USDA Loan Guidelines – Adjusted annual income

1980.348  Adjusted annual income

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Adjusted annual income is annual income as determined in §1980.347 of this subpart less the following:

(a)  A deduction of $480 for each member of the family residing in the household, other than the applicant, spouse, or coapplicant, who is:

(1)  Under 18 years of age;

(2)  Eighteen years of age or older and is disabled as defined in §1980.302(a) of this subpart; or

(3)  A full-time student aged 18 or older.

(b)  A deduction of $400 for any elderly family as defined in §1980.302(a) of this subpart.

(c)  A deduction for the care of minors 12 years of age or under, to the extent necessary to enable a member of the applicant/borrower’s family to be gainfully employed or to further his or her education.  The deduction will be based only on monies reasonably anticipated to be paid for care services and, if caused by employment, must not exceed the amount of income received from such employment.  Payments for these services may not be made to persons whom the applicant/borrower is entitled to claim as dependents for income tax purposes.  Full justification for such deduction must be recorded in detail in the loan docket.

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(d)  A deduction of the amount by which the aggregate of the following expenses of the household exceeds 3 percent of gross annual income:

(1)  Medical expenses for any elderly family (as defined in §1980.302(a) of this subpart).  This includes medical expenses for any household member the applicant/borrower anticipates incurring over the ensuing 12 months and which are not covered by insurance (e.g., dental expenses, prescription medicines, medical insurance premiums, eyeglasses, hearing aids and batteries, home nursing care, monthly payments on accumulated major medical bills, and full-time nursing or institutional care which cannot be provided in the home for a member of the household); and

(2)  Reasonable attendant care and auxiliary apparatus expenses for each disabled member of any household to the extent necessary to enable any member of such household (including such disabled member) to be employed.

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USDA Loan Guidelines – Annual income

1980.347  Annual income

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Annual income determinations will be thoroughly documented in the Lender’s casefile.  Historical data based on the past 12 months or previous fiscal year may be used if a determination cannot logically be made.  Annual income to be considered includes:

(a)  Current verified income, either part-time or full-time, received   by the applicant/borrower and all adult members of the household, including any coapplicant/coborrower.

(b)  If any other adult member of the household is not presently employed but there is a recent history of such employment, that person’s income will be considered unless the applicant/borrower and the person involved sign a statement that the person is not presently employed and does not intend to resume employment in the foreseeable future, or if interest assistance is involved, during the term of the Interest Assistance Agreement.  The statement will be filed in the applicant/borrower’s loan file.

(c)  Income from such sources as seasonal type work of less than
12 months duration, commissions, overtime, bonuses, and unemployment compensation must be computed as the estimated annual amount of such income for the upcoming 12 months.  Consideration should be given to whether the income is dependable based on verification by the employer and the applicant’s history of such income over the previous 24 months.

(d)  The following are included in annual income:

(1)  The gross amount, before any payroll deductions, of wages and salaries, overtime pay, commissions, fees, tips, bonuses, and other compensation for personal services of all adult members of the household.

(2)  The net income from operation of a farm, business, or profession.  Consider the following:

(i)  Expenditures for business or farm expansion and payments of principal on capital indebtedness shall not be used as deductions in determining income.  A deduction is allowed in the manner prescribed by IRS regulations only for interest paid in amortizing capital indebtedness.

(ii)  Farm and nonfarm business losses are considered “zero” in determining annual income.

(iii)  A deduction, based on straight line depreciation, is allowed in the manner prescribed by IRS regulations for the exhaustion, wear and tear, and obsolescence of depreciable property used in the operation of a trade, farm, or business by a member of the household.  The deduction must be based on an itemized schedule showing the amount of straight line depreciation that could be claimed for Federal income tax purposes.

(iv)  Any withdrawal of cash or assets from the operation of a farm, business, or profession will be included in income, except to the extent the withdrawal is reimbursement of cash or assets invested in the operation by a member of the household.

(v)  A deduction for verified business expenses, such as for lodging, meals, or fuel, for overnight business trips made by salaried employees, such as long-distance truck drivers, who must meet these expenses without reimbursement.

(3)  Interest, dividends, and other net income of any kind from real or personal property, including:

(i)  The share received by adult members of the household from income distributed from a trust fund.

(ii)  Any withdrawal of cash or assets from an investment except to the extent the withdrawal is reimbursement of cash or assets invested by a member of the household.

(iii)  Where the household has net family assets, as defined in §1980.302(a) of this subpart, in excess of $5,000, the greater of the actual income derived from all net family assets or a percentage of the value of such assets based on the current passbook savings rate.

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(4)  The full amount of periodic payments received from social security (including social security received by adults on behalf of minors or by minors intended for their own support), annuities, insurance policies, retirement funds, pensions, disability or death benefits, and other similar types of periodic receipts.

(5)  Payments in lieu of earnings; such as unemployment, disability and worker’s compensation, and severance pay.

(6)  Public assistance except as indicated in paragraph (e)(2) of this section.

(7)  Periodic allowances, such as:

(i)  Alimony and/or child support awarded in a divorce decree or separation agreement, unless the payments are not received and a reasonable effort has been made to collect them through the official entity responsible for enforcing such payments and they are not received as ordered; or

(ii)  Recurring monetary gifts or contributions from someone who is not a member of the household.

(8)  Any amount of educational grants or scholarships or VA benefits available for subsistence after deducting expenses for tuition, fees, books, and equipment.

(9)  All regular pay, special pay (except for persons exposed to hostile fire), and allowances of a member of the armed forces who is the applicant/borrower or coapplicant/coborrower, whether or not that family member lives in the unit.

