to the borrower as well as the best interest of the Government. 

§ 3550.208 Reamortization using promissory note interest rate. 

Reamortization using the promissory note interest rate may be authorized when RHS 

determines that reamortization is required to enable the borrower to meet scheduled 

obligations, and only if the Government’s lien priority is not adversely affected. 

(a) Permitted uses. Reamortization at the promissory note interest rate may be used to 

accomplish a variety of servicing actions, including to: 

(1) Repay unauthorized assistance due to inaccurate information. 

(2) Repay principal and interest accrued and advances made during a moratorium. 

(3) Bring current an account under a delinquency workout agreement after the 

borrower has demonstrated the willingness and ability to meet the terms of the loan 

and delinquency workout agreement and reamortization is in the borrower’s and 

Government’s best interests. 

(4) Bring a delinquent account current in the case of an assumption where the due 

on sale clause is not triggered as described in § 3550.163(c). 

(5) Cover the remaining debt when a portion of the security property is being 

transferred but the acquisition price does not cover the outstanding debt. The 

remaining balance will be reamortized for a period not to exceed 10 years or the 

final due date of the note being reamortized, whichever is sooner. 
7 CFR Part 3550 

Appendix 1 - Page 91 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 

§ 3550.208 (a) (Con.) 

(6) Bring an account current where the National Appeals Division (NAD) reverses 

an adverse action, the borrower has adequate repayment ability, and RHS 

determines the reamortization is in the best interests of the Government and the 

borrower. 

(b) Payment term of reamortized loan. Except as noted in paragraph (a)(5) of this 

section, the term of the reamortized loan may be extended to the maximum term for which 

the borrower was eligible at the time the loan was originally made, less the number of 

years the loan has been outstanding. In all cases, the term must not exceed the 

remaining security life of the property. 

§ 3550.209 [Reserved] 

§ 3550.210 Offsets. 

Any money that is or may become payable from the United States to an RHS borrower 

may be subject to administrative, salary, or Internal Revenue Service (IRS) offsets for the 

collection of a debt owed to RHS. 

(a) IRS offset. RHS may take action to effect offset of claims due RHS against tax 

refunds due to RHS debtors under 31 U.S.C. 3720a and 31 CFR 285.2. 

(b) Salary offset. Offset of claims due to RHS may be collected pursuant to the salary 

offset provisions in 7 CFR part 3, subpart C for a federal employee or other persons 

covered in that subpart. 

(c) Administrative offset. RHS may take action to effect administrative offset to recover 

delinquent claims due to it in accordance with the procedures in 7 CFR part 3, subpart B. 

(d) Offset by other federal agencies. Escrow funds and loan and grant funds held or 

payable by RHS are not subject to offset by other federal agencies. 

§ 3550.211 Liquidation. 

(a) Policy. When RHS determines that a borrower is unable or unwilling to meet loan 

obligations, RHS may accelerate the loan and, if necessary, acquire the security property. 

The borrower is responsible for all expenses associated with liquidation and acquisition. 

If the account is satisfied in full, the borrower will be released from liability. RHS may 

pursue any deficiency unless the borrower received a moratorium at any time during the 

life of the loan and faithfully tried to repay the loan. 
7 CFR Part 3550 

§ 3550.211 (Con.) 

Appendix 1 - Page 92 

(b) Tribal allotted or trust land. Liquidations involving a security interest in tribal allotted 

or trust land shall only be pursued after offering to transfer the account to an eligible tribal 

member, the tribe, or the Indian Housing Authority. Forced liquidation of RHS security 

interests in Indian trust lands or on tribal allotted land will be recommended only after the 

State Director has determined it is in the best interest of the Government. 

(c) Acceleration and foreclosure. If RHS determines that foreclosure is in the best 

interest of the Government, RHS will send an acceleration notice to each borrower and 

any cosigner. 

(d) Voluntary liquidation. After acceleration, borrowers may voluntarily liquidate through: 

(1) Refinancing or sale. The borrower may refinance or sell the security property 

for at least net recovery value and apply the proceeds to the account. 

(2) Deed in lieu of foreclosure. RHS may accept a deed in lieu of foreclosure to 

convey title to the security property only after the debt has been accelerated and 

when it is in the Government’s best interest. 

(3) Offer by third party. If a junior lienholder or cosigner makes an offer in the amount 

of at least the net recovery value, RHS may assign the note and mortgage. 

(e) Bankruptcy. 

(1) When a petition in bankruptcy is filed by a borrower after acceleration, 

collection actions and foreclosure actions are suspended in accordance with the 

provisions of the Bankruptcy Code. 

(2) RHS may accept conveyance of security property by the trustee in bankruptcy if 

the Bankruptcy Court has approved the transaction, RHS determines the 

conveyance is in the best interest of the Government, and RHS will acquire title free 

of all liens and encumbrances except RHS liens. 

(3) Whenever possible in a Chapter 7 Bankruptcy, a reaffirmation agreement will 

be signed by the borrower and approved by the court prior to discharge, if RHS 

decides to continue with the borrower. 

(f) Junior lienholder foreclosure. When a junior lienholder foreclosure does not result in 

payment in full of the RHS debt but the property is sold subject to the RHS lien, RHS may 

liquidate the account unless the new owner is eligible to assume the RHS debt and 

actually assumes the RHS debt. 

(g) Payment subsidy. If the borrower is receiving payment subsidy, the payment subsidy 

agreement will not be canceled when the debt is accelerated, but will not be renewed 

unless the account is reinstated. 
(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

7 CFR Part 3550 

§ 3550.211 (Con.) 

(h) Eligibility for special servicing actions. A borrower is not eligible for special servicing 

actions once the account has been accelerated. 

(i) Reporting. RHS may report to IRS and credit reporting agencies any debt settled 

through liquidation. 

§§ 3550.212 - 3550.249 [Reserved] 

§ 3550.250 OMB control number. 

The information collection requirements contained in this regulation have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control number 

0575-0172. Public reporting burden for this collection of information is estimated to vary from 5 

minutes to 3 hours per response, with an average of 1 1/2 hours per response, including time 

for reviewing insurrections, searching existing data sources, gathering and maintaining the data 

needed, and completing and reviewing the collection of information. You are not required to 

respond to this collection of information unless it displays a currently valid OMB control number. 

Subpart F - Post-Servicing Actions 

§ 3550.251 Property management and disposition. 

(a) Policy. Rural Housing Service (RHS) will manage custodial property and Real Estate 

Owned (REO) property to protect the Government’s interest, and may dispose of REO 

property through direct sales, sealed bid, or auction. RHS will follow affirmative fair 

housing marketing policies. 

(b) Custodial property. RHS may take custodial possession of security property that has 

been abandoned, or for other reasons necessary to protect the Government’s security. 

After taking custodial possession of a security property, RHS may maintain and repair the 

security property as needed to protect the Government’s interest, pay required real estate 

taxes and assessments, and secure personal property left on the premises. Expenses 

will be charged to the borrower's account. Custodial property may be leased when it is in 

the Government’s best interest and in such cases the borrower’s account will be credited 

for income from the security property. 

Appendix 1 - Page 93 
7 CFR Part 3550 

Appendix 1 - Page 94 

§ 3550.251 (Con.) 

(c) REO property. 

(1) Classification. When RHS takes title to a security property, it is classified as 

either program or nonprogram (NP) property. An REO property that is eligible for 

financing under the section 502 program, or which could reasonably be repaired to 

be eligible, is classified as program property. An REO property that cannot 

reasonably be repaired to be eligible as section 502 property, and property that has 

been improved to a point that it will no longer qualify as modest under section 502, 

is classified as NP property. 

(2) Disclosing decent, safe, and sanitary defects. When RHS determines that an 

REO property to be sold is not decent, safe, and sanitary, or does not meet costeffective energy conservation standards, it will disclose the reasons why. The deed 

by which such an REO property is conveyed will contain a covenant restricting it 

from residential use until it is decent, safe, and sanitary and meets the RHS costeffective energy conservation standards. RHS will also notify any potential 

purchaser of any known lead-based paint hazards. 

(3) Property on Indian tribal allotted or trust land. REO property which is located 

on Indian tribal allotted or trust land, will be sold or otherwise disposed of only to a 

member of the particular tribe having jurisdiction over the allotted or tribal land, to 

the tribe, or to an Indian housing authority serving the tribe on a first-come, firstserved basis. 

(4) Sale of program REO properties. For no less than 30 days after a program REO 

property is listed for sale, the property will be reserved for sale to eligible direct or 

guaranteed single family housing very-low, low- or moderate income applicants 

under this part or part 3555 of this title, and for sale or lease to nonprofit 

organizations or public bodies providing transitional housing and turnkey housing for 

tenants of such transitional housing in accordance with 42 U.S.C. 11408a. Offers 

from eligible direct or guaranteed single family housing applicants are evaluated at 

the listed price, not the offering price. Priority of offers received the same day from 

eligible direct or guaranteed single family housing applicants will be given to 

applicants qualifying for veterans’ preference, cash offers from highest to lowest, 

then credit offers from highest to lowest. Acceptable offers of equal priority received 

on the same business day are selected by lot. After the expiration of a reservation 

period, REO properties can be bought by any buyer. 
7 CFR Part 3550 

(01-23-03) SPECIAL PN 

Revised (03-09-22) SPECIAL PN 

§ 3550.251 (c) (Con.) 

(5) Sale by sealed bid or auction. RHS may authorize the sale of an REO property 

by sealed bid or public auction when it is in the best interest of the Government. 

(d) Special purposes. 

(1) REO property may be purchased for conversion to multiple family housing. 

Appendix 1 - Page 95 
7 CFR Part 3550 

§ 3550.251 (d)(Con.) 

(2) RHS shall follow the standards and procedures in 42 U.S.C. 11408a for the 

sale or lease of an REO property to a public agency or nonprofit organization. The 

terms of the sale and lease, and the entity seeking to purchase or lease the REO 

property, must meet the requirements in 42 U.S.C. 11408a. 

(3) REO property may be sold under special provisions to nonprofit organizations 

or public bodies for the purpose of providing affordable housing to very low- and 

low-income families. 

§ 3550.252 Debt settlement policies. 

(a) Applicability. Debt settlement procedures may be initiated to collect any amounts due 

to RHS including: 

(1) Balances remaining on loan accounts after all liquidation proceeds or credits 

have been applied, 

(2) Subsidy recapture or grant amounts due, and 

(3) Unauthorized assistance due. 

(b) Judgment. RHS may seek a judgment whenever a judgment might enable RHS to 

collect all or a significant portion of an amount owed. 

(c) Multiple loans. RHS does not settle debts for one loan while other RHS loans on the 

same security property remain active. 

(d) Cosigners and claims against estates. RHS may use any and all remedies available 

under law to collect from any cosigner and from a deceased borrower's estate. 

(e) Reporting. RHS will report to the Internal Revenue Service and credit reporting 

agencies any debt settled through cancellation, compromise, or adjustment. 

Appendix 1 - Page 96 
7 CFR Part 3550 

§ 3550.252 (Con.) 

(f) Settlement during legal or investigative action. Cases that are under investigation for 

fiscal irregularity or have been referred to the Office of the Inspector General, the Office of 

the General Counsel, or the U.S. Attorney will not be considered for debt settlement until 

final action by the investigating or prosecuting entity has been taken. 

(g) Offsets. RHS may request offsets as described in § 3550.210 to collect amounts 

owed. 

(h) Escrow funds. At liquidation all funds held in escrow or unapplied funds will be 

applied against the debt. 

§ 3550.253 Settlement of a debt by compromise or adjustment. 

Compromise or adjustment offers may be initiated by the debtor or by RHS. RHS will 

approve only those compromises and adjustments that are in the best interest of the 

Government. 

(a) Compromise. A compromise is an agreement by RHS to release a debtor from 

liability upon receipt of a specified lump sum that is less than the total amount due. 

(b) Adjustments. An adjustment is an agreement by RHS to release a debtor from 

liability generally upon receipt of an initial lump sum representing the maximum amount 

the debtor can afford to pay and periodic additional payments over a period of up to 5 

years. 

(c) Timing of offers. 

(1) For a settlement offer to be considered, secured debts must be fully matured 

under the terms of the debt instrument or must have been accelerated by RHS. 

(2) Unsecured debts owed after the sale of the security property may be proposed 

for compromise or adjustment at any time. Debts that were never secured may be 

proposed for compromise or adjustment when they are due and payable. 

(d) Retention of security property. The debtor may retain the security property if the 

compromise payment is at least equal to the net recovery value, and it is in the best 

interest of the Government to allow the debtor to retain the security property. 

Appendix 1 - Page 97 

(01-23-03) SPECIAL PN 

Revised (05-19-16) PN 486 
7 CFR Part 3550 

§§ 3550.254 - 3550.299 [Reserved] 

§ 3550.300 OMB control number. 

The information collection requirements contained in this regulation have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control number 

0575-0172. Public reporting burden for this collection of information is estimated to vary from 5 

minutes to 3 hours per response, with an average of 1 1/2 hours per response, including time 

for review instructions, searching existing data sources, gathering and maintaining the data 

needed, and completing and reviewing the collection of information. 

Appendix 1 - Page 98 
HB-1-3550 

APPENDIX 2 

FORMS AND CERTIFICATIONS REFERENCED IN THIS HANDBOOK 

FORMS 

AD 1048, Certification Regarding Debarment, Suspension, Ineligibility, and 

 Other Voluntary Exclusions – Lower Tier Covered Transactions 

FEMA’s Standard Flood Hazard Determination 

FEMA’s Elevation Certificate 

Form RD 400-1, Equal Opportunity Agreement 

Form RD 400-3, Notice to Contractors and Applicants 

Form RD 400-6, Compliance Statement 

Form RD 402-1, Deposit Agreement 

Form RD 402-2, Statement of Deposits and Withdrawals 

Form RD 410-4, Application for Rural Housing Assistance (Nonfarm Tract), Uniform 

 Residential Loan Application 

Form RD 410-8, Applicant Reference Letter 

Form 1007, Marshall and Swift Square Foot Appraisal Form 

Form RD 1910-5, Request for Verification of Employment 

Form RD 1922-12, Nonfarm Tract Comparable Sales Data 

Form RD 1922-14, Residential Appraisal Review for Single Family Housing 

Form RD 1922-15, Administrative Appraisal Review for Single Family Housing 

Form RD 1924-1, Development Plan 

Form RD 1924-2, Description of Materials 

Form RD 1924-6, Construction Contract 

Form RD 1924-7, Contract Change Order 

Form RD 1924-9, Certification of Contractor’s Release 

Form RD 1924-10, Release by Claimants 

Form RD 1924-12, Inspection Report 

Form RD 1924-16, Record of Pre-Construction Conference 

Form RD 1924-19, Builder’s Warranty 

Form RD 1924-25, Plan Certification 

Form RD 1927-4, Transmittal of Title Information 

Form RD 1927-5, Affidavit Regarding Work of Improvement 

Form RD 1927-8, Agreement with Prior Lienholder 

Form RD 1927-9, Preliminary Title Opinion 

Form RD 1927-19, Certification of Attorney 

Form RD 1927-20, Certification of Title Insurance Company 

Form RD 1940-16, Promissory Note 

Form RD 1940-43, Notice of Right to Cancel 

Form RD 1944-4, Certification of Disability or Handicap 

____________________________________________________________________________________

Appendix 2, Page 1 of 3 

(01-23-03) SPECIAL PN 

Revised (06-04-18) PN 513 
HB-1-3550 

Form RD 1944-5, Manufactured Housing Dealer-Contractor Application 

Form RD 1944-6, Interest Credit Agreement 

Form RD 1944-11, Conditional Commitment 

Form RD 1944-14, Payment Assistance/Deferred Mortgage Assistance Agreement 

Form RD 1944-36, Application for Conditional Commitment 

Form RD 1944-59, Certificate of Eligibility 

Form RD 1944-60, Landlord’s Verification 

Form RD 1944-61, Credit History Worksheet 

Form RD 1944-62, Request for Verification of Deposit 

Form RD 1955-2, Report on Real Estate Problem Case 

Form RD 1955-20, Lease of Real Property 

Form RD 1955-42, Open Real Property Master Listing Agreement 

Form RD 1955-43, Notice of Real Property for Sale (Single Family Housing) 

Form RD 1955-44, Notice of Residential Occupancy Restriction 

Form RD 1955-45, Standard Sales Contract, Sale of Real Property by the United States 

Form RD 1955-46, Invitation, Bid, and Acceptable Sale of Real Property by the United States 

Form RD 1955-47, Bill of Sale ‘A’ 

Form RD 1955-49, Quitclaim Deed 

Form RD 1955-50, Advice of Inventory Property Sold 

Form RD 1955-50A, Advice of Inventory Property Sold-Credit Sale 

Form RD 1955-50B, Advice of Inventory Property Sold-Cash Sale/Transfer--Acquired Property 

Form RD 3550-1, Authorization to Release Information 

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

Form RD 3550-4, Employment and Asset Certification 

Form RD 3550-6, Notice of Special Flood Hazards, Flood Insurance Purchase Requirements, 

and Availability of Federal Disaster Relief Assistance 

Form RD 3550-7, Funding Commitment and Notification of Loan Closing 

Form RD 3550-9, Initial Escrow Account Disclosure Statement 

Form RD 3550-10, Condominium Rider 

Form RD 3550-11, Planned Unit Development (PUD) Rider 

Form RD 3550-12, Subsidy Repayment Agreement 

Form RD 3550-14, Real Estate Mortgage or Deed of Trust for (State) 

Form RD 3550-15, Tax Information 

Form RD 3550-16, Release from Personal Liability 

Form RD 3550-17, Funds Transmittal Report 

Form RD 3550-19, Transmittal-Closing Documents 

Form RD 3550-22, Assumption Agreement, Single Family Housing 

Form RD 3550-23, Applicant Orientation Guide 

Form RD 3550-24, Grant Agreement 

Form RD 3550-25, Loan Closing Instructions and Loan Closing Statement 

Form RD 3550-27, Substitute Payment Coupon 

Form RD 3550-30, Verification of Debt Proposed for Refinancing 

Form RD 3550-34, Option to Purchase Real Property 

Authorization Agreement for Preauthorized Payments 

ASTM E-1528, Transaction Screen Questionnaire Loan Estimate 

Closing Disclosure 

Internal Revenue Service Form 4506-T, Request for Transcript of Tax Return 

U.S. Citizenship and Immigration Services Form G-845, Document Verification Request 

Social Security Administration Form SSA-3288, Consent for Release of Information 

____________________________________________________________________________________

Appendix 2, Page 2 of 3 
HB-1-3550 

CERTIFICATIONS

Verification of Pensions and Annuities 

Verification of Student Income and Expenses 

Verification of Medical Expenses 

Verification of Social Security Benefits 

Verification of Public Assistance 

Verification of Child/Dependent Care 

Verification of Unemployment Benefits 

Verification of Business Expenses 

Verification of Support Payments 

Record of Oral Verification 

____________________________________________________________________________________

Appendix 2, Page 3 of 3 

(01-23-03) SPECIAL PN 

Revised (06-04-18) PN 513 
HB-1-3550

APPENDIX 3 

HANDBOOK LETTERS REFERENCED IN THIS HANDBOOK

Handbook Letter 1 (3550), Moderate Income Options 

Handbook Letter 2 (3550), Funds Not Available 

Handbook Letter 3-A (3550), Waiting Period (Funds Not Available)

Handbook Letter 3-B (3550), Waiting Period (Extended Processing Timeframe)

Handbook Letter 4 (3550), Funds Not Available – Certificate of Eligibility and/or Property Identified 

Handbook Letter 5 (3550), Cover Letter for Initial Disclosures Package

Handbook Letter 10 (3550), Status of Offer to Buy Single Family Housing REO Property 

Handbook Letter 11 (3550), Request Information

Handbook Letter 12 (3550), Notification of Approval (504 Grant and/or Loan) 

Handbook Letter 15 (3550), Standardized Adverse Decision Letter 

Handbook Letter 16A (3550), Eligibility of Self-Help Applicants- New Construction or Acquisition 

Rehabilitation 

Handbook Letter 16B (3550), Eligibility of Self-Help Applicants- Owner Occupied Rehabilitation 

Handbook Letter 17 (3550), Adverse Decision Involving An Appraisal

Handbook Letter 18 (3550), Unfavorable Decision After State Director Review Of An Appraisal 

Handbook Letter 19 (3550), Pre-qualification Review

Handbook Letter 20 (3550), Response to Request to Sale for Less Than the Debt

Appendix 3, Page 1 of 1 (01-23-03) SPECIAL PN

Revised (02-09-24) PN 606
HB-1-3550

Handbook Letter 1 (3550)

REFERENCE: Field Office Handbook Chapter 3 

SUBJECT: Moderate Income Options

Date: [ insert today’s date ] 

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ] 

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

Information obtained while processing your application for Rural Development loan assistance indicates 

that your adjusted annual household income exceeds the maximum low-income limit for this area, which 

is $(insert the applicable income limit). The following options are available to you in obtaining housing:

1. Sale of Real Estate Owned (REO) Property. This is the sale of a property that is owned by the 

Government. Rural Development acquires title to properties periodically and welcomes you to visit 

www.dawsonsmanagement.com (click on USDA properties) to view the changing availability of 

properties.

