USDA loan updates for Rural Mortgages
Credit, income, appraisal, condominiums, new rules
USDA Updates
WEDNESDAY, JANUARY 18, 2023
USDA Updates to Credit Eligibility, Site Requirements, Condo Requirements,
Income, Tax Returns, and More
USDA release Fourth Quarter new ins and outs
SPECIAL Procedure Notice updating several chapters of the USDA Rural Development Handbook HB-1-3555.
Changes as outlined below (including the Handbook Chapter and Paragraph) and apply them to USDA originations as applicable. Unless otherwise indicated, all updates
are currently in effect/effective immediately.
Some changes are related to trends in real estate today such as the addition of an Accessory Dwelling Unit or Granny Flats, some are related to trends in bankruptcy procedures.
Manual Underwriting for credit scores under 680
10.2 – Credit Eligibility Requirements
• Clarified the list of adverse credit items that render an applicant ineligible for a USDA loan
• Updated the requirement for delinquent court-ordered child support payments subject to collection by administrative offset to implement requirements of the Lender Participation and Financial Requirements Final Rule
Attachment 10-A – Credit Matrix
• Clarification: When the lender becomes aware of potential derogatory or contradictory information that is erroneous or not included in data submitted to GUS, the loan must be manually downgraded
• Credit Score Validation: Clarified what credit history items are considered eligible tradelines when validating credit scores
• Credit Exceptions: Added, for clarification, that the lender may be required to submit credit exception documentation for Agency review along with applicant’s explanation and supporting documentation
• Chapter 11, 12, or 13 Bankruptcy: Added clarification for dismissed Ch. 11, 12, or 13 Bankruptcy (BK) plans to distinguish between completed plans and revised the section on “Plans in Progress” for specifics that apply to GUS Accept or Refer/Manually Underwritten loans
“Discharged” to completed plans to provide further distinction from “Dismissed” plans
o For GUS Refer and Manually Underwritten files, plans completed 12 months or more do not require a credit exception (completed < 12 months require a credit exception)
• Delinquent Court Ordered Child Support: Added “payments are to be brought current, the debt is paid in full, or otherwise satisfied by a documented release of liability” in order to implement requirements of the Lender Participation and Financial Requirements Rule
• Non-Federal Judgment: Added that the borrower may not repay scheduled payments in one lump sum to meet the three timely payments requirement (to be consistent with other repayment plans)
o Added the requirement that evidence of the repayment agreement and payment history must be retained in the loan file
12.4 – Site Requirements
• ADU: Updated Accessory Dwelling Unit (ADU) definition to reflect current HUD definition and added the ADU should not create potential rental income and that those that support household members are acceptable
• Multiple Parcels: Added an improvement that has been built across lot lines is acceptable” and included an example
12.5 – Residential Appraisal Reports
• Updated to state appraisals must be completed within 180 days of closing; and
• Appraisal updates are valid for no greater than one year from the effective date of the original appraisal
12.6 – Water and Wastewater Disposal Systems
• Water Analysis: Updated to state water analysis must be current and not greater than 150 days old at closing
12.9 – Existing and New Dwellings
• Added that lenders must retain evidence of plans and specifications, construction inspections, and thermal standards
• Referenced new “Repair Escrow and Rehabilitation and Repair with Purchase Comparison” (Attachment 12-E)
o Funds that remain in the escrow account after completion of all required repairs must be utilized for an eligible loan purpose or applied to the principal balance of the loan
12.11 – Condominiums and Planned Unit Developments
• Condominium Requirements: Updated Condominiums to General Condominium Requirements
o Project may be accepted if it can be or has been approved by HUD/FHA, VA, Fannie Mae or Freddie Mac
o Added condominium documentation requirements
o Removed ineligible condo requirements and stated condo projects with ineligible characteristics listed under HUD/FHA, VA, Fannie Mae or Freddie Mac are ineligible
o Removed site condo eligibility
New condo project insurance requirements
• Planned Unit Developments (PUDs):
PUD all homeowners must be a part of the HOA and pay lien supported assessments
o If a condo is within a PUD and has separate HOA dues, both must be included in the DTI
12.13 – Lender Requirements
• Updated Lender Requirements to state that lenders submitting a request for commitment are self-certifying they have staff experienced with construction loans or employ an experienced construction loan management company and the builder’s experience is relevant to the type of loan
• Removed requirement for lender to provide form RD 3555-16
12.14 – Construction Contractor-Builder Requirements
• Removed builder credit examination and criminal background check requirements and acceptable credit history paragraph
Repair Escrow and Rehabilitation Repair Chart
Procedure Notice PN 573
9.3 – Annual Income
• Clarified that lenders must verify the income of each adult household member for the previous two years
• Clarified under “full income documentation” that W-2s are required in addition to paystubs
• Clarified, for self-employed borrowers, if ownership interest is < 25% neither “business owner” nor “self-employed” options should be selected in GUS
• Restructured guidance on tax transcripts to emphasize a failure to timely file tax returns is not an eligible explanation to forgo obtaining tax transcripts
9.8 – Stable and Dependable Income
• Included additional guidance on gaps in employment, clarifying it is the lender’s responsibility to determine if the income is stable and dependable
• Clarified a business loss from a closed business may be removed from consideration under the same circumstances self-employment income from a closed business can be removed from consideration
Income and Documentation Matrix
• Automobile Allowance: Revised to allow full expense allowance to be included as income if full debt counted in DTI
• Boarder Income: Clarified that boarder income refers to rental income from an individual renting space inside the dwelling
• Bonus and Overtime: Revised bonus and overtime income to reflect a one-year history and must be in the same/similar line of work
• Employee Fringe Benefits: Clarified that employer-provided fringe benefits that are reported as taxable income may be included in repayment income
• Mortgage Credit Certificate: Removed requirement to obtain an IRS W-4 when using MCC income
• Secondary Employment: Clarified that an applicant must have a one-year history of working both jobs concurrently for secondary employment income to be considered for repayment income
• Variable Income: Added category for guidance on variable income
• Assets and Reserves
o Gift Funds:
Clarified that gift funds applied as earnest money should not be entered on the “Loan and Property Information” GUS application page
Clarified that gift funds need to be sourced via the donor’s bank statement when funds are sent directly to the settlement agent
o Retirement – 401k, IRA, etc.: Clarified that funds borrowed against retirement accounts are eligible for funds to close, but not reserves
Attachment 9-E – Information for Analyzing Tax Returns for Self-Employed Applicants
• Capital gain or loss (from Schedule D): Revised guidance to reflect a two year history to be consistent with the guidance in Attachment 9-A
15.1 – Introduction
• Updated to state the agency requires lenders to use GUS
15.3 – Loan Application Package
• B. Guaranteed Underwriting System - GUS Accept loans: Revised paragraph to refer to mandatory use of GUS
15.7 – Lender Response to Conditional Commitment
• C. Requesting Changes in Conditions: Clarified that change requests should be made via email
Attachment 15-A – Guaranteed Rural Housing Loan Origination Checklist
• Lender Instructions: Updated instructions to state electronic delivery is the preferred method for submission to Rural Development
• Evidence of qualified alien (Page 1): Removed for Underwriting Recommendation ACCEPT files
• Verification of Rent (Page 2): Clarified VOR is applicable to manually underwritten loans with credit scores below 680
• Underwriting Analysis (Page 3): Clarified documentation of income calculations