7 CFR Part 3555

Table of Contents

Appendix 1

7 CFR PART 3555 - GUARANTEED RURAL HOUSING PROGRAM

TABLE OF CONTENTS

Sec. Page

Subpart A - General 8

3555.1 Applicability. 8

3555.2 Purpose. 8

(a) General. 8

(b) Demonstration programs. 8

3555.3 Civil rights. 8

3555.4 Mediation and Appeals 9

3555.5 Environmental requirements. 9

(a) Policy. 9

(b) Regulatory references. 9

(c) Agency responsibilities. 9

(d) Lender and loan applicant responsibilities. 9

3555.6 State and local law. 11

3555.7 Exception authority. 11

3555.8 Conflict of interest. 11

(a) Applicant and borrower responsibility. 11

(b) Lender responsibility. 11

(c) Prohibited relationships and associations. 11

(d) Result of disclosure. 12

3555.9 Enforcement. 12

3555.10 Definitions and abbreviations. 12

3555.11 – 3555.49 [Reserved] 23

3555.50 OMB control number. 23

Subpart B – Lender Participation 23

3555.51 Lender eligibility. 23

(a) Ability to underwrite and service loans. 23

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Sec. Page

(b) SFHGLP participation requirements. 24

3555.52 Lender approval. 26

(a) Initial approval. 26

(b) Conditions of approval. 26

(c) Terminations of approval. 26

3555.53 Contracting for loan origination. 27

3555.54 Sale of loans to approved lenders. 27

3555.55 – 3555.99 [Reserved] 27

3555.100 OMB control number. 28

Subpart C – Loan Requirements 28

3555.101 Loan purposes. 28

(a) Eligible purposes. 28

(b) Eligible costs. 28

(c) Combination construction and permanent loan. 30

(d) Refinancing. 30

3555.102 Loan restrictions. 33

(a) Existing manufactured home. 34

(b) Income producing land or buildings. 34

(c) Business or income producing enterprise. 34

(d) Loan discount points. 34

(e) Refinancing. 34

(f) Buydown. 34

(g) Lease. 34

(h) Seller concessions. 34

3555.103 Maximum loan amount. 34

(a) Market value. 34

(b) Purchase price and acquisition costs. 34

(c) Newly constructed dwelling – limited to 90 percent. 34

3555.104 Loan terms. 35

(a) Interest rate. 35

(b) Repayment period. 35

(c) Repayment schedule. 35

(d) Negative amortization. 35

3555.105 Combination construction and permanent loans. 35

(a) Lender requirements. 35
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Sec.

(b) Contractor or builder requirements.

Page

36

(c) Use of loan funds. 37

(d) Terms. 37

(e) Mortgage file documentation. 38

(f) Loan Note Guarantee. 39

(g) Unplanned changes during construction. 39

(h) Reservation of funding. 39

3555.106 [Reserved] 39

3555.107 Application for and issuance of the loan guarantee. 39

(a) Processing of applications. 39

(b) Automated underwriting. 39

(c) Manual underwriting. 41

(d) Appraisals. 41

(e) Environmental requirements. 42

(f) Issuance of a conditional commitment. 42

(g) Loan guarantee fee. 42

(h) Annual fee. 43

(i) Proper closing and requesting the loan note guarantee. 43

(j) Issuance of the guarantee. 44

3555.108 Full faith and credit. 44

(a) General. 44

(b) Interest. 44

(c) Violations. 45

(d) Indemnification. 45

3555.109 Qualified Mortgage 46

3555.110 - 3555.149 [Reserved] 46

3555.150 OMB control number. 46

Subpart D – Underwriting the Applicant 46

3555.151 Eligibility requirements. 46

(a) Income eligibility. 46

(b) Citizenship status. 46

(c) Principal residence. 47

(d) Adequate dwelling. 47

(e) Eligibility of current homeowners. 47

(f) Legal capacity. 47

(g) Suspension or debarment. 47

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Sec. Page

(h) Repayment ability. 48

(i) Credit qualifications. 50

(j) Obtaining credit. 52

3555.152 Calculation of income and assets. 52

(a) Repayment income. 52

(b) Annual income. 53

(c) Adjusted annual income. 55

(d) Net family assets. 57

3555.153 – 3555.199 [Reserved] 58

3555.200 OMB Control number 58

Subpart E – Underwriting the Property 58

3555.201 Site requirements. 58

(a) Rural areas. 58

(b) Site standards. 59

3555.202 Dwelling requirements. 59

(a) New dwellings. 59

(b) Existing dwellings. 60

(c) Escrow account for exterior or interior development. 60

3555.203 Ownership requirements. 61

(a) Fee-simple ownership. 61

(b) Secured leasehold interest. 61

3555.204 Security requirements. 62

(a) Recorded security document. 62

(b) Prior liens. 62

(c) Adequate security. 62

(d) Collateral. 62

3555.205 Special requirements for condominiums. 63

3555.206 Special requirements for community land trusts. 63

(a) Rural Development review. 63

(b) Foreclosure termination. 63

(c) Organization. 63

(d) Lender documentation. 63

(e) Appraisals. 63

3555.207 Special requirements for Planned Unit Developments. 63

3555.208 Special requirements for manufactured homes. 63

(a) Eligible costs. 63

(b) Loan restrictions. 63
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Sec. Page

(c) Construction and development. 65

(d) Warranty requirements. 66

(e) HUD requirements. 66

(f) Title and lien requirements 66

3555.209 Rural Energy Plus loans. 67

3555.210 – 3555.249 [Reserved] 67

3555.250 OMB control number. 67

Subpart F – Servicing Performing Loans 67

3555.251 Servicing responsibility. 67

(a) Servicing actions. 67

(b) Third party servicer. 68

(c) Transfer of servicing. 68

(d) Non-compliance. 68

3555.252 Required servicing actions. 68

(a) Collecting regularly scheduled payments. 68

(b) Payment of taxes and insurance. 68

(c) Insurance. 69

(d) Credit reporting. 69

(e) Bankruptcy actions. 70

3555.253 Late payment charges. 70

(a) Maximum amount. 70

(b) Loans with interest assistance. 70

3555.254 Final payments. 70

3555.255 Borrower actions requiring lender approval. 70

(a) Mineral leases. 70

(b) Partial release of security property. 71

3555.256 Transfer and assumptions. 72

(a) Transfer without assumption. 72

(b) Transfer with assumption. 72

(c) Transfer without approval. 74

(d) Transfer without triggering the due-on-sale clause. 74

3555.257 Unauthorized assistance. 75

(a) Unauthorized assistance due to false information. 75

(b) Unauthorized assistance due to inaccurate information. 75

3555.258 – 3555.259 [Reserved] 75

3555.300 OMB control number. 75
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Sec. Page

Subpart G – Servicing Non-Performing Loans 76

3555.301 General servicing techniques. 76

(a) Prompt action. 76

(b) Evaluation of borrower. 76

(c) Prompt contact. 76

(d) Determine ability to cure. 76

(e) Communication. 76

(f) Prior to liquidation. 76

(g) Maintain documentation. 77

(h) Formal servicing plan. 77

3555.302 Protective advances. 77

(a) Advances for taxes and insurance. 77

(b) Advances for costs other than taxes and insurance. 77

3555.303 Traditional loan servicing options. 77

(a) Eligibility. 77

(b) Servicing options. 78

(c) Terms of loan note guarantee. 79

3555.304 Special servicing options. 79

(a) General. 79

(b) Conditions for special servicing options. 80

(c) Extended-term loan modification. 80

(d) Mortgage recovery advance. 81

3555.305 Voluntary liquidation. 83

(a) Eligibility. 83

(b) Pre-foreclosure or short sale. 83

(c) Deed in lieu of foreclosure. 84

(d) Offer by junior lienholder. 84

(e) Other methods of voluntary liquidation. 84

3555.306 Liquidation. 85

(a) General. 85

(b) Foreclosure. 85

(c) Reinstatement of accounts. 86

(d) Bankruptcy. 86

(e) Maintain condition of security property. 86

(f) Lender acquisition of title. 87

(g) Debt settlement reporting. 87

3555.307 Assistance in natural disasters. 88

(a) Policy. 88
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Sec. Page

(b) Evaluating the damage. 88

(c) Special relief measures. 88

(d) Insurance claim settlements. 88

3555.308 – 3555.349 [Reserved] 88

3555.350 OMB control number. 88

Subpart H – Collecting on the Guarantee. 88

3555.351 Loan guarantee limits. 89

(a) Original loan amount. 89

(b) Maximum loss payment. 89

3555.352 Loss covered by the guarantee. 89

(a) Principal balance. 89

(b) Accrued interest. 89

(c) Additional interest. 89

(d) Protective advances. 89

(e) Liquidation costs. 89

3555.353 Net recovery value. 89

(a) For a property that has been sold. 90

(b) For a property has been acquired. 90

3555.354 Loss claim procedures. 91

(a) Sold property. 91

(b) REO. 91

(c) Deficiency judgments. 92

3555.355 Reducing or denying the claim. 92

(a) Determination of loss payment. 92

(b) Disputes. 93

3555.356 Future recovery. 93

3555.356 – 3555.399 [Reserved] 93

3555.400 OMB control number. 94
7 CFR Part 3555

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7 CFR PART 3555 – GUARANTEED RURAL HOUSING PROGRAM

Subpart A - General.

Sec. 3555.1 Applicability.

This part sets forth policies for the Single Family Housing Guaranteed Loan Program 

(SFHGLP) administered by USDA Rural Development. It addresses the requirements of 

section 502(h) of the Housing Act of 1949, as amended, and includes policies regarding 

originating, servicing, holding and liquidating SFHGLP loans. Any provision regarding 

the expenditure of funds under this part is contingent upon the availability of funds.

Sec. 3555.2 Purpose.

(a) General. The purpose of the SFHGLP is to provide low- and moderate-income 

persons who will live in rural areas with an opportunity to own decent, safe and 

sanitary dwellings and related facilities. The SFHGLP offers applicants without 

sufficient resources to provide the necessary housing on their own account, and 

unable to secure the credit necessary for such housing from other sources upon 

terms and conditions, which the applicant can reasonably be expected to fulfill 

without the guarantee, an opportunity to acquire, build, rehabilitate, improve,or 

relocate dwellings in rural areas.

(b) Demonstration programs. Rural Development may authorize limited 

demonstration programs as allowed by law. The objective of these 

demonstration programs will be to test new approaches to offering housing 

under the statutory authority granted to the Secretary. Therefore, such 

demonstration programs may not be consistent with all of the provisions 

contained in this part. However, any statutory SFHGLP requirements will 

remain in effect.

Sec. 3555.3 Civil rights.

Rural Development, lenders, and their agents must administer the program fairly, and 

in accordance with both the letter and the spirit of all equal opportunity, equal credit 

opportunity and fair housing legislation, and applicable executive orders. Loan 

guarantees, 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 (provided the applicant has the capacity to enter into a binding contract), handicap, 

receipt of income from public assistance, sexual orientation, or because the applicant has,
7 CFR Part 3555

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), the Equal Credit Opportunity Act (15 U.S.C. 

1691), and Executive Order 11063 as amended by Executive Order 12259, as applicable. 

Rural Development's civil rights compliance requirements are provided in 7 CFR part 

1901, subpart E.

Sec. 3555.4 Mediation and appeals.

Whenever Rural Development makes a decision that will adversely affect a 

participant, the participant may proceed with alternative dispute resolution including 

mediation and a USDA National Appeals Division hearing in accordance with 7 CFR 

parts 1 and 11. The participant also may request an informal review of the adverse 

decision made by Rural Development. Except when the adverse decision applies to a loss 

claim, the applicant or borrower and the lender may participate in the appeal process.

Adverse decisions made by the lender cannot be appealed unless concurrence by Rural 

Development was required by this subpart and obtained by the lender.

Sec. 3555.5 Environmental review requirements.

(a) Policy. Rural Development will consider environmental quality, economic, 

social, and other relevant factors in program development and decision-making 

processes. Rural Development will take into account potential environmental 

impacts of proposed projects by working with applicants, other Federal 

agencies, American 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 environmental quality.

(b) Regulatory references. Loan 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. 

(Revised 04-01-16, SPECIALPN.)

(c) Agency responsibilities. Rural Development is responsible for compliance with 

all applicable environmental regulations andstatutes.

(d) Lender and loan applicant responsibilities.

(1) Lenders must use due diligence in regard to potential environmental 

hazards to ensure the property is decent, safe and sanitary and ofsufficient

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value to adequately secure the loan. The level of due diligence review to 

determine potential environmental hazards must be equivalent to the 

standards established by Fannie Mae, Freddie Mac, FHA, or the VA.

(2) Mortgage loan transactions will be subject to the requirements of the1994 

National Flood Insurance Reform Act to determine if the dwelling is 

located in a Special Flood Hazard Area (SFHA).

(3) On an as needed basis, lenders and loan applicants will assist Rural 

Development in obtaining such information as Rural Development needs 

to complete its environmental review and to cooperate in the resolution of 

environmental problems.

(4) Lenders will become familiar with Agency environmental requirements, 

so they can advise applicants and reduce the probability of unacceptable 

applications being submitted to Rural Development.

(5) The lender must comply with Federally mandated flood insurance 

purchase requirements. Existing dwellings in a SFHA are not eligible 

under the SFHGLP unless flood insurance through the FEMA National 

Flood Insurance Program (NFIP) is available for the community and flood 

insurance, whether NFIP, “Write Your Own,” or private flood insurance, 

is purchased by the borrower. The lender will require the borrower to 

obtain, and maintain for the term of the mortgage, flood insurance for any 

property located in a SFHA, listing the lender as a loss payee. Purchase of 

existing structures within the federally regulated floodplain will not 

require consideration of alternatives to avoid adverse effects and 

incompatible development in floodplains.

(6) The borrower must obtain, and continuously maintain for the life of the 

mortgage, flood insurance on the security property in an amountsufficient 

to protect the property securing the guaranteed loan. Flood insurance 

policies must be issued under the NFIP, or by a licensed property and 

casualty insurance company authorized to participate in NFIP's "Write 

Your Own" program or private flood insurance policy, as approved by the 

lender. Lenders are required to accept private flood insurance policies, 

when purchased by a borrower, that meet the requirements of 42 U.S.C. 

4012a (b)(1)(A). Lenders remain responsible to ensure a private flood 

insurance policy meets the requirements of 42 U.S.C. 4012a(b)(1)(A).

(7) Rural Development will not guarantee loans for new or proposed homesin 

an SFHA unless the lender obtains a final Letter of Map Amendment 

(LOMA) or a final Letter of Map Revision (LOMR) that removesthe
7 CFR Part 3555

property from the SFHA, or performs an alternatives analysis in 

compliance with the Agencies National Environmental Policy Act 

regulation and obtains a FEMA elevation certificate that shows that the 

lowest floor (including basement) of the dwelling and all related building 

improvements are built at or above the 100-year flood plain elevation in 

compliance with the NFIP.

Sec. 3555.6 State and local law.

Lenders will comply with applicable State and local laws and regulations, including 

the laws of American Indian tribes. Supplemental guidance will be issued in the case of 

any conflict with or significant differences from provisions of this part.

Sec. 3555.7 Exception authority.

The Administrator of the Agency, or a designee, may make an exception to any 

requirement or provision of this part or to address any omissions in this part, when the 

Administrator, or designee, determines that 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.

Sec. 3555.8 Conflict of interest.

(a) Applicant or borrower responsibility. The applicant or borrower must disclose 

to the lender any prohibited relationship or association with any Rural 

Development employee and the lender must disclose that information to Rural 

Development.

(b) Lender responsibility. The lender must disclose to Rural Development any 

prohibited relationship or association it, or any of its employees, has withany 

Rural Development employee.

(c) Prohibited relationships and associations. Prohibited relationships and 

associations include the following:

(1) Immediate family members, including parents and children, whether 

related by blood or marriage;

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(2) Close relatives, including grandmother, grandfather, aunt, uncle, 

sister, brother, niece, nephew, granddaughter, grandson, or first cousin, 

whether related by blood or marriage;

(3) Any household residents;

(4) Immediate working relationships, including coworkers in the same 

office, subordinates, and immediate supervisors; and

(5) Close business associations, including business partnerships, joint 

ventures, or closely held corporations.

(d) Result of disclosure. Disclosure of prohibited relationships and associations 

under this section will not necessarily result in applicant, borrower or lender 

ineligibility. Disclosures may result in reassignment with regard to the loan 

guarantee in question so that no prohibited relationships or associations exist 

between the Rural Development employees responsible for loan guarantee 

transactions and lenders, borrowers, or applicants.

Sec. 3555.9 Enforcement.

Rural Development will take such actions as are appropriate and necessary to enforce 

the provisions of these regulations. Such actions will include, but not be limited to, 

reduction of the loss claim payment; termination of a lender's or servicer's participation in 

the SFHGLP; suspension and debarment of participation in this or other Federal 

programs; and, any other appropriate administrative, civil, or criminal actions as allowed 

by law. Rural Development may assess civil monetary penalties pursuant to Section 543 

of the Housing Act of 1949, 42 U.S.C. 1409s(b).

Sec. 3555.10 Definitions and abbreviations.

The definitions and abbreviations in this section apply to this part.

Acceleration. Demand for immediate repayment of the entire balance of a debt if the 

covenants in the promissory note, assumption agreement, or security instruments are 

breached.

Adjusted annual income. Income from all household members who live or propose to live 

in the dwelling as their primary residence for all or part of the ensuing 12 months. 