2. A transfer and assumption of an existing Rural Development loan. You may assume the unpaid 

balance of a loan from a Rural Development borrower whose property is for sale. Equity or repairs would 

need to be paid for with cash provided by you.

3. A Guaranteed Rural Housing loan. If you wish to learn more about this program and obtain a list of 

participating lenders, please contact this office at (insert field office address).

4. Other credit. You may wish to pursue financing through a private lending institution.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Handbook Letter 1 (3550)

Page 2

Applications for the purchase of an REO property or loan transfer and assumption are given funding 

priority. If you are interested in a specific REO property or loan transfer and believe you can meet the 

conditions outlined above, you should notify this office within 15 days of receipt of this letter. If we do 

not hear from you within the specified time frame, your application will be withdrawn. Please refer to 

Attachment 1-C in this letter regarding your ability to have the decision further reviewed.

Sincerely,

( insert name of the Loan Approval 

Official ) ( insert title of the Loan 

Approval Official)

Attachment

[Attachment 1-C of Chapter 1]
HB-1-3550

Handbook Letter 2 (3550)

REFERENCE: Field Office Handbook Chapter 3 

SUBJECT: Funds Not Available

Date: [ insert today’s date ]

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ]

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

Rural Development cannot continue to process your application at this time due to the lack of availability 

of funds for households within your income category. However, based on a review of your verified credit 

and financial information, you have been determined eligible for loan services through this Agency. The 

approximate waiting period before funds may be available to consider your loan request is ( insert 

approximate days/months funds will be available ).

Once funding is available to consider your loan request, we will notify you with further instructions. You 

may be asked to provide the Agency with updated information so that we can confirm your continued 

eligibility.

Please be advised that Rural Development has a homeownership education requirement for first-time 

homebuyers. If you are a first-time homebuyer, you will be required to provide documentation of 

completion of an acceptable homeownership education course. Documentation must be in the form of a 

certificate of completion or letter from the provider of the homeownership education. Our office can 

assist you in locating an acceptable provider. We strongly encourage that applicants look into and take 

the training early in the process. In the meantime, do not incur debts for items such as a building site, or 

the repair, purchase, or construction of a home; there is no guarantee that the Agency will extend you 

financing.

(01-23-03) SPECIAL PN

Revised (06-04-18) PN 513
HB-1-3550

Handbook Letter 2 (3550)

Page 2

If you are planning to assume the unpaid balance of a loan from an existing Rural Development borrower 

or purchase a Government Real Estate Owned property, you should advise this office. These transactions 

can be processed without delay. You may also wish to discuss eligibility requirements for the Guaranteed 

Rural Housing loan.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington,

D.C. 20410 or call (800) 669-9777.

Sincerely,

[insert name of Loan Approval Official] 

[insert title of Loan Approval Official]
HB-1-3550

Handbook Letter 3-A (3550)

REFERENCE: Field Office Handbook Chapter 3 

SUBJECT: Waiting Period (Funds Not Available)

Date: [insert today’s date]

[insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.)] 

[insert applicant(s) street/post office address]

[insert city,state, and zip code]

Dear [insert applicant last name(s) (Mr., Mrs., Ms.)]:

The rural housing application that you submitted to Rural Development on [insert receipt date] remains 

active.

However, resources are still currently unavailable to consider your loan request. The approximate waiting 

period is now [insert # of months/days].

Please complete the enclosed form if you are still interested in Rural Development assistance and update 

your current address and telephone number. Your failure to return the enclosed form to this office within 

15 days of the date of this letter will result in the withdrawal of your application. If your application is 

withdrawn, you may reapply.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
HB-1-3550

Handbook Letter 3-A (3550)

Page 2

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington,

D.C. 20410 or call (800) 669-9777.

Feel free to contact this office at [insert phone number] if you have any questions. 

Sincerely,

[insert name of Loan Approval Official] 

[insert title of Loan Approval Official]

Enclosure
TO: [insert name and address of applicable Rural Development field office]

HB-1-3550

Handbook Letter 3-A (3550)

Page 3 

I am still interested in receiving rural housing assistance through Rural Development. Please keep my 

application active. My current contact information is as follows:

Name:

(Please print)

Address: 

(Street/Post Office Address)

(City, State, and Zip Code)

Telephone: 

(Please include area code)

Email: 

THIS INFORMATION HAS /HAS NOT CHANGED SINCE YOU LAST

CONTACTED ME. (Please check either "has" or "has not" above.)

Signed by: Date:

Applicant

Signed by: Date:

Applicant

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

Note: If you wish to have your application remain on file, please complete this form, 

sign and date it, then return it to the Rural Development office processing your loan 

application. Your response must be received within 15 days from the date on the 

attached letter of [insert today's date]. 
HB-1-3550

Handbook Letter 3-B (3550)

REFERENCE: Field Office Handbook Chapter 3 

SUBJECT: Waiting Period (Extended Processing Timeframe)

Date: [insert today’s date]

[insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.)] 

[insert applicant(s) street/post office address]

[insert city,state, and zip code]

Dear [insert applicant last name(s) (Mr., Mrs., Ms.)]:

The rural housing application that you submitted to Rural Development on [insert receipt date] remains 

active. However, we are currently unable to consider your loan request due to extended processing 

timeframes. The approximate waiting period until your application will be processed to determine eligibility 

is [insert # of months/days].

[DELETE THE FOLLOWING PARAGRAPH WHEN SENDING THE INITIAL HB LETTER 

3-B (following paragraph is only to be included when sending a subsequent HB Letter 3-B).] 

Please complete the enclosed form if you are still interested in Rural Development assistance and 

update your current address and telephone number. Your failure to return the enclosed form to this 

office within 15 days of the date of this letter will result in the withdrawal of your application. If your 

application is withdrawn, you may reapply.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington,

D.C. 20410 or call (800) 669-9777.

Feel free to contact this office at [insert phone number] if you have any questions.

Sincerely,

[insert name of Loan Approval Official] 

[insert title of Loan Approval Official]

Enclosure

 

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595
[Agency reminder: Do not send this attachment with 

initial HB Letter 3-B, only include this attachment if a 

follow up HB Letter 3-B is needed. Delete this 

reminder when sending the attachment to the applicant] 

TO: [insert name and address of applicable Rural Development field office]

HB-1-3550

Handbook Letter 3-B (3550)

Page 2 

I am still interested in receiving rural housing assistance through Rural Development. Please keep my 

application active. My current contact information is as follows:

Name: 

(Please print)

Address: 

(Street/Post Office Address)

(City, State, and Zip Code)

Telephone: 

(Please include area code)

Email: 

THIS INFORMATION HAS /HAS NOT CHANGED SINCE YOU LAST

CONTACTED ME. (Please check either "has" or "has not" above.)

Signed by: Date: Applicant

Signed by: Date: Applicant

Note: If you wish to have your application remain on file, please complete this form, 

sign and date it, then return it to the Rural Development office processing your loan 

application. Your response must be received within 15 days from the date on the 

attached letter of [insert today's date]. 
HB-1-3550

Handbook Letter 4 (3550)

REFERENCE: Field Office Handbook Chapter 3

SUBJECT: Funds Not Available – Certificate of Eligibility and/or Property Identified

Date: [ insert today’s date ]

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ]

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

You are receiving this letter because you have been deemed eligible for Rural Development assistance 

and:

 You have been issued a Certificate of Eligibility (COE).

 You have submitted a purchase agreement or sales contract for a property.

Unfortunately, Rural Development cannot continue processing your application at this time due to a 

temporary lack of funds for households within your income category. You should immediately:

 Stop searching for a property unless you find a seller who is willing to agree to a closing date 

that is at least 30 days beyond the approximate waiting period listed below.

 Speak with the seller about extending the closing date to at least 30 days beyond the 

approximate waiting period listed below. If the seller is willing to extend the closing date, 

please submit a copy of the addendum to the contract to Rural Development.

The approximate waiting period before funds may be available to consider your loan request is

[ insert approximate days/months funds will be available ]. We will notify you once funding is available 

to consider your loan request.

If you are planning to assume the unpaid balance of a loan from an existing Rural Development borrower 

or purchase an Agency Real Estate Owned property, you should advise this office. These transactions can 

be processed without delay.

(01-23-03) SPECIAL PN

Revised (01-06-17) PN 492
HB-1-3550

Handbook Letter 4 (3550)

Page 2

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions ofsuch a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington,

D.C. 20410 or call (800) 669-9777.

Sincerely,

[insert name of Loan Approval Official] 

[insert title of Loan Approval Official]
HB-1-3550

Handbook Letter 5 (3550)

REFERENCE: Field Office Handbook Chapter 3

SUBJECT: Cover Letter for Initial Disclosures Package

Date: [insert today’s date]

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ]

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

Thank you for submitting an application for a single family housing loan in the amount of (insert the loan 

amount as shown on the Loan Estimate). In accordance with the Integrated Mortgage Disclosures under 

the Real Estate Settlement Procedures Act and the Truth in Lending Act, the following is provided:

• The Loan Estimate Disclosure. This document is provided to show the maximum costs 

associated with the loan product; the final costs may be lower. If there is a change in 

circumstances, such as a change in the loan amount, a revised Loan Estimate may be 

issued. The payment amount does not reflect any possible payment assistance nor does 

the issuance of a Loan Estimate constitute an approval of a loan.

• A List of Settlement Service Providers. These providers are not endorsed by or affiliated 

with Rural Development and applicants may select service providers not on this list.

• The Consumer Financial Protection Bureau Booklet, “Your home loan toolkit: A stepby-step guide”.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this credit is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, DC 

20580.

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
HB-1-3550

Handbook Letter 5 (3550)

Page 2

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms of 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington, DC 

20410 or call (800) 669-9777.

If you have any questions or need further information, please contact this office at (insert field office 

address).

Sincerely,

( insert name of the Loan Originator ) 

( insert title of the Loan Originator )
HB-1-3550

Handbook Letter 10 (3550)

REFERENCE: Field Office Handbook Chapter 16

SUBJECT: Status of Offer to Buy Single Family Housing REO Property

Date: [ insert today’s date ] 

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ] 

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

Regarding your offer to purchase the above-referenced REO property, please be advised that:

 1. Your offer has been accepted. Please contact this office to discuss proceeding with the 

transaction.

 2. Another offer has been accepted, however, your offer is being held as a back-up offer.

 3. The property is reserved for exclusive purchase for no less than 30 days after listing by 

eligible Direct or Guaranteed program applicants and for sale or lease to nonprofit 

organizations or public bodies providing transitional and turnkey housing for tenants 

of such transitional housing. Your offer will be considered after this period if no 

acceptable offer from one of these reserved parties is received.

 4. Your offer could not be accepted for the following reason(s):

 Less than the listed sale price.

 An offer from a program applicant has been accepted.

 Another offer has already been accepted.

 The property is no longer forsale.

 (For back-up offers) The prior offer has been accepted.

 5. The property has been withdrawn from sale.

 6. A previous offer has been canceled. The property has been relisted for sale.

 7. The property has been relisted for sale at the following: 

Price $ 

Terms: 

 8. Other: 

Please feel free to contact this office if you have any questions regarding this letter. Thank you for your 

interest in purchasing REO property.

Sincerely,

[ insert name of Loan Approval Official ] 

[ insert title of Loan Approval Official ]

(01-23-03) SPECIAL PN

Revised (06-24-22) PN 563
HB-1-3550

Handbook Letter 11 (3550)

REFERENCE: Field Office Handbook Chapter 3 

SUBJECT: Request Information

Date: [ insert today’s date ] 

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ] 

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

The following information must be submitted to this office in order for Rural Development to continue 

processing your application:

This letter is to advise you that no action can be taken until all the above items have been received in this 

office. Your application will remain in an inactive status until the information is received. Your failure to 

provide all the above items by , will result in the withdrawal of your 

application. If your incomplete application is withdrawn, you may appeal the withdrawal (see 

https://www.usda.gov/oha/nad/appeals for instructions on filing an appeal) or you can reapply.

Please be advised that Rural Development has a homeownership education requirement for first-time 

homebuyers. If you are a first-time homebuyer, you will be required to provide documentation of 

completion of an acceptable homeownership education course. Documentation must be in the form of a 

certificate of completion or letter from the provider of the homeownership education. Our office can 

assist you in locating an acceptable provider. We strongly encourage that applicants take the training 

early in the process.

(01-23-03) SPECIAL PN

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

Handbook Letter 11 (3550)

Page 2

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington,

D.C. 20410 or call (800) 669-9777.

Sincerely,

[ insert name of Rural Development Official ] 

[ insert title of Rural Development Official ]
t

HB-1-3550

Handbook Letter 12 (3550)

REFERENCE: Field Office Handbook Chapter 12

SUBJECT: Notification of Approval (504 Grant and/or Loan)

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ] 

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

Rural Development has approved your request for assistance as follows:

Approval of Section 504 Repair Loan assistance in the amount of [$ insert loan amount] at a fixed 1.0% 

interest rate.

Approval of Section 504 Repair Grant assistance in the amount of [$ insert grant amount].

If the amount(s) listed above are less than the amount requested, you may contribute the difference from 

other sources of funds, reduce the repair amount by negotiating with your contractor(s), or appeal the 

determination. The loan (grant) will be closed and secured only through the following instrument(s):

Promissory Note Only Grant Agreement

REPAYMENT TERMS: The loan will be repaid in monthly installments of principal and interest over a 20

year period, with the first installment due approximately 30 days after the last loan advance or acceptance 

of the repair work, whichever is earlier.

ADDITIONAL ITEMS OR CONDITIONS REQUIRED BY CLOSING: All items checked below

apply.

Attached list of repairs is to be completed, an escrow in the amount of $ will be held until the 

work is satisfactorily completed. RHS will fully disburse the loan/grant proceeds upon completion of the 

rehabilitation, subject to the homeowner’s written statement of satisfaction.

Documents: Any document used to verify employment, income, and assets that is over 120 days old, as 

of the date of closing will need to be updated prior to settlement.

Other:

Approval Official: Date: 

Note: Date of approval will be the same as date of obligation.

This loan (grant) is approved subject to the availability of funds and other conditions required by RHS. If 

you have any questions, contact the approval official whose name appears above at . 

(01-23-03) SPECIAL PN

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

Handbook Letter 15 (3550)

REFERENCE: Field Office Handbook Chapter 1 

SUBJECT: Standardized Adverse Decision Letter

Date: [ insert today’s date ]

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ]

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

Thank you for the opportunity to consider your request for Rural Development assistance. In reviewing 

your request, we considered all information submitted to the Agency and the regulations that govern the 

assistance for which you applied. After careful review, we regret to inform you that we were unable to 

take favorable action on your request. The specific reasons for our decision are as follows:

(The following items should be included in each adverse decision letter and can be presented in different 

formats depending upon the type of assistance requested and reasons for denial):

• Specific reasons for the decision;

• Regulatory basis (CFR citation) for the decision;

• If applicable, a statement of any evidence considered in making the decision such as credit 

reports, financial statements, etc.;

• If applicable, a statement of any issues presented by the customer such as those discussed during 

any meetings or phone conversations.

If one of the above reasons included an unacceptable credit history, please note that a tri-merge credit 

report on you was obtained from Equifax Mortgage Solutions, 4300 Westown Parkway, Suite 200, West 

Des Moines, IA 50266; telephone (800) 333-0037. You may obtain a free copy of your credit report from 

Equifax and dispute the accuracy or completeness of the report directly to Equifax. While the report was 

provided by Equifax, the decision to deny your request for assistance was made by this Agency and not 

Equifax.

(01-23-03) SPECIAL PN

Revised (11-18-22) PN 571
HB-1-3550

Handbook Letter 15 (3550)

Page 2

If you believe our decision is incorrect, or the facts used in this case are in error, you may challenge our 

decision. Please see the attached document.

Sincerely,

[ insert name of Loan Approval Official ] 

[ insert title of Loan Approval Official ]

Attachment [ insert Attachment 1-B or 1-C, as appropriate from Chapter 1 ]
HB-1-3550

Handbook Letter 16 A (3550)

REFERENCE: Field Office Handbook Chapter 4 

SUBJECT: Eligibility of Self-Help Applicants- New Construction or Acquisition Rehabilitation 

Date: [ insert today’s date ] 

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ] 

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

You have been determined eligible for Rural Housing Service (RHS) financing for {INSERTCONSTRUCTION, OR ACQUISITION REHABILITATION} of a modest single family home under the

Self-Help program. Eligibility is based on income and financial information that is verified within 180 

days of loan approval and closing. Loan approval and closing are subject to the continued eligibility of

the applicant and the availability of loan funds. Changes in your financial status (income and expenses) 

must be reported to RHS, and may affect your eligibility and the amount of loan for which you qualify. 

RHS has determined that you qualify for a Self-Help loan up to the amount of $ in_________

County, based on a down payment of $_________, estimated 

annual real estate taxes of $__________________ and insurance of $___________________. 

Funding Source Funding Amount Term (Yrs.) Interest Rate

1. RHS

2.

3.

4.

TOTAL FUNDING AMOUNT:

• The RHS interest rate noted above is the full note rate in effect as of the date of this notification.

• The RHS interest rate is not locked in and is subject to change on the 1st of each month until 

locked at the lower rate in effect at the time of the loan approval (as evidenced by issuance of 

Form RD 3550-7, Funding Commitment and Notification of Loan Closing), or closing.

• You may be eligible for a subsidy that reduces the interest rate charged against the RHS loan. 

This payment subsidy is not a grant and is subject to recapture.

Subject to completion of homeownership education - Yes __ No __

(01-23-03) SPECIAL PN

Added (02-09-24) PN 606
HB-1-3550

Handbook Letter 16A (3550)

Page 2

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington, D.C. 

20410 or call (800) 669-9777.

Sincerely,

[ insert name of Loan Approval Official ] 

[ insert title of Loan Approval Official ]
HB-1-3550

Handbook Letter 16 B (3550)

REFERENCE: Field Office Handbook Chapter 4 

SUBJECT: Eligibility of Self-Help Applicants-Owner Occupant Rehabilitation 

Date: [ insert today’s date ]

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ]

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

You have been determined eligible for Rural Housing Service (RHS) financing for owner occupant 

rehabilitation of a modest single family home under the Self-Help program. Eligibility is based on

income and financial information that is verified within{INSERT 120 OR 180 AS APPLICABLE}

days of approval and closing. {INSERT LOAN, LOAN GRANT COMBO, OR GRANT} approval 

and closing are subject to the continued eligibility of the applicant and the availability of funds.

Changes in your financial status (income and expenses) must be reported to RHS, and may affect your 

eligibility and the amount for which you qualify. RHS has determined that you qualify for a Self-Help 

{INSERT LOAN, LOAN GRANT COMBO, OR GRANT} in_________ County, up to the amount of 

$_________loan and $__________grant.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington, D.C. 

20410 or call (800) 669-9777.

Sincerely,

[ insert name of Loan Approval Official ] 

[ insert title of Loan Approval Official ]

(01-23-03) SPECIAL PN

Added (02-09-24) PN 606
HB-1-3550

Handbook Letter 17 (3550)

REFERENCE: Field Office Handbook Chapter 5 

SUBJECT: Adverse Decision Involving an Appraisal

Date: [ insert today’s date ] 

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ] 

Dear [ insert applicant(s) last name(s) (Mr., Mrs., Ms.) ]:

After carefully analyzing the appraisal of the property located at , 

we are unable to take favorable action on your request for Rural Development services. The specific 

reasons for our decision are:

[insert the specific reasons associated with the appraisal for the adverse action]

If the aforementioned reason for denial was because the requested loan amount was greater than 

the appraised value, you may want to look into the following options:

1) Adjust the sales contract price.

2) If the sales contract falls through, a new Form RD 1944-59, Certificate of Eligibility, good for 

120 days, may be issued by contacting your Local Office.

3) Dispute the appraisal by presenting any new, objective information regarding the subject property, 

for the Agency’s consideration (e.g., incorrect or incomplete information was used for square 

footage, number of bedrooms, number of bathrooms, garage size, upgrades, repaired or renovated 

conditions, etc.). Comparable sales which are different from those used in the appraisal will not be 

considered.

You should inform the Local Office of which option you will exercise, and present any new information 

for our consideration, within 15 days from the date of this letter. Please submit the information in writing 

to the Local Office at [insert office address and office email resource account, if applicable.] If you have 

any other questions concerning this decision, you may contact the Local Office at [insert office phone 

number, address, and office email resource account, if applicable] to request a meeting with this office 

within 15 days from the date of this letter. You may also bring a representative or legal counsel with you.

If additional information is submitted to dispute the appraisal, Rural Development will perform a 

Technical Appraisal Review. The results of that review will be provided to you in writing, once 

completed.

