Source: http://usda-loans.com/guidelines/
Timestamp: 2019-04-24 14:01:09+00:00

Document:
The borrower must not have sufficient assets to obtain other traditional conventional financing. The borrower may, however, qualify for an FHA or VA loan. In other words, applicants may have liquid assets and be eligible to participate in the GRH Program. Those assets, however, should not be sufficient to meet the down payment and closing cost requirements associated with a conventional uninsured mortgage product (LTV ≤ 80%). This means applicants do have a choice of USDA-Guaranteed Rural Housing, FHA, VA, or a conventional mortgage product with private mortgage insurance.
In the USDA Loan-Rural Development program, the appraisal determines the maximum loan amount. The applicant may borrow up to 102% of the appraised value for purchase transactions, and 100.35% for refinance transactions if the guarantee fee is included in the loan amount.
Seller contributions without any limitation are available to assist the borrower in paying closing costs. If they exceed 6% of the sales price, comparable sales and a comment from the appraiser with respect to the impact to value is required.
2/1 temporary buydowns are permitted with compensating factors.
Interest rate of the new loan must be a fixed rate (2/1 Temporary Buydowns are not permitted).
The guarantee fee is 0.35% (for FY 2017)of the total principal obligation of the new loan.
The 0.35% guarantee fee may be always financed into any GRH refinancing transaction. As usual, borrowers may finance other closing costs and fees up to 100% of the current appraised value. However, it is possible for the loan-to-value (LTV) of the new loan to reach 100.35% if the 0.35% guarantee fee is financed. Loans may exceed 100% LTV only to the extent that the excess represents a financed guarantee fee of no more than 0.35%.
As part of the refinancing transaction, additional borrowers may be added to the new GRH loan or existing borrowers may be deleted from the current loan. All applicants that will be a party to the promissory note for the new loan must meet all eligibility requirements.
Ratios must meet requirements as stated in RD Instruction 1980-D, §1980.345(c)(3). The monthly housing expense to income ratio should typically not exceed 29% and the total debt to income ratio should typically not exceed 41%. However, originators may request a ratio waiver with documentation of acceptable compensating factors. A satisfactory payment history for the current mortgage will be considered a strong compensating factor by both the Rural Housing Service (RHS) and USDA Loan.
A complete Uniform Residential Appraisal Report (URAR) is required unless the refinance loan amount includes only the unpaid principal balance with or without the 0.35% guarantee fee.
No other property inspections or thermal certifications are necessary. However, any conditions noted on an appraisal that are related to the safety or livability of the subject property must be addressed and rectified prior to loan closing. Expenses related to property inspections and property repairs may not be financed into the new GRH refinance loan, or escrowed for prior to closing.
Property must be a nonfarm, non-income providing tract.
If the property is a new construction and the builder offers a a 10-year Builder Warranty is provided, only a Final Inspection and a Thermal Certification are required.
Existing properties must meet the current requirements of HUD Handbooks 4150.2 and 4905.1, typically verified through an RHS Adequacy Certification (Existing Dwelling Inspection Report), or by the appraiser certifying in the comments section of the appraisal that the property meets HUD Handbooks 4150.2 and 4905.1.
When repairs are required for structural or mechanical deficiencies that exceed the Seller’s contractual obligation, USDA Loan can assist borrowers. USDA Loan allows the ability to finance required improvements based on an “as improved” appraised value, in combination with an escrow hold-back at closing.
A corrected FNMA 1003 (Uniform Residential Loan Application) with the amount of financed improvements listed under the “Repairs” Section.
Estimates/contracts for all repairs financed with loan proceeds.
A USDA Loan-approved escrow hold-back agreement signed by buyer and seller at closing.
A collection of one and one-half times of the estimated repair cost retained at closing to be disbursed by the settlement agent.
Final inspection of required repairs will be required.
Rural Development requires all repairs to be completed prior to their issuance of the final Loan Note Guarantee (Rural Development Form 1980-17). However, external repairs delayed by weather related issues must be completed within 120 days of loan closing as outlined in Rural Development Instruction §1980.315 – Escrow accounts for exterior development.