Adjusted annual income is used to determine whether an applicant is income-eligible for 

a guaranteed loan, or interest assistance, if applicable. Adjusted annual income provides 

for deductions to account for varying household circumstances and expenses. See 

3555.152(c) for a complete description of adjusted annual income.
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Agency. The Rural Housing Service of the U.S. Department of Agriculture, Rural 

Development.

Agency employee. Any employee of the Rural Housing Service, or any employee of the 

Rural Development mission area who carries out SFHGLP functions.

Alien. See ``Qualified alien.''

Amortization. A gradual reduction of the mortgage debt through equal monthly principal 

and interest payments sufficient to fully repay the unpaid principal balance over the 

mortgage term.

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.

Annual fee. A periodic amount that is based on the average annual scheduled unpaid 

principal balance of the loan and is paid by the servicing lender to Rural Development on 

an annual basis for issuance of a Loan Note Guarantee. The fee may be passed on to the 

borrower and included in the monthly mortgage payment of a borrower and is used when 

calculating payment ratios.

Annual income. The income of all household members calculated according to Sec. 

3555.152(b). Annual income is used to determine adjusted annual income in Sec.

3555.152(c) for program eligibility purposes.

Applicant. An individual applying to a lender for a guaranteed loan.

Area median income. The median income in a specific locality, typically a county or 

Metropolitan Statistical Area (MSA), as determined by the Department of Housing and 

Urban Development.

Assumption. A method of selling real estate wherein the property purchaser accepts the 

liability for payment of an existing mortgage. Borrower. An individual obligated to 

repay the loan guaranteed under the Guaranteed Rural Housing loan program.

Combination construction and permanent loan. A guaranteed loan on which the Rural 

Development guarantee becomes effective at the time construction of an eligible single 

family housing project begins.

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Community land trust. A private nonprofit community housing development organization 

that is established to acquire parcels of land, held in perpetuity, primarily for conveyance 

under long-term ground leases. See section 502(a)(3)(B) of the Housing Act of 1949, 42

U.S.C. 1472(a)(3)(B), as amended.

Conditional commitment. Rural Development's agreement that a proposed loan will be 

guaranteed if all conditions and requirements established by Rural Development are met.

Condominium project. A real estate project in which each owner has title to a unit in a 

building, an undivided interest in the common areas of the project and sometimes the 

exclusive use of certain limited common areas. See Sec. 526(d) of the Housing Act of 

1949, as amended. Debarment. An action taken under 2 CFR part 180 or 417to exclude 

a person or entity from participating in Federal programs.

Default. A loan is considered in default when a payment has not been paid after 30 days 

from the date it was due.

Disability. See ``Person with a disability.''

Dwelling. A house, manufactured home, or condominium unit, and related facilities, such 

as a garage or storage shed, used or to be used as the borrower's principal residence.

Elderly family. An elderly family consists of one of the following:

(1) A person who is the head, spouse, or sole member of a household and who is 62 

years of age or older, or who is disabled, and is an applicant orborrower;

(2) 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

(3) Where the deceased borrower or spouse in a household was at least 62 years old 

or disabled, the surviving household member shall continue to be classified as 

an elderly household for the purpose of determining adjusted income, even 

though the surviving members may not meet the definition of an elderly family 

on their own, provided:

(i) They occupied the dwelling with the deceased household member at 

the time of the death;

(ii) If one of the surviving household members is the spouse of the 

deceased household member, the surviving household shall be 

classified as an elderly family only until the remarriage or death ofthe 

surviving spouse; and
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(iii) At the time of the death of the deceased household member the 

dwelling was financed with a Guaranteed Rural Housing loan.

Escrow account. A trust account that is established by the lender or its servicing agent to 

hold funds collected from the borrower and allocated for the payment of real estate taxes, 

special assessments, hazard or flood insurance premiums, and other similar expenses.

Existing dwelling. A dwelling that does not meet the definition of ``new dwelling''.

Extended-term loan modification. A loan modification authorized under Sec. 3555.304 

of this part, in which the lender reduces the interest rate to a level at or below the 

maximum allowable interest rate and then extends the repayment term up to a maximum 

of 40 years from the date of loan modification, but only as long as is necessary to achieve 

the targeted mortgage payment to income ratio.

Fannie Mae. A private, shareholder-owned company with a charter from Congress to 

support the housing finance system, formerly officially known as the Federal National 

Mortgage Association.

FEMA. The United States Department of Homeland Security, Federal Emergency 

Management Agency.

FHA. The Federal Housing Administration of the United States Department of Housing 

and Urban Development.

FHLB. Federal Home Loan Bank.

First-time homebuyer. Individuals who meet any one of the following three criteria are 

considered first-time homebuyers:

(1) An individual who has had no ownership interest in a principal residence during 

the three-year period ending on the date of loan closing.

(2) An individual who is a displaced homemaker and who, except for owning a 

home with a spouse, has had no ownership interest in a principal residence 

during the three-year period ending on the date of loan closing. Displaced 

homemakers include any individual whois:

(i) An adult;

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(ii) Unemployed or underemployed;

(iii) Experiencing difficulty in obtaining or upgrading employment; and

(iv) In recent years has worked primarily without remuneration to care for 

the home and family, but has not worked full-time, full-year in the 

labor force.

(3) An individual who is a single parent and who, except for owning a home with a 

spouse, has had no ownership interest in a principal residence during the threeyear period ending on the date of loan closing. Single parents include any 

individual who is:

(i) Unmarried or legally separated; and

(ii) Has custody or joint custody of one or more children, or ispregnant.

Forbearance agreement. An agreement between the lender and the borrower providing for 

temporary suspension of payments or a repayment plan that calls for periodic payments 

of less than the normal monthly payment, periodic payments at different intervals, etc. to 

bring the account current.

Freddie Mac. A private, shareholder owned company with a charter from Congress to 

support the housing finance system, formerly officially known as the Federal Home Loan 

Mortgage Corporation.

Funded buydown account. An escrow account funded by the lender, seller, or through a 

third party gift, from which monthly payments are released directly to the lender to 

reduce the amount of interest on a loan, thereby improving an applicant's repayment 

ability.

Ginnie Mae. Government National Mortgage Association, a Government-owned 

corporation within HUD.

Household. All persons routinely living in the dwelling as principal residence, except for 

live-in aides, foster children, and foster adults.

Housing Act of 1949. The Act which, in part, provides the authority for single family 

housing programs, codified at 42 U.S.C. 1471 et seq.

HUD. The United States Department of Housing and Urban Development.
7 CFR Part 3555

Interest assistance. Agency assistance available to eligible borrowers that reduces the 

effective interest rate on the guaranteed loan. Interest assistance applied to borrowers 

whose loans were approved as a subsidized guaranteed loan between April 17, 1991, and 

September 30, 1991, and who entered into interest assistance and shared equity 

agreements at loan closing.

IRS. The Internal Revenue Service of the United States Department of the Treasury. 

Leasehold estate. The right to use and occupy real estate for a stated term and under 

conditions which have been conveyed by a lease.

Lender. The entity making, holding, or servicing a loan that is guaranteed under the 

provisions of this part.

Live-in aide. A person who:

(1) Lives with an elderly person or a person with a disability and

(2) Is essential to that person's care and well-being, and

(3) Is not obligated for the person's support, and

(4) Would not be living in the unit except to provide the support services.

Loan modification. A written agreement that permanently changes an original note term, 

such as the interest rate, monthly payment, and/or the principal balance due to 

capitalization of interest or advances.

Low-income. An adjusted income limit developed in consultation with HUD under 42

U.S.C. 1437a(b)(2)(D).

Manufactured home. A structure that is built on a permanent foundation according to 

Federally Manufactured Home Construction and Safety Standards established by HUD 

and found at 24 CFR part 3280.

Market value. The value of the property as determined by a current appraisal made in 

accordance with the Uniform Standards of Professional Appraisal Practices.

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Median income. The area median income, adjusted for family size, as established by 

HUD.

Moderate income. The greater of:

(1) 115 percent of the U.S. median family income,

(2) The average of the state-wide and state non-metro median family income,

(3) 115/80ths of the area low-income limit adjusted for household size for the 

county or MSA where the property is, or will be, located.

Modest housing. For purposes of this part, ``modest housing'' is the housing that a low- or 

moderate-income borrower can afford based on their repayment ability.

Mortgage. A form of security instrument or consensual lien on real property including a 

real estate mortgage and a deed of trust.

Mortgage credit certificate. A certificate issued by an authorized State or local housing 

finance agency that documents a Federal income tax credit awarded to a first-time 

homebuyer and/or low- or moderate-income homebuyer. The Federal income tax credit 

reduces the applicant's Federal income tax liability, which improves his or her repayment 

ability.

Mortgage payment to income ratio. As used in Sec. 3555.304, this ratio is the monthly 

mortgage payment (principal, interest, taxes, and insurance) divided by the borrower's 

gross monthly income.

Mortgage recovery advance. A mortgage recovery advance is funds advanced by the 

lender on behalf of a borrower to satisfy the borrower's arrearage, pay legal fees and 

foreclosure costs related to a cancelled foreclosure action, and reduce principal. Upon
7 CFR Part 3555

request, RHS will reimburse the lender for eligible mortgage recovery advances under 

Sec. 3555.304.

MSA (Metropolitan Statistical Area). A geographic entity defined by

the United States Office of Management and Budget.

Net family assets. The value of assets available to a household, as contained in Sec. 

3555.152(d).

Net recovery value. The amount available to apply to the outstanding unpaid loan balance 

after considering the value of the security property and other amounts recovered, and 

deducting the costs associated with liquidation, acquisition and sale of the property. Net 

recovery value is calculated differently depending on the type of disposition, as contained 

in Sec. 3555.353.

New dwelling. A dwelling that is to be built is under construction, or a dwelling that is 

less than one year old and has never been occupied. A manufactured home is considered 

a new unit if the manufacturer's date is within 12 months of the purchase contract and the 

unit has never been occupied or installed at any other location as otherwise provided by 

Rural Development.

Participant. For the purpose of appeals, a participant is any individual or entity that has 

applied for, or whose right to participate in or receive a payment, loan guarantee, or other 

benefit, is affected by an Agency decision in accordance with 7 CFR 11.1.

Person with a 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.

Planned Unit Development. For the purpose of this definition, a condominium is not a 

Planned Unit Development (PUD). A PUD is a development that has all of the following 

characteristics:

(1) The individual unit owners own a parcel of land improved with a dwelling. This 

ownership is not in common with other unit owners;

(2) The development is administered by a homeowners association that owns and is 

obligated to maintain property and improvements within the development(for

Appendix 1 – Page 19

(03-09-16) SPECIAL PN
7 CFR Part 3555

Appendix 1 – Page 20

example, greenbelts, recreation facilities and parking areas) for the common use 

and benefit of the unit owners; and

(3) The unit owners have an automatic, non-severable interest in the homeowners 

association and pay mandatory assessments.

Pre-foreclosure sale. A sale of property in which the lender and borrower agree to accept 

the proceeds of the sale to satisfy a defaulted mortgage, even though this may be less than 

the amount owed on the mortgage, in order to avoid foreclosing on the property.

Primary residence. See ``Principal residence.''

Principal residence. The home domicile physically occupied by the owner for the major 

portion of the year and the address of record for such activities as Federal income tax 

reporting, voter registration, occupational licensing, etc.

Prior lien. A lien against the security property that is superior in right to the lender's debt 

instrument.

Qualified alien. See the definition of the term under Section 401 of the Personal 

Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) (8 U.S.C. 

1641).

Real estate taxes. Taxes and assessments estimated to be due and payable on the property.

REO (Real Estate Owned). Property that formerly served as security for a guaranteed 

loan and for which the lender holds title.

Repayment income. Used to determine whether an applicant has the ability to make 

monthly loan payments. Repayment income may include amounts excluded for the 

purpose of determining adjusted annual income. See Sec. 3555.152(a) for a complete 

description of repayment income.

Rural area. The definition of ``rural area'' is found in section 520 of the Housing Act of 

1949, as amended.

Rural Development. A mission area within USDA that includes the Rural Housing 

Service, the Rural Utilities Service, and the Rural Business-Cooperative Service.

Scheduled payment. The monthly installment on a promissory note, as modified by an 

interest assistance agreement or forbearance agreement, plus escrow payments.
7 CFR Part 3555

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 pay down the debt.

Security instrument. The mortgage, or deed of trust, that secures the promissory note or 

assumption agreement.

Security property. All the real property that serves as collateral for a guaranteed loan.

Settlement date. The settlement date, for the purpose of loss calculation, is the later of the 

following:

(1) Actual foreclosure date;

(2) The closing date, if sold to a third party at the foreclosuresale;

(3) The date the borrower sells the property to a third party in order to avoid or cure 

a default situation, with prior approval of the lender;

(4) When title is acquired to the security following the expiration of anystaterequired redemption or confirmation period; or

(5) The date title is acquired upon recordation of a deed-in-lieu of 

foreclosure, with prior approval of the lender.

SFHGLP. Single Family Housing Guaranteed Loan Program. The SFHGLP guarantees 

loans under section 502 of the Housing Act of 1949. Under the guarantee, the holder of 

the loan note may be reimbursed by Rural Development for all or part of a loss incurred 

if a borrower defaults on a loan.

Short sale. A type of voluntary liquidation (also referred to as a preforeclosure sale or 

short payoff) where a borrower and the lender who holds the mortgage on the property 

agree to sell the property at fair market value, but for less than the current outstanding 

debt (including any missing payments, late fees, penalties, and advances for taxes and the 

like).

Streamlined-assist refinance. A streamlined-assist refinance is an abbreviated method of 

refinancing which does not require a credit report, or the calculation of loan-to-value or debtto-income ratios. Lenders must verify that the borrower has been current on their existing loan 

for the preceding 12 month period.

Supplemental loan. A guaranteed loan made in conjunction with a transfer and 

assumption to provide funds to complete the transaction.

Appendix 1 – Page 21

(03-09-16) SPECIAL PN

Revised (04-30-20) PN 536
7 CFR Part 3555

Appendix 1 – Page 22

Suspension. An action taken under 2 CFR parts 180 or 417 to exclude a person or entity 

from participation in Federal programs for a temporary period, pending completion of an 

investigation of wrongdoing.

Total debt to income ratio. Total debt to income ratio is defined as the borrower's 

monthly mortgage payment plus all recurring monthly debt divided by the borrower's 

gross monthly income.

Unauthorized assistance. Any guaranteed loan or interest assistance for which there was 

no regulatory or statutory authorization, or for which the borrower was not eligible.

United States 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.

U.S. non-citizen national. A person born in American Samoa or Swains Island on or after 

the date the U.S. acquired American Samoa or Swains Island, or a person whose parents 

are U.S. non-citizen nationals.

VA. United States Department of Veterans Affairs.

Veterans' preference. A preference in loan processing extended to a SFHGLP loan 

applicant who served on active duty and has been discharged or released from the active 

forces on conditions other than dishonorable from the United States Army, Navy, Air 

Force, Marine Corps, or Coast Guard. The preference applies to the service person, or the 

family of a deceased serviceperson who died in service before the termination of such 

war or such period or era. The applicable timeframes are:

(1) During the period of April 6, 1917, through March 31, 1921;

(2) During the period of December 7, 1941, through December 31, 1946;

(3) During the period of June 27, 1950, through January 31, 1955;

(4) For a period of more than 180 days, any part of which occurred after January 

31, 1955, but on or before May 7, 1975;

(5) During the period beginning August 2, 1990, and ending January 2, 1992, 

provided, of course, that the veteran is otherwise eligible; or

(6) During any other period as prescribed by Presidential proclamation orlaw.
7 CFR Part 3555

Warehouse lender. A non-depository lender who utilizes short-term revolving lines of 

credit to finance loan origination and or construction financing.

Sec. Sec. 3555.11-3555.49 [Reserved] 

Sec. 3555.50 OMB control number.

The report and recordkeeping requirements contained in this subpart have been 

approved by the Office of Management and Budget and have been assigned OMB control 

number 0575-0179.

Subpart B--Lender Participation 

Sec. 3555.51 Lender eligibility.

A lender must meet the requirements described in this section to be approved for 

participation in the SFHGLP.

(a) Ability to underwrite and service loans. The lender must have a demonstrated 

ability to underwrite and service single-family home loans. A lender will be 

considered to have such a demonstrated ability if it qualifies as one of the 

following:

(1) A State Housing Agency;

(2) A lender approved as a supervised or nonsupervised mortgagee by 

HUD with direct endorsement authority for submission of 

applications for Federal Housing Mortgage Insurance;

(3) A supervised or nonsupervised mortgagee with authority to close VAguaranteed loans on the automatic basis;

(4) A lender approved by Fannie Mae for single-family loans;

(5) A lender approved by Freddie Mac for single-family loans;

(6) A Farm Credit System institution that provides documentation of its 

ability to underwrite and service single-family loans. Lenders who are 

a Farm Credit System lender with direct lending authority meet 

demonstrated ability;

Appendix 1 – Page 23

(03-09-16) SPECIAL PN

Revised (11-29-22) SPECIAL PN 
7 CFR Part 3555

Appendix 1 – Page 24

(7) A lender participating in other Rural Development or Farm Service 

Agency guaranteed loan programs that provide documentation of its 

ability to underwrite and service single family loans. Documentation 

criteria for other Rural Development or Farm Service Agency 

guarantee loan programs require an active lender agreement; or

(8) A Federally supervised lender that provides documentation of its 

ability to originate, underwrite, and service single-family loans. 