(01-23-03) SPECIAL PN

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

Handbook Letter 17 (3550)

Page 2

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington,

D.C. 20410 or call (800) 669-9777.

Sincerely,

[insert name of Loan Approval Official] 

[insert title of Loan Approval Official]
HB-1-3550

Handbook Letter 18 (3550)

REFERENCE: Field Office Handbook Chapter 5

SUBJECT: Unfavorable Decision After Technical Review of an Appraisal 

Report

Date: [insert today’s date ]

[insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[insert applicant(s) street/post office address ]

[insert city,state, and zip code ]

Dear [ insert applicant last name(s) (Mr., Mrs., Ms.) ]:

At your request, a Technical Appraisal Review has been completed by Rural Development appraisal staff, 

for the property you wish to purchase at [insert address from appraisal report]. As a result of this review 

we have determined the Appraisal Report and its value estimate are acceptable, as required by Rural 

Development regulations and appraisal industry standards.

As a result of this determination, we are unable to take favorable action on your loan request. The 

specific reason(s) for our decision are:

[Insert “The loan amount requested is not supported by the appraised value of the property” and/or 

any other specific reason associated with the appraisal for the adverse action.]

The determination that the Appraisal Report is acceptable is not appealable in accordance with 7 CFR 

Section 1900.53(c). However, you may consider the following options:

1. Adjust the sales contract price.

2. If the sales contract falls through, a new Form RD 1944-59, Certificate of Eligibility, good for 

120 days, may be issued by contacting your Local Office.

3. Seek mediation and/or request a hearing with National Appeals Division (NAD) regarding the 

Agency’s determination that the loan amount requested is not supported by the appraised value of 

the property (i.e., inadequate security). See Attachment 1-B, An Appealable Adverse Decision.

You should inform the Local Office if you intend to exercise option 1 or 2 within 15 days from the date of 

this letter. See Attachment 1-B for instructions and specific timeframes for requesting mediation or appeal 

(option 3). [Include Attachment 1-B from Chapter 1]

The Federal Equal Credit Opportunity Act prohibits creditorsfrom discriminating against credit applicants 

on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the 

capacity to enter into a binding contract); because all or part of the applicant’s income derives from any 

public assistance program; or because the applicant has in good faith exercised any right under the 

Consumer Credit Protection Act. The federal agency that administers compliance with thislaw concerning 

this creditor is the Federal Trade Commission. If a person believes he or she was denied assistance in 

violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 20580.

 (01-23-03) SPECIAL PN

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

Handbook Letter 18 (3550)

Page 2

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions ofsuch a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington,

D.C. 20410 or call (800) 669-9777.

Sincerely,

[insert name of Loan Approval Official] 

[insert title of Loan Approval Official]
HB-1-3550

Handbook Letter 19 (3550)

REFERENCE: Field Office Handbook Chapter 3 

SUBJECT: Pre-qualification Review

Date: [ insert today’s date ]

[ insert applicant(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert applicant(s) street/post office address ]

[ insert city, state, and zip code ]

Dear [ insert applicant(s) last name(s) (Mr., Mrs., Ms.) ]:

Rural Development has conducted a pre-qualification review using a profile credit report (obtained at no 

cost to you) as well as unverified information you provided either orally or in writing. During this 

informal and unbinding review, items that raised concerns or need clarification were noted.

To qualify for program assistance, applicants must meet basic eligibility requirements that include, but are 

not limited to, acceptable credit history and loan repayment ability. We would like the opportunity to 

discuss with you the information obtained through the pre-qualification review. We ask that you call our 

office at [insert office phone number] within 15 days of the date on this letter.

You are welcome to submit a Uniform Residential Loan Application regardless of the issues discussed 

during the phone conversation.

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit 

applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the 

applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income 

derives from any public assistance program; or because the applicant has in good faith exercised any right 

under the Consumer Credit Protection Act. The federal agency that administers compliance with this law 

concerning this creditor is the Federal Trade Commission. If a person believes he or she was denied 

assistance in violation of this law, they should contact the Federal Trade Commission, Washington, D.C. 

20580.

(01-23-03) SPECIAL PN

Revised (04-27-16) PN 485
HB-1-3550

Handbook Letter 19 (3550)

Page 2

The Fair Housing Act prohibits discrimination in real estate related transactions, or in the terms or 

conditions of such a transaction, because of race, color, religion, sex, disability, familial status, or national 

origin. The federal agency that is responsible for enforcing this law is the U. S. Department of Housing 

and Urban Development. If a person believes that they have been discriminated against in violation of 

this law, they should contact the U. S. Department of Housing and Urban Development, Washington,

D.C. 20410 or call (800) 669-9777.

Sincerely,

[insert name of Loan Approval Official] 

[insert title of Loan Approval Official]
HB-1-3550

Handbook Letter 20 (3550)

REFERENCE: Field Office Handbook Chapter 13

SUBJECT: Response to Request to Sale for Less Than the Debt

Date: [insert today’s date]

[ insert borrower(s) first/mi/last name(s) (Mr., Mrs., Ms.) ] 

[ insert borrower(s) street/post office address ]

[ insert city, state, and zip code ] 

RE: [ Type of Assistance

Requested ] [ insert account # ] 

[ Residential Real Estate Located at (Popular Street Address of Property) ] 

Dear [ insert borrower last name(s) (Mr., Mrs., Ms.) ]:

USDA Rural Development has reviewed your request for consent to allow you to sell the subject 

property for the sale price that you have proposed. USDA Rural Development consents to this sale and 

agrees to release its first mortgage lien upon receipt of net proceeds from the sale in an amount not less 

than

$ . By approving this sale, the Agency is agreeing only to release its lien; 

however, you will remain obligated for repayment of any remaining debt. The remaining debt can be 

settled through the debt settlement process. For your convenience a Debt Settlement Application is 

enclosed for you to complete and return to the Servicing and Asset Management Office as instructed 

in the application.

- or - 

USDA Rural Development has reviewed your request for consent to allow you to sell the subject 

property for the sale price that you have proposed and does not consent to this sale for the following 

reasons: [insert specific reasons]. Please contact the local field office at the above location for 

additional information.

Sincerely,

[ insert name of RD Official ] 

[ insert title of RD Official ]

(01-23-03) SPECIAL PN

Revised (04-15-21) PN 549
Effective Dates and Interest Rates 

for Above-Moderate Rural Housing (RH) 

or Other Real Estate (ORE) Loans

Effective Date Interest Rate (%)

March 11, 1978 8.75 + .50

June 3, 1978 9.00 + .50

July 4, 1978 9.50 + .50

May 23, 1979 10.00 + .50

October 15, 1979 10.50 + .50

November 14, 1979 11.50 + .50

February 27, 1980 12.00 + .50

March 6, 1980 13.00 + .50

April 19, 1980 14.00 + .50

May 14, 1980 13.00 + .50

June 14, 1980 11.50 + .50

September 20, 1980 12.00 + .50

December 20, 1980 13.50 + .50

May 27, 1981 15.50 + .50

September 14, 1981 16.50 + .50

October 1, 1981 17.50 + .50

November 9, 1981 16.50 + .50

December 7, 1981 15.50 + .50

February 22, 1982 16.50 + .50

April 8, 1982 15.50 + .50

August 30, 1982 15.00 + .50

September 20, 1982 14.00 + .50

October 25, 1982 13.50 + .50

November 1, 1982 12.50 + .50

December 6, 1982 12.00 + .50

May 23, 1983 11.50 + .50

July 11, 1983 12.00 + .50

August 8, 1983 12.50 + .50

September 19, 1983 13.00 + .50

December 1, 1983 12.50 + .50

_ 

(01-23-03) SPECIAL PN

Appendix 4, Page 1 of 9 

Revised (07-11-22) SPECIAL PN
Effective Dates and Interest Rates for

Above-Moderate Single Family Housing (SFH) Nonprogram Loans

Effective Date Interest Rate (%)

July 8, 1985 13.00

September 1, 1985 12.375

December 2, 1985 11.375

May 1, 1986 10.375

June 1, 1986 10.00

March 1, 1987 9.75

April 1, 1987 9.00

July 1, 1987 9.50

October 1, 1987 10.00

November 1, 1987 10.50

January 1, 1988 10.00

April 1, 1988 9.50

June 1, 1988 10.00

October 1, 1988 10.25

December 1, 1988 10.00

February 1, 1989 10.25

April 1, 1989 10.00

May 1, 1989 10.25

July 1, 1989 10.00

August 1, 1989 9.50

September 1, 1989 9.25

May 1, 1990 9.75

August 1, 1990 9.50

February 1, 1991 9.25

December 1, 1991 8.75

October 1, 1992 8.25

May 1, 1993 7.75

November 1, 1993 7.00

May 1, 1994 8.00

July 1, 1994 8.50

January 1, 1995 9.25

May 1, 1995 8.50

July 1, 1995 8.00

January 1, 1996 7.25

June 1, 1996 7.75

February 1, 1998 7.25

August 1, 1998 6.75

October 1, 1998 7.25

November 1,1998 6.875

December 1, 1998 6.625

January 1, 1999 6.875

February 1, 1999 6.750

March 1, 1999 6.875

May 1, 1999 7.250

July 1, 1999 7.375

August 1, 1999 7.625

October 1, 1999 7.750

Appendix 4, Page 2 of 9
Effective Dates and Interest Rates for

Above-Moderate Single Family Housing (SFH) Nonprogram Loans

Effective Date Interest Rate (%)

December 1, 1999 7.875

October 1, 2000 7.375

January 1, 2002 6.625

May 1, 2002 7.250

November 1, 2002 6.500

July 1, 2003 6.250

August 1, 2003 5.875

September 1, 2003 6.250

October 1, 2003 6.875

February 1, 2004 6.625

May 1, 2004 5.875

July 1, 2004 6.875

October 1, 2004 6.750

November 1, 2004 6.500

April 1, 2005 6.125

June 1, 2005 6.375

July 1, 2005 6.125

August 1, 2005 5.875

January 1, 2006 6.250

February 1, 2006 6.250

June 1, 2006 6.500

July 1, 2006 6.750

November 1, 2006 6.500

January 1, 2007 6.250

March 1, 2007 6.375

May 1, 2007 6.250

August 1, 2007 6.625

October 1, 2007 6.500

January 1, 2008 6.125

March 1, 2008 5.875

August 1, 2008 6.250

November 1, 2008 5.875

February 1, 2009 4.875

March 1, 2009 4.500

April 1, 2009 5.125

July 1, 2009 5.375

August 1, 2009 5.675

September 1, 2009 5.500

October 1, 2009 5.375

July 1, 2010 5.125

August 1, 2010 5.000

September 1, 2010 4.750

Appendix 4, Page 3 of 9

(01-23-03) SPECIAL PN

Revised (12-08-22) PN 572
Effective Dates and Interest Rates for

Above-Moderate Single Family Housing (SFH) Nonprogram Loans

November 1, 2010 4.500

January 1, 2011 4.750

February 1, 2011 5.000

April 1, 2011 5.125

July 1, 2011 4.750

October 1, 2011 4.375

November 1, 2011 4.000

December 1, 2011 3.750

July 1, 2012 3.625

August 1, 2013 4.000

September 1, 2013 4.250

February 1, 2014 4.500

April 1, 2014 4.250

July 1, 2014 4.125

December 1, 2014 3.875

February 1, 2015 3.750

March 1, 2015 3.500

May 1, 2015 3.625

July 1, 2015 3.750

April 1, 2016 3.500

September 1, 2016 3.375

January 1, 2017 3.750

April 1, 2018 4.250

November 1, 2018 4.000

December 1, 2018 4.250

March 1, 2019 4.000

August 1, 2019 3.625

November 1, 2019 3.500

April 1, 2020 3.250

July 1, 2020 2.750

August 1, 2020 3.000

October 1, 2020 3.250

November 1,2020 3.500

January 1, 2021 3.000

June 1, 2022 3.500

July 1, 2022 3.750

August 1,2022 3.750

October 1,2022 3.750

November 1,2022 3.750

Appendix 4, Page 4 of 9
DETERMINATION OF AMOUNT OF UNAUTHORIZED ASSISTANCE

A. When the recipient was at fault, choose the interest rate (from page 5 

or 6 of this appendix) that was in effect when the loan was approved and 

compute interest on the entire loan at that interest rate from the date the 

loan was closed to the date the letter to the borrower of unauthorized 

assistance is sent. Add the interest to the beginning principal balance, and 

subtract that from any payments the borrower has made on the loan. The 

result is the amount of unauthorized assistance.

B. When the recipient received interest credits to which he or she was not 

entitled, the amount of unauthorized assistance is considered to be the 

monthly amount of unauthorized interest credit times the number of months the 

incorrect agreement has been (or was) in effect, without the addition of 

interest. This formula will be used both in cases where the recipient was at 

fault and where the recipient was not at fault.

C. When the recipient was not at fault and:

1. The entire loan was unauthorized, the amount of unauthorized 

assistance is the outstanding balance (principal and interest) due as of the 

date of the repayment. The interest rate will be the rate set in the note.

2. The entire loan was made at the wrong interest rate, the amount of 

unauthorized assistance will be computed as follows:

Outstanding principal balance x (correct rate - note rate) x length of 

time the loan was outstanding. For example, suppose a borrower received a

$35,000 loan on February 1, 1982, at 11 percent. The loan should have been 

made at 13 percent. The borrower has made several payments and reduced the 

outstanding principal balance to $33,500. The borrower will repay the loan 

on February 1, 1984. To figure the amount of unauthorized assistance; 

multiply $33,500 x 2 percent x 2 years. The 2 percent is the difference 

between the current rate and the note rate. If the borrower was properly 

granted interest credits, the unauthorized assistance for the time the 

interest credit agreement was in effect will be zero. For example, suppose a 

borrower's note should have been written at 13 percent but was improperly 

written at 11 percent. The borrower was granted interest credits and has 

been repaying at a rate of 1 percent. It makes no difference what the note 

and the current rates were; the borrower was entitled to repay the loan at 1 

percent, in accordance with the interest credit agreement.

_ 

(01-23-03) SPECIAL PN

Appendix 4, Page 5 of 9 

Revised (07-11-22) SPECIAL PN
INTEREST RATES TO BE CHARGED ON LUMP-SUM REPAYMENTS 

WHEN UNAUTHORIZED ASSISTANCE WAS RECEIVED BECAUSE

RECIPIENT WAS AT FAULT

For Fiscal Year (FY) Interest Rate to Be Charged (%)

1979 8.974

1980 10.734

1981 13.094

1982 14.208

1983 10.880

1984 12.255

1985 11.236

1986 9.015

1987 8.227

1988 8.461

1989 8.990

1990 8.590

1991 7.936

1992 7.042

1993 6.200

1994 5.350

1995 7.797

1996 6.770

1997 7.110

1998 5.980

_ 

Appendix 4, Page 6 of 9 
INTEREST RATES TO BE CHARGED ON LUMP-SUM REPAYMENTS 

WHEN UNAUTHORIZED ASSISTANCE WAS RECEIVED BECAUSE 

RECIPIENT WAS AT FAULT (Con.)

For Fiscal Year (FY) Interest Rate to Be Charged (%)

1999 5.81

2000 6.36

2001 5.75

2002 5.62

2003 5.03

2004 5.24

2005 4.72

2006 4.99

2007 4.91

2008 4.58

2009 4.01

2010 4.28

2011 4.23

2012 2.970

2013 3.040

2014 3.460

2015 2.750

2016 2.490

2017 2.820

2018 2.970

2019 2.820

_Appendix 4, Page 7 of 9 

(01-23-03) SPECIAL PN

Revised (07-11-22) SPECIAL PN
INTEREST RATES TO BE CHARGED ON LUMP-SUM REPAYMENTS 

WHEN UNAUTHORIZED ASSISTANCE WAS RECEIVED BECAUSE 

RECIPIENT WAS AT FAULT (Con.)

For Fiscal Year (FY) Interest Rate to Be Charged (%)

2020 1.67

2021 1.94

2022 * 

_Appendix 4, Page 8 of 9 
* The interest rate for FY 2021 will not be available until early FY 2022. 

If cases of unauthorized assistance received in FY 2021 are being serviced

prior to the provision of a rate for FY 2021, use the interest rate for FY 

2020 to compute the amount due.

_Appendix 4, Page 9 of 9

(01-23-03) SPECIAL PN

Revised (07-11-22) SPECIAL PN
HB-1-3550 

APPENDIX 5

RURAL HOUSING DEMONSTRATION PROGRAM 

I. PURPOSE 

Section 506 (b) of title V of the Housing Act of 1949 authorizes the Secretary of Agriculture to 

permit demonstrations involving innovative housing units and systems that do not meet existing 

published standards, rules, regulations, or policies. Under this law, Rural Housing Service is 

authorized to provide the Rural Housing Demonstration program which tests new approaches to 

construction of housing under the statutory authority granted to the Secretary of Agriculture. 

Section 506 (b) imposes two conditions: (1) that the health and safety of the population of the 

areas in which the demonstrations are carried out will not be adversely affected, and (2) that the 

aggregate expenditures for such demonstrations may not exceed $10 million in any fiscal year. 

II. OBJECTIVES 

The intended effect is to increase the availability of affordable rural housing low-income families 

through innovative designs and systems. The Agency solicits proposals for a Rural Housing 

Demonstration Program under section 506(b) of title V of the Housing Act of 1949, which 

provides loans to low income borrowers to purchase innovative housing units and systems that 

do not meet existing regulations. However, any program requirements that are statutory will 

remain in effect. 

III. STATE OFFICE ROLES AND RESPONSIBILITIES 

A. Have demonstration application packages available for interested parties. 

1. Maintain list of persons given a demonstration package. 

2. Designate housing state member as coordinator. 

3. Develop a plan to coordinate review by program and technical staff. 

____________________________________________________________________________________________ 

Appendix 5, Page 1 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

B. Field office staff should be instructed to refer questions or interested parties to 

designated person in the State Office. 

C. Review proposals for completeness within 15 days of receipt. 

1. Completed proposals must be reviewed and evaluated based on the

evaluation criteria. Submit proposals determined to be acceptable to the 

National Office with recommendations within 20 days. 

2. Incomplete packages must be returned to the submitter within 15 days of 

receipt with an explanation of what is missing. 

D. Upon request, be able to provide the National Office with a list of package 

requesters as well as status of submissions. 

E. The State Office will track such approved proposals including any conditional 

commitments and Section 502 loans approved. 

IV. PROPOSAL CONTENT AND EVALUATION CRITERIA 

The innovative housing units and systems must be creative, affordable, durable, energy efficient, 

and include a diversity of housing types. The proposal must be beyond the “idea” state. The 

proposed organization or individual must have the experience and “know-how” to implement 

construction of the housing unit concept in relation to the requirements of RHS’s housing 

programs. The proposed cost and price analysis should be in comparison with other proposals 

and be considered realistic for the efforts planned. Examples of eligible proposals include, but 

are not limited to: new or improved energy savings houses, roofing that cools and building 

techniques that cut costs and improve the quality of rural housing. These innovative housing 

units should reduce costs, raise living standards, and improve rural area living environments. 

RHS, in its analysis of the proposals received, will consider whether the proposals will carry out 

the objectives of this demonstration effort in accordance with the following proposed content 

and evaluation criteria: 

A. Technical Management. A proposal providing for the design, development, and 

application of a complete housing unit, including effective use of land, to be 

considered responsive shall address each of the items listed below. These items 

have been selected and arranged to provide a basis for the rapid and impartial 

evaluation of the proposal. Proposal development and design of innovative 

housing units and systems shall address those items under a housing unit concept 

which are applicable to the particular situation. For example, appropriate 

 

Appendix 5, Page 2 of 23 
HB-1-3550 

statements are to be made with respect to the housing unit description 

adaptability, state of development, resolution of potential code problems, cost 

projections, and reassurance of health and safety. 

The proposer is requested to keep the proposal as concise as possible and 

consistent with providing the requested information. Elaborate brochures and 

presentation methods are not desired. 

B. Housing Unit Concept. A description of the housing unit concept shall include 

the items listed below (the term “housing unit concept” is considered to include 

the construction method and process, the effective innovative use of land for 

single or multiple units, and the interrelations with utilities and other services): 

 

1. Housing Unit Description. Provide written and graphic details of the total 

housing unit including floor plan and conceptual arrangement drawings 

and outline specifications. Highlight innovative and unique features. 

Indicate the relationship between subsystems. Elements to be addressed 

include rationale for selection of the housing unit concepts including 

factors of economy, productivity, performance, anticipated benefits, 

market acceptance, and consumer preference as they relate to the 

following: 

a. Architectural: Floor plan at 1/4” per 10’; arrangements of housing 

units; finishes and aesthetic treatment; comparison with the 

requirements of national model codes; ability to incorporate 

varying appearance elements to provide architectural diversity. 

b. Structural: Structural system (including engineering calculations) 

and total weather envelope (RHS present “Thermal Performance 

Construction Standards” used as a minimum) and acoustical 

treatment and exterior finishes. 

c. Foundations: Foundation requirements peculiar to the proposed 

housing unit if separate from the structural system noted above. 

d. Interior Work: Partitions, floor, wall and ceiling, finishes, 

cabinetry, trim, built-in furniture, and stair treatment, if any. 