For loans closing with USDA Loan’s funds, it is our policy to have repairs for internal deficiencies completed within 30 days of loan closing. As Rural Development will require a final inspection once the work is completed, please include this expense as part of the escrow holdback.
The maximum interest rate for the Rural Development Guaranteed Rural Housing Program is defined as the FNMA 90-day actual-actual yield requirements plus 60 basis points, rounded up to the nearest quarter percent.
Each day USDA Loan will publish the maximum Note Rate as defined by FNMA on its Rural Housing Rate Sheet. These rate sheets are only available to Licensed and approved mortgage brokers.
Note: For Guaranteed Rural Housing refinance transactions, the interest rate of the new loan must only be less than the interest rate of the existing loan.
Subject property and applicant(s) must meet all criteria for the Rural Development Guaranteed Housing Program.
Applicant (buyer) must be credit-approved by USDA Loan.
In accordance with Rural Development (FmHA) Instruction 1980-D, no release of liability will be granted to the original Borrower(s).
A new title policy will be required at closing.
All sources of income must be verified using FNMA Form 1005 – “Verification of Employment”. Rural Development, as outlined in Rural Development Instruction §1980.351, will typically review the past 24 months to determine both Income Eligibility, as well as compliance with Monthly Housing (29%) and Total Debt (41%) Ratios. Usually, USDA Loan requires verified primary sources of income for a 24-month period to confirm loan approval.
Alternate documentation is permitted in place of FNMA Form 1005. Alternate documentation must include: two years W-2’s, 30 days paystubs with year-to-date information, and a Processor’s Certification of Employment.
Full Time – For borrowers whose income is derived from full-time employment, two (2) years of full employment history must be verified on FNMA Form 1005 (Verification of Employment).
Borrowers are not required to have 24 months continuous employment with their current employer.
Where there has been a change in employers in the last 24 months, the borrower must explain any gap in employment that extends beyond one (1) month.
Borrowers employed by a relative or closely-held family business.
Borrowers who are not commissioned, but need to validate their expenses.
Part-Time – Part-time or second job income with duration of 24 months may be used.
Overtime and Bonus Income – Overtime and bonus income can be used to qualify the applicant if the employer verifies that the applicant has received it during the last 24 months and indicates that the overtime or bonus income will in all probability continue. The lender must develop an average of the last 24 months overtime and bonus income to determine the amount of income that can be considered in evaluating the borrower’s qualifications.
Self-Employed Income – Two (2) previous years 1040’s are required. They must be signed and certified by the applicant. Additionally, a year-to-date Profit & Loss Statement with Balance Sheet, prepared and signed, must be submitted. If the applicant has 25 percent or more ownership interest in any business entity, the applicant must also provide the most recent two (2) years’ business tax returns (Corporate, Sub-S Corporate, or Partnership) along with a current Profit and Loss Statement with a Balance Sheet prepared and signed by an accountant.
Alimony, Child Support, and Separate Maintenance – USDA Loan requires documentation that child support, alimony, or separate maintenance will continue for three (3) years after the date of the mortgage application or it will not be considered as income. The borrower must also provide evidence that the funds have been received for the last 12 months. Acceptable evidence includes deposit slips, canceled checks, court records, or tax returns.
Retirement Income – Retirement income, i.e., pensions, annuities, 401K distribution, etc., may be verified by letters from the organizations providing the income, copies of the retirement award letters (with photocopies of canceled checks attached), tax returns, or IRS W-2 forms. This evidence must confirm a continuation of this income for a minimum of three (3) years.
Social Security Income – Acceptable verification includes a photocopy of the Social Security Administration’s award letter or copies of the borrower’s last 2 statements to confirm the regular deposit of the payments. Benefits that have defined expiration dates must have a remaining term of at least three (3) years to be considered as income.
Disability Income – Disability income will be considered acceptable income provided it can be documented by furnishing a recent copy of respective letter of benefits or allotment setting forth the terms of the income. The benefits must be on-going for a minimum of three (3) years.
Unemployment And Public Assistance Benefits – Unemployment And Public Assistance benefits will be considered as income if they are properly documented by letters or exhibits by the paying agency. The amount, frequency and duration of payments must be stated in the verifying documents. If an individual receives unemployment benefits as a regular part of his/her income, USDA Loan requires copies of tax returns for the past two (2) years to establish a history of receipt. This income must be documented as on-going for a minimum of three (3) years.