Acceptable sources of supervision include:

(i) Being a member of the Federal Reserve System.

(ii) The Federal Deposit Insurance Corporation (FDIC).

(iii) The National Credit Union Administration (NCUA).

(iv) The Office of the Comptroller of the Currency (OCC).

(v) The Federal Housing Finance Board regulating lenders within the 

Federal Home-Loan Bank (FHLB) system.

(9) If lenders cannot meet the requirements under paragraphs (a)(1) through (8) 

of this section, they may demonstrate its ability to originate and underwrite 

loans by submitting appropriate documentation, examples of which include, 

but are not limited to:

(i) A summary of residential mortgage lending activity.

(ii) Written criteria outlining the lender's policy and procedures 

for originating, underwriting and closing residential 

mortgage loans.

(iii) Evidence of an experienced loan underwriter on staff.

(iii) Certification the lender will contract with an Agencyapproved lender meeting the criteria to participate in the 

program as a servicer.

(10) A lender that proposes to service loans that cannot meet paragraphs 

(a)(1) through (8) of this section must demonstrate its ability by 

submitting appropriate documentation, examples of which include but 

are not limited to:
7 CFR Part 3555

(i) Evidence of a written plan when contracting for escrow 

services.

(ii) Evidence the lender has serviced single-family residential 

mortgage loans in the year prior to request lender approval to 

participate in the SFHGLP.

(11) The financial requirements for non-supervised lenders not covered in 

paragraph (a)(8), must have:

(i) A minimum adjusted net worth of $250,000, or $50,000 in 

working capital plus one percent of the total volume in excess of 

$25 million in guaranteed loans originated, serviced, or 

purchased during the lender’s prior fiscal year, up to a 

maximum required adjusted net worth of $2.5 million, and

(ii) One or more lines of credit with a minimum aggregate of one 

million dollars.

(b) SFHGLP participation requirements. Lenders and their agents must comply with 

the following requirements:

(1) Keep up to date, and comply with, all Agency regulations and handbooks, 

including all amendments and revisions of program requirements and 

policies. Lenders must also comply with all other applicable federal, state 

and local laws, rules, and requirements, including those under the purview 

of the Consumer Financial Protection Bureau, such as the Real Estate 

Settlement Procedures Act and Truth in Lending Act. Lenders who originate 

a minimal number loans, as determined by the Agency, in a 24 month time 

frame may be required to take updated training to ensure a lender's 

continued knowledge of the program;

(2) Regularly check Rural Development's Web site for new issuances 

related to the program;

(3) Underwrite loans according to Rural Development regulations and 

process and approve loans in accordance with programinstructions;

(4) Review loan applications for accuracy and completeness,

(5) Ensure that applicant income limits are not exceeded;

(6) Ensure that borrowers have adequate loan repayment ability and 

acceptable credit histories;

(7) Ensure that loss claims include only supportable costs;

(8) Cooperate fully with Agency reporting and monitoring requirements;

(9) Comply with limitations on loan purposes, loan limitations, interest rates, 

and loan terms;

(10) Inform Rural Development immediately after the sale, transfer, or 

change of servicers of any Agency guaranteed loan;

Appendix 1 – Page 25

(03-09-16) SPECIAL PN

Revised (11-29-22) SPECIAL PN 
7 CFR Part 3555

Appendix 1 – Page 26

(11) Maintain reasonable and prudent business practices consistent with 

generally accepted mortgage industry standards, such as maintaining 

fidelity bonding;

(12) Remain responsible for servicing even if servicing has been contracted to 

a third party;

(13) Use Rural Development, HUD, Fannie Mae, or Freddie Mac forms, 

unless otherwise approved by Rural Development;

(14) Maintain eligibility under paragraph (a) of thissection;

(15) Notify Rural Development if there are any material changes in 

organization or practices;

(16) Be neither debarred nor suspended from participation in Federal 

programs, not debarred, suspended or sanctioned under state licensing 

and certification laws and regulation;

(17) Notify Rural Development in the event of its bankruptcy or 

insolvency;

(18) Remain free from default and delinquency on any debt owed to the 

Federal government;

(19) Allow Rural Development or its representative access to the lender's 

records, including, but not limited to, records necessary for on-site and 

desk reviews of the lender's operation and the operations of any of its 

agents to verify compliance with Agency regulations and guidelines;

(20) Maintain adequate operational quality control and reporting 

procedures to prevent mortgage fraud;

(21) Maintain complete loan files with all required documentation that is 

accessible by the Agency upon request for review; and

(22) Execute a lender's agreement provided by Rural Development.

(23) Provide documentation as required by the Agency to be reviewed every 

two years for lender participation and, (24) Provide evidence that principal 

officers have a minimum of two years of experience in originating or 

servicing guaranteed mortgage loans as recommended in OMB Circular A–

129.
7 CFR Part 3555

Appendix 1 – Page 27

(03-09-16) SPECIAL PN

Sec. 3555.52 Lender approval.

(a) Initial approval. The lender must apply for and receive approval from Rural 

Development to participate in the SFHGLP. Application forms are available from 

Rural Development.

(a) Conditions of approval. The lender must provide evidence to support their ability 

to originate, underwrite and/or service SFHGLP loans as outlined inSec. 

3555.51(a), including evidence of the lender's internal loan criteria and quality 

control. New lenders will be subject to mandatory training prior to lender approval 

in accordance with Agency procedures.

(b) Termination of approval. Lender approval may be terminated in any of the 

following situations:

(1) Lapse of any eligibility requirement. In the event that a lender fails to 

meet any of the requirements described in Sec. 3555.51, the lender must 

notify Rural Development immediately. Rural Development may 

terminate the lender's approval upon written notice and in accordance 

with the lender's agreement. The Agency may take other appropriate 

corrective action due to non-compliance with any of the requirements in 

this part and the lender's agreement. A lender whose approval has been 

terminated must sell any SFHGLP loans it holds to an approved lender 

immediately, and in no event later than 6 months, after termination of

approval.

(2) Voluntary withdrawal. The lender may choose to end participation in the 

SFHGLP at any time. If the withdrawing lender has originated SFHGLP 

loans and obtained conditional commitments but has not closed the 

loans, or is holding or servicing SFHGLP loans, the lender must make 

arrangements prior to withdrawing for the transfer of such loans to 

lenders approved to participate in theSFHGLP.

Sec. 3555.53 Contracting for loan origination.

Lenders may contract with mortgage brokers, non-approved lenders, or other entities 

for loan origination services, closing services, or both, provided the loan is transferred 

immediately after closing to an Agency approved lender to which the guarantee will be 

issued. The approved lender is responsible for ensuring that the loan is properly 

underwritten, obtaining the conditional commitment, ensuring that the loan is properly 

closed, and ensuring that all closing costs, financing, and settlement fees meet Agency 

program requirements.

Sec. 3555.54 Sale of loans to approved lenders.

Revised (11-29-22) SPECIAL PN
7 CFR Part 3555

Appendix 1 – Page 28

Lenders may sell SFHGLP loans only to other Agency-approved lenders, Fannie 

Mae, Freddie Mac, or the Federal Home Loan Banks. In such a sale, the purchasing 

lender acquires all rights of the selling lender under the Loan Note Guarantee, and 

assumes all of the selling lender's obligations contained in any note, security instrument, 

or Loan Note Guarantee in connection with the loan purchased. The purchasing lender 

may be subject to any defenses, claims, or offsets that Rural Development would have 

had against the selling lender if the selling lender had continued to hold the loan. The 

lender must notify Rural Development immediately upon the sale or transfer of servicing 

of a SFHGLP loan.

Sec. Sec. 3555.55--3555.99 [Reserved]

Sec. 3555.100 OMB control number.

The report and recordkeeping requirements contained in this subpart have been 

approved by the Office of Management and Budget and have been assigned OMB control 

number 0575-0179.

Subpart C--Loan Requirements 

Sec. 3555.101 Loan purposes.

Loan funds must be used to acquire a new or existing dwelling to be used by the 

applicant as a principal residence.

(a) Eligible purposes. Loan funds may be used for:

(1) The construction or purchase of a new dwelling;

(2) The cost of acquisition of an existing dwelling;

(3) The cost of repairs associated with the acquisition of an existing 

dwelling; or

(4) Acquisition and relocation of an existing dwelling.

(b) Eligible costs. Loan funds also may be used to pay for the following items 

associated with the acquisition of a dwelling:

(1) Purchase and installation of essential household equipment in the 

dwelling such as wall-to-wall carpeting, ovens, ranges,refrigerators,
7 CFR Part 3555

Appendix 1 – Page 29

(03-09-16) SPECIAL PN

washing machines, clothes dryers, heating and cooling equipment, 

and other similar items as long as the equipment is conveyed with the 

dwelling and such items are typically included in the purchase of 

similar dwellings in the area.

(2) Purchase and installation of energy-saving measures.

(3) Site preparation including grading, foundation, plantings, seeding or 

sodding, trees, walks, fences, and driveways to the home.

(4) A supplemental loan to provide funds for seller equity or essential 

repairs when an existing guaranteed loan is assumedsimultaneously.

(5) Special design features or equipment when necessary because of a 

physical disability of the applicant or a member of the household.

(6) Loan funds may be used to pay for reasonable and customary 

expenses related to obtaining the loan. Allowable loan expenses 

include:

(i) Legal, architectural, and engineering fees;

(ii) Title exam, title clearance and title insurance;

(iii) Transfer taxes and recordation fees;

(iv) Appraisal, property inspection, surveying, environmental, 

tax monitoring, and technical services;

(v) Homeownership education.

(vi) Reasonable and customary loan discount points to reduce the 

note interest rate from the rate authorized in Sec. 3555.104(a).

(vii) Reasonable and customary non-recurring closing costs 

associated with the mortgage transaction that do not exceed those 

charged other applicants by the lender for similar transactions such as 

FHA-insured or VA-guaranteed first mortgage loans. If the lender 

does not participate in such
7 CFR Part 3555

Appendix 1 – Page 30

programs, the loan closing costs may not exceed those 

charged other applicants by the lender for a similar loan 

program that requires conventional mortgage insurance or 

guarantee. Allowable closing costs include the actual cost of 

credit reports, the loan origination fee, settlement fee, 

deposit verification fees, document preparation fees (if 

performed by a third party not controlled by the lender), and 

other reasonable and customary costs as determined by 

Rural Development. Payment of finder's fees or placement 

fees for the referral of an applicant to the lender is 

prohibited.

(viii) Reasonable connection fees, assessments, or the pro rata 

installment costs for utilities such as water, sewer, 

electricity and gas for which the borrower isresponsible.

(ix) The prorated portion of real estate taxes that is due and 

payable on the property at the time of closing and to 

establish escrow accounts for real estate taxes, hazard and 

flood insurance premiums, and related costs.

(x) The amount of the loan up-front guarantee fee required by 

Sec. 3555.107(g).

(xi) The cost of establishing a cushion in the mortgage escrow 

account for payment of the annual fee required by Sec. 

3555.108(h), not to exceed 2 months.

(xii) If the seller or other third party pays any of the costs 

described in this section, the amount of the costs paid by the 

seller or other third party may not be included in the loan 

amount to be guaranteed.

(c) Combination construction and permanent loan. Loan funds may be used and 

Rural Development will guarantee a ''combination construction and permanent 

loan'' as defined at Sec. 3555.10, during the term of construction and prior to 

the borrower occupying the property, subject to the conditions in Sec. 

3555.105.

(d) Refinancing. Refinancing is permitted only in the followingsituations:
7 CFR Part 3555

(1) The loan may be used for permanent financing when temporary 

financing to construct a new dwelling, or to purchase and improve an 

existing dwelling, is arranged as a part of the loanpackage.

(2) In the case of loans for a site on which a dwelling is not constructed 

prior to issuance of the Loan Note Guarantee, refinancing is permitted 

if:

(i) The site is free and clear of debt;

(ii) The debt to be refinanced was incurred for the sole purpose 

of purchasing the site;

(iii) The applicant is unable to acquire adequate housingwithout 

refinancing; and

(iv) An appropriate dwelling will be constructed on the site.

(3) The loan is a present Section 502 Direct or guaranteed loan, 

authorized under the Housing Act of 1949 subject to the following 

additional requirements:

(i) Three options for refinancing may be offered: streamlined, 

non-streamlined, and streamlined-assist. Other than 

provided in this paragraph, no cash out is permitted for any 

refinance. Documentation costs and underwriting 

requirements of subparts D, E, and F of this part apply to 

streamlined and non-streamlined refinances.

(A) Lenders may offer a streamlined refinance for 

existing Section 502 Guaranteed loans, which does 

not require a new appraisal. The lender will pay off 

the balance of the existing Section 502 Guaranteed 

loan.

(03-09-16) SPECIAL PN

Revised (06-02-16) SPECIAL PN

(B) Lenders may offer non-streamlined refinancing for 

existing Section 502 Guaranteed or Direct loans, 

which requires a new and current market value 

appraisal. The amount of the new loan must be 

supported by sufficient equity in the property as

Appendix 1 – Page 31
7 CFR Part 3555

Appendix 1 – Page 32

determined by an appraisal. The appraised value 

may be exceeded by the amount of up-front 

guarantee fee financed, if any, when using the nonstreamlined option.

(C) A streamlined-assist refinance loan is a special 

refinance option available to existing Section 502 

direct and guaranteed loan borrowers. Applicants 

must meet the income eligibility requirements of

§3555.151(a), and must not have had any defaults 

during the 12 month period prior to the refinance 

loan application. There are no debt-to-income 

calculation requirements, no credit report 

requirements, no property inspection requirements, 

and no loan-to-value requirements. There is no 

appraisal requirement except for Section 502 direct 

loan borrowers who have received a subsidy.

(ii) The interest rate of the new loan must be fixed and must not 

exceed the interest rate of the original loan being 

refinanced.

(iii) Existing borrowers seeking to refinance must have 

demonstrated their ability to meet payment demands by 

maintaining a current account for the 180 days prior to 

application.

(iv) The loan security must include the same property as the 

original loan and be owned and occupied by the borrowers 

as their principal residence.

(v) The maximum loan amount cannot exceed the balance of 

the loan being refinanced including accrued interest, the 

guarantee fee, and reasonable and customary closing costs. 

When a direct loan is refinanced, any recapture amount 

owed may be included in the loan amount or deferred as 

long as the recapture amount takes a subordinate lien 

position to the new SFHGLP loan. A discount on the 

recapture amount may be offered if the borrower does not 

defer recapture or includes the recapture amount in the new 

loan.
7 CFR Part 3555

(vi) Two options for refinancing can be offered. Lenders may 

offer a streamlined refinance for existing Section 502 

Guaranteed loans, which does not require a new appraisal. 

Streamlined financing may not be available for existing 

Section 502 Direct loans. The lender will pay off the 

principal balance of the existing Section 502 Guaranteed 

loan. The new loan amount cannot include any accrued 

interest, closing costs or lender fees. The refinance up-front 

guarantee fee as established by the Agency can be included 

in the loan to be refinanced to the extent financing does not 

exceed the original loan amount. Lenders may offer nonstreamlined refinancing for existing Section 502 Guaranteed 

or Direct loans, which requires a new and current market 

value appraisal. The new loan may include the principal and 

interest of the existing Agency loan, reasonable closing 

costs and lenders fees to extent there is sufficient equity in 

the property as determined by an appraisal. The appraised 

value may be exceeded by the amount of up-front guarantee 

fee financed, if any, when using the non-streamlined option. 

Documentation, costs, and underwriting requirements of 

subparts D, E, and F of this part apply to refinances, unless 

otherwise provided by the Agency.

(vii) Lenders may require property inspections and/or repairs as 

a condition to loan approval. Expenses related to property 

inspections and repairs required of the lender may not be 

financed into the new loan amount.

(viii) The lender pays a guarantee fee as established by the 

Agency.

(ix) The refinance loan may be subject to an annual fee as 

established by the Agency; and

(x) The Agency may limit the number of guaranteed loans 

made for refinancing purposes based on market conditions 

and other appropriate factors.

Sec. 3555.102 Loan restrictions.

Appendix 1 – Page 33

(03-09-16) SPECIAL PN
7 CFR Part 3555

Appendix 1 – Page 34

A guarantee will not be issued if loan funds are to be used for:

(a) Existing manufactured homes. Purchase of an existing manufactured home, 

except as provided in Sec. 3555.208(b)(3);

(b) Income producing land or buildings. Purchase or improvement of land or 

buildings that are typically used principally for income-producing purposes;

(c) Business or income-producing enterprise. Purchase or the construction of 

buildings which are largely or in part specifically designed to accommodate a 

business or income-producing enterprise;

(d) Loan discount points. Loan discount points, except as provided inSec. 

3555.101(b)(6)(vi);

(e) Refinancing. Refinancing, except as provided in Sec. 3555.101(d);

(f) Buydown. Establishing a buydown account;

(g) Lease. Payments on a lease; or

(h) Seller concessions. Purchasing a home if the seller, or other interested third 

party, contributes more than 6 percent, unless otherwise provided by the 

Agency, of the property's sales price toward the purchaser's mortgage financing 

costs, closing costs, escrow accounts, furniture or other giveaways.

Sec. 3555.103 Maximum loan amount.

The amount of the loan must not exceed the lesser of:

(a) Market value. The market value of the property as determined by an appraisal 

that meets Agency requirements plus the amount of the up-front loan guarantee 

fee required by Sec. 3555.107(g), or

(b) Purchase price and acquisition costs. The total of the purchase price and all 

eligible acquisition costs as permitted by Sec. 3555.101.