____________________________________________________________________________________________ 

Appendix 5, page 3 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

e. Mechanical: Heating, ventilating and, if applicable, air 

conditioning; unit air changes; plumbing and fuel supply system

piping or conduits; waste disposal. 

f. Electrical: Power supply and distribution system; lighting system. 

g. Appliance and Equipment: Describe items which are included, and 

any special features, interface requirements. 

h. Ancillary Structure and Facilities: Describe any features provided 

separate from the basic housing unit that are normally part of a total 

housing complex, such as central laundry facilities and communal 

areas. 

i. Land Use Concepts: Outline plans for innovative use of land to

permit effective rural communities and small town planning, and

effective utility systems. 

2. Housing Unit Adaptability. Address the methods planned for adapting the 

proposed housing units to a variety of housing types and site 

considerations. Describe in narrative form and by concept drawings, 

modifications, or variations required to adapt the housing units to these 

varying situations. 

a. Housing Types: Describe the type of housing for which the unit

may be used, and indicate adjustments that may be required. 

Provide sketches. 

b. Climatic Area: Designate the climatic area where the housing unit 

should be placed, and describe design changes required to adapt the 

unit to each area for which the unit is suitable. Particular reference 

to the changes to be made to the unit for adaptability to resist severe 

weather conditions such as hurricane and extreme snow 

accumulation. 

__________________________________________________________________________________ 

Appendix 5, page 4 of 23 
HB-1-3550 

c. Geology and Soils: Provide conceptual foundation design for those 

geologic soil conditions considered as appropriate for the proposed 

system. Conversely, list the geologic and soil conditions which 

would preclude the use of the proposed units. 

d. Site Topography: Provide drawings or sketches which indicate 

adjustments or modifications required to adapt the units to various 

topographies. 

e. Site Size: Discuss the ability of the proposed units and its mix of 

housing types to adapt to various site sizes. 

f. Site Situations: Designate the types of sites for which the unit is 

considered appropriate and describe conceptually the unit treatment 

for each type. Describe the effects on unit design and production 

due to labor and material availability or similar factors related to 

site situation. 

g. “Self-Help” Completion: Describe any work that can be done by 

the prospective occupant and the degree to which this might be 

practical. Note any skill or special training required. 

h. Changes: Discuss the flexibility of the unit with regard to 

modifications in the unit after construction, including expansion and 

rearrangements. 

i. Regional Applications: Discuss the States, regions, or areas of the 

country where the proposer is willing or interested in construction 

of this housing unit. 

3. State of Housing Unit Development. Describe the present state of 

development of the housing unit and the subsystem components. 

Highlight any previous or current experience utilizing the proposed 

housing unit with particular emphasis on cost, acceptability, construction 

experience, and health and safety. 

______________________________________________________________________________________ 

Appendix 5, page 5 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

4. Constraints. Discuss and list restrictive provisions in the model 

and local codes that the proposer has resolved and that will not 

cause conflict with or inhibit the demonstration of the innovative 

housing unit concept in the selected areas of the country. 

5. Housing Unit Cost Projections. Furnish cost projections for each 

of the following situations (“housing unit in place cost” is defined 

as including all construction, utility, and land cost): 

a. Housing Unit Construction: Construction of the housing 

unit on sites proposed in the climatic regions noted above. 

b. Ownership and Operating Cost Projections: Annual cost of 

ownership and operation of a housing unit, including 

estimates for utility expenses, insurance, and similar items. 

State assumptions. 

c. Maintenance Projections: Annual rate of expense averaged 

over a 5-year cycle for property maintenance including 

painting, repairs, and prorated replacement of equipment. 

d. Useful Life Projections: The probable useful life of the 

housing unit using separate projections for the structural 

systems, interior work, and mechanical and electrical 

system, if appropriate. State any conditions pertinent to the 

estimate. If housing units are constructed based on settled 

proposals, the proposer will be required to certify the actual 

construction cost. 

C. Organization and Staffing. Describe the plan for organizing the total 

effort required to implement housing unit design and construction. This 

plan must include the following elements: 

1. Management. An outline of the proposed management framework, 

including lines of responsibility and illustrating the varied 

disciplines required. Discuss the organizational and contractual 

requirements among the parties and their separate and mutual 

responsibilities, including plans for subcontracting portions of the 

work where applicable. 

______________________________________________________________________________________ 

Appendix 5, page 6 of 23 
HB-1-3550 

2. Key Individuals. A list of key individuals who will be assigned 

major management and professional responsibilities. Indicate the 

responsibilities to be assigned and indicate the persons’ 

qualifications for the proposed assignment. 

3. Data Collection. Describe the types, how, and by whom housing 

unit evaluation data will be collected and analyzed. 

4. Time Schedule. Prepare a time schedule for development that sets 

start dates, completion dates, and relationships between different 

activities. 

D. Evaluation Criteria. The Rural Housing Service, in its analysis of the 

proposals received, will give primary consideration to those proposals 

which demonstrate the greatest potential for carrying out the objectives of 

this demonstration effort in accordance with the following general criteria. 

1. Housing Unit Concept. 

a. A proposal must be well beyond the “idea” stage. 

Sufficient testing must have been completed to demonstrate 

its feasibility. The proposal must be judged ready for full 

scale field testing in a rural setting. 

b. Ability of the housing unit to provide for the protection of 

life, property, and for the safety and welfare of the 

consumer, general public, and occupants through the 

design, construction, qualify of materials, use and 

maintenance of the housing unit. 

c. Flexibility of the housing unit in relation to varying types 

of housing and varying site considerations. 

d. Flexibility of the housing concept, insofar as it provides the 

ability to adjust or modify unit size and arrangements, 

either during design or after construction. 

______________________________________________________________________________________ 

Appendix 5, page 7 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

e. Efficiency in the use of materials and labor, with respect to 

cost in place, the conservation of materials, and the 

effective use of labor skills. Potential for Self-Help 

Housing Program will also be considered. 

f. Selection of materials for durability and ease of 

maintenance. 

g. Concepts for the effective use of land and environment. 

2. Organizational Capabilities. 

a. The experience and “know-how” of the proposed 

organization or individual to implement construction of the 

housing unit concept in relation to the requirements of 

RHS’ housing programs. The interests of low- and very 

low-income rural residents in the proposed housing will be 

considered. 

b. The management structure and organization of the 

proposer. 

c. The quality and diversity of management and professional 

talent proposed as “key individuals.” 

d. The management plan of how this effort will be conducted. 

3. Cost and Price Analysis. 

 

a. The level of costs which are proposed, as they may 

compare with other proposals and be considered realistic 

for the efforts planned. Also, the quantity and level of 

detail in the information supplied. 

Projected cost of “housing in place,” with particular reference to housing for very low 

and low-income families. 

______________________________________________________________________________________ 

Appendix 5, page 8 of 23 
HB-1-3550 

V. SUBMITTING AND REVIEWING PROPOSALS 

 

All interested parties must make a written request for a proposal package. The request 

must be made to the State Director in the State in which the proposal will be submitted. 

RHS will not be liable for any expenses incurred by respondents in the development and 

submission of applications. 

Completed applications that have been determined to carry out the objectives of the 

program will be considered on a first come, first served basis based on the date a 

completed application was submitted. An application is considered complete only if the 

“Application for Approval of Housing Innovation” (included at the end of this Appendix) 

is complete in content, contains information related to the criteria, and all applicable 

additional information required by the application form has been provided. Applicants 

submitting an incomplete application will be advised in writing of additional information 

needed for continued processing. Rural Development will review each application for 

completeness and accuracy. 

 

All application packages received by the State Director are evaluated and all acceptable 

application packages are submitted to the National Office for concurrence. The package 

is reviewed by the Program Support Staff and determined whether acceptable or 

unacceptable under the Demonstration Program. Each acceptable package must include a 

proposed allocation for the dwellings to be built. 

 

VI. NATIONAL OFFICE APPROVAL OF PROPOSALS 

 

After the National Office concurrence by the RHS Administrator, the State Director is 

notified and the Community Development Manager is made aware of the approval and 

prepares to issue conditional commitments for proposed dwellings. If the proposal is not 

selected, the State Director will so notify the applicant in writing, giving specific reasons 

why the proposal was not selected. Any decisions made by the Agency for the Section 

502 Rural Housing Demonstration program cannot be appealed. Each borrower’s file 

should be marked as a demonstration dwelling. 

______________________________________________________________________________________ 

Appendix 5, page 9 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

VII. FUNDING OF APPROVED PROPOSALS 

 

State Directors are authorized to use funds for the section 502 Direct Rural Housing 

Demonstration Program on a project-by-project basis. Funds are subject to the 

requirements of RD Instruction 1940-L and are based on the availability of funds prior to 

the National Office year-end pooling date. Funds cannot be reserved or guaranteed under 

the demonstration-housing concept. There is no guarantee that a market exists for 

demonstration dwellings, and this does not ensure that an eligible loan applicant will be 

available for such a section 502 Rural Housing dwelling. 

VIII. PROJECT REQUIREMENTS 

 

All RHS eligible loan applicants must meet the applicable requirements of 7 CFR part 

3550. 

A. When the proposer has an applicant, the next step will be the development 

of drawings and specifications that detail the requirements for construction 

of a demonstration dwelling unit on a specific site. The floor plans and 

elevations must be satisfactory to the applicant. 

B. The State Engineer must review and determine acceptability of the 

individual unit and site designs for specific locations prior to construction. 

Adequate inspections per RD Instruction 1924-A should be made to 

protect the security interest of the Agency. 

C. The proposer will be responsible for the drawings and specifications that 

detail the requirements for construction of demonstration dwelling units 

on specific sites. 

D. All plans and specifications must meet the certification requirements of 

RD Instruction 1924-A. 

E. The necessary permits should be obtained for local authorities prior to any 

site, building, plumbing, mechanical or electrical work being started. 

When applying the demonstration concepts, requirements of RD Instruction 1970 series 

“Environmental” must be met. 

______________________________________________________________________________________ 

Appendix 5, page 10 of 23 
HB-1-3550 

F. Executive Order 12898 requires the Agency to conduct a Civil Rights 

Impact Analysis on each project prior to loan approval. Also, the 

requirements of Executive Order 11246 are applicable regarding equal 

employment opportunity when the proposed contract exceeds $10,000. 

If there is no available RHS eligible loan applicant, the Rural Housing Demonstration 

Program applicant will have to advance funds to complete the construction of the 

demonstration housing with the risk that there may be no RHS applicant or other 

purchaser from which the builder will recover his or her development and construction 

costs. 

_____________________________________________________________________________________ 

Appendix 5, page 11 of 23

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

Paperwork Reduction Act 

 

The information collection requirements contained in this appendix have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control 

number 0575-0114. Public reporting burden for this collection of information is 

estimated to be 80 hours per response including time for reviewing instructions, 

searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. 

 

The following contain the “Application for Approval of Housing Innovation” which 

should be completed by the applicant and the “State Office Technical Evaluation Sheet” 

is an analysis of the Housing Demonstration concept in relation to the specific criteria 

contained in the Proposed Content and Evaluation Criteria. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

________________________________________________________________________ 

Appendix 5, page 12 of 23 
HB-1-3550 

FORM APPROVED 

 OMB No. 0575-0114 

 

APPLICATION FOR APPROVAL OF HOUSING INNOVATION 

(To be Completed by Applicant) 

 

Name of Company:________________________________________________________ 

 

Address: _______________________________________________________________ 

________________________________________________________________________ 

Executive Officer:_________________________________________________________ 

 

Contact Person:____________________________ Phone Number:_________________ 

 

1. Describe the proposed housing unit innovation. 

________________________________________________________________________ 

________________________________________________________________________ 

________________________________________________________________________ 

2. How does the innovation differ from comparable, conventional housing units? 

________________________________________________________________________ 

________________________________________________________________________ 

________________________________________________________________________ 

3. How does the innovation deviate from present RHS housing standards for this type of 

housing unit? 

________________________________________________________________________ 

________________________________________________________________________ 

________________________________________________________________________ 

According to the Paperwork Reduction Act of 1995, an agency may not conduct or sponsor, and a person is not required to respond to a 

collection of information unless it displays a valid OMB control number. The valid OMB control number for this information collection is 

0575-0114. The time required to complete this information collection is estimated to average 80 hours per response, including the time for 

reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection 

of information. 

Appendix 5, Page 13 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

4. Describe the intended buyer occupants of the housing unit (income levels, age groups, 

family composition). 

________________________________________________________________________ 

________________________________________________________________________ 

________________________________________________________________________ 

5. Does the innovation comply with local building codes? Yes _____ No _____ If no, 

has variance from those codes been approved by local housing authorities? 

 Yes ___________ No __________ 

 Attach documentation of compliance or approval of variance. 

6. What impact, if any, will the innovation have on the health or safety of the: 

a. housing unit occupants 

b. local population 

7. What impact, if any, will the innovation have on the physical environment? 

8. What are your qualifications for implementing the proposed innovation? 

a. Training 

b. Experience 

 

 

____________________________________________________________________________________________ 

Appendix 5, Page 14 of 23 
HB-1-3550 

9. Will the innovation increase, or decrease, the initial cost of construction? 

 Increase _______ Decrease _______ Neither increase nor decrease ________ 

 If increase or decrease, by what amount? _____________________________________ 

 Explain 

 Attach documentation 

10. Will the innovation increase, or decrease, the cost of maintenance, repairs, or 

replacements? 

 Increase _____ Decrease _____ Neither increase nor decrease _____ 

 If increase or decrease, explain, including time frames in your estimations of additional 

costs or savings. 

 Attach documentation. 

11. Will the innovation make it more feasible for the housing owners to do part of the 

initial construction or finishing work? 

 Yes __________ No __________ 

 If yes, describe. 

 

12. Will the innovation make it more feasible for the housing owners to do their own 

repairs, replacements, or maintenance? 

 Yes __________ No __________ 

 If yes, describe. 

___________________________________________________________________________________________

Appendix 5, page 15 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

FOR INNOVATIONS INVOLVING BASIC ARCHITECTURE OR CONSTRUCTION 

13. What impact will the innovation have on the life expectancy of the housing unit? 

 _____ shorten life expectancy _____ extend life expectancy 

 _____ no impact on life expectancy 

 If shorten or extend life expectancy, explain. 

___________________________________________________________________________ 

FOR INNOVATIONS INVOLVING A COMPONENT OF THE HOUSING UNIT 

14. Compared to comparable, conventional components, will the innovation have a 

 longer, shorter, or the same life expectancy? 

 shorter _______ longer ________ the same ________ 

 Explain. 

15. What impact, if any, will the innovation component have on other parts of the 

 housing unit? 

 ___________________________________________________________________________ 

16. Has this innovation been successfully used before? 

a. in similar types of housing units. Yes _______ No _______ 

b. in different types of housing units. Yes _______ No _______ 

 If yes, what types of units? 

c. in similar climates. Yes _______ No _______ 

___________________________________________________________________________ 

Appendix 5, page 16 of 23 
HB-1-3550

d. in different types of climates. Yes _______ No _______ 

 If yes, what types of units? 

___________________________________________________________________________ 

e. in similar geological areas. Yes _______ No _______ 

f. in different types of geological areas. Yes _______ No _______ 

 If yes, what types of units? 

If you answered yes to any part of question 16, attach documentation. 

17. Will the innovation make future remodeling or expansion of the unit more feasible? 

 Yes ____________ No ___________ 

 If yes, explain 

18. Address the issues in the technical management section of the proposal contract section 

and evaluation criteria to the extent these issues were not fully discussed in the 

responses to the preceding questions. 

 

 

Rural Housing Service is an Equal Opportunity Lender. Complaints of discrimination should be sent to: 

Secretary of Agriculture, Washington, DC 20250. 

____________________________________________________________________________________________ 

Appendix 5, page 17 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN
HB-1-3550 

Rural Housing Service 

State Office Technical Evaluation Sheet 

Rural Housing Demonstration Program 

 

Instruction: 

 

Evaluation of Rural Housing Demonstration Program technical proposal concepts will be 

based upon analysis of the proposer’s concept in relation to the specific criteria contained 

in the Proposal Content and Evaluation Criteria. Reviewers should record their evaluation 

of each proposal in terms of its strengths and weaknesses, i.e., the degree to which the 

proposal concept possesses or lacks the attributes set forth in the Proposal Content and 

Evaluation Criteria paragraphs of this Appendix. 

 

Reviewer’s comments should be provided in the space below to indicate the basis for the State 

Office recommendations and any other pertinent observations. 

 

Prior to evaluating the proposer’s concepts, it should be screened to determine if it is fully 

responsive in accordance with the requirements of the Proposal Content and Evaluation 

Criteria paragraphs of this Appendix. Proposals found to be non-responsive will be 

removed from further consideration. The State Office will return the submission to the 

proposer with a list of the non-responsive areas identified. 

 

State: _____________________ Reviewer: ____________________ Date: __________ 

 

Name of Proposer: _______________________________________________________ 

 

Address: _______________________________________________________________ 

_______________________________________________________________________ 

 

Executive Officer: _______________________________________________________ 

 

Contact Person: ____________________________ Phone Number: _______________ 

 

Proposal Description: _____________________________________________________ 

________________________________________________________________________ 

________________________________________________________________________ 

 

___________________________________________________________________________________________

Appendix 5, page 18 of 23 
HB-1-3550 

The proposal is (check one): 

 

___ Responsive - complete the technical evaluation sheet 

___ Nonresponsive - return to proposer with explanation 

 

I. Proposal Evaluation (Specific strengths and weaknesses. Use additional 

sheets if more space is needed.) 

A. Housing Unit Concept 

 

1. State of Development - is the housing unit ready for full scale field testing in a rural setting: 

Strengths Weaknesses 

 

 

2. Ability of Housing Concept to provide for the protection of life, property, and for the safety and 

welfare of occupants: 

Strengths Weaknesses 

 

3. Flexibility of Housing Concepts: 

a. Site Consideration 

Strengths Weaknesses 

 

________________________________________________________________________________________ 

Appendix 5, Page 19 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN 
HB-1-3550 

b. Dwelling Unit Concept

Strengths Weaknesses 

4. Efficiency in the use of material and labor. 

Strengths Weaknesses 

5. Materials durability and ease of maintenance. 

Strengths Weaknesses 

6. Concepts effect on land use and the environment. 

Strengths Weaknesses 

Appendix 5, Page 20 of 23 
HB-1-3550 

B. Organization Capabilities 

1. Experience of organizations or proposer to implement construction of the Housing Unit 

Concept: Is there evidence of a potential applicant? 

Strengths Weaknesses 

 

2. Evaluation of effectiveness of Management structure and organization of proposer. 

Strengths Weaknesses 

3. Qualifications of key individuals. 

Strengths Weaknesses 

4. The management plan of how construction will be conducted. 

Strengths Weaknesses 

Appendix 5, Page 21 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN
HB-1-3550 

5. Is the proposed time schedule realistic?

Strengths Weaknesses 

C. Cost and Price Analysis: 

1. The quality, quantity, and level of detail supporting the cost of constructing the property 

concept. 

Strengths Weaknesses 

2. How does this compare with present housing costs in your State?

Strengths Weaknesses 

 

3. Projected housing cost for low- and very low-income individuals. 

Strengths Weaknesses 

 

____________________________________________________________________________________

Appendix 5, Page 22 of 23 
HB-1-3550 

II. State Office Summary Review Comments and Recommendations. 

A. Recommendations/Comments (Proposal’s overall strengths and weaknesses) 

1. Housing Unit Concept: 

 

2. Organizational Capabilities: 

 

3. Cost and Price Analysis: 

 

 

4. Other: 

B. Recommendation/Rating based on the proposal and objective of the 

demonstration. 

 (Check one): ________ Excellent _______ Very Good ________ Good 

________ Fair _______ Poor 

 

 

______________________________________________________________________________________ 

Appendix 5, Page 23 of 23 

(01-23-03) SPECIAL PN 

Renumbered (07-22-19) SPECIAL PN
HB-1-3550 

APPENDIX 6 

SECTION 306C WWD GRANTS TO INDIVIDUALS 

I. GENERAL. This appendix sets forth the policies and procedures for making initial and 

subsequent Water and Waste Disposal (WWD) grants to individuals authorized by Section 

306C(b) of the Consolidated Farm and Rural Development Act (7 U.S.C. 1926(c)), as amended. 

The objective of the Section 306C WWD individual grant program is to facilitate the use of 

community water and/or waste disposal systems by the residents of colonias along the 

U.S./Mexico border. WWD grants are processed similarly to Section 504 grants, except as 

modified by this appendix. 