Dividends/Interest Income – Dividends and interest may be used as income provided the assets that are generating the dividend/interest income will not be used for the down payment or closing costs on the proposed loan. The applicant must provide tax returns for the previous two (2) years along with verification of current assets via statements, verification of deposits, etc. This income will be averaged over two (2) years or calculated at current market interest rates, whichever is less.
Rural Development Guaranteed Rural Housing loans are typically underwritten to Rural Development Instruction §1980.345(d).
The total debt ratio should include revolving debt regardless of when the debt will be retired. Installment loans will only be considered if the debt will be retired in more than six months. However, if the monthly payment on the debt is substantial, the payment will also be included in long term debt.
If the borrower has co-signed a loan for another party, an acceptable 12-month history validating that the borrower is not making the payment must be provided in order to exclude the payment from the total debt.
When a borrower has a delinquent student loan obligation, a satisfactory six-month repayment history must be provided.
A 24-month history of residence is required on all files. Additionally, a 12-month verification of rent or mortgage with a payment rating is also required on all files when the primary wage earner has a credit score of less than 620. This may be done using a Request for Verification of Rent or Mortgage Account, or information contained on the credit report, or canceled checks. All lates greater than 30 days must be documented with an explanation from the applicant.
NOTE: Applicants with credit scores of 620 or greater are not required to explain recent credit inquiries or to document adverse credit history except for those involving delinquent Federal debt or a previous Agency loan. Additionally, existing collection accounts may remain outstanding and rental verifications are not required for applicants with credit scores of 620 or greater.
Verification of funds is not required unless the borrower’s contribution is the greater than 2% of the purchase price. In those cases, the following are acceptable sources for verification of funds.
Current balance must cover cash-to-close requirements.
Statements – To substantiate that a borrower has sufficient funds available for closing, the lender may accept the borrower’s original statement(s) for the most recent two (2) months to verify funds that the borrower has in a deposit institution. The borrower’s statements must identify clearly the depository institution, the account holder(s), the account number, the time period covered by the statement, all deposit and withdrawal transactions, and the ending account balance.
If the date of the borrower’s most recent statement is more than 45 days earlier than the date of the borrower’s application, the borrower must supply a supplemental statement – the lender may accept any -generated forms (such as deposit or withdrawal slips) that show a machine-printed account number, balance, and date.
Analysis of discretionary income through a household budget supports the ability to accumulate the funds.
Cash is a way of life for the borrower and can be documented with receipts where cash is used consistently to make household payments, such as rent/mortgage, utilities, etc.
Gifts (or grants) – A borrower can use funds obtained as a gift (or grant) to satisfy part of the cash requirement for closing only if the donor is a relative or friend, or charitable organization, municipality, or nonprofit organization.
include the donor’s statement that no repayment is expected.
The lender must verify that funds have been transferred to the borrower’s account and show documentation of the transfer of the gift funds from the donor’s account; for example, by obtaining a copy of the donor’s withdrawal slip or canceled check and the borrower’s deposit slip, etc. When the funds are not transferred prior to settlement, the donor may give the closing agent a certified check for the amount of the gift. A copy of that check or a settlement statement showing receipt of that check will be sufficient documentation for the lender’s records provided the donor is listed as the remitter.
A gift (or grant) from a charitable organization, municipality, or nonprofit organization must be evidenced by either a copy of the letter awarding the gift or grant to the borrower or a copy of the legal agreement that specifies the terms and conditions of the gift or grant. This supporting document must include language indicating that no repayment of the gift or grant is expected and an indication of how the funds will be transferred (to the borrower, the lender, or the closing agent). The lender must include in the individual mortgage file evidence of the transfer of the funds – such as a copy of the donor’s canceled check or a settlement statement showing receipt of the check.
Note: All supporting gift documentation (other than the gift letter) is no longer required if the entire gift is going toward closing costs/prepaids (any amount), or being used to pay-off debt of $1,000 or less.
Disposition of Personal Assets – Proceeds from the sale of personal property may be used towards closing costs. Documentation for funds obtained should include a bill of sale, statement verifying deposit of funds, and when applicable, a transfer of title.