(c) Newly constructed dwelling--limited to 90 percent. A newly constructed 

dwelling that does not meet the definition of an existing dwelling, as defined at 

Sec. 3555.10, and cannot meet the inspection and warranty requirements of 

Sec. 3555.202(a) of this subpart is limited to 90 percent of the present market 

value. The dwelling must meet or exceed the International Energy Conservation 

Code (IECC) in effect at the time of construction.
7 CFR Part 3555

Sec. 3555.104 Loan terms.

(a) Interest rate. The loan must be written at an interest rate that:

(1) Is fixed over the term of the loan;

(2) Shall be negotiated between the lender and borrower to allow the 

borrower to obtain the best available rate in compliance with all 

applicable laws;

(3) If the interest rate increases between the time of the issuance of the 

conditional commitment and the loan closing, the lender will 

submit appropriate documentation and underwriting analysis to 

confirm that the applicant is still eligible;

(4) The warehouse lender may charge an interest rate for interim 

construction financing that exceeds the underlying promissory 

note rate. After construction ends, the interest rate must revert 

to a rate that is no higher than the underlying promissory note 

rate. The Agency reserves the right to establish a maximum 

amount for the interim construction financing interest rate in the 

handbook, as necessary to further program goals and protect the 

interests of the government.

(b) Repayment period. The term of the loan may not exceed 30 years. Adjustable 

rate mortgages, balloon term mortgages or mortgages requiring prepayment 

penalties are ineligible terms.

(c) Repayment schedule. Amortized payments will be due and payablemonthly.

(d) Negative amortization. The loan note must not provide for interest on interest.

Sec. 3555.105 Combination construction and permanent loans.

Guarantees of combination construction and permanent loans are subject to the 

following conditions:

(a) Lender requirements. In addition to other lender requirements of this part, 

lenders seeking guarantees of combination construction and permanent loans 

must:

(1) Have two or more years’ experience making and administering 

construction loans.

Appendix 1 – Page 35

(03-09-16) SPECIAL PN

Revised (11-29-22) SPECIAL PN
7 CFR Part 3555

Appendix 1 – Page 36

(2) Submit an executed construction contract with each loan application 

package.

(3) Review and approve construction contractors or builders. The lender 

will conduct due diligence investigations to determine that the 

contractor or builder meets the minimum requirements inparagraph

(b) of this section. Evidence of the contractor or builder's compliance 

must be made available by the lender upon request of theAgency.

(4) Close the loan prior to the start of construction with proceeds

disbursed to cover the cost of, or balance owed on, the land and the 

balance into escrow.

(5) Pay out monies from escrow to the builder during construction. The 

lender must obtain written approval from the borrower before each 

draw payment is provided to the builder. The borrower and lender are 

jointly responsible for approving disbursements during the 

construction phase. The lender must ensure that the appropriate work 

has been completed prior to releasing each draw. The Agency may 

require the lender to submit a draw and disbursement ledger for any 

loan guarantee upon request.

(6) Obtain documentation that confirms the construction of the subject 

property is complete.

(b) Contractor or builder requirements. Contractors or builders of homesfinanced 

with guaranteed combination construction and permanent loans must at least 

have:

(1) Two or more years’ experience building or constructing all aspects of 

single family dwellings similar to the type of project being proposed;

(2) State-issued construction or contractor licenses, as required by State 

or local law;

(3) Insurance for commercial general liability of at least $500,000;

(4) Contractors or builders who are constructing their own residence 

are ineligible.
7 CFR Part 3555

Appendix 1 – Page 37

(03-09-16) SPECIAL PN

Revised (04-30-20) PN 536

(c) Use of loan funds.

(1) The loan is to finance the purchase of real estate and construction of a

single family dwelling or the purchase and required rehabilitation of 

an existing single family dwelling. Condominiums, including 

detached condominiums and site condominiums, are ineligible for 

combination construction and permanent loans.

(2) The loan amount may include:

(i) The price of the lot.

(ii) Reasonable and customary construction costs related to the 

construction administration, such as architectural and 

engineering fees, building permits and fees, surveys, title 

updates, contingency reserves, not exceeding a percentage 

specified by the Agency of the cost of construction, draw 

control and inspection fees, builder's risk insurance or 

course of construction insurance, and landscaping costs;

(iii) Reasonable and customary closing costs as defined at 

Sec. 3555.101; and

(iv) The costs of an interim construction financing interest 

rate and PITI reserve under 3555.104(a) and 

3555.105(d)(7), respectively.

(3) Funds remaining after full disbursement of construction costs will be 

applied by the lender as a principal payment. Borrowers are not to 

receive funds after closing except that the borrower may receive funds 

remaining from certain unused prepaid expenses if the borrower used 

personal, non-loan funds to pay those expenses.

(d) Terms. The following terms apply to guarantees of combination construction 

and permanent loans:

Revised (11-29-22) SPECIAL PN
7 CFR Part 3555

Appendix 1 – Page 38

(1) The interest rate for the construction and permanent loan will be 

established in accordance with Sec. 3555.104 at the time the rate is 

locked, which must occur prior to closing.

(2) The fair market value as determined by a licensed or certified appraiser in 

accordance with regulation 3555.107(d) will be used to establish the 

maximum loan amount.

(3) Annual fees will begin in the month immediately following loan closing 

and will not be affected by loan reamortization following the completion of 

construction. Lenders may fund a lender imposed escrow account for 

borrower payments of the annual fee in accordance with Sec. 

3555.101(b)(6)(xi), as an eligible loan purpose, provided the market value 

of the property is not exceeded.

(4) Interest on the construction loan is payable monthly either directly from 

the borrower or indirectly drawn from an established interest reserve. Real 

estate taxes and property insurance due during the construction period 

may also be paid using the same draw process. The annual fee will be due 

and payable from the lender on the 1st of the month following the 

anniversary date the construction to permanent loan closed.

(5) Initial payment of the regularly scheduled (amortized) principal and interest 

payment may be postponed up to one year, if necessary, based upon the 

construction period. Local conditions and the proposed construction contract 

may dictate the term.

(6) The loan will be modified and re-amortized to achieve full repayment within 

its remaining term once construction is complete. Within a reasonable time, 

as specified by the Agency, after the final inspection, the borrower will 

begin making regularly scheduled (amortized) principal and interest 

payments once the loan isre-amortized.

(7) Lenders may fund a reserve account for up to 12 months of regularly 

scheduled (amortized) principal and interest payments along with taxes and 

insurance (PITI). In such cases, a loan modification is not required after 

construction in complete. Funds remaining in the PITI reserve after 

construction is complete will be applied by the lender as a principal 

payment.

(e) Mortgage file documentation. Standard industry credit and verification 

documents may be utilized when processing and closing the loan and must be dated 

within a reasonable time, specified by the Agency, of the closing in order to be 

considered valid. In addition to documentation noted at Sec. 3555.202(a), lenders must 

obtain and retain evidence:
7 CFR Part 3555

Appendix 1 – Page 39

(03-09-16) SPECIAL PN

Revised (04-30-20) PN 536

(1) The actual cost to construct or rehabilitate the subject dwelling;

(2) The acquisition, transfer of ownership, and/or ownership of land;

(3) Certification of construction completion and that construction costs 

have been fully drawn;

(4) Closing costs;

(5) Certification that property is free and clear of all other liens after 

conversion to permanent loan;

(6) Required inspections and warranties; and

(7) Loan modification agreement when construction is complete 

confirming the existence of the permanent loan and the amortizing 

interest rate on the loan.

(8) Evidence that all funds remaining in the construction escrow or 

PITI reserve accounts have been applied as a principal curtailment 

once construction or rehabilitation is complete.

(f) Loan Note Guarantee. The Loan Note Guarantee will be issued after closing of 

the construction loan without waiting for complete construction of the subject 

property upon:

(1) Request by the approved lender;

(2) The lender's submission of the closing documentation acceptable to 

Rural Development demonstrating that the loan was properly closed;

(3) Payment of the guarantee fee; and

(4) The lender's compliance with other requirements under Sec. 

3555.107.

(g) Unplanned changes during construction. Should an unplanned change occur 

with the borrower or contractor preventing completion of construction, the 

lender remains responsible for completion of improvements satisfactory to 

Rural Development. The loan will be serviced in accordance with subpartsF 

and G of this part. Funds remaining in all PITI reserve and construction 

escrow accounts after full disbursement of construction costs will be applied 

by the lender as a principal payment.
7 CFR Part 3555

Appendix 1 – Page 40

(h) Reservation of funding. Rural Development reserves the right to limit the 

number or amount of loans guaranteed under this section based on market 

conditions and other factors it considers appropriate, such as loan and portfolio 

performance.

Sec. 3555.106 [Reserved]

Sec. 3555.107 Application for and issuance of the loan guarantee.

(a) Processing of applications. Except as provided in this section, Rural 

Development will process loan guarantee applications in the order that 

completed applications are received. Application forms and instruction 

procedures are available at any Rural Developmentoffice.

(1) If analysis of the utilization of funds during the fiscal year indicates 

that, at the rate of current utilization, funds may not be sufficient to 

sustain that level of activity for the remainder of the fiscal year, the 

Agency may determine a shortage of funds exists.

(2) When there is a shortage of funds, the Agency will limit SFHGLP 

loans to first-time homebuyers or veterans. First-time homebuyers and 

veterans will be served in the order their applications are received.

(b) Automated underwriting. Rural Development will offer approved lenders an automated 

system, if available; to process Rural Development guaranteed loans under this part. 

The automated underwriting system is a tool to help evaluate credit risk, but does not 

substitute or replace the careful judgment of experienced underwriters, and shall not be 

the exclusive basis for a determination on whether to extend credit. The lender must

apply for and receive approval from Rural Development to utilize the automated 

underwriting system. Application forms are available from Rural Development. 

Lenders using the automated underwriting system shall do so in accordance with 

SFHGLP regulations and guidelines. Rural Development reserves the right to 

terminate the lender's use of the automated underwriting system.

(1) Lenders who utilize the Rural Development automated underwriting 

system remain responsible for ensuring all data is true and accurately 

represented.

(2) Full documentation and verification, in accordance with Subparts C, D andE 

of this part, will be retained in the lender's permanent loan file and must 

confirm the applicant's eligibility, creditworthiness, repayment ability, 

eligible loan purpose, sufficient collateral, and all other regulatory 

requirements.

(3) Lenders who utilize the Rural Development automated underwriting system 

will be subject to indemnification requirements in accordance with Sec. 

3555.108.
7 CFR Part 3555

Appendix 1 – Page 41

(03-09-16) SPECIAL PN

Revised (04-30-20) PN 536

(4) If a loan receives an ``Accept'' underwriting recommendation, the 

lender is generally permitted to submit minimal documentation 

including the appraisal, flood hazard determination and fully 

executed request for guarantee, unless the lender is instructed to 

provide other documentation.

(5) Loan requests that receive a ``Refer'' or ``Refer with Caution'' 

underwriting recommendation require further review and manual 

underwriting by the lender to determine whether the applicant meets 

SFHGLP eligibility requirements.

(6) Lenders who utilize Rural Development's automated underwriting 

system will validate findings, based upon the output report of the 

underwriting system.

(7) The final submission of the last scoring event must be retained in the 

lender's permanent loan file.

(c) Manual underwriting. Lenders may utilize a manual underwriting method. Full 

documentation and verification, in accordance with Subparts C, D and E of this 

part will be submitted to Rural Development when requesting a guarantee and 

maintained in the lender's file. The documentation will confirm the applicant's 

eligibility, creditworthiness, repayment ability, eligible loan purpose, adequate 

collateral, and satisfaction of other regulatory requirements.

(d) Appraisals. The lender must supply a current appraisal report of the property for 

which the guarantee is requested.

(1) Appraisals must be conducted in accordance with the Uniform 

Standards of Professional Appraisal Practices.

(2) Approved lenders are responsible for selecting a qualified appraiser 

and the integrity, accuracy and thoroughness of the appraisals used to 

support their loan guarantee request.

(3) The appraiser must report all readily observable property deficiencies, 

potential environmental hazards, as well as any adverse conditions 

discovered performing the research involved in completing the 

appraisal.

(4) The Agency will conduct reviews of the appraisals prior to issuance of 

the conditional commitment, and other reviews may be conducted to
7 CFR Part 3555

Appendix 1 – Page 42

ensure overall quality of appraisals. The lender is responsible for 

correcting any appraisal deficiencies reported by the Agency.

(5) The Agency may determine an appraiser ineligible to conduct 

appraisals for SFHGLP due to the failure to comply with applicable 

requirements and regulations. Appraisals from the ineligible 

appraisers will not be accepted.

(6) Use of an alternative approach to value for appraisals performed in 

remote rural areas, on tribal lands, or where a lack of market activity 

exists may be accepted at the Agency's discretion.

(7) The validity period of an appraisal will be 120 days, unless otherwise

provided by the Agency.

(e) Environmental requirements. The lender and Rural Development will meet all 

environmental responsibilities in accordance with Sec. 3555.5.

(f) Issuance of a conditional commitment. The lender must demonstrate that all the 

general loan, applicant, and site eligibility requirements of this part are met 

before Rural Development will issue a conditional commitment. The lender, 

however, may obtain any required property inspection reports, such as a well 

test or construction phase inspections, if applicable and not needed for 

environmental compliance, after the issuance of the conditional commitment, 

but prior to loan closing.

(1) The conditional commitment will expire in 90 days from issuance, 

unless new construction is involved.

(2) The expiration of a conditional commitment may coincide with 

projected completion of new construction.

(3) An extension may be granted if the loan cannot be closed due to 

circumstances beyond the lender's control.

(4) Lenders may accept or decline the conditional commitment, or submit 

requests for changes with adequate support and documentation to be 

reviewed by the Agency.

(g) Loan guarantee fee. The lender must pay a nonrefundable up-front guarantee 

fee, the cost of which may be passed on to the borrower. The up-front guarantee 

fee will not exceed 3.5 percent of the principal obligation. The current 

guarantee fee is available at any Rural Development office and may change 

periodically. Notice of a change in fee will be published as authorizedin
7 CFR Part 3555

Exhibit K of subpart A of part 1810 of this chapter (RD Instruction 440.1, 

available in any Rural Development office) or online at: 

http://www.rurdev.usda.gov/rd_instructions.html. Once the guarantee has been 

issued, the fee will not be refunded.

(h) Annual fee. The Agency may impose an annual fee of the lender not toexceed

0.5 percent of the average annual scheduled unpaid principal balance of the 

loan for the life of the loan to allow the Agency to reduce the up-front 

guarantee in Sec. 3555.107(g). The annual fee will be applicable to purchase 

and refinance loan transactions. The annual fee may be passed on to the 

borrower by the lender. The Agency may assess a late charge to the lender if the 

annual fee is not paid by the due date, and the late charge may not be passed on 

to the borrower. Further administrative guidance is provided in the handbook.

(i) Proper closing and requesting the loan note guarantee. The lender must ensure 

that any loan to be guaranteed is properly closed using documents acceptable to 

Rural Development.

(1) Within 30 days of loan closing, the lender must request issuance of a 

loan guarantee.

(2) The lender will certify the loan was closed in accordance with the 

conditional commitment and that no major changes have taken place 

since issuance of a commitment, except any changes specifically 

approved by the Agency.

(3) The lender will maintain evidence of hazard insurance and, if 

applicable, flood insurance.

(4) Evidence of documentation supporting the properly closed loan may 

be submitted to the Agency through regular mail, express mail, 

facsimile or secure email. Rural Development may offer approved 

lenders an automated method of submitting properly closedloans.

(5) Lenders will submit full documentation supporting a closed loan or 

evidence of self-certification status, as described in this section. Selfcertified lenders must still submit the settlement statement and 

promissory note. Lenders must obtain written authorization from the 

Agency prior to submitting evidence of self-certification in lieu offull

Appendix 1 – Page 43

(03-09-16) SPECIAL PN
7 CFR Part 3555

Appendix 1 – Page 44

documentation. Authorization for self-certification may be granted by 

the Agency if:

(i) The lender has an active lender agreement.

(ii) The lender is actively engaged in originating SFHGLP loans 

and has closed a minimum of 10 loans in the past 12 

months.

(iii) The lender has successfully submitted 10 consecutive loan 

closing to the Agency that were in compliance with loan 

closing requirements and procedures.

(iv) The lender agrees to retain evidence of confirmed closing 

conditions in accordance with the issued conditional 

commitment in the lender's permanent loan file.

(j) Issuance of the guarantee. The loan guarantee does not take effect until:

(1) The lender transmits the required up-front guarantee fee, the lender 

certification form provided by Rural Development, and loan closing 

documents to Rural Development;

(2) The lender meets all other conditions set out in the conditional 

commitment;

(3) The loan is current at the time the lender requests the loanguarantee;

(4) Any construction or rehabilitation, is complete except for development 

described in Sec. Sec. 3555.101(c) and 3555.202(c); and (5) Rural 

Development issues the loan guarantee document.

Sec. 3555.108 Full faith and credit.

(a) General. The Loan Note Guarantee constitutes an obligation supported by the 

full faith and credit of the United States and is incontestable except for fraud or 

misrepresentation of which the lender has actual knowledge at the time it 

becomes such lender or which the lender participates in or condones. 

Misrepresentation includes negligent misrepresentation.