II. DEFINITIONS. The following definitions apply to this appendix. 

 

(a) Colonia. Any identifiable community designated in writing by the State or 

county in which it is located; determined to be a colonia on the basis of objective criteria 

including lack of potable water supply, lack of adequate sewage systems, lack of decent, 

safe, and sanitary housing, and inadequate roads and drainage; and existed and was 

generally recognized as a colonia before October 1, 1989. 

 

(b) Individual. Resident of a colonia located in a rural area. 

 

(c) Rural areas. Includes unincorporated areas and any city or town with a 

population not in excess of 10,000 inhabitants according to the most recent decennial 

census of the United States. 

 

(d) System. A community or central water supply or waste disposal system. 

III. GRANT PURPOSES. Grant funds may be used to pay the reasonable costs for 

individuals to: 

 

(a) Extend service lines from the system to a residence; 

 

(b) Connect service lines to a residence’s plumbing; 

 

(c) Pay reasonable charges or fees for connecting to a system; 

 

________________________________________________________________________ 

Appendix 6, Page 1 of 3 

(01-23-03) SPECIAL PN 

Renumbered (03-15-19) PN 522 
HB-1-3550 

(d) Pay for necessary installation of plumbing and related fixtures within dwellings 

lacking such facilities (this is limited to one bath tub, sink, commode, kitchen sink, water 

heater, and outside spigot); and 

 

(e) Construct and/or partition off a portion of the dwelling for a bathroom, not to 

exceed 4.6 square meters (48 square feet) in size. 

IV. GRANT RESTRICTIONS

 

(a) Maximum grant

 

(1) Maximum grant to any individual for water service lines, connections, and/or 

construction of a bathroom is $3,500. 

 

(2) Maximum grant to any individual for sewer service lines, connections, and/or 

construction of a bathroom is $4,000. 

 

(3) Lifetime assistance to any individual for initial or subsequent Section 306C WWD grants 

may not exceed a cumulative total of $5,000. 

 

(4) Document the amount of assistance provided each grantee on a list of Section 306C 

WWD recipients and retain it in the office operational file. 

Maintenance of the list will permit destruction of closed Section 306C WWD assistance case 

folders as prescribed in §2033.10(b)(4)(i) of RD 

Instruction 2033-A. The list must include the following information recorded at the time a 

Section 306C WWD grant is made: 

 

 (i) Grantee name, address, and case number; 

 

 (ii) Name of co-grantees, if any; 

 

 (iii) Amount of the grant; and 

 

(iv) Date grant was made. 

________________________________________________________________________ 

Appendix 6, Page 2 of 3 
HB-1-3550 

(b) Limitation on use of grant funds. Section 306C WWD grant funds may not be 

used to: 

 

(1) Pay any debt of obligation of the grantee other than obligations incurred 

 for items listed in Section III of this appendix; 

 

 (2) Pay individuals for their own labor; or 

 

(3) Pay costs that are not considered reasonable by the Agency.

V. ELIGIBILITY REQUIREMENTS. Section 306C WWD applicants must meet the 

following requirements (applicants need not be age 62 or older): 

 

(a) Own a dwelling located in a colonia and must present evidence of ownership (see 

Chapter 12 for requirements). 

 

(b) Have a total taxable income based on the latest Federal income tax form from all 

individuals residing in the household that is below the most recent poverty income 

guidelines established by the Department of Health and Human Services; and 

 

(c) Must not be delinquent on any Federal debt. 

____________________________________________________________________________________

Appendix 6, Page 3 of 3 

(01-23-03) SPECIAL PN 

Renumbered (03-15-19) PN 522 
HB-1-3550 

APPENDIX 7 

STATE SUPPLEMENTS 

In accordance with RD Instruction 2006-B, all state supplements must be submitted to the 

National Office for either prior approval or post approval. Appendix 7 may serve as a 

placeholder for state supplements if a paper master manual is retained.

____________________________________________________________________________________

Appendix 7, Page 1 of 1 

(01-23-03) SPECIAL PN 

Revised (03-15-19) PN 522 
HB-1-3550 

APPENDIX 8 

VERIFICATIONS 

____________________________________________________________________________________

Appendix 8, Page 1 of 11 

(01-23-03) SPECIAL PN 

Renumbered (03-15-19) PN 522 

VERIFICATION OF PENSIONS AND ANNUITIES

REQUEST FOR INFORMATION

Federal regulations require us to verify financial information provided by applicants for housing assistance. We 

ask your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to 

Release Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is enclosed 

for your convenience. If you have questions, please call ________________ at ____________________. 

APPLICANT IDENTIFICATION

Name ________________________ SSN (last 4 digits): XXX-XX-________ DOB: ____________ 

REQUESTED INFORMATION

A. INCOME FROM ANNUITIES

1. $ ____________ Current monthly gross amount received. Will the applicant continue to receive this 

monthly amount for the next twelve months? ___ Yes ___ No (If “No”, please explain.) 

2. Describe any deductions from the gross amount that are taken. 

B. VERIFICATION OF ASSETS

1. $_____________ Current market value of assets held in the retirement or pension plan. 

2. Can the applicant withdraw amounts from the retirement account without retiring or terminating employment? 

_____ Yes ______ No. If yes, explain the terms of the withdrawal, including any penalties. 

3. Can the applicant borrow against amounts in the retirement account? ___ Yes ____ No 

If yes, explain the terms (maximum amount, interest rate, repayment term, purposes, etc.). 

VERIFIER INFORMATION: Please sign this verification form and print the name, address and telephone 

number of the verifier. 

Name:________________________________ Title:______________________________________ 

______________________________________ Telephone Number:____________________ 

(Signature) 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 
HB-1-3550 

VERIFICATION OF STUDENT INCOME AND EXPENSES

REQUEST FOR INFORMATION

Federal regulations require us to verify financial information provided by applicants for housing assistance. We ask 

your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to Release 

Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is enclosed 

for your convenience. If you have questions, please call ________________ at ____________________. 

APPLICANT IDENTIFICATION

Name ____________________________ SSN (last 4 digits): XXX-XX-________ DOB: ____________ 

REQUESTED INFORMATION

1. Describe any financial assistance the above-referenced student receives. 

Source Amount Purpose for Which Funds May Be Used 

 

 Scholarship(s) 

 Grant(s) 

 Loan(s) 

 Work-Study 

 Other 

2. Describe any expenses the above-referenced student has for: 

 $___________ Tuition 

 $___________ Housing 

 $___________ Books 

 $___________ Supplies and Equipment 

 $___________ Transportation 

 $___________ Misc. Personal Expenses 

 $___________ Total 

VERIFIER INFORMATION: Please sign this verification form and print the name, address and telephone 

number of the verifier. 

Name:___________________________ Title:_______________________________________ 

________________________________ Telephone Number:___________________________ 

(Signature) 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 

____________________________________________________________________________________

Appendix 8, Page 2 of 11 
HB-1-3550 

VERIFICATION OF MEDICAL EXPENSES

REQUEST FOR INFORMATION

Federal regulations require us to verify financial information provided by applicants for housing assistance. We ask 

your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to Release 

Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is enclosed 

for your convenience. If you have questions, please call ________________ at ____________________. 

APPLICANT IDENTIFICATION

Name ___________________________ SSN (last 4 digits): XXX-XX-________ DOB:___________ 

REQUESTED INFORMATION

1. Please list the purpose of any accumulated medical bills, identify to whom the amount is owed, and provide the 

amount to be paid during the coming 12 months. 

Amount Owed To Medical Expenses for (general purpose)

2. Medical Insurance Premiums 

 $_____________ Amount Paid Payment Period: __ per month, ___ per year 

 Medical Insurance Premiums 

 $_____________ Amount Paid Payment period: __ per month, ___ per year 

3. List other anticipated medical expenses: 

VERIFIER INFORMATION: Please sign this verification form and print the name, address and telephone 

number of the verifier. 

Name:________________________________ Title:_______________________________________ 

______________________________________ Telephone Number:___________________________ 

(Signature) 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 

____________________________________________________________________________________

Appendix 8, Page 3 of 11

(01-23-03) SPECIAL PN 

Renumbered (03-15-19) PN 522
HB-1-3550 

VERIFICATION OF SOCIAL SECURITY BENEFITS

REQUEST FOR INFORMATION

Federal regulations require us to verify financial information provided by applicants for housing assistance. We ask 

your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to Release 

Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is enclosed 

for your convenience. If you have questions, please call ________________ at ____________________. 

APPLICANT IDENTIFICATION

Name __________________________ SSN (last 4 digits): XXX-XX-________ DOB: ____________ 

REQUESTED INFORMATION

Gross monthly Social Security benefit amount: $_____________ 

Type of benefit: ____________________________ 

Gross monthly Supplemental Security Income payment amount (including State Supplement): $______________ 

Type of benefit: ____________________________ 

Amount of monthly deductions for Medicare paid by the applicant: $_______________ 

VERIFIER INFORMATION: Please sign this verification form and print the name, address and telephone 

number of the verifier. 

Name:________________________________ Title:_______________________________________ 

______________________________________ Telephone Number:___________________________ 

(Signature) 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 

____________________________________________________________________________________

Appendix 8, Page 4 of 11 
HB-1-3550 

VERIFICATION OF PUBLIC ASSISTANCE

REQUEST FOR INFORMATION

Federal regulations require us to verify financial information provided by applicants for housing assistance. We ask 

your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to Release 

Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is enclosed 

for your convenience. If you have questions, please call ________________ at ____________________. 

APPLICANT IDENTIFICATION

Name _________________________ SSN (last 4 digits): XXX-XX-________ DOB: ____________ 

REQUESTED INFORMATION 

Number in family: __________ Rate Per Month 

Aid to families with dependent children $____________ 

General assistance $____________ 

Does this amount include Court Awarded Support Payments Yes No 

Amount specifically designated for shelter and utilities $_____________ 

Other assistance / type: _____________________________________ $_____________ 

Total monthly grant $_____________ 

Other income / source: ______________________________________ $_____________ 

*Maximum allowance for rent and utilities $_____________ 

Amount of public assistance given during the past 12 months $_____________ 

VERIFIER INFORMATION: Please sign this verification form and print the name, address and telephone 

number of the verifier. 

Name:________________________________ Title:_______________________________________ 

______________________________________ Telephone Number:____________________ 

(Signature) 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 

____________________________________________________________________________________

Appendix 8, Page 5 of 11 

(01-23-03) SPECIAL PN 

Renumbered (03-15-19) PN 522 
HB-1-3550 

VERIFICATION OF CHILD/DEPENDENTCARE 

REQUEST FOR INFORMATION 

Federal regulations require us to verify financial information provided by applicants for housing assistance. We ask 

your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to Release 

Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is enclosed 

for your convenience. If you have questions, please call ________________ at ____________________. 

APPLICANT INFORMATION CAREGIVER INFORMATION 

Name: _________________________________ Name: _________________________________ 

Address: _______________________________ Company (if applicable): ___________________ 

_______________________________________ Address: ________________________________ 

 ________________________________________ 

SERVICES PROVIDED 

The name and age of the applicant’s dependent(s) under your care: 

1. 4. 

2. 5. 

3. 6. 

_____________________________________________________________________________________________ 

Frequency and Cost of Care: 

In a typical week: 

How many hours of care do you provide the applicant’s dependent(s)? _________ 

What days do you provide care? Sun Mon Tue Wed Thurs Fri Sat 

Approximately how many weeks in a year do you provide care: ____/52 weeks 

During extended school holidays/breaks: 

How many hours of care do you provide the applicant’s dependent(s) per week? _________ 

What days do you provide care? Sun Mon Tue Wed Thurs Fri Sat 

For the services provided, the average amount charged is: $__________ per week month . 

For services to be provided during the next 12 months, the total expected cost is: $___________ for the next 12 

months. 

If any of the amount charged is paid for or reimbursed by an outside source (public services, employer, etc.), the 

amount covered by an outside source is: $__________ per week month (check the appropriate billing period). 

____________________________________________________________________________________

Appendix 8, Page 6 of 11 
HB-1-3550 

____________________________________________________________________________________

Appendix 8, Page 7 of 11

(01-23-03) SPECIAL PN 

Renumbered (03-15-19) PN 522 

VERIFICATION OF CHILD/DEPENDENTCARE – CONTINUED 

APPLICANT PAYMENT HISTORY 

Indicate the number of years you have: 

Known applicant _____ 

Provided services to applicant _____ 

What is the highest amount 

the applicant has owed you? 

$ 

How much does the applicant 

presently owe you? 

$

How would you rate the applicant’s promptness in making payments in the previous 24 months? 

 Advance On Time Late (30+ days) 

Indicate the number of times payments were late in the previous 24 months: 

30 Days 60 Days 90 Days

Use this space to include any comments you wish to make concerning your experience with the applicant’s 

payment history. 

VERIFIER INFORMATION: 

Name:_______________________________________ Date:______________________________ 

 _______________________________________ Telephone Number:___________________ 

 (Signature) 

Title: _______________________________________ 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code). 
HB-1-3550 

VERIFICATION OF UNEMPLOYMENT BENEFITS

REQUEST FOR INFORMATION

Federal regulations require us to verify financial information provided by applicants for housing assistance. We 

ask your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to 

Release Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is 

enclosed for your convenience. If you have questions, please call ________________ at ___________________. 

APPLICANT IDENTIFICATION

Name ___________________________ SSN (last 4 digits): XXX-XX-________ DOB:____________ 

REQUESTED INFORMATION

1. Are benefits being paid now? Yes No 

2. If yes, what is gross weekly payment? $________________ 

3. Date of initial payment _________________ 

4. Duration of benefits _________________ weeks 

 Is claimant eligible for future benefits? Yes No 

5. If yes, how many weeks? _________________ 

6. If no, what is termination date of benefits? __________________ 

VERIFIER INFORMATION: Please sign this verification form and print the name, address and telephone 

number of the verifier. 

Name:________________________________ Title:___________________________________ 

______________________________________ Telephone Number:____________________ 

(Signature) 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 

____________________________________________________________________________________

Appendix 8, Page 8 of 11
HB-1-3550 

VERIFICATION OF BUSINESS EXPENSES

REQUEST FOR INFORMATION

Federal regulations require us to verify financial information provided by applicants for housing assistance. We 

ask your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to 

Release Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is enclosed 

for your convenience. If you have questions, please call ________________ at ____________________. 

APPLICANT IDENTIFICATION

Name ___________________________ SSN (last 4 digits): XXX-XX-________ DOB: ____________ 

REQUESTED INFORMATION 

Based on business transacted from __________________ 20____, to __________________ 20____ 

1. Gross Income $________________ 

2. Expenses: 

 (a) Interest on Loans $________________ 

 (b) Cost of Goods/Materials $________________ 

 (c) Rent $________________ 

 (d) Utilities $______________________________ 

 (e) Wages/Salaries $________________ 

 (f) Employee Contributions $________________ 

 (g) Federal Withholding Tax $________________ 

 (h) State Withholding Tax $________________ 

 (i) FICA $________________ 

 (j) Sales Tax $________________ 

 (k) Other $________________ 

 (l) Straight Line Depreciation $________________ 

 Total Expenses $________________ 

3. Net Income $________________ 

VERIFIER INFORMATION: Please sign this verification form and print the name, address and telephone 

number of the verifier. 

Name:________________________________ Title:_______________________________________ 

______________________________________ Telephone Number:____________________ 

(Signature) 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 

____________________________________________________________________________________

Appendix 8, Page 9 of 11 

(01-23-03) SPECIAL PN 

Renumbered (03-15-19) PN 522 
HB-1-3550 

VERIFICATION OF SUPPORT PAYMENTS

REQUEST FOR INFORMATION

Federal regulations require us to verify financial information provided by applicants for housing assistance. We 

ask your cooperation in supplying the information requested. The attached Form RD 3550-1, Authorization to 

Release Information, provides the applicant's authorization. 

Your prompt return of the requested information will be appreciated. A self-addressed return envelope is 

enclosed for your convenience. If you have questions, please call __________________ at _________________. 

APPLICANT IDENTIFICATION

Name _______________________ SSN (last 4 digits): XXX-XX-________ DOB: ____________ 

REQUESTED INFORMATION

Name of Person Paying Support: ___________________________________________ 

Address:___________________________________ __________________________________ 

Unit/Apt#:__________________________________ 

City: ______________________________________ 

State, Zip:__________________________________ 

For: ( ) Former Spouse 

 ( ) Children 

Children names are: 

1. 4. 7. 

2. 5. 8. 

3. 6. 9. 

Amount of Support: $_____________ Week Month Year 

VERIFIER INFORMATION: Please sign this verification form and print the name, address and telephone 

number of the verifier. 

Name:________________________________ Title:___________________________________ 

______________________________________ Telephone 

Number:____________________ 

(Signature) 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 

____________________________________________________________________________________

Appendix 8, Page 10 of 11
HB-1-3550 

RECORD OF ORAL VERIFICATION

APPLICANT INFORMATION 

Re: _______________________________________________________________________________ 

Address: __________________________________________________________________________ 

__________________________________________________________________________________ 

Date Received: _________________________________

INFORMATION VERIFIED

Item verified: __________________________________ 

Person contacted: _______________________________ 

Representing: ___________________________________ 

INFORMATION SUPPLIED

_____________________________________ ___________________ ___________________ 

Signature of Person Receiving Verification Date Time 

WARNING: Knowingly and willingly making a false or fraudulent statement to any department of the United 

States Government is a felony punishable by fine and imprisonment (Title 18, Section 1001, U.S. Code) 

____________________________________________________________________________________

Appendix 8, Page 11 of 11 

(01-23-03) SPECIAL PN 

Renumbered (03-15-19) PN 522
HB-1-3550

APPENDIX 9

SINGLE FAMILY HOUSING DIRECT INCOME LIMITS

AVAILABLE ONLINE AT:

https://www.rd.usda.gov/files/RD-DirectLimitMap.pdf

Appendix 9, Page 1 of 1

(01-23-03) SPECIAL PN

Revised (05-04-20) SPECIAL PN
HB-1-3550

APPENDIX 10

SINGLE FAMILY HOUSING FIELD GUIDANCE ON 

DISASTER DECLARATIONS

I. PURPOSE

The following provides general guidance to Agency staff for appropriate action following a 

disaster covered by a Presidential Disaster Declaration (Major Disaster Declaration or Fire 

Management Declaration). Additional guidance may be provided from the National Office 

(e.g., funding guidance and unique program type codes if special disaster funding is 

received). 

Field Offices should check the Federal Emergency Management Agency (FEMA) website

at www.fema.gov for Presidential Disaster Declarations in areas served. This appendix 

applies to designated areas eligible for Individual and/or Public Assistance.. 

Unless otherwise specified in this appendix, disaster assistance applications for Section 

502 Direct and Section 504 Loans and/or Grants should be accepted, evaluated, and 

closed following the same procedures as described in Chapters 2 through 10 and 12 of 

this Handbook. This applies to existing customers returning for subsequent assistance or 

new customers. The focus by Agency staff will be to serve those affected by the disaster 

as quickly and efficiently as possible. Awareness of policies and procedures such as 

proper use of funds remain of the utmost importance. 

Processes specific to disaster assistance include: 

• Disaster victims should be directed to contact FEMA, the Small Business

Administration (SBA), their homeowner insurance company, and other agencies

or charitable organizations offering assistance.

• Agency staff must obtain certification statements from recipients that indicate

they have not received other benefits for the same purpose as the RD assistance.

• Funds received from FEMA and other sources for disaster relief should not be

considered in the net family assets.

Appendix 10, Page 1 of 6

(01-23-03) SPECIAL PN 

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

• Applicants must establish that physical damage to their home was caused by the

natural disaster.

• The maximum Section 504 grant assistance to any one household for one

dwelling to address the damage caused by the natural disaster and make the home

decent, safe, and sanitary may not exceed ten percent of the national average area

loan limit. This allowance only applies one year from the declaration date.

• Section 504 grant funds may not be used for cosmetic improvements (e.g., ceiling

fans, wall cabinets, or crown molding) and the purchase or replacement of nonessential appliances (washing machines, dryers, microwaves, etc.).

II. ADDITIONAL STATE/FIELD OFFICE ROLES AND RESPONSIBILITIES

• Designate an individual to coordinate Rural Development response and recovery

efforts.

• Obtain the State Preliminary Damage Assessment from FEMA.

• Plan and conduct outreach efforts to reach disaster victims.

• Consider utilizing Field Offices outside of the disaster area to support

application processing activities.

• Coordinate assistance from local appraisers, insurance adjusters, and other

agencies to verify losses when possible.

Appendix 10, Page 2 of 6
HB-1-3550

III. DOCUMENTATION OF IMPACT

The following documentation must be in the case file:

• Home is in a disaster area identified in the Presidential Disaster Declaration.

• Applicant must provide documentation regarding destruction of or damage to the

residence. This may include an insurance report, an inspection report by an

independent fee inspector or government agency, or conclusive photographic evidence

showing the destruction or damage.

• Applicant’s insurance information claim is needed for insurance benefits and evidence

to show that the damage to the property is not fully covered.