Borrowing of Funds on an Unsecured Basis – Borrowers that qualify may borrow funds on an unsecured basis to pay for their closing costs and prepaids. For example, a borrower could obtain an unsecured loan from a family member, or credit union, or even a credit card cash advance.
In order to qualify for this option, a borrower’s median credit score must be 660 or above.
When utilizing this option, Lenders must remember to include the unsecured debt in the total debt calculations, and should indicate on the “Source of Downpayment, Settlement Changes, and/or Subordinate Financing” Section of the FNMA 1003 (Uniform Residential Loan Application) the amount of the unsecured funds.
Reserve Funds – There is no requirement for payment reserves after closing.
Updating Documents – When updating expired verification of funds documents, alternate documentation can be used. For example, when updating an expired Verification of Deposit, statements or print-outs may be used. Although one month current statement and print-out may be used to update funds, these cannot be used to initially verify funds.
Applicants utilizing the Guaranteed Rural Housing Program represent a wide spectrum of credit profiles. Most applicants have never owned a home, many applicants have never rented, and many applicants have little or no established credit. Nonetheless, despite these varied profiles, they all may be excellent candidates to achieve successful homeownership through this affordable housing program.
As we work to support this objective, as well as to comply with the current Rural Development Instruction §1980.309(f)(4) Counseling, the underwriter may request evidence of your borrowers successful completion of homeownership counseling. This is not a requirement on every Rural Development loan file. It will be used selectively on files which have no previous housing expense and/or no established positive credit trades to demonstrate an ability to handle the proposed housing payment on a timely basis.
If this condition is part of our decision on your Rural Development loan file, the condition may be cleared by utilizing Fannie Mae’s “Guide to Homeownership”, or a comparable program offered by local non-profit organizations, or a standard mortgage insurance class given by the lender. This condition may be cleared at closing by providing a signed certificate of completion and the household budget worksheet information.
Please note, while homeownership counseling is not required on all files by USDA Loan, many Rural Development State Offices require all first-time home buyers to complete home buyer education (as of March 28, 2016).
If you are originating Guaranteed Rural Housing product in a state not referenced above, please confirm with Rural Development your State’s requirements regarding homeownership counseling, as additional states are considering this requirement as a mandatory item for all first-time home buyers.
The buydown period is 24 months. There is a 2% reduction in note rate in year one (1), and a 1% reduction in note rate in year two (2). For years three (3) through thirty (30), the loan returns to the maximum rate.
The borrower will be qualified by Rural Development and USDA Loan at the note rate.
USDA Loan’s daily price includes the buydown escrow. There is no further contribution required at closing to establish the buydown account.
With this issue in mind, Lenders are reminded that borrowers cannot make any direct or indirect contribution to the buydown account. Borrowers may pay points in connection with the Lender’s establishment of a 2/1 buydown loan. However, the borrower cannot pay any more points than what would have been assessed for the same note rate on a 30-year fixed mortgage, without the 2/1 buydown option. Neither can the Borrower pay increased fees (i.e., origination fee) to pay for the cost of the buydown.
All 2/1 temporary buydown loans must still comply with the maximum interest restrictions set forth in Rural Development Instruction §1980.320 based on the actual note rate without the benefit of the buydown.
All loans closed using the 2/1 temporary buydown option must use the USDA Loan approved Buydown Agreement. Use of any other agreement will delay funding. A copy of the USDA Loan Buydown Agreement (Subsidy Account Agreement) form can be found in the Forms Section of this manual.
As all buydowns are Seller/Lender funded, all 2/1 temporary buydown loans must be disclosed on the Truth-in-Lending at the full note rate without the benefit of the 24-month subsidy.
Present housing expense over the last 12 months similar to proposed housing expense.
Accumulated savings which when added to the applicant’s current housing expense show an ability to make payments on the proposed loan.
Verifiable history of previous increase(s) which when projected shows an ability to make payments under the proposed loan.
Post high school education or technical training that places the applicant in a field where future increases can be expected to make payments under the proposed loan.
Have more questions about the USDA Loans guidelines? Be sure to contact one of our USDA loan experts to help you.

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