(b) Interest. A note that provides for the payment of interest on interest, however, 

shall not be guaranteed. If the note to which the Loan Note Guarantee is 

attached or relates provides for the payment of interest on interest, then the 

Loan Note Guarantee is void. Notwithstanding the prohibition of interest on
7 CFR Part 3555

interest, interest may be capitalized in connection with re-amortization under 

subpart G of this part.

(c) Violations. The Loan Note Guarantee will be unenforceable by the lender to the

extent any loss is occasioned by violation of usury laws, civil rights laws, 

negligent servicing, failure to obtain the required security or use of loan funds 

for unauthorized purposes, regardless of the time at which Rural Development 

acquires knowledge of the foregoing. Negligent servicing is defined as 

servicing that is inconsistent with this subpart and includes the failure to 

perform those services which a reasonably prudent Lender would perform in 

servicing its own loan portfolio of loans that are not guaranteed. The term 

includes not only the concept of a failure to act, but also not acting in a timely 

manner or acting contrary to the manner in which a reasonably prudent Lender

would act up to the time of loan maturity or until a final loss ispaid.

(d) Indemnification. The loan note guarantee will remain in effect for any holder of 

the loan who acquired it from an originating lender. If the Agency determines 

that a lender did not originate a loan in accordance with the requirements in this 

part, and the Agency pays a claim under the loan guarantee, the Agency may 

revoke the originating lender's eligibility status in accordance with subpart B of 

this part and may also require the originating lender:

(1) To indemnify the Agency for the loss, if the default leading to the 

payment of loss claim occurred within five (5) years of loan closing, 

when one or more of the following conditions issatisfied:

(i) The originating lender utilized unsupported data or 

omitted material information when submitting the request 

for a conditional commitment to the Agency;

(ii) The originating lender failed to properly verify and 

analyze the applicant’s income and employment history 

in accordance with Agency guidelines;

(iii) The originating lender failed to address property 

deficiencies identified in the appraisal or inspection 

report that affect the health and safety of the occupants or 

the structural integrity of the property;

Appendix 1 – Page 45

(03-09-16) SPECIAL PN

Revised (06-02-16) SPECIAL PN
7 CFR Part 3555

Appendix 1 – Page 46

(iv) The originating lender used an appraiser that was not 

properly licensed or certified, as appropriate, to make 

residential real estate appraisal in accordance with § 

3555.103(a); or,

(2) To indemnify the Agency for the loss regardless of how long ago the 

loan closed or the default occurred, if the Agency determines that 

fraud or misrepresentation was involved with the origination of the 

loan.

(3) In addition, the Agency may use any other legal remedies it has 

against the originating lender.

Sec. 3555.109 Qualified mortgage.

A qualified mortgage is a guaranteed loan meeting the requirements of this part and 

applicable Agency guidance, as well as the requirements in 12 CFR 1026.43(e)(2)(i) through

(i) and 12 CFR 1026.43(e)(3). An extension of credit made pursuant to a program 

administered by a State Housing Finance Agency is exempt from thisrequirement as defined

in 12 CFR 1026.43(a)(3)(iv). Lenders will be allowed to cure unintentional errors and retain 

the qualified mortgage statusif the conditionsset in 12 CFR 1026.31(h) are met.

Sec. Sec. 3555.110-3555.149 [Reserved] 

Sec. 3555.150 OMB control number.

The report and recordkeeping requirements contained in this subpart are currently 

with the Office of Management and Budget under review and awaiting approval.

Subpart D--Underwriting the Applicant 

Sec. 3555.151 Eligibility requirements.

(a) Income eligibility. At the time of loan approval, the household's adjusted 

income must not exceed the applicable moderate income limit. The lender is

responsible for documenting the household's income to determine eligibility for 

the SFHGLP.

(b) Citizenship status. Applicants must provide evidence acceptable to the Agency 

of their status as United States citizens, U.S. non-citizen nationals, or qualified 

aliens, as defined in Sec. 3555.10.
7 CFR Part 3555

Appendix 1 – Page 47

(03-09-16) SPECIAL PN

(c) Principal residence. Applicants must agree and have the ability to occupy the 

dwelling as their principal residence. The Agency may require evidence of this 

ability. Rural Development will not guarantee loans for investment properties, 

or temporary, short-term housing.

(d) Adequate dwelling. The dwelling must be modest, decent, safe, and sanitary.

(e) Eligibility of current homeowners. Current homeowners may be eligible for 

guaranteed home loans under this part if all the following conditions aremet:

(1) The applicants are not financially responsible for another Agency 

guaranteed or direct home loan by the time the guaranteed home loan 

is closed;

(2) The current home no longer adequately meets the applicants' needs;

(3) The applicants will occupy the home financed with the SFHGLP 

loan as their primary residence;

(4) The applicants are without sufficient resources or credit to obtain the 

dwelling on their own without the guarantee;

(5) No more than one single family housing dwelling other than the one 

associated with the current loan request may be retained; and

(6) The applicants must be financially qualified to own more than one 

home. In order for net rental income from the retained dwelling to be 

considered for the applicant's repayment ability, the consistency of 

the rental income must be demonstrated for at least the previous 24 

months, and the current lease must be for a term of at least 12 

months after the loan is closed.

(f) 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.

(g) Suspension or debarment. Applicants who are suspended or debarredfrom 

participation in Federal programs under 2 CFR parts 180 and 417 are not 

eligible for loan guarantees.
7 CFR Part 3555

Appendix 1 – Page 48

(h) Repayment ability. Applicants must demonstrate adequate repayment ability. 

Lenders must maintain documentation supporting the repayment ability 

analysis in the loan file. Refer to Sec. 3555.152(a) for furtherinformation.

(1) A repayment ratio will be used to determine an applicant's ability to 

repay a loan. The Agency will utilize two ratios, principal, interest, 

taxes and insurance (PITI) ratio and total debt (TD) ratio, to 

determine adequate repayment for the requested loan. The Agency 

reserves the right to consider calculation of a single ratio in 

determining repayment for the requested loan.

(i) An applicant is considered to have adequate repayment 

ability when the monthly amount required for payment of 

PITI, homeowners' association dues, the monthly 

calculation of an annual fee, as applicable, and other real 

estate assessments does not exceed 29 percent of the 

applicant's repayment income and the monthly amount of 

PITI plus recurring monthly debts (total debt) does not 

exceed 41 percent of the applicant's repayment income.

(ii) For home purchases under the Rural Energy Plus provision 

of Sec. 3555.209, the Agency reserves the right to allow 

flexibility in the PITI and TD ratio. The handbook will 

define what flexibilities can be extended.

(iii) Contributions to personal income taxes, retirement accounts 

(including the repayment of personal loans from those 

retirement accounts), savings (including repayment of loans 

secured by such funds), the cost to commute, membership

fees in unions or like organizations, childcare or other 

voluntary obligations will not be considered in the TD ratio.

(iv) Except for obligations specifically excluded by State law, the 

debts of non-purchasing spouse must be included in the 

applicant's repayment ratios if the applicant resides in a 

community property state.

(2) The repayment ratio may exceed the percentage specified in paragraph 

(h)(1) of this section if certain compensating factors exist. The 

handbook will define when a debt ratio waiver may be granted. The 

automated underwriting system will take into account any 

compensating factors in determining whether the variance is 

appropriate. For manually underwritten loans, the lender must
7 CFR Part 3555

Appendix 1 – Page 49

(03-09-16) SPECIAL PN

document compensating factors demonstrating that the household has 

higher repayment ability based on its capacity, willingness and ability 

to pay mortgage payments in a timely manner. The presence of 

compensating factors does not strengthen a ratio exception when 

multiple layers of risk, such as a marginal credit history, are present in 

the application. Acceptable compensating factors and supporting 

documentation for a proposed debt ratio waiver will be further 

defined and clarified in the handbook. Compensating factors include, 

but are not limited to:

(i) A credit score at an acceptable level of 680 or higher for 

any applicants, unless otherwise provided by the Agency. 

The Agency reserves the right to change the acceptable 

level of credit score.

(ii) A minimal increase in housing expense, i.e. the currentrent 

payment is comparable to the proposed mortgage loan 

payment PITI and if applicable, homeowner association 

dues.

(iii) The demonstrated ability to accumulate savings and cash 

reserves post loan closing.

(iv) Continuous employment with a current primary employer.

(3) Loan ratio exceptions require written approval by Rural Development, 

or acceptance by an Agency approved automated underwriting 

system. Flexibilities surrounding loan ratio exceptions will be further 

clarified in the handbook. Lenders with loans accepted by an Agency 

approved automated underwriting system need not submit 

documentation for the need for a ratio waiver.

(4) If an applicant does not meet the repayment ability requirements, the 

applicant can increase repayment ability by having other eligible 

household members join the application.

(5) Mortgage Credit Certificates may be considered in determining an 

applicant's repayment ability.
7 CFR Part 3555

Appendix 1 – Page 50

(6) Section 8 Homeownership Vouchers may be used in determining an 

applicant's repayment ability. The monthly subsidy may be treatedas 

repayment income in accordance with Sec. 3555.152(a) or offset in 

the PITI.

(7) A funded buydown account may be used to reduce the borrower's 

monthly mortgage payment during the early years of repayment when 

all of the following requirements are met:

(i) The loan will be underwritten at the noterate.

(ii) The interest rate may be bought down to no more than 2 

percentage points below the note rate.

(iii) The interest rate paid by the borrower may increase no more 

frequently than annually.

(iv) The interest rate paid by the borrower may increase no more 

than 1 percentage point annually.

(v) Funds must be placed in an escrow account with monthly 

releases scheduled directly to the lender.

(vi) Funds must be placed with a Federal- or state-regulated 

lender.

(vii) The escrow account must be fully funded for the buydown 

period.

(viii) The borrower is not permitted to use personal funds or 

funds borrowed from another source to establish the escrow 

account for the buydown.

(ix) The borrower must not be required to borrow or repay thefunds.

(i) Credit qualifications. Applicants generally must have a verifiable credit history 

that indicates a reasonable ability and willingness to meet their debt obligations 

as evidenced by an acceptable credit score, a credit report from a recognized 

credit repository meeting the requirements of Fannie Mae, Freddie Mac, FHA 

or VA, and other credit qualifications satisfactory to RuralDevelopment.

(1) Except as provided in paragraph (i)(6) of this section, the applicant's 

credit history must demonstrate a past willingness and ability to meet
7 CFR Part 3555

Appendix 1 – Page 51

(03-09-16) SPECIAL PN

credit obligations to enable the lender to evaluate each applicant and 

draw a logical conclusion about the applicant's commitment and 

ability to handling financial obligations successfully and ability to 

make payments on the new mortgage obligation.

(2) A loan’s acceptance by an Agency approved automated underwriting 

system eliminates the need for the lender to submit documentation of 

the credit qualification decision as loan approval requirements will be 

incorporated in the automated system.

(3) For manually underwritten loans, lenders must submit documentation 

of the credit qualification decision. Lenders will use credit scores to 

manually underwrite loan mortgage requests. Lenders are required to 

validate the credit scores utilized in the underwriting determination. 

Indicators of significant derogatory credit will require further review 

and documentation of that review. Indicators of significant derogatory 

credit include, but are not limited to:

(i) A foreclosure that has been completed in the 36 months 

prior to application by the applicant.

(ii) A bankruptcy in which debts were discharged within 36 

months prior to the date of application by the applicant. A 

lender may give favorable consideration to applicants who 

have entered into a bankruptcy debt restructuring plan who 

have completed 12 months of consecutive payments. The 

payment performance must have been satisfactory with all 

required payments made on time, and the Trustee or the 

Bankruptcy Judge must approve of the new credit.

(iii) One rent or mortgage payment paid 30 or more days late 

within the last 12 months prior to application by the 

applicant.

(iv) A previous Agency loan that resulted in a loss to the 

Government.

(4) When evidence of significant derogatory credit is present, lenders may 

consider extenuating circumstances, including but not limited to,

Revised (11-29-22) SPECIAL PN
7 CFR Part 3555

Appendix 1 – Page 52

whether the problems were caused by factors temporary in nature, if the 

circumstances leading to the derogatory credit were beyond the control

of the applicant, and if the loan would significantly reduce the 

applicant's housing expenses.

(5) In all cases, the applicant cannot have an outstanding Federal 

judgment, other than a judgment obtained in the United States Tax 

Court, or a delinquent non-tax Federal debt that has not been paid in 

full or otherwise satisfied.

(6) For applicants without an established credit history, alternative 

methods may be used to evidence an applicant's willingness to pay, 

such as a non-traditional mortgage credit report or multiple 

independent verifications of tradereferences.

(7) A credit report for a non-purchasing spouse must be obtained in order to 

determine the debt-to-income ratio referenced at Sec. 3555.151(h) if the 

applicant resides in a community property state.

(8) Lenders are encouraged to offer or provide for home ownership 

counseling. Lenders may require first-time homebuyers to undergo 

such counseling if it is reasonably available in the local area. When 

home ownership counseling is provided or sponsored by Rural 

Development or another Federal agency in the local area, the Lender 

must require the borrower to successfully complete the course.

(9) Applicants with delinquent child support payments subject to collection 

by administrative offset are ineligible unless the payments are brought 

current, the debt is paid in full, or otherwise satisfied.

(j) Obtaining credit. The applicant must be unable to obtain traditional

conventional mortgage credit, as defined by the Agency, for the subject loan.

Sec. 3555.152 Calculation of income and assets.

The lender must obtain and maintain documentation in the loan file supporting the 

lender's determination of all income and assets described in this section.

(a) Repayment income. Repayment income is the amount of adequate and stable 

income from all sources that parties to the promissory note are expected to 

receive. Repayment income is used to determine the applicant's ability to repay a 

loan.

(1) The lender must examine the applicant's past income record for at least 

the past 2 years and any applicable training and/or education. The 

Agency may require additional information and documentation
7 CFR Part 3555

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(03-09-16) SPECIAL PN

from self-employed applicants and applicants employed by businesses 

owned by family members.

(2) The lender must establish an applicant's anticipated amount of 

repayment income and the likelihood of its continuance for at least the 

next 3 years to determine an applicant's capacity to repay a requested

mortgage loan in accordance with Sec. 3555.151(h)(1).

(3) Income may not be used in calculating an applicant's ratios if it is 

from any source that cannot be verified, is not stable, or is likely not 

to continue.

(4) The following types of income are examples of income not included in 

repayment income:

(i) Any student financial aid received by householdmembers 

for tuition, fees, books, equipment, materials, and 

transportation;

(ii) Amounts received that are specifically for, or in 

reimbursement of the cost of medical expenses for any 

family member;

(iii) Temporary, nonrecurring, or sporadic income (including 

gifts);

(iv) Lump sum additions to family assets such as inheritances, 

capital gains, insurance payments and personal or property 

settlements;

(v) Payments for the care of foster children or adults; and

(vi) Supplemental Nutrition Assistance Program payments.

(b) Annual income. Annual income is the income of all household members, 

regardless of whether they will be parties to the promissory note.

(1) Applicants must provide the income, expense and household 

information necessary to enable the lender to make income 

determinations.
7 CFR Part 3555

Appendix 1 – Page 54

(2) Lenders must verify employment and income information provided 

by the applicant for all household members. Lenders will verify the 

income for each adult household member for the previous 2 years. 

Written or oral verifications provided by third-party sources or 

documents prepared by third-party sources are acceptable. Lenders 

must project the expected annual income for the next 12 months from 

the verified sources.

(3) The lender remains responsible for the quality and accuracy of all 

information used to establish a household's eligibility.

(4) Household income from all sources including, but not limited to, 

income from temporarily absent household members, allowances for 

tax-exempt income and net family assets as defined in paragraph (d) 

of this section are to be considered in the calculation of annual 

income.

(5) The following sources of income will not be considered in the 

calculation of annual income:

(i) Earned income of persons under the age of 18 unless they 

are an applicant or a spouse of a member of the household;

(ii) Payments received for the care of foster children or foster 

adults and incomes received by foster children or foster 

adults who live in the household;

(iii) Amounts granted for, or in reimbursement of, the cost of 

medical expenses;

(iv) 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 HUD definition of 

annual income at 24 CFR 5.609(c);

(v) Temporary, nonrecurring, or sporadic income (including 

gifts);

(vi) 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
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(03-09-16) SPECIAL PN

supplemental social security income and Social Security 

benefits received in a lump sum;

(vii) Any earned income tax credit;

(viii) Adoption assistance in excess of any amount determined 

pursuant to HUD's definition of annual income at 24CFR 

5.609(c);

(ix) Amounts received by the family in the form of refunds or 

rebates under State or local law for property taxes paid on 

the dwelling;

(x) 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;

(xi) The full amount of any student financial aid;

(xii) Any other revenue exempted by a Federal statute, a list of 

which is available from any Rural Development office;

(xiii) Income received by live-in aides, regardless of whether the 

live-in aide is paid by the family or a social service 

program;

(xiv) Employer-provided fringe benefit packages unless 

reported as taxable income; and

(xv) Amounts received through the Supplemental Nutrition 

Assistance Program.

(c) Adjusted annual income. Adjusted annual income is used to determine program 

eligibility and is annual income as defined in paragraph (b) of this section, less 

any of the following verified deductions for which the household is eligible.

(1) A reduction for each family 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 of which will be
7 CFR Part 3555

Appendix 1 – Page 56

determined pursuant to HUD definition of adjusted income at 24 CFR 

5.611.