• Proof of ownership, rental, or other arrangement for principal residence documentation

in the designated disaster area.

• Certification written on Form RD 410-4, Uniform Residential Loan Application, page 8,

“I/we certify that I/we have not previously nor do I/we anticipate receiving any other

payment or benefit of any kind for the same purpose for which I/we am applying for

assistance from Rural Development.” This must also be signed by all parties of the

application and/or owners of the home to be repaired.

• Staff must make responsible efforts to avoid providing duplicate benefits. If applicable,

this includes verification from the mortgage lender of insurance coverage and

verification by the insurer of coverage.

Appendix 10, Page 3 of 6

(01-23-03) SPECIAL PN 

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

IV. PORTFOLIO MONITORING

Immediately following a disaster there is usually little application activity as most 

residents are in “recovery mode”. Outreach efforts take effect over time, applications 

begin coming in, and supplemental funding may or may not become available. The

focus is on providing assistance to those in great need. State Offices need to monitor 

activities of the affected Field Offices during this time.

Items to consider include the following:

• Are there outreach efforts in all affected areas of the designation?

• Are funds being used for persons and families affected or displaced by the

presidential declared disaster?

• Are disaster funds utilized for eligible purposes?

• Do applicants meet all 502 or 504 eligibility requirements?

• Does the property meet all 502 eligibility requirements?

• Is FEMA’s disaster declaration specified in the case files?

• Is there certification and follow up in the applicant’s case file to indicate the applicant

has not received assistance through homeowner’s insurance, FEMA, SBA

or other organizations for the same purpose?

• Are the disaster loans and grants coded properly (as applicable)?

Monitoring by the State Office does not end with the file review. Open communication 

with the staff of the affected Field Office(s) is important. Communication and 

coordination with other agencies before, during, and after is important to the success of 

recovery.

Appendix 10, Page 4 of 6
HB-1-3550

V. CUSTOMER SERVICE AND LOANSERVICING

Rural Development makes every effort to help existing borrowers who are victims of 

disaster to recover from the financial hardship, to minimize the potential for delinquency 

liquidation, and to protect the Government’s interest. The Servicing and Asset 

Management Office (Servicing Office) will take the lead. However, Field Office staff 

may frequently be the first contact point.

Field Staff should refer existing customers seeking loan servicing assistance to 

Servicing Office at:

USDA Rural Development 

Servicing Office

Attn: Customer Assistance

Post Office Box 66818 

St. Louis, Missouri 63166-6818 

Phone: (800) 793-8861 

NOTE: The following information is provided for awareness of field staff. The 

Servicing Office will continue to provide customers with servicing options and 

decisions.

Upon notice of a disaster declaration, collection calls and treasury offset will be 

suspended for all borrowers residing in the declaration area. In addition, the following 

servicing options will be available for borrowers affected by the natural disaster:

Insured Losses: If security property is to be repaired, the borrower’s Rural

Development loan account must be current before insurance proceeds can be released. 

An authorized Field Office employee may release insurance proceeds less than $10,000 

to the borrower when presented with the insurance company's repair list. Insurance 

proceeds of $10,000 or more must be forwarded to Servicing Office, Hazard Insurance 

Section, according to current claims handling procedures. A Field Office employee will 

inspect repairs when completed as required under 7 CFR 3550.110(d) (3) and RD 

Instruction 1924-A. If security property is not going to be repaired, insurance proceeds 

must be applied to pay off the loan. Recapture is calculated based on the market value at 

the time of the loss, according to 7 CFR 3550.162. If market value is less than the debt, 

Servicing Office will apply the insurance proceeds to the amount of the debt, including 

recapture. Market value is determined by a recent file appraisal if documented that it 

represents an accurate indication of value at the time of the loss.

Appendix 10, Page 5 of 6 

(01-23-03) SPECIAL PN 

Revised (06-02-23) PN 583
Uninsured Losses: A borrower who sustains an uninsured loss is covered by the 

moratorium authority below but is in default of the mortgage by failing to keep the 

property insured. If a borrower incurs an uninsured loss, the Field Office will notify 

Servicing Office through Task 285 of the estimated amount of damage to the property 

and the date of loss. I f a borrower is unable to pay off the debt or repair the house with 

personal resources or other credit, the debt must be settled under 7 CFR 3550.253. 

Moratorium: Under the exception authority of 7 CFR 3550.8, Servicing Office is 

authorized to grant a moratorium for a period not to exceed 180 days for 502 and 504 

borrowers located in the declared area. Borrowers who have lost employment, sustained 

severe property damage or medical expenses, should contact Servicing Office for an 

extension for up to 18 additional months, not to exceed a total of 24 months. After the 

completion of the moratorium period, the account will automatically be reamortized.

Escrow will not be required.

Reamortization: Since SBA is statutorily prohibited from making disaster loans 

to persons delinquent on a federal debt, Servicing Office is authorized to 

reamortize a delinquent 502 Direct account when a borrower shows evidence of 

application for a disaster loan from the SBA.

The primary servicing actions in the natural disaster area will continue to be the 

responsibility at Servicing Office as described in this Handbook; however, assistance 

may be needed from the Field so that Servicing Office can adequately service the 

loan.

Appendix 10, Page 6 of 6 

HB-1-3550
HB-1-3550 

APPENDIX 11 

SINGLE FAMILY HOUSING DIRECT PROGRAMS 

APPROVAL AUTHORITY GUIDELINES 

To receive their Single Family Housing (SFH) direct loan and grant approval authority, all new 

SFH specialists must follow the guidelines below that include (among other steps) 

training/testing, mentoring, and file reviews. While the specialist should complete the process as 

expeditiously as possible, the entire process can take upwards of 18 months. If a specialist does 

not complete the process within 24 months, the Housing Program Director and State Director 

will examine and oversee the specialist’s progress until approval authority is obtained or other 

action is deemed necessary. 

I. Training/Testing: 

 To begin, the new specialist will:

o Register under the SFH University.

o Review and follow all instructional materials under the Direct University “Training 

Plan”.

 The specialist will complete all of the Direct University “Learning Modules & Quizzes”. 

o The State Office and/or Area Office may supplement the Direct University with 

training specific to state/local laws and any other supplemental training they deem 

necessary.

 After all modules and quizzes have been successfully completed, the specialist will take 

the “Final Assessment”. 

II. Mentoring: 

 At the time the new specialist registers for the SFH University, the immediate supervisor 

will assign a mentor to the specialist.

o The mentor should be:

 Well versed in underwriting SFH direct loans and grants.

 Prepared to actively serve as a resource to the trainee until they obtain their 

approval authority. 

 Prepared to provide written quarterly reports to the trainee’s supervisor and the 

Housing Program Director outlining the specialist’s progress and any areas of 

needed development. 

o The mentor should not be the specialist’s immediate or next level supervisor. 

______________________________________________________________________________ Appendix 11, Page 1 of 4 

(01-23-03) SPECIAL PN 

Revised (06-28-19) PN 525 
HB-1-3550 

III. File Reviews: 

 After the new specialist successfully passes the final assessment, they will be tasked with 

independently rendering a decision on a variety of direct loan, grant, and combo 

applications from the eligibility determination to closing. At the decisional phases, the 

immediate supervisor must attest to the specialist’s decision before the decision can be 

officially rendered. Once the immediate supervisor is comfortable with the decisions being 

rendered by the specialist, they will: 

o Submit a minimum of five Section 502 and four Section 504 files to the State Office 

for their review. In both programs, one rejected application must be provided in that 

total. The Section 502 closed loans should include existing homes with repairs and 

construction (or purchase new); the Section 504 closed loans/grants must include at 

least one combo. 

o Email the Housing Program Director letting them know which files to review via the 

Electronic Customer File system. 

o Notify the Housing Program Director in one of two ways: 

 All at once (with a minimum of nine files as defined above). 

 In two separate submissions (each containing roughly half of the required files as 

defined above) that are no more than three months apart. 

 The State Office reviewer will: 

o Use a consistent method of review and may use Attachment 6-B, Loan Quality 

Review, and the Underwriting, Pre-Closing, and Compliance Review Tool. 

o Request additional files if needed to determine the specialist’s level of proficiency. 

o Share their review results with the immediate supervisor. 

IV. Supervisor Recommendation for Approval: 

 After steps I – III above are satisfactorily completed, the immediate supervisor will:

o Coordinate with the Housing Program Director a field review with the new specialist 

to visit properties proposed for financing or financed under the SFH direct programs. 

 The new specialist will be responsible for setting up the travel route and making 

any necessary arrangements. It is recommended that at least two Section 502 

properties and one Section 504 rehab property be visited. 

 The visits will generally be exterior in nature and will be used to gauge the 

recommendation for inspection authority and site approval authority. 

o Send a letter to the State Director, through the Housing Program Director, 

recommending the designation of loan and grant approval authority once the property 

visits are satisfactorily completed. 

______________________________________________________________________________ Appendix 11, Page 2 of 4
HB-1-3550 

 The State Director will review the recommendation along with the supporting 

documentation (e.g. training records) and make a decision regarding the designation of 

loan and grant approval authority. If granted, the designation will be documented using 

the letter format provided below. If denied, the State Director will request that the 

immediate supervisor and Housing Program Director develop an updated training plan 

for the specialist to address noted areas of weakness. 

V. Restrictions/Revocations and Reinstatement of Approval Authority: 

Both the Administrator and the State Director can make written restrictions or revocations on a 

specialist’s approval authority (refer to RD Instruction 1901-A, 1901.4 (d) and (e)). Should this 

occur, the State Office has the authority to determine what actions, trainings, and conditions are 

required to reinstate the specialist’s approval authority. 

______________________________________________________________________________ Appendix 11, Page 3 of 4 

(01-23-03) SPECIAL PN 

Revised (06-28-19) PN 525 
HB-1-3550 

FURTHER DELEGATION OF AUTHORITY 

TO: [Name] 

 [Title] 

 USDA Rural Development 

 [Location] 

By the authority delegated to me as State Director for USDA Rural Development, [State Name] 

by RD Instruction 1901-A, I hereby make the following delegation to the aforementioned 

employee: 

 Loan approval authority for Single Family Housing Section 502 direct loans, loan 

assumptions and nonprogram credit sales for the maximum loan amount described in 7 

CFR Part 3550, Subpart B; 

 Loan and grant approval authority for Single Family Housing Section 504 direct loans, 

grants, combinations, and loan assumptions for the maximum amount described in 7 CFR 

Part 3550, Subpart C; and 

 Single Family Housing inspection authority and site approval authority in accordance 

with 7 CFR Part 1924, Subparts A and C. 

This delegation is effective immediately and will continue until the delegate leaves their position 

or until revocation or other change is made in writing. 

Training is an ongoing process. Continue to reach out to your supervisor and State Office SFH 

staff for guidance. 

 

Date _____________ 

 [Name] 

 State Director 

 

cc: [First line supervisor] 

 eOPF 

______________________________________________________________________________ Appendix 11, Page 4 of 4
HB-1-3550

Appendix 12, Page 1 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

APPENDIX 12

SINGLE FAMILY HOUSING DIRECT PROGRAMS 

AMERICAN RESCUE PLAN ACT (ARPA) GUIDELINES

These guidelines, which have been granted in the past through an Unnumbered Letter dated May

12, 2021, provide updated processing guidance for applications from existing Section 502 and 

Section 504 direct loan borrowers, to refinance outstanding loans which are, or have been, in 

an approved COVID-19 moratorium. These guidelines are also expanded to accept 

applications from Section 502 self-help borrowers to refinance outstanding self-help loans 

which were closed in Fiscal Year (FY) 2020 or later; and to make the Deferred Mortgage 

Payments (DMP) program (7 CFR 3550.69) available to Section 502 very low-income selfhelp borrowers who closed in FYs 2020 or later.

These guidelines are needed in response to the American Rescue Plan Act (ARPA) of 2021 to 

ensure mortgage payments are more affordable for eligible Section 502 and Section 504 

borrowers. Updates include a fast-track processing option, guidance on determining market 

value, guidance on Deferred Mortgage Payments and other self-help guidance, and other 

clarifications throughout.

The American Rescue Plan Act (ARPA) of 2021 (H.R. 1319, Section 3207) appropriated an 

additional $39 million of Budget Authority (BA) for section 502 and 504 direct loans, to remain 

available until September 30, 2023. IMPORTANT: However, this BA was rescinded as part of 

the Fiscal Responsibility Act which was signed into law by the President on June 3, 2023. In 

order to provide a wind-down period following the expiration of the ARPA BA under the Fiscal 

Responsibility Act, the Agency continued acceptance of these refinance applications (in 

accordance with 7 CFR 3550.201) through June 30, 2023. The Agency will continue to prioritize 

the refinance applications received by this deadline until all are fully processed.

IMPLEMENTATION RESPONSIBILITIES:

Unless the guidance in this Appendix is supplemented or revoked, the Agency will temporarily 

accept applications through June 30, 2023, from existing Section 502 and Section 504 direct loan 

borrowers, to refinance outstanding loans, which have been in an approved COVID-19 

moratorium or have built a home utilizing the Self-Help Housing Program and closed in FYs 

2020 or later, as follows:

 COVID-19 Moratorium Status, Net Tangible Benefit, and Borrower Outreach. To

be eligible for refinance, borrowers must be (or have been) on a COVID-19 moratorium

(CUST/USER in LoanServ Field 56 will reflect: “C”). Any borrower meeting this

criterion may apply at any time.
HB-1-3550

Appendix 12, Page 2 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

The Agency must determine that there is a net tangible benefit (NTB) to the borrower as 

the result of the refinance. A NTB includes, but is not limited to, a reduced note rate or a 

change in term that results in a more affordable payment for the borrower. This must be 

documented in the ARPA Worksheet. 

However, in an effort to reach borrowers who may have the most immediate need for 

assistance and to provide them every opportunity for success post-moratorium, the 

Agency will continue to provide outreach under which borrowers who have been on a 

COVID-19 moratorium, will be sent an outreach letter from the Servicing and Asset 

Management Office (Servicing Office) about the availability of this option and how to 

apply. This is an informational letter only, and not a requirement for eligibility. The 

Servicing Office will upload a copy of the letter in the borrower’s existing case record in 

Electronic Customer File (ECF) under the Forbearance (Special Assistance) 

classification > ARPA Notifications document type. In addition, the Servicing Office 

will continue to provide additional outreach through the 30, 60, and 90-day delinquency 

notices. The Customer Engagement Division has and will continue to promote the 

ARPA refinance program with borrowers when discussing their servicing options. 

Borrowers may also visit https://www.rd.usda.gov/programs-services/single-familyhousing-programs/single-family-arpa for more information.

 Self-Help Borrowers. Regardless of moratorium status, very low- and low-income selfhelp borrowers with permanent loans that closed in FYs 2020 or later are eligible to 

apply for refinancing under this guidance. In general, these refinance requests will 

follow the same process for General ARPA or Fast Track options, unless noted otherwise 

in the guidance. The Agency must determine that there is a NTB to the borrower as the 

result of the refinance. A NTB includes, but is not limited to, a reduced note rate or a 

change in term that results in a more affordable payment for the borrower.

Additionally, very low-income self-help borrowers with loans closed in FYs 2020 or 

later, may be eligible for the Deferred Mortgage Payment program available through 

ARPA refinance funding. For qualified borrowers, this program allows for up to 25% of 

a borrower's monthly principal and interest payment at 1 percent to be deferred for up to 

15 years. 

 ARPA Processing Resources.

All internal processing tools and letters referenced throughout this Appendix are posted in 

the Direct SharePoint > General Info > American Rescue Plan Act folder (“SharePoint”).

 ARPA Application Package.

1. Impacted borrowers must use the “ARPA Checklist of Items to Accompany the 

Uniform Residential Loan Application” when submitting a complete application, 

instead of HB-1-3550, Chapter 3, Attachment 3-J or Chapter 12, Attachement 12-E.
HB-1-3550

Appendix 12, Page 3 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

2. A standardized, ARPA specific application packet, which includes the above 

mentioned ARPA Checklist of Items, is available to borrowers at 

https://pubmai.sc.egov.usda.gov/ and https://www.rd.usda.gov/programsservices/single-family-housing-programs/single-family-arpa, and is also posted on 

SharePoint.

3. Loan application packagers must use the “Phase I Application Submittal Cover Letter 

for ARPA” and the “Packaging Required Disclosure Letter for ARPA” on the Direct

Loan Application Packagers page, in lieu of the Phase 1 and required disclosure letter 

in HB-1-3550, Attachment 3-A.

 Processing Options.

o Fast-Track processing is available for borrowers who meet all of the following 

criteria:

• There are no capital improvements to be considered in a market value 

determination, as indicated by the borrower’s selection on the ‘Calculating 

Recapture – Capital Improvements Credit’ form submitted as part of a 

complete application.

• There are no repairs for major health and safety hazards included in the 

refinance loan.

• The most current property tax valuation available from the applicable tax 

assessment authority (see Exhibit 1) shows adequate security to support an 

outstanding eligible junior lien(s) which will be included in the refinance 

loan or subordinated.

o General ARPA processing will be followed when Fast Track does not apply.

o Deferred Mortgage Payments (7 CFR 3550.69) is a temporarily authorized use of 

ARPA refinance funding for self-help borrowers with loans closed in FYs 2020 or 

later. In order to qualify for deferred mortgage payments (for up to 15 years), the 

self-help household’s adjusted income at the time of initial approval for the refinance 

loan, must not exceed very-low income. The loan term is 38 years. Deferred 

payment agreements are effective for twelve months, and once a borrower becomes 

ineligible for deferred mortgage assistance, it cannot be received again. Deferred 

mortgage payments are subject to recapture when the borrower transfers title or 

ceases to occupy the property.

A Deferred Mortgage tab has been added to the Worksheet for Computing Income & 

Max Loan Calculator (Attachment 4-A), which includes specific calculations for the 

eligibility requirements in §3550.69.
HB-1-3550

Appendix 12, Page 4 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

Exhibits 1 and 2 provide an overview of the Fast Track and General processing options: 

Application

Letter 3 – Loan Estimate (LE) and 

max recapture 

Letter 4 - Eligibility

Letter 6 (Borrower 

decides whether to 

include recapture)

Order Title Work 

Payoff 

(Task 504 & 505) to calculate final 

recapture

Closing Disclosure

*Market Value Determination 

Capital Improvements and/or health & safety repairs included?

Yes

Go to General 

Processing 

Eligible junior liens for 

affordable housing products to 

be included in the refinance are 

supported by **PTV?

Amended Final Payoff (Task 506 & 

507) to calculate final recapture

Subsidy not included

Subsidy 

included

Closing 

Disclosure 

(CD)

Update file, 

reissue CD

if needed

Obligation/Approval

Closing

Exhibit 1 - ARPA Fast Track Process Overview

For DMP/Self-Help borrowers - use appraisal in the original file, 

provided it is less than 2 years old. If over 2 years old, use 

**PTV if supported, or go to General Processing and order

appraisal for market value determination.

Fast Track is to be followed when all the following apply:

 No Capital Improvements

 No Repairs

 Eligible junior liens for affordable housing 

products to be included in the refinance are 

supported by **PTV

No

No

Fast Track – use **PTV 

information for market 

value determination, no 

appraisal required 

Yes

 

**Property Tax Valuation (PTV)

 Use the market value obtained from local, county, or state 

tax assessment authority, as applicable. 

 Assessment authorities will generally assess properties at

market value, or as a percentage of the property’s market 

value. Often, the market and assessed values will both be 

displayed on the tax/assessor record; staff must use the 

market value. 

 If only the assessed value is displayed, staff must confirm 

if the property is assessed at market value, or as a 

percentage of the market value. 

 - If the property is assessed as a percentage of the 

market value, staff must include documentation of 

taxing authority’s percentage when calculating the 

 market value for Agency purposes. 

 
HB-1-3550

Appendix 12, Page 5 of 16

(01-23-03) SPECIAL PN

Added (02-14-23) PN 576

Application

Letter 3 – Loan Estimate 

(LE) and max recapture 

Letter 4 - Eligibility

Letter 6 (Borrower 

decides whether to 

include recapture)

Order Title Work 

Payoff 

(Task 504 & 

505) to 

calculate final 

recapture

Closing Disclosure

*Market Value 

Determination

**Use 

Property Tax 

Valuation 

information

Appraisal

Appraisal 

Tasks 

502 & 503 

(45 days)

Capital 

Improvements?

Must order 

appraisal 

for market 

value 

determination 

Eligible junior liens for 

affordable housing products to 

be included in the refinance, 

supported by **Property Tax 

Valuation (PTV)? No

Eligible junior lien must 

be subordinated 

OR

Order appraisal for market 

value determination

Yes or N/A

Use **PTV information 

for market value 

determination, no 

appraisal required

Amended Final Payoff 

(Task 506 & 507) to 

calculate final recapture

Subsidy not included

Subsidy 

included

Closing 

Disclosure 

(CD)

Obligation/Approval

Closing

Exhibit 2 - ARPA General Process Overview

For DMP/Self-Help borrowers - use appraisal in the original file, 

provided it is less than 2 years old. If over 2 years old, use **PTV 

or order appraisal or market value determination.

Cat-Ex, if repairs included

General ARPA Processing is to be followed when Fast Track does not apply (e.g., capital improvements and/or repairs included)

If repairs included, construction 

monitoring as applicable

 

**Property Tax Valuation (PTV)

 Use the market value obtained from local, county, or state tax 

assessment authority, as applicable. 

 Assessment authorities will generally assess properties at market 

value, or as a percentage of the property’s market value. Often, 

the market and assessed values will both be displayed on the tax/

assessor record; staff must use the market value. 

 If only the assessed value is displayed, staff must confirm if the 

property is assessed at market value, or as a percentage of the 

market value. 

 - If the property is assessed as a percentage of the market 

 value, staff must include documentation of taxing 

 authority’s percentage when calculating the market value 

 for Agency purposes. 

Yes No

Update file, 

reissue CD 

If needed
HB-1-3550

Appendix 12, Page 6 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

 ARPA Application Review. All applications (including those which are incomplete) 

must be entered into UniFi as soon as possible after receipt; and all application material 

must be stored in ECF as soon as the new account number is available; ECF must be 

utilized as the official case record beginning with application receipt. It is very 

important staff use the correct ECF classification instructions found in the ARPA 

Processing Checklist to avoid processing delays. (NOTE: While the majority of ARPA 

application material must be stored under the new account number, market value and 

payoff documents must be loaded to the existing primary account number’s ECF.) 

 The Agency will process applications in accordance with 7 CFR 3550 and HB-1- 

3550, except for the following: 

1. Application Processing Stage:

a) Processing Checklist – staff must use the “ARPA Application Processing 

Checklist” in lieu of HB-1-3550, Attachment 3-G or 12-C. A fillable 

version is available on SharePoint. Note: the ARPA Processing Checklist 

includes Attachment 1 to be used for Fast Track, and Attachment 2 for 

General ARPA Processing.

ARPA Worksheet - for General ARPA and Fast Track, staff and loan 

application packagers must use the ARPA Worksheet in lieu of 

Attachment 4-A, Worksheet for Computing Income.

• For Deferred Mortgage Payments, a Deferred Mortgage tab has 

been added to Attachment 4-A (do not use the ARPA 

Worksheet for Deferred Mortgage applications as the ARPA 

Worksheet does not include repayment calculations which are 

needed for Deferred Mortgage purposes.)

The applicable worksheets include a section for the Loan Narrative. 

These are posted on SharePoint, and on the Direct Loan Application 

Packagers page.

b) Processing priority (HB-1-3550, 3.13 B.). ARPA refinance applications 

and Deferred Mortgage loans will receive third priority for processing 

(due to hardship). 

c) Eligible use of funds. The loan may exceed the market value of the 

property and/or the area loan limit (unless otherwise noted), only as 

necessary to cover the following:

i. Refinance of borrower’s outstanding Agency direct loan indebtedness.
HB-1-3550

Appendix 12, Page 7 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

ii. Subsidy Recapture (502 only). Subsidy recapture may be included in 

the amount to be refinanced if requested by the borrower but should 

be considered carefully. The analysis must include what the 

borrower’s total outlay will be on the recapture amount being 

refinanced (by amortizing the amount as applicable) and comparing to 

the potential discount the borrower may be eligible for by refinancing 

the recapture amount (see HB-2-3550, Par. 2.25). The ARPA 

Worksheet includes additional information to assist with this analysis. 

For example, if a borrower owes $20,000 in recapture, they may 

receive a 25% discount for paying that off by borrowing new loan 

funds as part of the refinance; in which case they would need to 

borrow $15,000 to pay off the discounted recapture amount. Because 

the $15,000 then becomes principal which will be amortized under the 

new loan, it must be determined whether the amount of interest paid is 

likely to exceed the amount the borrower saved through the discount. 

The analysis should be documented carefully in the ARPA Worksheet 

and discussed with the borrower, who will decide if they want to 

include the recapture in the refinance.

iii. Closing costs associated with the new loan, and allowable excess costs 

over the market value and area loan limit (including the tax service fee 

and initial deposit to fund the escrow account).

iv. Permissible packaging fees:

 502 - not to exceed $1,300 for certified packaging bodies with an 

intermediary (split per agreement with intermediary), $1,100 for 

certified packaging body without an intermediary (packaged by an 

intermediary, opt-out, or when a state isn’t served by an 

intermediary), or $575 for an approved non-certified packager.

 504 - $575 for eligible 504 loan packaging types.

v. 502 only - outstanding debt to prior lien holders (as identified on Form 

RD 1927-8, Agreement with Prior Lienholder), if rates and/or terms 

are less favorable than the Agency’s new loan. However, even if the 

Agency offers a more favorable rate or term, lower payment, etc., the 

borrower may still choose to remain with the prior lienholder if they 

determine it is in their best interest to do so (e.g. – if the Agency rate 

is lower, but borrower only has a few years remaining on the term, 

they may prefer to continue as-is to pay off the debt in fewer years.)

vi. In limited circumstances, amounts needed to correct major 

deficiencies, such as structural or issues impacting the health and 

safety of the occupants or members of the community, or to protect 

the Government’s interest in the property. There must be a net
HB-1-3550

Appendix 12, Page 8 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

tangible benefit (NTB) to the borrower when including funds to 

correct major deficiencies. If the borrower has indicated major 

deficiencies requiring repair on the ARPA Checklist of Items to 

Accompany the URLA, field staff must determine the requested 

repairs are a major deficiency before advising borrower to obtain bids. 

It is recommended the borrower obtain two bids for each repair; 

however, one bid can be accepted when determined reasonable and 

borrower has stated that only one bid can be obtained. 

vii. 502 only (if there is adequate security value) - junior liens for eligible

affordable housing products (e.g., secondary financing for down

payment assistance loans, forgivable loans, deferred payment loans,

etc.) or Uniform Commercial Code (UCC) liens for permanent fixtures

to the home (e.g., solar panels, HVAC systems, etc.) may be included

in the Agency refinance if there is a NTB to the borrower (i.e., the

borrower has a lower total payment when refinanced). If there isn’t

adequate security value, the junior lien must be subordinated to the

new loan. If security value is not adequate to include the amount(s) in

the refinance, or a subordination cannot be obtained, the loan cannot be

closed.

viii. Involuntary liens (e.g., child support liens, judgment liens from

unsecured creditors, state tax liens, etc.) are not eligible to be included

in the Agency refinance loan. An involuntary lien must be paid or

subordinated, otherwise the loan cannot be closed.

d) ARPA Program Type Codes:

Used through June 3, 2023:

502 Loan – ARP Multi-Year 1079

502 Loan – ARP Packaged with Intermediary * 1080

502 Loan – ARP Non-Certified Packaged 1081

502 Loan – ARP Certified Packaging Body with Approved Opt-Out 1082

502 Loan – ARP Self-Help 1083

502 Loan - ARP Deferred Mortgage Payments Very-Low Self-Help 

ONLY 1084

504 Loan – ARP Multi-Year 2079

504 Loan – ARP Packaged 2080

504 Loan – ARP Self-Help 2083

Used after June 3, 2023:

Non-ARPA Loan (Very-Low) 1087

Non-ARPA Loan (Low (or moderate)) 1088

∗ The intermediary code will not be entered into UniFi for ARPA loans due to 

system constraints.
HB-1-3550

Appendix 12, Page 9 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

e) TRID: The Loan Estimate (LE) and Closing Disclosure (CD) ‘Non-Purchase’

forms will be used for all refinanced loans secured by a deed of trust or mortgage.

f) Terms:

i. 502:

o If the estimated loan amount is less than $24,000 with a remaining term of

less than ten years, the LE will be issued using a new 10-year term.

However, if a longer term is necessary to demonstrate a NTB, or if the

applicant prefers, a 25-year or 33-year term may be used (30-year for

manufactured homes).

o If the estimated loan amount is over $24,000, the LE will be issued using a

33-year term (30-year for manufactured homes). However, if the applicant

prefers a shorter term (and a NTB is still demonstrated) they may select a

25-, or a 10-year term (10-year terms are not eligible to receive payment

assistance and this must be acknowledged by the borrower on the TRID

cover letter). If the applicant does not demonstrate a NTB on a 33-year

term, and adjusted income does not exceed 60 percent of the applicable

area median income, a 38-year term may be used (unless it is a

manufactured home).

o If the Deferred Mortgage Payments application, a 38-year term must be

used.

ii. 504 – 20 years.

g) Income:

i. Adjusted household income must be calculated to determine if the applicant is

income-eligible to receive a new program loan. Evaluation of borrower

repayment income is not required for General ARPA or Fast Track options.

ii. 502 –

 General ARPA and Fast Track - the adjusted income must not exceed

the applicable moderate-income limit at the time of loan approval and

closing. As a reminder, the ARPA Worksheet must be used in lieu of

Chapter 4, Attachment 4-A of HB-1-3550, Worksheet for Computing

Income.

 For Deferred Mortgage applications - the self-help household’s

adjusted income must not exceed very-low income at the time of initial

loan approval for the refinance loan. As a reminder, use the Deferred

Mortgage tab in the Worksheet for Computing Income & Max Loan

Calculator (Chapter 4, Attachment 4-A of HB-1-3550) – not the ARPA

Worksheet.

iii.504 – The adjusted income must not exceed the very low-income limit at the

time of loan approval and closing. If the household exceeds the very lowincome limit, 502 loan funds may be used to refinance the 504 debt.

Note - Borrowers with Multiple Loans:

a. An initial and subsequent 502 loans will be combined into one ARPA
HB-1-3550

Appendix 12, Page 10 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

502 refinanced loan. 

b. An initial and subsequent 504 loans may be combined into one ARPA

504 refinanced loan, provided the borrower still meets the very-low

adjusted household income requirements. If adjusted household

income is low or moderate, loans can be combined into a 502 loan,

however, the field should explain this will result a higher note rate

interest and the borrower could have recapture of subsidy.

c. Initial 502 and subsequent 504 loan(s) may be refinanced separately, or

all loans could be refinanced into one 502 ARPA loan. If the borrower

is very-low income, staff must first review the 502 and 504 loans as

separate refinances. If there is no NTB or the borrower exceeds the

very-low income category, the 504 debt may be refinanced into the 502

ARPA refinance loan. The field should explain this will result in a

higher note rate interest and the borrower could have recapture of

subsidy. The ARPA worksheet must be used when considering a NTB

and determining which is the best option for the applicant.

h) Assets:

The borrower and/or net family assets will not be evaluated for down payment

requirements or repayment income calculations, as applicable. However, net

family assets must still be evaluated for annual and adjusted income calculations.

i) Credit:

i. The borrower’s credit history will not be evaluated using a tri-merge credit

report (TMCR) or infile; therefore, no credit report fee is to be collected and

these reports must not be ordered. Attachment 3-H is not required.

ii. Nontraditional/alternative credit sources are not required.

iii. The Agency must check the Department of Treasury’s Do Not Pay (DNP)

portal.

NOTE: All Agency accounts in moratorium or whose moratoriums have 

expired and have become delinquent are reported to the Credit Alert 

System and the Department of Treasury (DBCK), which is checked 

through the DNP portal, regardless of the reason the moratorium was 

granted. Therefore, it is important that field staff clearly document that 

the DNP hit is related to an approved COVID-19 moratorium. If the 

account number reflected on the DNP matches the account that has 

received a COVID-19 moratorium (CUST/USER in LoanServ Field 56 

will reflect: “C”), processing may continue. All other DNP hits are 

subject to the guidance in HB-1-3550, Chapter 4.

iv. Bankruptcy - if a borrower is in Chapter 7 or 13 bankruptcy at the time of

application to refinance, the borrower’s attorney must be notified of the

proposed terms of the refinance. The Agency must receive written concurrence

from the attorney or court (e.g., order granting the motion) before approving
HB-1-3550

Appendix 12, Page 11 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

the loan; however, additional items such as letters of explanation regarding 

circumstances of the bankruptcy are not required from the applicant. If a 

borrower had a previous bankruptcy and the debt is not reaffirmed, it does not 

prohibit the applicant from applying or being eligible for ARPA refinance; 

however, since the refinance loan is new debt, the borrower would personally 

be liable for the new debt and should be informed that the bankruptcy 

protection would not apply to the new loan.

j) Adding/Removing Borrowers:

i. Adding borrowers – it is acceptable to add a new borrower; provided the

household continues to meet applicable income limit (502 - moderate; DMP –

very low; 504 - very low). The added borrower’s credit history will not be

evaluated, except for DNP check as noted above. Systematic Alien

Verification for Entitlements (SAVE) must be checked for new borrowers.

Homeownership Education and Form 3550-23, Applicant Orientation Guide

will not be required from new borrowers.

ii. All borrowers on the existing RHS debt must remain on the refinance (except

for deceased individuals). If a borrower who does not live in the home has

executed a quit claim deed conveying their interest in the security property to

the remaining borrower, staff may proceed without including the departing

borrower on the refinance loan. The ‘ARPA Letter 7 - ARPA Notification to

Departing Borrower’ must be sent to the departing borrower, after ARPA

Letter 3 is issued to inform them of the remaining borrower’s intent to

refinance the loan. As a reminder, conveying the security interest does not

release the departing borrower from liability for the initial loan or any

recapture owed on that loan; the Agency must issue ‘ARPA Letter 8 –

Notification of Release of Liability’ to the departing borrower upon loan

closing and expiration of recission rights. A copy of this letter must be stored

in ECF for the original loan, and the ARPA loan; and add a note to both

accounts (existing and ARPA refinance accounts) in LoanServ to read “See

[insert date of ARPA Letter 8] notification to departing borrower regarding

liability following ARPA refinance.”

k) Applicants who exceed the applicable income limit, or are determined ineligible

for other reasons (e.g., there is no net tangible benefit to the proposed transaction,

or an applicant is not eligible due to an outstanding judgment obtained by the

United States in a Federal court, other than the United States Tax Court. This

requirement is statutory and cannot be waived), must be sent the ARPA specific

Standardized Adverse Decision Letter posted in SharePoint, in lieu of HB Letter

15. In addition, the letter should include HB-1-3550 Attachment 1-B or 1-C, as

appropriate (see HB-1-3550, Par. 1.10 for guidance on which Attachment to use).
HB-1-3550

Appendix 12, Page 12 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

2. Other (502) eligibility processing items:

a) Social Security Number CROSS REFERENCE check is not required (except for

new borrowers being added).

b) SAVE check is not required (except for new borrowers being added).

c) Form RD 3550-23, Applicant Orientation Guide is not required.

d) The Eligibility Summary from UniFi is required to document the Annual and

Adjusted Income only; these figures should match those in the ARPA Worksheet.

The Eligibility Summary must be signed by the Loan Originator with a note on

Page 2 to see ARPA Worksheet for correct refinanced loan amount.

e) Notify the borrower of eligibility using the “ARPA Letter 4 - Eligibility Letter”

posted on SharePoint, instead of Form RD 1944-59, Certificate of Eligibility.

f) Once “ARPA Letter 4 – Eligibility Letter” issued, staff should request title using

Form RD 1927-4, Transmittal of Title Information (HB-1-3550, Chapter 8,

paragraph 8.4) for loans $7,500 or greater. Request for title should reflect

estimated maximum payoff amount minus subsidy recapture.

3. Property Eligibility Stage:

a) Whole house inspections are not required.

b) Determining Market Value. See the Exhibits 1 and 2 (as applicable) of this

Appendix for guidance on determining market value. If an appraisal should be

ordered, it is very important ARPA appraisals are ordered through the Servicing

Office, as described in Attachment 2 of the ARPA Processing Checklist. The

Servicing Office will be responsible for all communication with the appraisal

vendor. ARPA appraisals must not be ordered through the nationwide appraisal

contract used for originations.

c) A new Flood Hazard Determination will be required.

d) If repairs are included, a new Lead Based Paint (LBP) risk assessment is required

for houses built prior to 1978.

e) If repairs are included, RD Instruction 1970-B, Exhibit D “Categorical

Exclusion” is required.

f) Eligibility of the subject property does NOT need to be re-verified. (Note: loans

may be approved even if an area’s designation has changed from rural to nonrural, HB-1-3550, Chapter 5, paragraph 5.3 C. 6.).

4. Underwriting/Approval Stage:

a) Loan Narrative updated in the ARPA Worksheet (or Deferred Mortgage tab in the

Worksheet for Computing Income & Max Loan Calculator (HB-1-3550, Chapter 4,

Attachment 4-A), if applicable) to include underwriting details by Loan Approval

Official.

b) Follow applicable guidance for submitting payoff request(s) carefully, as found in

the ARPA Processing Checklist (Att.1 – Fast Track, or Att. 2 - General ARPA) once

the property’s market value has been determined.

c) Once the payoff quote is received from the Servicing Office, field staff will issue

ARPA Letter 6 – Subsidy Recapture Borrower Notification within the prescribed
HB-1-3550

Appendix 12, Page 13 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

timeframes in the ARPA Processing Checklist. This letter is to provide the 

applicant an opportunity to review the recapture amount and determine if they 

will include the amount in the refinance or defer repayment of the subsidy 

recapture (see HB-2-3550, Chapter 2 for more information on deferral of subsidy 

recapture). Borrower must return ARPA Letter 6 within 10 business days of 

issuance.

d) Once ARPA Letter 6 is returned by the borrower, see applicable ARPA

Processing Checklist Attachment for next steps to obligate and issue Form RD

3550-7, Funding Commitment and Notification of Loan Closing.

e) Staff should carefully issue a ‘Non-Purchase’ Closing Disclosure.

f) Once the Servicing Office sends the payoff in ECF, field staff will follow the

guidance in the ARPA Processing Checklist for updating ARPA Worksheet &

UniFi, obligating in LoanServ and issuance of Form 3550-7, Funding Commitment

and Notification of Loan Closing.

• An Amended payoff request is only needed if the borrower chooses to include the

subsidy or the payoff calculation is more than 30-day old, staff should follow the

applicable ARPA Processing Checklist (Att.1 – Fast Track, or Att. 2 - General

ARPA).

5. Closing Stage:

a) If debt to a prior lien holder (as identified on Form RD 1927-8, Agreement with

Prior Lienholder) will not be refinanced and the lien stays in place, a new Form RD

1927-8 must be obtained to correspond to the Agency’s new loan.

b) Field staff will establish an escrow account in the origination of the new ARPA

refinance loan. Field staff will use the current tax and insurance information

available in ECF, LoanServ and current tax records. The Servicing Office will

complete an escrow analysis on the escrow account on the existing account when

completing the payoff. If there is an escrow surplus on the existing escrow

account, the Servicing Office will issue the borrower a refund approximately 20

days after the account is paid in full. If there is an escrow shortage on the

existing escrow account, the shortage will be included in the payoff provided by

the Servicing Office. NOTE: there are specific instructions in the Registration

Section of the UniFi Quick References Guide if there are taxes or insurance

payments due after the payoff is completed.

c) 502 borrowers (with a term 25-years or greater) must sign a new Form RD 3550-

12, Subsidy Repayment Agreement, for the new loan; the original Form RD

3550-12 remains valid for the deferred subsidy recapture. NOTE: the market

value listed on the form should be the lesser of the refinance loan amount (P&I,

closing costs, repairs, prior liens, etc.), or the property’s market value (see

Exhibit 1 or 2).

d) Form RD 1940-43, Notice of Right to Cancel must be given at loan closing to

any applicant who already holds title to the dwelling being mortgaged.

o If a loan is made for less than $7,500 and no mortgage will be taken, this

form does not need to be sent out.

o The payoff calculation will be effective the date of closing; however,
HB-1-3550

Appendix 12, Page 14 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

funds cannot be disbursed due to rescission rights until 3 business days 

have passed because these applicants have a legal right to cancel (rescind) 

the loan within 3 business days from whichever of the following activities 

occurs last (HB-1-3550, Chapter 8, paragraph 8.6 F. 2): 

o execution of the mortgage or deed of trust,

o receipt of Loan Estimate,

o receipt of Form RD 1940-43, Notice of Right to Cancel.

o If the loan has rescission rights, it must be activated within 4 business

days. Do NOT activate until after the rescission period has expired.

o Send closing documents to Servicing Office within 6 business days. In the

top right corner of Form RD 3550-19, Transmittal - Closing Documents

mark “RESCISSION LOAN”.

o Note: See Chapters 5 & 10 of the DLOS Manual for additional guidance

on rescission rights.

e) While the original Promissory Note will be paid in full, the Agency will leave the

original real estate mortgage or deed of trust in place to secure the deferred

recapture receivable account. A new 502 loan of less than $7,500 that is

scheduled for repayment within 10 years from the date of the loan may be

secured by a Promissory Note only; otherwise, the new Promissory Note must be

secured by a new real estate mortgage or deed of trust, which the closing

agent/attorney must record upon loan closing. This means the Agency may have

multiple mortgages/deeds of trust, one to secure any deferred recapture owed,

and another to secure the new debt. It is not necessary to subordinate the

Agency’s original mortgage/deed of trust, to the Agency’s new mortgage/deed of

trust.