(2) A deduction of reasonable expenses for the care of a child 12 years of 

age or under that:

(i) Enables a family member to work, to actively seek 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, including the value of 

any health benefits, earned by the family member enabled 

to work. If the child care provider is a household member, 

the cost of the children's care cannot be deducted.

(3) A deduction of reasonable expenses related to the care of household 

members with disabilities that:

(i) Enable a family member or the individual with disabilities 

to work, to actively seek work, or to further a member's 

education;

(ii) Are not reimbursed from insurance or another source; and

(iii) Are in excess of 3 percent of the household's annual income 

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.

(4) For any elderly family, a deduction in the amount determined 

pursuant to HUD definition of adjusted income at 24 CFR5.611.

(5) For elderly and disabled families 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 3 percent of the household's 

annual income.
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(03-09-16) SPECIAL PN

(d) Net family assets. For the purpose of computing annual income, the net family 

assets of all household members must be included in the calculation of annual 

income. Lenders must document and verify assets of all householdmembers.

(1) Net family assets include, but are not limited to, the actual or imputed 

income from:

(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 is 

accessible to the applicant without retiring or terminating 

employment;

(v) Lump sum receipts such as lottery winnings, capital gains, 

and inheritances;

(vi) Personal property held as an investment; and

(vii) Any value, in excess of the consideration received, for any 

business or household assets disposed of for less than fair 

market value during the 2 years preceding the income 

determination. The value of assets disposed of for less than 

fair market value shall not be considered if they were 

disposed of as a result of foreclosure, bankruptcy, or a 

divorce or separation settlement.

(2) Net family assets for the purpose of calculating annual income 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;
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Appendix 1 – Page 58

(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; and

(viii) Other amounts deemed by the Agency not to constitute net 

family assets.

Sec. Sec. 3555.153-3555.199 [Reserved] 

Sec. 3555.200 OMB control number.

The report and recordkeeping requirements contained in this subpart are currently with 

the Office of Management and Budget under review and awaiting approval.

Subpart E--Underwriting the Property 

Sec. 3555.201 Site requirements.

(a) Rural areas. Rural Development will only guarantee loans made in rural areas 

designated as rural by Rural Development. However, if a rural area designation 

is changed to nonrural:

(1) Existing conditional commitments in the former rural area will be 

honored;

(2) A supplemental loan may be made in accordance with Sec. 3555.101 

in conjunction with a transfer and assumption of a guaranteed loan;

(3) Loan requests where the application and purchase contract was 

complete prior to the area designation change may be approved; and
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Appendix 1 – Page 59

(03-09-16) SPECIAL PN

(4) REO property sales and transfers with assumption may be processed.

(b) Site standards. Sites must be modest and developed in accordance with any 

standards imposed by a State or local government and must meet all of the 

following requirements.

(1) The site size must be typical for the area.

(2) The site must not include income-producing land or buildings to be 

used principally for income-producing purposes. Vacant land without 

eligible residential improvements, or property used primarily for 

agriculture, farming or commercial enterprise is ineligible for a loan 

guarantee.

(3) The site must be contiguous to and have direct access from a street, 

road, or driveway. Streets and roads must be hard surfaced or all 

weather surfaced and legally enforceable arrangements must be in

place to ensure that needed maintenance will be provided.

(4) The site must be supported by adequate utilities and water and 

wastewater disposal systems. Certain water and wastewater systems 

that are privately-owned may be acceptable if the lender determines

that the systems are adequate, safe, compliant with applicable codes 

and requirements, and the cost or feasibility to connect to a public or 

community system is not reasonable. Certain community-owned 

water and wastewater systems may be acceptable if the lender 

determines that the systems are adequate, safe, and compliance with 

applicable codes and requirements. The Agency may require 

inspections on individual, central, or privately-owned and operated 

water or waste systems.

Sec. 3555.202 Dwelling requirements.

(a) New dwellings. New dwellings must be constructed in accordance with 

certified plans and specifications, and must meet or exceed the International 

Energy Conservation Code (IECC) in effect at the time of construction. The 

lender must obtain and retain evidence of construction costs, inspection reports, 

certifications, and builder warranties acceptable to Rural Development.
7 CFR Part 3555

Appendix 1 – Page 60

(b) Existing dwellings. Existing dwellings are considered to meet the following 

criteria when inspected and certified as meeting HUD requirements for one-tofour unit dwellings in accordance with Agency guidelines:

(1) Be structurally sound;

(2) Be functionally adequate;

(3) Be in good repair, or to be placed in good repair with loan funds; and

(4) Have adequate and safe electrical, heating, plumbing, water, and 

wastewater disposal systems.

(c) Escrow account for exterior or interior development. This paragraph does not 

apply if the development is related to a ''combination construction and 

permanent loan'' under Sec. 3555.101(c). If a dwelling is complete with the 

exception of interior or exterior development work, Rural Development may 

issue the Loan Note Guarantee on the loan if the following conditions aremet:

(1) The incomplete work does not affect the habitability of the dwelling, 

nor the health or safety of the housing occupants.

(2) The cost of any remaining interior or exterior work is not greater than 

10 percent of the final loan amount.

(3) An escrow account is funded in an amount sufficient to assure the 

completion of the remaining work. This figure must be at least 100 

percent of the cost of completion but may be higher if the lender 

determines a higher amount is needed.

(4) The builder or a licensed contractor has executed a contract providing 

for completion of the planned development within 180 days of loan 

closing. If the borrower will be completing the planned development 

on an existing dwelling without the services of a contractor, the 

requirement for an executed contract is waived when all of the 

following conditions are met:

(i) The estimated cost to complete the work is less than 10 

percent of the total loan amount;

(ii) The escrow amount is less than or equal to $10,000; and
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Appendix 1 – Page 61

(03-09-16) SPECIAL PN

(iii) The lender has determined the borrower has the knowledge 

and skills necessary to complete the work.

(5) The lender may release escrowed funds only after obtaining a final 

inspection report acknowledged by the borrower and indicating all 

planned development has been satisfactorily completed.

(6) The lender remains responsible to ensure a final inspection is 

performed and required repairs are completed.

(7) The settlement statement reflects the amounts escrowed.

Sec. 3555.203 Ownership requirements.

After the loan is closed, the borrower must have an acceptable ownership 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) Secured leasehold interest. Loans may be guaranteed on leasehold properties. If 

the conditions in this subsection are met:

(1) The applicant is unable to obtain fee simple title to theproperty;

(2) Such leaseholds are fully marketable in the area, except in the case of 

properties located on American Indian restricted land;

(3) The lease has an unexpired term of at least 45 years from the date of 

loan closing, except in the case of properties located on American 

Indian restricted land where the lease must have an unexpired term at 

least equal to the term of the loan. Leases on American Indian 

restricted land for period of 25 years which are renewable for a 

second 25 year period are permissible as are leases of a longer 

duration;

(4) The mortgage must cover both the property improvements and the 

leasehold interest in the land;
7 CFR Part 3555

Appendix 1 – Page 62

(5) The leasehold estate must constitute real property, be subject to the 

mortgage lien, be insured by a title policy, be assignable or 

transferable and cannot be terminated except for nonpayment of lease 

rents; and

(6) The lease must be recorded in the appropriate local real estate records.

Sec. 3555.204 Security requirements.

Rural Development will only guarantee loans that are adequately secured. A loan 

will be considered adequately secured only when all of the following requirements are 

met:

(a) Recorded security document. The lender obtains at closing, a mortgage on all 

required ownership and leasehold interests in the security property and ensures 

that the loan is properly closed.

(b) Prior liens. No liens prior to the guaranteed mortgage exist except in 

conjunction with a supplemental loan for transfer and assumption. The 

guaranteed loan must have first lien position at closing. Junior liens by other 

parties are permitted as long as the junior liens do not adversely affect 

repayment ability or the security for the guaranteed loan.

(c) Adequate security. Existing and proposed property improvements are 

completely on the site and do not encroach on adjoiningproperty.

(d) Collateral. All collateral secures the entire loan.
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(03-09-16) SPECIAL PN

Sec. 3555.205 Special requirements for condominiums.

Loans may be guaranteed for condominium units in condominium projects that 

meet all the requirements of this part, as well as the standards for condominium standards 

established by HUD, Fannie Mae, VA, or Freddie Mac, including those related to selfcertification, warranty, underwriting, and ineligible condominium projects.

Sec. 3555.206 Special requirements for community land trusts.

A community land trust must meet the definition in accordance with Sec. 3555.10 

and other requirements described in this subpart. Loans may be guaranteed for dwellings 

on land owned by a community land trust only if:

(a) Rural Development review. Rural Development reviews and accepts any 

restrictions imposed by the community land trust on the property or applicant 

before loan closing. The Agency may place conditions on the approval of 

restrictions on resale price and rights of firstrefusal.

(b) Foreclosure termination. The community land trust automatically and 

permanently terminates upon foreclosure or acceptance by the lender of a deed 

in lieu of foreclosure.

(c) Organization. The organization must meet the definition of a community land 

trust as defined in the Housing Act of 1949 and the followingrequirements:

(1) Be organized under State or local laws.

(2) Members, founders, contributors or individuals cannot benefit from 

any part of net earnings of the organization.

(3) The organization must be dedicated to decent affordable housing for 

low-and moderate-income people.

(4) Comply with financial accountability.

(d) Lender documentation. The lender's file must contains documentation that the 

community land trust has community support, local market acceptance and 2 

years of prior experience in providing affordable housing.

(e) Appraisals. A property located on a site owned by a community land trust must 

be appraised as leasehold interest and meet the provisions of Sec. 3555.203.
7 CFR Part 3555

Appendix 1 – Page 64

Sec. 3555.207 Special requirements for Planned Unit Developments (PUDs).

Loans may be guaranteed for PUDs that meet all of the requirements of this part, as 

well as the criteria for PUDs established by HUD, VA, Fannie Mae, or Freddie Mac.

Sec. 3555.208 Special requirements for manufactured homes.

Loans may be guaranteed for manufactured homes if all the requirements in this 

section are met.

(a) Eligible costs. In addition to the loan purposes described in Sec. 3555.101, 

Rural Development may guarantee a loan used for the following purposes 

related to manufactured homes when a real estate mortgage covers both the unit 

and the site:

(1) Purchase of a new manufactured home, transportation, permanent 

foundation, and installation costs of the manufactured home, and 

purchase of an eligible site if not already owned by the applicant;and

(2) Site development work properly completed to HUD, state and local 

government standards, as well as the manufacturer’s requirements for 

installation on a permanent foundation.

(b) Loan restrictions. The following loan restrictions are in addition to the loan 

restrictions contained in Sec. 3555.102:

(1) A loan will not be guaranteed if it is used to purchase a site without 

also financing a new unit.

(2) A loan will not be guaranteed if it is used to purchase furniture, 

including but not limited to: movable articles of personal property 

such as drapes, beds, bedding, chairs, sofas, divans, lamps, tables, 

televisions, radios, and stereo sets. Furniture does not include wall-towall carpeting, refrigerators, ovens, ranges, washing machines, 

clothes dryers, heating or cooling equipment, or other similaritems.

(3) A loan will not be guaranteed to purchase an existingmanufactured 

home and site unless:
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Appendix 1 – Page 65

(03-09-16) SPECIAL PN

(i) The unit and site are already financed with an Agency direct 

single family or guaranteed loan;

(ii) The unit and site are being sold by Rural Development as 

REO property;

(iii) The unit and site are being sold from the lender's inventory, 

and the loan for which the unit and site served as security 

was a loan guaranteed by Rural Development; or

(iv) The unit was installed on its initial installation site on a 

permanent foundation complying with the manufacturer's 

and HUD installation standards.

(4) A loan will not be guaranteed for repairs to an existing unit, unless the 

unit meets the requirements of Sec. 3555.208(b)(3).

(5) A loan will not be guaranteed for the purchase of an existing 

manufactured home that has been moved from anothersite.

(c) Construction and development.

(1) To be an eligible unit, the new unit must have a floor space of not less 

than 400 square feet.

(2) The unit must be properly installed on a permanent foundation 

according to HUD standards, and the manufacturer's requirementsfor 

installation on a permanent foundation. A certification of proper 

foundation is required.

(3) All wheels, axles, towing hitches and running gear must be removed 

from the manufactured home.

(4) Unit construction must conform to the Federal Manufactured Home 

Construction and Safety Standards (FMHCSS) and be constructed in 

compliance with the HUD heating and cooling requirements for the 

State in which the unit will be located. Any alterations, such as garage 

construction, as a new unit must comply with FMHCSS.

(5) The site development, installation and set-up must conform to the 

HUD requirements and the manufacturer's requirements for a 

permanent installation.
7 CFR Part 3555

Appendix 1 – Page 66

(6) The unit must meet or exceed the IECC in effect at the timeof 

construction.

(7) The lender must maintain documentation of construction plans and 

required certifications.

(d) Warranty requirements.

(1) The applicant must receive a warranty in accordance with HUD 

requirements for new manufactured homes on permanent foundations.

(2) The warranty must identify the unit by serial number.

(3) The lender and applicant must obtain certification that the 

manufactured home has sustained no hidden damage during 

transportation and, if manufactured in separate sections thatthe 

sections were properly joined and sealed according to the 

manufacturer's specifications.

(4) The manufactured home must be affixed with a data plate, placed 

inside the unit, and a certification label, affixed to each transportable 

section at the tail-light end of each unit which indicates that thehome 

was designed and built in accordance with HUD's construction and 

safety standards in effect on the date the home was manufactured.

(5) The lender must retain a copy of all manufacturers' warranties in the 

lender file.

(e) HUD requirements. The FMHCSS and HUD requirements may be found at

http://www.access.gpo.gov/nara/cfr/waisidx_04/24cfr3280_04.html.

(f) Title and lien requirements. To be eligible for the SFHGLP, the following 

conditions must be met and documented in the lender'sfile:

(1) A manufactured home loan must be secured by a perfected lienon 

real property consisting of the manufactured home and the land;

(2) The manufactured home must be taxed as real estate as applicable 

under State law, including relevant statutes, regulations, and judicial 

decisions;
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Appendix 1 – Page 67

(03-09-16) SPECIAL PN

(3) The security instrument must be recorded in the land records andmust 

identify the encumbered property as including both the home and the 

land;

(4) If applicable State law so permits, any certificate of title to the 

manufactured home must be surrendered to the appropriate State 

government authority. If the certificate of title cannot be surrendered, 

the lender must indicate its lien on the certificate;

(5) The mortgage must be covered by a standard real property title 

insurance policy and any other endorsement required in the applicable 

jurisdiction for manufactured home ensuring the manufactured home 

is part of the real property that secures the loan; and

(6) The borrower must acknowledge the unit is a fixture and part ofthe 

real estate securing the mortgage.

Sec. 3555.209 Rural Energy Plus loans.

Loans guaranteed under Rural Energy Plus provisions are for the purchase of 

energy-efficient homes. Homes that meet the most current IECC standards including 

existing homes that are retrofitted to those standards are eligible. Energy-efficient homes 

result in lower utility bills, conserve energy, and thus, make more income available for 

monthly debt obligations. For loans guaranteed under this subpart, the lender will certify 

that the home meets the most current IECC standards. The Handbook will define what 

further flexibilities can be extended.

Sec. Sec. 3555.210-3555.249 [Reserved] 

Sec. 3555.250 OMB control number.

The report and recordkeeping requirements contained in this subpart are currently 

with the Office of Management and Budget under review and awaiting approval.

Subpart F--Servicing Performing Loans 

Sec. 3555.251 Servicing responsibility.

(a) Servicing action. Lenders must perform those servicing actions that a 

reasonable and prudent lender would perform in servicing its own portfolioof 

non-guaranteed loans.
7 CFR Part 3555

Appendix 1 – Page 68

(b) Third party servicer. A lender may contract with a third party to service its 

loans, but the servicing lender of record remains responsible for the quality and 

completeness of the servicing.

(c) Transfer of servicing. Rural Development may require a lender to transfer its 

loan servicing activities to an approved lender if Rural Development determines 

that the lender has failed to provide acceptable servicing.

(d) Non-compliance. Lenders who fail to comply with Agency requirements or 

program guidelines may be subject to withdrawal of lender approval, denial 

and/or reduction in loss claims, withdrawal of the loan guarantee and/or 

indemnification in accordance with Sec. 3555.108(d).

Sec. 3555.252 Required servicing actions.

Lender servicing responsibility includes, but is not limited to, the following 

actions.

(a) Collecting regularly scheduled payments. Lender must collect regularly 

scheduled loan payments and apply them to the borrower's account.

(b) Payment of taxes and insurance. Lenders must ensure that real estate taxes, 

assessments, and flood and hazard insurance premiums for all property that 

secures a guaranteed loan are paid on schedule.

(1) Establish escrow account. Lenders with the capacity to escrow funds 

must establish escrow accounts for all guaranteed loans for the 

payment of taxes and insurance. Escrow accounts must be 

administered in accordance with the Real Estate Settlement and 

Procedures Act (RESPA) of 1974, and insured by the FDIC or the 

NCUA.

(2) Plan and responsibility of lender to ensure payment. Lenders that do 

not have the capacity to escrow funds must implement procedures, 

subject to Agency approval, to ensure the borrower pays such 

obligations on a timely basis. In addition, such lenders must accept 

the responsibility for payment of taxes and insurance that comes due 

prior to liquidation. Rural Development will not include any taxes or 

insurance amounts that accrued prior to acceleration in any potential 

loss claim. Rural Development may revoke the acceptance ofthe
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Appendix 1 – Page 69

(03-09-16) SPECIAL PN

lender's plan if loan performance indicates that delinquency and loss 

rates are being affected by the lender's inability to escrow for taxes, 

assessment, and insurance. This alternative is not available to lenders 

who contract for servicing.

(c) Insurance.

(1) Until the loan is paid in full, lenders must ensure that borrowers 

maintain hazard and flood insurance as required, on property securing 

guaranteed loans. The insurance must be issued by companies in 

amounts, and on terms and conditions, acceptable to Rural 

Development. Flood insurance through the National Flood Insurance 

Program must be maintained for all property located in special flood 

or mudslide areas identified by FEMA and must be consistent with 

mortgage industry standards, as determined by the Agency.

(2) Lenders must ensure that borrowers immediately notify them of any 

loss or damage to insured property securing guaranteed loans and 

collect the amount of the loss from the insurance company. Unless the 

borrower pays off the guaranteed loan using the insurance proceeds, 

the following requirements must be met:

(i) All repairs and replacements using the insurance proceeds 

must be planned, performed, and inspected in accordance 

with Agency construction requirements and procedures.

(ii) When insurance funds remain after payments for all repairs, 

replacements, and other authorized disbursements have 

been made, the funds must be applied in the following 

order: prior liens (including past-due property taxes); pastdue amounts; protective advances; and released to the 

borrower if the lender's debt is adequately secured.

(3) If the insurance claim is de minimis as determined by the Agency, the 

lender may release the funds directly to the borrower to advance funds 

to contractors, provided that the account is current and the borrower 

has a history of timely payments; the borrower occupies the property; 

and the borrower executes an affidavit agreeing to apply the funds for 

repairs or reconstruction of the dwelling.

(d) Credit reporting. The lender must notify a credit repository of each new 

guaranteed loan, must identify the loan as guaranteed by RuralDevelopment,
7 CFR Part 3555

Appendix 1 – Page 70

and must report to that repository whenever any account becomes more than 30 

calendar days past due.

(e) Bankruptcy actions. The lender is responsible for monitoring and taking all 

appropriate and prudent actions during bankruptcy proceedings to protect the 

borrower and Government's interest, in accordance with Sec. 3555.306(d).

Sec. 3555.253 Late payment charges.

Late payment charges will not be covered by the guarantee and cannot be added to 

the principal and interest due under any guaranteed note.

(a) Maximum amount. Any late payment charge must be reasonable and customary 

for the area.

(b) Loans with interest assistance. The lender must not charge a late fee if the only 

unpaid portion of the borrower's scheduled payment is interest assistance owed 

by Rural Development.

Sec. 3555.254 Final payments.

Lenders may release security instruments only after payment for the satisfaction of 

the full debt, including any recapture, has been received and verified.

Sec. 3555.255 Borrower actions requiring lender approval.

(a) Mineral leases. A lender may consent to the lease of mineral rights and 

subordinate its lien to the lessee's rights and interests in the mineral activity if 

the security property will remain suitable as a residence, the lender's security 

interest will not be adversely affected, and Rural Development's environmental 

requirements are met. Concurrence by Rural Development prior to consenting 

to the lease of mineral rights is required, unless otherwise provided by the 

Agency. Subordination of guaranteed 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, the lender may consent to the lease only if the borrower 

assigns 100 percent of the income from the lease to the lender to be 

applied to reduce the principal balance, and the total rent to be paidis
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at least equal to the estimated decrease in the market value of the 

security property.

(2) If the proposed activity is not likely to decrease the value of the 

security property, the lender 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 the lender tobe 

applied to reduce the principal balance.

(b) Partial release of security property. A lender may consent to transactions 

affecting a security property, such as selling or exchanging security property or 

granting of a right-of-way across the security property, and grant a partial 

release, provided that the following conditions are met.

(1) The borrower will receive adequate compensation, and either make a 

reduction to the principal balance or make improvements to the 

security property, in order to maintain the current loan-to-value ratio 

for the guaranteed loan.

(i) For sale of security property, the borrower must receive

cash in an amount equal to or greater than the value of the 

security property being sold or interests being conveyed.

(ii) For exchange of security property, the borrower must 

receive another parcel of property with value equal to or 

greater than that being disposed of.

(iii) For granting an easement or right-of-way, the borrower 

must receive benefits that are equal to or greater than the 

value of the security property being disposed of or interests 

being conveyed.

(2) An appraisal of the security property will be conducted by the lender 

if the most current appraisal is more than 1 year old or if it does not 

reflect current market value.

(3) The security property, after the transaction is completed, will continue 

to be an adequate, safe, and sanitary dwelling.

(4) Repayment of the guaranteed debt will not be jeopardized.

(5) When exchange of all or part of the security property is involved, title 

clearance will be obtained before release of the existing security.
7 CFR Part 3555

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(6) 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 the lender's 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 the guaranteed indebtedness or used for 

improvements to the security property consistent with the 

purposes and limitations applicable for use of guaranteed 

loan funds. The lender must ensure that the proceeds are 

used as planned.

(7) The lender will seek Agency concurrence, unless otherwise provided 

by the Agency, by submitting documentation supporting the 

borrower's reason for request, the proposed use of the land with 

supporting plans, specifications, cost estimates, surveys, disclosures 

of restrictions, legal description modification, title clearance related to 

the transaction request, as applicable, and any other documents

necessary for the Agency to make a determination.

Sec. 3555.256 Transfer and assumptions.

(a) Transfer without assumption.

(1) The lender must notify Rural Development if the borrower transfers 

the security property and the transferee does not assume thedebt.

(2) Except as described in paragraph (d) of this section, if a security 

property is transferred with the lender's knowledge without 

assumption of the debt, Rural Development will void the guarantee.

(b) Transfer with assumption.

(1) The lender must obtain Agency approval before consenting to a 

transfer with an assumption of the outstanding debt.
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(2) Rural Development may approve a transfer with an assumption of the 

outstanding debt if the following conditions aremet:

(i) The transferee must assume the entire outstanding debt and 

acquire all property securing the guaranteed loan balance; 

however, the transferor must remain personally liable. The 

transferor must pay any recapture as a result of interest 

subsidy granted, if applicable, owed at the time of the 

transfer and assumption.

(ii) The transferee must meet the eligibility requirements 

described in subpart D of thispart.

(iii) The property must meet the site and dwelling requirements 

described in subpart E of this part, or be brought to those 

standards prior to the transfer. Guaranteed loans secured by 

properties located in areas that have ceased to be rural may 

be assumed notwithstanding the fact that the property is 

located in a non-rural area.

(iv) The priority of the existing lien securing the guaranteed 

loan must be maintained or improved.

(v) Any new rates and terms must not exceed the rates and 

terms allowed for new loans under this part, and the interest

rate must not exceed the interest rate on the initialloan.

(vi) A new guarantee fee, calculated based on the remaining 

principal balance, must be paid to Rural Development in 

accordance with Sec. 3555.107(g).

(vii) If additional financing is required to complete the transfer 

and assumption or to make needed repairs, Rural 

Development may approve a supplemental guaranteed loan 

provided adequate security exists.

(viii) The lender must verify and document their permanent file 

in accordance with subpart C of this part.

(ix) A written request supported by the lender demonstrating the 

applicant's credit worthiness, income eligibility and 

underwriting analysis must be submitted to the Agency for 

approval of a transfer and assumption.
7 CFR Part 3555

Appendix 1 – Page 74

(x) The lender may close the loan in accordance with Sec. 

3555.107.

(c) Transfer without approval. If a lender becomes aware that a borrower has 

transferred a property without approval, the lender must take one of the 

following actions:

(1) Notify Rural Development and continue the loan without the 

guarantee; or

(2) Obtain Agency approval for the transfer with assumption; or

(3) Liquidate the guaranteed loan and submit a claim for any loss.

(d) Transfer without triggering the due-on-sale clause.

(1) The following types of transfers do not trigger due-on-sale clauses in 

security instruments:

(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;

(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; or

(v) A transfer into an inter vivos trust in which the borrower 

does not transfer rights of occupancy in the property.
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(2) When a transferee obtains a property with a guaranteed loan through a 

transfer that does not trigger the due-on-sale clause:

(i) The lender will notify Rural Development of the transfer;

(ii) Rural Development will continue with the guarantee, 

whether or not the transferee assumes the guaranteed loan;

(iii) The transferee may assume the guaranteed loan on the rates 

and terms contained in the promissory note. If the account 

is past due at the time an assumption agreement is executed, 

the loan may be re-amortized to bring the account current;

(iv) The transferee may assume the guaranteed loan under 

new rates and terms if the transferee applies and is eligible.

(3) Any subsequent transfer of title, except upon the death of the inheritor 

or between inheritors to consolidate title, will trigger the due-on-sale 

clause.

Sec. 3555.257 Unauthorized assistance.

(a) Unauthorized assistance due to false information. (1) If the borrower receives a 

guaranteed loan based on false information provided by the borrower, Rural 

Development may require the lender to accelerate the guaranteed loan. After the 

lender accelerates the loan upon request, the lender may submit a claim for any 

loss. If the lender fails to accelerate the loan upon request, Rural Development 

may reduce or void the guarantee.

(2) If the borrower receives a guaranteed loan based on false information 

provided by the lender, Rural Development may void the guarantee 

subject to the provisions of Sec. 3555.108.

(3) If the borrower or lender provides false information, Rural 

Development may pursue criminal and civil false claim actions, 

suspension and/or debarment, and take all other appropriate action.

(b) Unauthorized assistance due to inaccurate information. Rural Development will 

honor a guarantee for a loan made to an applicant who receives a guaranteed 

loan based on inaccurate information if the applicant was eligible to receive the 

guaranteed loan at the time it was made, and if the loan funds were used only 

for eligible loan purposes.
7 CFR Part 3555

Appendix 1 – Page 76

Sec. Sec. 3555.258-3555.299 [Reserved]

Sec. 3555.300 OMB control number.

The report and recordkeeping requirements contained in this subpart are currently 

with the Office of Management and Budget under review and awaiting approval.

Subpart G--Servicing Non-Performing Loans 

Sec. 3555.301 General servicing techniques.

In accordance with industry standards and as provided by the Agency:

(a) Prompt action. Lenders shall take prompt action to collect overdue amounts 

from borrowers to bring a delinquent loan current in as short a time as possible 

to avoid foreclosure to the extent possible and minimize losses.

(b) Evaluation of borrower. Lenders must evaluate loans and take appropriate loss 

mitigation actions in an effort to resolve any repayment problems and provide

borrowers with the maximum opportunity to become successfulhomeowners.

(c) Prompt contact. In the event of default, the lender shall promptly contact the 

borrower within a timeframe specified by the Agency.

(d) Determine ability to cure. The lender must make a reasonable effort to obtain 

from the borrower information regarding the reason for default, theborrower's 

current financial situation and any other necessary information to evaluate the 

borrower's ability to cure the default and determine a feasible plan for 

collection, and/or alternatives to foreclosure.

(e) Communication. Before an account becomes 60 days past due and if there is no 

payment arrangement in place, the lender must send a certified letter to the 

borrower requesting an interview for the purpose of resolving the past due 

account.

(f) Prior to liquidation. Before an account becomes 60 days past due or before 

initiating liquidation, the lender must assess the physical condition ofthe
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Revised (04-30-20) PN 536

property, determine whether it is occupied, and take necessary steps to protect 

the property.

(g) Maintain documentation. The lender must maintain documentation 

demonstrating that requirements in this subpart have been met and whatsteps 

have been taken to save a mortgage prior to making a decision to foreclose.

(h) Formal servicing plan. The lender must report a formal servicing plan to the 

Agency utilizing a web-based automated system when a borrower’s accountis 

delinquent for 90 days or more and a method other than foreclosure is 

recommended to solve the delinquency.

Sec. 3555.302 Protective advances.

Lenders may pay the following pre-liquidation expenses necessary to protect the 

security property and charge the cost against the borrower’s account.

(a) Advances for taxes and insurance. Without prior Agency concurrence, lenders 

may advance funds to pay past due real estate taxes, hazard and flood insurance 

premiums, and other related costs.

(b) Advances for costs other than taxes and insurance. Protective advances for 

costs other than taxes and insurance, such as emergency repairs, can be made 

only if the borrower cannot, or will not, obtain an additional loan or 

reimbursement from an insurer or the borrower has abandoned the property. 

The lender must determine that any repairs funded by protective advances are 

cost effective. Repairs funded by protective advances must be planned, 

performed and inspected in accordance with Sec. 3555.202 and as further 

described by the Agency. The lender must obtain prior Agency concurrence 

before issuing protective advances under this paragraph of a significant 

amount as specified by the Agency.

Sec. 3555.303 Traditional servicing options.

(a) Eligibility. To be eligible for traditional servicing, all the following conditions 

must be met:
7 CFR Part 3555

Appendix 1 – Page 78

(1) The borrower presently occupies the property;

(2) The borrower is in default or facing imminent default for an 

involuntary reason. A borrower is ``facing imminent default'' if that 

borrower is current or less than 30 days past due on the mortgage 

obligation and is experiencing a significant reduction in income or 

some other hardship that will prevent him or her from making the 

next required payment on the mortgage during the month in which it 

is due. The borrower must be able to document the cause of the 

imminent default, which may include, but is not limited to, one or 

more of the following types of hardship:

(i) A reduction in or loss of income that was supporting the 

mortgage loan;

(ii) A change in household financial circumstances;

(3) The borrower demonstrates a reasonable ability to support repayment 

of the debt in the future;

(4) There are no adverse property conditions that inhibit the inhabitability 

or use of the property; and

(5) The borrower has not received assistance due to the submissionof 

false information by the borrower.

(b) Servicing options. The lender must consider traditional servicing options in the 

following order to resolve the borrower's default or imminent default:

(1) Repayment agreement. A repayment agreement is an informal plan 

lasting 3 months or less to cure short-term delinquencies.

(2) Special forbearance agreement. A special forbearance agreement is a 

longer-term formal plan to cure a delinquency not to exceed the 

equivalent of 12 months of PITI. The agreement may gradually 

increase monthly payments in an amount sufficient to repay the 

arrearage over a reasonable amount of time and/or temporarily reduce 

or suspend payments for a short period. If the borrower is at least 3
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Revised (04-30-20) PN 536

months delinquent, the special forbearance agreement may resume 

normal payments for several months followed by a loan modification.

(3) Loan modification plan. A loan modification is a permanent change in 

one or more of the terms of a loan that results in a payment the borrower 

can afford and allows the loan to be brought current. A loan modification 

must be a written agreement.

(i) Loan modifications must be a fixed interest rate and cannot 

exceed the market interest rate at the time ofmodification.

(ii) Loan modifications may capitalize all or a portion of the 

arrearage and/or reamortization of the balance due 

including foreclosure fees and costs, tax and insurance 

advances, and past due Agency annual fees imposed by 

the lender. Late charges and lender fees may not be 

capitalized.

(iii) If necessary to demonstrate repayment ability, the loan term 

after reamortization may be extended for up to 30 years 

from the date of the loan modification.

(iv) The lender's lien priority cannot be adversely affected by 

providing a loan modification.

(v) Lenders may require that borrowers complete a trial 

payment plan prior to making scheduled payments 

amended by the traditional loan servicing loan 

modification.

(c) Terms of loan note guarantee. Use of traditional servicing options does not change 

the terms of the loan note guarantee except when the traditional servicing option 

meets the requirements of Sec. 3555.303(b)(3)(iii). The loan guarantee will apply 

to loan terms extending beyond the 30 year loan term from the date of origination 

when a loan modification meets the criteria set forth in Sec. 3555.303(b)(3)(iii).

Sec. 3555.304 Special servicing options.

(a) General.

(1) Lenders must exhaust traditional servicing options outlined in this part or 

have determined that use of traditional servicing options would not

resolve the delinquency, prior to special servicingoptions.
7 CFR Part 3555

Appendix 1 – Page 80

Lenders must exhaust special servicing options prior to liquidation in 

accordance with Sec. Sec. 3555.305 or 3555.306.

(2) Use of special loan servicing does not change the terms of the loan note 

guarantee.

(3) Special servicing options shall be used in the order established in this 

section to bring the borrower's mortgage payment to income ratio as 

close as possible to, but not less than, 31 percent.

(4) If the borrower currently has a mortgage payment to income ratio of 31

percent or less, special servicing options can be utilized to cure the 

delinquency without modifying the note; otherwise, special servicing 

options shall be used in the order established in this section to bring the 

borrower’s mortgage payment to income ratio as close as possible to, 

but not less than, 31 percent.

(b) Conditions for special servicing options. In addition to the requirements in Sec. 

3555.303(a), the following conditions apply to all special loanservicing:

(1) The borrower's total debt to income ratio following the special loan 

servicing must not exceed 55 percent. Prior to servicing a borrower's 

account with special loan servicing, the lender must verify the 

borrower's income and total debt.

(2) The borrower must successfully complete a trial payment plan of 

sufficient duration, as determined by the Agency, to demonstrate that 

the borrower will be able to make regularly scheduled payments as 

modified by the special loan servicing.

(3) Expenses related to special loan servicing including, but not limited to,

title search and recording fees shall not be charged to the borrower. 

However, if a foreclosure was initiated and canceled prior to special 

loan servicing, legal fees and costs for work performed in relation to 

the foreclosure costs before the cancellation date may be charged to the 

borrower.

(4) Capitalization of late charges and lender fees is not permitted in the 

special loan servicing option.