Summary of Key ARPA Processing Tasks 

(submit under existing, primary account)

Task 502 Field Staff sends to Servicing Office to request appraisal

Task 503 Servicing Office sends to notify Field Office appraisal is completed

Task 504 Field Office sends request to Servicing Office to complete payoff

Task 505 Servicing Office sends to notify Field Office payoff completed

Task 506 Field Office sends to Servicing Office to complete an amended 

payoff (if borrower includes subsidy or greater than 30-days old)

Task 507 Servicing Office sends to notify Field Office amended payoff 

completed

6. Applications in process at time of Appendix 12 issuance - for applications already in

process prior to the date of this Appendix, please note the following guidance:

• Determining Market Value –

o If an appraisal has not been ordered (Task 502), refer to Exhibit 1 or 2 of this
HB-1-3550

Appendix 12, Page 15 of 16

(01-23-03) SPECIAL PN

Revised (10-19-23) PN 595

Appendix, as applicable for determining the market value. 

• Note: Under the guidance in this Appendix, Form RD 1927-4, Transmittal

of Title Information now occurs immediately after determining eligibility.

ARPA Letter 4 (Eligibility) has been revised to include a disclosure that title

work will be ordered. If ARPA Letter 4 has previously been issued, Field

Staff should re-issue ARPA Letter 4 using the revised version dated

February 14, 2023.

o If an appraisal has been ordered (Task 502), the application must continue to be

processed using the existing ARPA Processing Checklist (dated prior to this

Appendix), including the appraisal process.

• Use of revised checklist and letters – unless noted above (e.g., an appraisal has been

ordered (Task 502)) any applications in process prior to or after the date of this

Appendix must follow the guidance in this Appendix.

7. Close-out procedures:

a) Applications addressed under this Appendix, including packaged applications,

must be post-marked, hand delivered, or electronically submitted to a USDARural Development Office by June 30, 2023, to be accepted for refinance

processing.

- Applications must be date stamped upon receipt (using the post-marked

date if received by mail) in the “Date Application Received” field on page

8 of the Form RD 410-4, Uniform Residential Application, and input into

Unifi within 3 business days of receipt.

b) Applications will continue to receive Priority 3 processing due to hardship.

c) Applications that are not post-marked, hand delivered, or electronically

submitted by this deadline will be issued Handbook Letter 15, Standardized

Adverse Decision Letter, with Attachment 1-C, An Adverse Decision That

Cannot Be Appealed, citing the expiration of the American Rescue Plan Act

budget authority per the Fiscal Responsibility Act dated June 3, 2023, and 7 CFR

3550.201, under which the Agency has prioritized the acceptance of these

refinance applications through June 30, 2023. Applications that are received

after June 30, 2023 and subsequently denied, must still be input into Unifi and

ECF for tracking purposes.

d) Borrowers who inquire about ARPA after June 30, 2023, should be directed to

the Servicing and Asset Management Office at 1-800-414-1226 for information

on available servicing options.

e) After June 3, 2023, applications that require funding will be obligated using new

codes tied to regular annual funding using program type codes:

- Non-ARPA Loan (Very low) – 1087

- Non-ARPA Loan (Low (or moderate)) – 1088

(NOTE: If the applicant is moderate income, you should select the appropriate
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Revised (10-19-23) PN 595

product code that reflects the correct loan term for low income. You will receive a 

‘Supervisor Override’ – click ok.)

f) ARPA Refinance Loans already obligated should remain under the previous ARPA Program

Type Codes (1079, 1080, etc.). If you need to de-obligate funds, you can leave the Program

Type Code as is and proceed with your full or partial de-obligation.

Due to the potential pause in the allocation of funds at the beginning of FY 2024, ARPA

applicants that are not obligated prior to the end of FY 2023 should be counseled that

there may be a delay in funding and closing. Funds should be obligated as soon as they

are available using the codes above.

g) When an ARPA refinance loan does not close due to issues identified on the title

work, states should contact the National Office ARPA resource account at

SFHARPA@usda.gov to determine whether the Agency may pay for the title

work. 

h) Every effort should be made to ensure these loans are processed and closed as

timely as possible. State Offices should closely monitor loans which have been

obligated but not yet closed, as well as applications on hand.
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(01-23-03) SPECIAL PN

Added (02-06-23) PN 574

APPENDIX 13 

SELF-HELP HOUSING 

I. OVERVIEW OF SELF-HELP HOUSING. The Self-Help Program is authorized under SEC.

523. [42 U.S.C. 1490c] of the Housing Act of 1949, as amended and is further defined at 7 CFR 1944,

Subpart I as well as RD Instruction 1944-I. The purpose of this program is to facilitate the efforts of both

public and private nonprofit organizations providing oversight to low and very low-income families who,

with the benefit of technical assistance, participate in Self-Help housing programs. Section 523 grant

recipients (hereafter referred to as Grantee) use funds primarily for administrative costs to seek out the

land for construction, package loan applications for participants, acquire quotes for building materials,

aid in the solicitation and selection of subcontracted labor, and direct program participants in tasks to

complete 65% of the labor contributed to constructing the dwelling or for rehabilitation projects, plan

labor tasks that will contribute to the owner realizing cost savings.

The Section 502 Direct Home Loan Program is typically utilized by participants choosing to build their 

homes in the Self-Help Program. In some areas, the Section 502 Program is used to acquire and 

rehabilitate existing homes. For owner occupied rehabilitation, the Section 504 Program is encouraged. 

Processing steps for a 502 or 504 Self-Help loan follow the requirements of Handbook-1-3550 and RD 

Instruction 1924-A unless otherwise addressed in this Appendix.

II. APPLICATION PROCESSING PRIORITY. Chapter 3 of this Handbook discusses application

processing priorities. Self-Help applications receive a priority four. They are priority four given the 

benefit of this partnership to all involved and given that delays in loan processing adversely affect a 

Grantee’s production goals for their grant. When Grantees are unable to meet their production goals 

for a grant, the cost of that program rises. Field Staff should consider these factors when processing 

category four applications.

III. SELF-HELP LOAN APPLICATION PACKAGING. Part of the requirements for Grantees

Is packaging 502 Direct loan applications to Rural Development for Self-Help Program participants. SelfHelp packaging is separate from the certified packaging process, but Grantee’s must follow the process 

found in Attachment 3-A of this handbook, including the use of the required applicant disclosure letter, 

Application/Property Submittal Cover Letters, eForms for application submittal, etc. As described in 

Attachment 3-A of this handbook, all packagers act as a “liaison” between the applicant and the Agency, 

and it is important that the Field Staff keeps the Grantee informed throughout loan application 

processing.

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IV. ENVIRONMENTAL REVIEWS. Self-Help new construction typically affects parcels

of land with 4 or more proposed lots which constitutes a ‘significant impact’ and will require a higher 

level of Environmental Review (ER) than the purchase of an existing home. Determining the level of ER 

required will likely need to occur even before loan application packages are submitted. The ER process 

should begin when a Grantee is purchasing land for the Self-Help Program. If the Grantee has another 

source of Federal funding such as the Self-Help Opportunity Program (SHOP) funded by the U.S. 

Department of Housing and Urban Development (HUD), Rural Development should coordinate with the 

other Federal Agencies to jointly process the ER. Guidance for ERs is found in RD Instruction 1970 series 

“Environmental” and Chapter 1, Paragraph 1.14 A. of this handbook.

V. APPRAISALS. Appraisal ordered by Grantees will be accepted provided that:

a. Rural Development is notified of the intent to order and the cost of the appraisal prior 

to any contractual commitment. Once notified Rural Development will:

i. Within three business days of receiving this notification, issue the applicant a 

third-party appraisal Loan Estimate (LE) and accompanying tailored Handbook 

Letter 5.

ii. RD will list the cost of the appraisal as provided by the third party, which may 

exceed the Agency’s prevailing appraisal fee in Paragraph 5.20 of this handbook.

b. Ordersthe appraisal only after:

i. Receiving notification from Rural Development to proceed with the order.

ii. Explaining to the applicant that they are ordering the appraisal on the 

applicant’s behalf and that the applicant will have to cover the fee, out-ofpocket, if the loan does not close.

• The Grantee may choose to collect the appraisal fee from the applicant 

prior to ordering. The appraisal fee, even though paid to the Grantee, is 

an allowable excess cost and is eligible to be reimbursed to the 

borrower from their loan proceeds at loan closing. A paid receipt must 

be forwarded to the Field Office to ensure proper credit and disclosure 

on the settlement statement.

c. The Grantee will provide a copy of the paid invoice for the appraisal along with a copy of 

the appraisal that:

i. Meets the Uniform Standards of Professional Appraisal Practice and Agency 

appraisal standards, as described in Chapter 5, Paragraph 5.14 of this Handbook, 

and 7 CFR 3550, § 3550.62 Appraisals.

ii. Lists Rural Development as an “intended user.”

d. The appraisal is reviewed for acceptability by Rural Development.

i. Rural Development must complete Form RD 1922-15, “Administrative Appraisal 

Review for Single Family Housing.”

ii. At a minimum, the first five appraisals obtained by a Grantee will receive a preclosing technical review.

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Added (07-21-23) PN 588

iii. All appraisals submitted by Grantees, which are subject to a technical preclosing 

review, must be entered into the Appraisal Hub on SharePoint to assist with the 

monitoring of performance and compliance.

iv. RD staff appraisers should complete their review within three business days. At 

the discretion of the appraisal staff, additional revisions or reviews may be 

required.

v. When additional revisions are needed, they will be addressed by RD staff 

appraisers, in coordination with the Field Staff, and the third party.

e. Once the Administrative Appraisal Review (and any applicable technical pre-closing 

review) determines the appraisal is acceptable, the RD processing Field Office must 

ensure the applicant is promptly provided a copy.

Loan funds may be used to reimburse the payor of the appraisal fee at loan closing. The amount 

of reimbursement for the appraisal may exceed the Agency’s standard appraisal fee (Chapter 5, 

Paragraph 5.20). The paid invoice for the appraisal and instructions for “paid outside of closing” 

reimbursement will be sent to the closing agent for proper disclosure and settlement.

VI. SELECTING A CONTRACTOR. RD Instruction 1924-A describes authorized construction 

methods which are the contract, borrower, Mutual Self-Help, and owner-builder. The Mutual Self-Help 

method is defined as the performance of work by mutual labor under the direction of a construction 

supervisor. The ways of doing the work, buying materials, and contracting for special services are like 

those used in the borrower method whereby the owner acts as their own general contractor. In the 

Mutual Self-Help method, a group agreement acts as the governing document between the builder and 

the Grantee. The group agreement is a vital document that outlines roles and responsibilities, labor 

contribution requirements, subcontracting arrangements, grievance procedures, and other items

related to the group build. The Loan Approval Official must be familiar with this agreement which is part 

of the approved Self-Help application docket. All changes must be reviewed by the Agency prior to use.

Under the Mutual Self-Help method, the Grantee is NOT a contractor and should NOT be asked to sign a 

construction contract or builder warranty. RD Instruction 1944-I, § 1944.406 of this section, specifically 

prohibits the Grantee from hiring personnel for the purpose of performing the participants’ construction 

work on the homes. Construction supervisors assisting families in building homes can perform work 

alongside the families so long as they do not perform an entire task solely and their work is not the 

determining factor of completing the task.

Grantees are vetted through the Section 523 approval process and are not checked as a 

contractor through Do Not Pay (DNP).

VII. CONSTRUCTION DOCUMENTS. The items listed below are submitted as part of the Section 

523 application process but must be updated as needed and submitted by the Grantees as part of each 

Section 502 construction package as follows:

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• Plans and Specifications. The building plans and specifications should be signed by the Grantee 

and the applicant on each page.

• Form RD 1924-2, Description of Materials. Required to be submitted for each application file.

• Form RD 1924-25, Plan Certification. The plans, specifications, calculations, and any 

modifications must be certified by the design professional on Form RD 1924-25, to ensure that 

the appropriate codes and standards are met.

• Development Budget. The development budget may include an amount for construction 

contingencies resulting from unusual and unforeseen circumstances beyond the contractor’s or 

borrower’s control (refer to Chapter 5, Paragraph 5.23 A of this Handbook, for the allowable 

amount and conditions). Form RD 1924-1 “Development Plan” is not required, provided the 

development budget contains the same information that would be recorded on the form.

The Grantee is responsible for subcontractor communication, and the Rural Development file does not 

need to contain pre-construction meeting documents as it would with new construction other than SelfHelp.

VIII. SUBCONTRACTS. Grantees work with subcontractors and suppliers to procure the needed 

supplies and skilled labor required to complete the homes. The Grantee obtains bids and selects the 

best available contractors/suppliers. The borrowers’ 502 loan funds are then used to make the 

purchases and pay invoices. To this end, contracts with subcontractors/vendors must be signed by the 

owner/builders but may be made individually with each owner/builder or as a group. Group contracts 

must clearly identify the charge to each participant, allow warranties to be issued directly to the owner, 

and must allow homeowners to work directly with the subcontractor for warranty work. In either case, 

the group agreement, signed by participants, should specify which process(es) the Grantee will be 

permitted to use. Subcontracts in Self-Help are unlike those in construction with a general contractor 

because funds are paid directly to the subcontractors. For this reason, it is reinforced that the following 

are required for subcontracted work under the Self-Help Program:

• Department of Labor Notification. Individual contracts that exceed $10,000 do require 

notification to the U.S. Department of Labor as described in Chapter 5, Paragraph 5.23 D 

of this Handbook. Group contracts exceeding $10,000 only require notification if the 

individual charge to any one home exceeds the threshold.

• Do Not Pay. Subcontracts $25,000 or more require clearance through the DNP system. See 

Paragraph 4.11 A for guidance on the DNP portal.

• Contractor’s Final Release and Waiver of Lien. Each subcontractor used during 

construction must sign Form RD 1924-9, “Contractor’s Final Release and Waiver of Lien.”

• Release of Claimant. Each subcontractor used during construction must signs Form RD 

1924-10, “Release by Claimants. Grantees” will maintain a list of subcontractors for each 

build to ensure this form can be easily obtained prior to final payments being made.

• Builder’s Warranty. Individual warranties offered on materials and subcontracted labor 

should be given by the Grantee to the owner with a copy to the Rural Development file. 

Grantees should not be asked to sign any warranty forms.

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HB-1-3550

IX. ADMINISTERING CONSTRUCTION FUNDS. In the Self-Help Program, Grantees are 

prohibited from using Section 523 grant funds to pay for the construction of the homes. Again, the 

Grantee is not a contractor so Field Offices should advance draws to avoid any need to reimburse a 

Grantee’s unrestricted funds that may have been used to pay for home construction while awaiting 

draws from the 502 accounts. To this end, draws against the 502 builders’ accounts will be guided by 

work in place and work to be completed in the next 30 days. Self-Help draws are not subject to the 

release of funds based on 60 or 90 percent of the work in place which is required under the contract 

method for new construction with a contractor. Grantees may request up to 100 percent of work in 

place as well as an advance for large, planned purchases in the next 30 days. At closing, an initial draw 

to cover the land, plans/specs, permits, and other costs which will be incurred within the first 30 days of 

closing (such as opening the supervised or custodial account) maybe be issued.

Field Staff should be aware that group split items are permissible for required building costs 

shared by the group (e.g., shared outhouse, power bill, tool rental, nail buckets, etc.). Draw requests 

should be made no more than once a month and must include documentation of the expenditures due 

on a detailed coversheet. Copies of corresponding invoices, code inspection reports, and pictures of 

progress should be attached to the detailed coversheet, as applicable (note that invoices coming due in 

the next 30 days may be unavailable at the time of the request and can be submitted with the next 

monthly draw). The coversheet will be signed by both the Grantee and the participating family before it 

is submitted for processing. A Rural Development inspection is not required for each draw, but Rural 

Development staff should monitor construction progress as compared to funds drawn down to ensure 

their general alignment (e.g., if the house is 20% complete, draws should be approximately 20% of the 

construction costs). RD Instruction 1944-I,§ 1944.425 of this section, provides requirements that must 

be met before a Grantee is authorized to manage 502 account funds in a custodial or supervised 

account.

X. SELF-HELP INSPECTIONS. Inspection requirements are the same for the Self-Help

Program. An inspection report and pictures from a Grantee can be accepted as a third-party inspection; 

however, to avoid any conflict of interest, Grantee inspections should not be the only ones completed. 

Grantee inspection should be coupled with local county/city inspectors, RD inspections, or other 

approved third-party inspectors. Inspections that cause a charge to the 502 borrower account should be 

used as a last resort. Grantees should never be asked to pay for an inspection.

XI. POST CLOSING LEVERAGED LOANS/GRANTS. Self-Help is a partnership between Rural 

Development and the Grantee and consistent communication is key to success. If unforeseen 

circumstances arise and additional funding is needed during construction, the Grantee should contact 

the borrower and Rural Development immediately. In some cases, the Grantee may have access to 

affordable home loan/grant products which could be used to cover cost overruns; however, an 

additional loan/grant adversely impacts a Self-Help builder’s sweat equity. Grantees who regularly place 

second liens on Self-Help participant’s property is an indication that there is an issue with the Grantee’s 

management/oversight of the project. State Offices should discuss these occurrences with the National 

Office for further guidance. Post-closing loans or grants should NOT be provided to the borrower 

without notification to Rural Development.

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HB-1-3550

XII. PARTICIPANT WITHDRAWL. In rare cases, a Self-Help owner/builder may be unable to 

complete the program. Grantees should communicate these issues to Rural Development. The group 

agreement should provide instructions for expelling a member from the group, or a borrower may quit; 

however, once a loan is closed, the program participant is in ownership of the property and must make 

decisions as such. In the event an owner/builder will not complete the home through the program, final 

decisions regarding how to move forward and complete the house must be made as follows:

1. Transfer to Another Self-Help Borrower- The borrower may wish to facilitate the sale of the 

partially built home to another very-low or low-income applicant on the Grantee’s waiting list. 

Rural Development can extend new loan funds to an eligible borrower for such a transfer (when 

funds are limited a new rates and terms assumption can be processed). A purchase and sale 

agreement will need to be executed between the owner and the incoming Self-Help Program 

participant. Parties should consider the closing costs required for the new loan when 

establishing the sales price (e.g., the closing cost will be seller paid, the applicant will take out a 

supplemental loan, or some other arrangement).

2. Contract Method- Some borrowers may wish to find a contractor to complete their home. This 

will likely cause the need for the borrower to qualify for a subsequent loan to cover the higher 

cost of building with a contractor.

The owner should be notified of their option in writing, given a reasonable timeframe to respond and be 

advised that the loan must be converted to permeant and payments started if they do not respond.

XIII. CONSTRUCTION CLOSEOUT. Once construction or rehabilitation work is satisfactorily 

completed, Rural Development will coordinate with the Grantee to close out construction, including 

converting the loan to permanent with payments starting 30 days after. At least 60 days prior to 

conversion, Rural Development should work with the Grantee to obtain the necessary paperwork for 

conversion including updated income documents, taxes, insurance information, etc. As with 

construction under the contract method, loan conversion MUST happen on the first of the month after 

the final inspection, issuance of the certificate of occupancy, or the new/repaired dwelling becomes 

occupied.

A. Funds Remaining After Completion. Any remaining loan funds which were deposited into the 

custodial/SBA account to pay final invoices for the home should be reconciled and closed quickly 

after conversion. It is anticipated that any final invoice would be paid within 60 days and

unused loan funds will be returned to Rural Development as a curtailment of the loan balance.

B. Compensation for construction defects. RD Guide Letter 1924-1, “Notification to Eligible 

Borrowers of Benefits Under RD Instruction 1924-F” should be provided to the borrower by the 

Field Office at conversion and will cover any materials/supplies as well as work completed by 

subcontractors.

Appendix 13, Page 6 of 7 
HB-1-3550

XIV. SELF-HELP TAKE-OUT LOANS. Using the Section 502 Direct Home Loan Program as take-outfinancing for self-help homes is highly discouraged. A Grantee’s organizational risk is elevated when 

holding ownership of the property during construction. If a Grantee chooses to process take-out loans, 

Rural Development assumes no liability for lack of available funding, unqualified applicants, ineligible 

properties, etc. Rural Development will not predetermine eligibility or obligate loan funds outside the 

instruction of this handbook.

XV. OTHER LOAN FINANCING. There is no requirement for Self-Help Program participants to 

use Rural Development financing. Self-Help Program participants must be at or below Rural

Developments low-income limit for the Grantee to charge the grant for the work completed and claim 

an equivalent unit under the grant. If an owner/builder is not receiving a Rural Development loan, they 

would not submit an application so Field Offices should refer to RD Instruction 1944-I for information on 

what documents the Grantee should submit which will be kept in the Section 523 file to ensure they 

meet program requirements.

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Added (02-06-23) PN 574