(c) Extended-term loan modification. The Lender may modify the loan by reducing 

the interest rate to a level at or below the maximum allowable interest rate and 

extending the repayment term up to a maximum of 40 years from the date of loan 

modification. The loan guarantee will apply to loan terms extending
7 CFR Part 3555

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(03-09-16) SPECIAL PN

Revised (04-30-20) PN 536

beyond the 30 year loan term from the date of origination when a loan 

modification meets the criteria set forth in this section.

(1) Loan modifications may capitalize all or a portion of the arrearage 

and/or reamortization of the balance due including foreclosure fees 

and costs, tax and insurance advances, and past due Agency annual 

fees imposed by the lender. Late charges and lender fees may not be 

capitalized.

(2) Loan modifications must be a fixed interest rate and cannot exceed 

the current market interest rate at the time of modification. When 

reducing the interest rate, the maximum rate is subject to paragraph 

(c)(3) of this section.

(3) The term shall be extended only as long as is necessary to achieve the 

targeted mortgage payment to income ratio after the interest rate has 

been fixed at a level at or below the maximum allowable rate.

(4) If the targeted mortgage payment to income ratio cannot be achieved 

using an extended-term loan modification alone, the lender may 

consider a mortgage recovery advance under this section in addition 

to the extended-term loan modification.

(d) Mortgage recovery advance.

(1) The maximum amount of a mortgage recovery advance is 30 percent 

of the unpaid principal balance as of the date of the initial default. 

The Agency may change the maximum amount of mortgage 

recovery advance by publication in the Federal Register.

(2) If the borrower’s total monthly mortgage payment is less than 31 

percent of gross monthly income prior to an extended term loan 

modification, the mortgage recovery advance can be used to cure the 

borrower’s delinquency without changing the terms of the 

promissory note.
7 CFR Part 3555

Appendix 1 – Page 82

(3) The principal deferment amount for a specific case shall be limited to 

the amount that will bring the borrower's total monthly mortgage 

payment to 31 percent of gross monthly income.

(4) The lender may file a claim pursuant to Subpart H of this part for 

reimbursement of reasonable title search and/or recording fees in 

connection with the promissory note and mortgage or deed-of-trust, 

not to exceed a maximum amount specified by the Agency.

(5) Prior to making a mortgage recovery advance, the lender must 

perform an escrow analysis to ensure that the payment made on behalf 

of the borrower accurately reflects the escrow amount required for 

taxes and insurance.

(6) The following terms apply to the repayment of mortgage recovery 

advances:

(i) The mortgage recovery advance note and subordinate 

mortgage or deed-of-trust shall be interest-free.

(ii) Borrowers are not required to make any monthly or periodic 

payments on the mortgage recovery advance note; however, 

borrowers may voluntarily submit partial payments without 

incurring any prepayment penalty.

(iii) The due date for the mortgage recovery advance note shall 

be the due date of the guaranteed note held by the lender, as 

modified by the special loan servicing. Prior to the due date 

on the mortgage recovery advance note, payment in full 

under the note is due at the earlier of the following:

(A) When the first lien mortgage and the guaranteed 

note are paid off; or

(B) When the borrower transfers title to the property by 

voluntary or involuntary means.

(iv) Repayment of all or part of the mortgage recovery advance 

must be remitted directly to the Agency by the borrower.
7 CFR Part 3555

(v) The Agency will collect this Federal debt from the borrower 

by any available means if the mortgage recovery advance is 

not repaid based on the terms outlined in the promissory 

note and mortgage or deed-of-trust.

(7) The lender may request reimbursement from the Agency for a 

mortgage recovery advance. A fully supported and documented claim 

for reimbursement must be submitted to the Agency within 60 days of 

the advance being executed by the borrower. The borrower must 

execute a promissory note payable to the Agency and a mortgage or 

deed-of-trust in recordable form perfecting a lien naming the Agency 

as the secured party for the amount of the mortgage recovery advance. 

The lender shall properly record the mortgage or deed-of-trust in the 

appropriate local real estate records and provide the original 

promissory note to the Agency.

(8) A loss claim filed by a lender will be adjusted by any amount of 

mortgage recovery advance reimbursed to the lender by theAgency.

Sec. 3555.305 Voluntary liquidation.

The lender must have exhausted the servicing options outlined in Sec. 3555.302 

through 3555.304 to cure the delinquency before considering voluntary liquidation. The 

methods of voluntary liquidation of the security property outlined in this section may be 

used to protect the interests of the Government.

(a) Eligibility. To be eligible for voluntary liquidation, the following conditions 

must be met:

(1) The loan is at least 30 days delinquent or meets the imminent default 

definition as outlined in Sec.3555.303(a)(2);

(2) The default was caused by an involuntary reason; and

(3) The borrower must presently occupy the property except in situations 

where the borrower does not occupy the property due to the same 

involuntary reason that led to the default.

(b) Pre-foreclosure or short sale. The borrower may sell the security property for a 

price that represents its fair market value. The sale price, less any reasonable 

and customary sale or closing costs incurred by the borrower, must be applied 

to the borrower's account.

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(03-09-16) SPECIAL PN

Revised 04-30-20) PN 536
7 CFR Part 3555

Appendix 1 – Page 84

(c) Deed in lieu of foreclosure. The lender may accept a deed in lieu of foreclosure 

if it will result in a lesser loss claim than if foreclosure occurs.

(d) Offer by junior lienholder. If a junior lienholder makes an offer in the amount 

of at least the anticipated net recovery value, as calculated in accordance with 

Sec. 3555.353, the lender may assign the note and mortgage to the junior 

lienholder.

(e) Other methods of voluntary liquidation. The lender may propose other methods 

of voluntary liquidation that are consistent with this section if the lender fully 

documents how the proposal will result in a savings to theGovernment.
7 CFR Part 3555

Sec. 3555.306 Liquidation.

(a) General.

(1) When a lender determines that a borrower is unable or unwilling to 

meet loan obligations with servicing options under this subpart, the 

lender must accelerate the guaranteed loan and, if necessary, 

foreclose.

(2) Prior to acceleration the lender must have advised the borrower, in 

writing, of available foreclosure avoidance options and the borrower 

must have failed to request such options.

(3) The lender must accelerate the guaranteed loan, with a demand letter, 

when the account is three scheduled payments past due unless there is 

a reasonable prospect of resolving the delinquency through another

method.

(4) The borrower is responsible for all expenses associated with 

liquidation and acquisition.

(b) Foreclosure.

(1) The lender must initiate foreclosure within 90 calendar days of the 

decision to liquidate unless Federal, State, or local law requires that 

foreclosure action be delayed. When there is a legal delay (such as 

bankruptcy), foreclosure must be initiated within 90 calendar days

after it becomes possible to do so. Foreclosure initiation begins with 

the first public action required by law such as filing a complaint or 

petition, recording a notice of default, or publication of a notice of 

sale.

(2) Lenders must exercise due diligence in completing the liquidation 

process to ensure the foreclosure is cost effective, expeditious, and 

completed in an efficient manner, as otherwise provided by the 

Agency. The lender must choose the foreclosure method representing 

the best interest of the Federal Government.

(3) The lender's decision to bid at foreclosure and any bid amount will be 

based upon the property value, whether the property value is 

sufficient to cover the existing debt and incurred costs, and any 

potential to recover a deficiency. The lender will encourage third 

party bidding at a foreclosure sale when the total debt, including the

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(03-09-16) SPECIAL PN
Appendix 1 – Page 86

7 CFR Part 3555

cost of acquiring, managing and disposing of the property, if acquired, 

is greater than the gross proceeds expected from a foreclosure sale at 

market value.

(c) Reinstatement of accounts. Unless State law imposes other requirements, the 

lender may reinstate an accelerated account if the borrower pays, or makes 

acceptable arrangements to pay, all past-due amounts, any protective advances, 

and any foreclosure-related costs incurred by thelender.

(d) Bankruptcy.

(1) When a borrower files a petition in bankruptcy, the lender must 

suspend collection and foreclosure actions in accordance with Title 11 

of the United States Code.

(2) The lender may accept conveyance of security property by the trustee 

in the bankruptcy, or the borrower, if the bankruptcy court has 

approved the transaction, and the lender will acquire title free of all 

liens and encumbrances except the lender'sliens.

(3) Whenever possible after the borrower has filed for protection under 

Chapter 7 of Title 11 of the United States Code, a reaffirmation 

agreement will be signed by the borrower and approved by the 

bankruptcy court prior to discharge, if the lender and the borrower 

decide to continue with the loan.

(4) The lender must protect the guaranteed loan debt and all collateral 

securing the loan in bankruptcy proceedings.

(5) The lender can include principal and interest lost as a result of 

bankruptcy proceedings in any claim filed in accordance with Sec. 

3555.354.

(e) Maintain condition of security property. The lender must make reasonable and 

prudent efforts to ensure that the condition of the security property is 

maintained during any liquidation, acquisition, and sale of the property. These 

efforts include, but are not limited to, periodic inspections, performing 

necessary repairs, winterization, securing the property, removing debris, yard 

maintenance and ensuring the continuance of property insurance. The lender 

must identify, determine the cause, and document any environmental hazard
7 CFR Part 3555

affecting the value of the security property. The lender must retain a record of all 

efforts to maintain the condition of the security property.

(f) Lender acquisition of title. If at liquidation, the title to the property is 

conveyed to the lender, the lender will submit a loss claim package, including 

a market value appraisal, within 60 days of the foreclosure sale date or the 

date the lender acquires title. If eviction action is required in order to obtain a 

market value appraisal, the lender must submit the loss claim package, 

including the market value appraisal, within 60 days of the date the occupants 

clear the premises. The lender must submit the loss claim request, including 

the market value appraisal, in accordance with subpart H.

(g) Debt settlement reporting. The lender must report to the IRS and all national 

credit reporting repositories any debt settled through liquidation.

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(03-09-16) SPECIAL PN

Revised (04-30-20) PN 536
Appendix 1 – Page 88

7 CFR Part 3555

Sec. 3555.307 Assistance in natural disasters.

(a) Policy. Servicers must utilize general procedures available under this subpart 

for servicing borrowers affected by natural disasters, as supplemented by Rural 

Development, to minimize delinquencies and avoidforeclosure.

(b) Evaluating the damage. Servicers are expected to inspect a security property 

whenever they have reason to believe the property has been damaged.

(c) Special relief measures. The servicer must evaluate on an individual case-bycase basis a mortgage that is (or becomes) seriously delinquent as the result of 

the borrower’s incurring extraordinary damages or expenses related to the 

natural disaster. The servicer should document its individual mortgage file 

regarding all servicing actions taken during this time period. The lender must 

consider all special relief alternatives for disaster assistance available to the 

borrower prior to suspending collection and foreclosure activities. The 

suspension of servicing actions will expire 90 days from the declaration date of

the natural disaster, unless otherwise extended by theAgency.

(d) Insurance claim settlements. Prior to release of hazard insurance proceeds 

because of damage caused by a natural disaster, servicers must complete a cost 

and benefit analysis on a case-by-case basis to determine if the property can be 

repaired or rebuilt. The servicer's actions must be based on the status of the 

mortgage, the amount of insurance proceeds, and the length of time required 

repairing or reconstructing the property, and the market conditions in the area. 

If the property will not be repaired or rebuilt, the insurance proceeds must be 

applied to the unpaid principal loan balance.

Sec. Sec. 3555.308-3555.349 [Reserved] 

Sec. 3555.350 OMB control number.

The report and recordkeeping requirements contained in this subpart are currently 

with the Office of Management and Budget under review and awaiting approval.

Subpart H--Collecting on the Guarantee
7 CFR Part 3555

Sec. 3555.351 Loan guarantee limits.

(a) Original loan amount. For the purposes of this section, the term ``Original Loan 

Amount'' means the original promissory note amount minus any loans funds 

notactually disbursed to the borrower or on behalf of the borrower at the time

the SFHGLP loan was made or thereafter.

(b) Maximum loss payment. The maximum payment for a loss sustained by the 

lender under the SFHGLP is the lesser of:

(1) 90 percent of the Original Loan Amount; or

(2) 100 percent of any loss equal to or less than 35 percent of the Original 

Loan Amount plus 85 percent of any remaining loss up to 65 percent 

of the Original Loan Amount.

Sec. 3555.352 Loss covered by the guarantee.

Subject to Sec. 3555.351, the loss claim payment will be calculated as t e 

difference between the Total Indebtedness on the loan and the Net Recovery Value 

calculated according to Sec. 3555.353. The Total Indebtedness on the loan includes:

(a) Principal balance. The unpaid principal balance;

(b) Accrued interest. Accrued interest at the guaranteed loan note rate from the last 

day interest was paid by the borrower to the settlement date, as defined at Sec. 

3555.10;

(c) Additional interest. Additional interest on the unsatisfied principal accrued from 

the settlement date to the date the claim is paid, but not more than 60 days from 

the settlement date;

(d) Protective advances. Principal and interest for protective advances, as described 

in Sec. 3555.303; and

(e) Liquidation costs. Reasonable and customary liquidation costs, such as attorney 

fees, market value appraisals, and foreclosure costs. Annual fees advanced by

the lender to the Agency are ineligible for reimbursement when calculating the 

loss payment.

Sec. 3555.353 Net recovery value.

The net recovery value of the property is determined differently for properties that 

have been sold than for properties that remain in inventory at the time the loss claim is 

filed.

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(a) For a property that has been sold. When a loss claim is filed on a property that 

was sold to a third party at the foreclosure sale or through an approved preforeclosure sale, net recovery value is calculated asfollows:

(1) The proceeds from the sale plus any other amounts recovered,minus

(2) The amount of actual liquidation and disposition costs provided those 

costs are reasonable and customary for the area. Costs incurred by inhouse staff may not be included.

(b) For a property that has been acquired. When a loss claim is filed on a 

property acquired by the lender through a foreclosure sale or a deed-in-lieu 

of foreclosure, the net recovery value is based on an estimated sales price 

calculated using a market value appraisal along with holding and 

disposition costs calculated using the acquisition and management factor 

(also known as the VA Net Value Factor) published by the VA, and other

factors as determined by the Agency. The lender must submit a loss claim 

package, including a market value appraisal, within 60 days of the 

foreclosure sale date or the date the lender acquires title. If eviction action 

is required in order to obtain a market value appraisal, the lender must 

submit the loss claim package, including the market value appraisal, within 

60 days of the date the occupants clear the premises and in accordance 

with subpart H.
7 CFR Part 3555

Revised (06-22-16) SPECIAL PN

Sec. 3555.354 Loss claim procedures.

All lenders must use a web-based automated system designated by the Agency to 

submit all loss claim requests.

(a) Sold property. For property that has been sold, the lender must submit a 

loss claim within 45 calendar days of the sale. Late claims made beyond 

this period of time may be rejected or reduced by Rural Development. 

Instructions and forms may be obtained from Rural Development.

(b) REO. If at liquidation, the title to the property is conveyed to the lender, the 

lender will submit a loss claim package, including a market value appraisal, 

within 60 days of the foreclosure sale date or the date the lender acquires title. If 

eviction action is required in order to obtain a market value appraisal, the lender 

must submit the loss claim package within 60 days of the date the occupants 

clear the premises. The lender must order a market value appraisal and include 

the market value appraisal with the loss claim package. The Agency will use the 

market value appraisal, along with other Agency required documentation, to 

determine the property value for the basis of the loss claim. The Agency will 

apply an acquisition and management resale factor to estimate holding and 

disposition costs, based on the most current VA Management and Acquisition 

Factor found at

https://www.benefits.va.gov/HOMELOANS/servicers_valeri.asp.

(c) Deficiency judgments. The lender must enforce any judgment for which there 

are current prospects of collection before submitting a loss claim, and amounts 

collected must be applied against the outstanding debt. Rural Development will 

process the loss claim if there are no current prospects for collection.

Sec. 3555.355 Reducing or denying the claim.

(a) Determination of loss payment. Subject to the requirements of Sec. 3555.108, if 

Rural Development determines that the amount of the loss was increased due to 

the lender's failure to comply with the conditions of the Loan Note Guarantee, 

the Agency may reduce or deny any loss claim by the portion of the loss 

determined was caused by the lender's action or failure to act. The 

circumstances under which loss claims may be denied or reduced include, but 

are not limited to, the following lender actions:

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7 CFR Part 3555

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7 CFR Part 3555

(1) Failure to adhere to required servicing and liquidation procedures as 

set forth in Agency regulations and guidance, including the payment 

of real estate taxes or hazard insurance when due;

(2) Failure to report defaulted loans to Rural Development within 

required timeframes;

(3) Failure to ensure that the security property is adequately maintained 

during liquidation;

(4) Delay in filing a loss claim;

(5) Claiming unauthorized expenses;

(6) Providing unauthorized assistance;

(7) Failure to obtain the required security or maintain the security 

position;

(8) Violating usury laws;

(9) Negligence, gross negligence or misrepresentation; or

(10) Committing fraud, or failing to report knowledge of fraud or false 

information.

(b) Disputes. If the lender disputes the loss claim amount determined by Rural 

Development, Rural Development will pay the undisputed portion of the loss 

claim, and the lender may appeal the decision in accordance with Sec. 3555.4.

Sec. Sec. 3555.356-3555.399 [Reserved]

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7 CFR Part 3555

Appendix 1 – Page 94

Sec. 3555.400 OMB control number.

The report and recordkeeping requirements contained in this subpart are currently 

with the Office of Management and Budget under review and awaiting approval.