(10)  The income of an applicant’s spouse, unless the spouse has been living apart from the applicant for at least 3 months (for reasons other than military or work assignment), or court proceedings for divorce or legal separation have been commenced.

(e)  The following are not included in annual income but may be considered in determining repayment ability:

(1)  Income from employment of minors (including foster children) under 18 years of age.  The applicant and spouse are not considered minors.

(2)  The value of the allotment provided to an eligible household under the Food Stamp Act of 1977.

(3)  Payments received for the care of foster children.

(4)  Casual, sporadic, or irregular cash gifts.

(5)  Lump-sum additions to family assets such as inheritances; capital gains; insurance payments from health, accident, hazard, or worker’s compensation policies; and settlements for personal or property losses (except as provided in paragraph (d)(5) of this section).

(6)  Amounts which are granted specifically for, or in reimbursement of, the cost of medical expenses.

(7)  Amounts of education scholarships paid directly to the student or to the educational institution and amounts paid by the Government to a veteran for use in meeting the costs of tuition, fees, books, and equipment.  Any amounts of such scholarships or veteran’s payments, which are not used for the aforementioned purposes and are available for subsistence, are considered to be income.  Student loans are not considered income.

(8)  The hazardous duty pay to a service person applicant/borrower or spouse away from home and exposed to hostile fire.

(9)  Any funds that a Federal statute specifies must not be used as the basis for denying or reducing Federal financial assistance or benefits.  (Listed in exhibit F of RD Instruction 1980-D, available in any RHCDS office.)

(f)  Income of live-in aides who are not relatives of the applicant or members of the household will not be counted in calculating annual income and will not be considered in determination of repayment ability.

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USDA Loan Guidelines – Other eligibility criteria

1980.346  Other eligibility criteria

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The applicant must:

(a)  Be a person who does not own a dwelling in the local commuting area or owns a dwelling which is not structurally sound, functionally adequate.

(b)  Be without sufficient resources to provide the necessary housing and be unable to secure the necessary conventional credit without an RHCDS guarantee upon terms and conditions which the applicant could reasonably be expected to fulfill.

(c)  Be a natural person (individual) who resides as a citizen in any of the 50 States, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, the Commonwealth of the Northern Marianas, Federated States of Micronesia, and the Republics of the Marshall Islands and Palau, or a noncitizen who resides in one of the foregoing areas after being legally admitted to the U.S. for permanent residence or on indefinite parole.

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(d)  Possess legal capacity to incur the loan obligation and have reached the legal age of majority in the State or have had the disability of minority removed by court action.

(e)  Have the potential ability to personally occupy the home on a permanent basis.  Because of the probability of their moving after graduation, full-time students will not be granted loans unless:

(1)  The applicant intends to make the home his or her permanent residence and there are reasonable prospects that employment will be available in the area after graduation, and

(2)  An adult member of the household will be available to make inspections if the home is being constructed.

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USDA Loan Guidelines – Applicant eligibility requirements

1980.345  Applicant eligibility requirements for a guaranteed loan

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Applicants who meet the requirements of this section are eligible for a loan guaranteed under this subpart.  Applicants desiring loan assistance as provided in this subpart must file loan applications with a Lender that meets the requirements set forth in §1980.309 of this subpart.  The Lender may accept applications filed through its agents, correspondents, branches, or other institutions.  The Lender must have at least one personal interview with the applicant to verify the information on the application and to obtain a complete picture of the applicant’s financial situation.  The interview may take place by telephone or face-to-face.

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(a)  Eligible income.  The applicant’s adjusted annual income determined in accordance with §1980.348 of this subpart may not exceed the applicable income limit in exhibit C of RD Instruction 1980-D (available in any RHCDS office) at the time of issuance of Form RD 1980-18, “Conditional Commitment for Single Family Housing Loan Guarantee.”  Adjusted annual income is used to determine eligibility for the RHCDS loan guarantee.

(b)  Adequate and dependable income.  The applicant (and coapplicant, if applicable) has adequate and dependably available income.  The applicant’s history of income and the history of the typical annual income of others in the area with similar types of employment will be considered in determining whether the applicant’s income is adequate and dependable.

(1)  A farm or nonfarm business loss must be considered in determining repayment ability.

(2)  A loss may not be used to offset other income in order to qualify for or increase the amount of RHCDS assistance.

(c)  Determining repayment ability.  In considering whether the applicant has adequate repayment ability, the Lender must calculate a total debt ratio.  The applicant’s total debt ratio is calculated by dividing the applicant’s monthly obligations by gross monthly income.

(1)  Monthly obligation consists of the principal, interest, taxes, and insurance (PITI) for the proposed loan (less any interest assistance under this program or any other assistance from a State or County sponsored program when such payments are made directly to the Lender on the applicant’s behalf), homeowner and other assessments, and the applicant’s long term obligations.  Long term obligations include those obligations such as alimony, child support and other obligations with a remaining repayment period of more than 6 months and other shorter term debts that are considered to have a significant impact on repayment ability.

(i)  Cosigned obligations.  Debts which have been cosigned by the applicant for another party must be considered unless the applicant provides evidence (usually canceled checks of the co-obligor or other third party) that it has not been necessary to make payments over the past 12 months.

(ii)  Liability on a previous mortgage.  When the applicant has disposed of a property through a sale, trade, or transfer without a release of liability, the debt must be considered unless the applicant provides evidence (usually canceled checks of the new owners) that the new owners have successfully made payments over the past 12 months.

(2)  Income, for the purpose of determining the total debt ratio, includes the total qualifying income of the applicant, coapplicant, and any other member of the household who will be a party to the note.

(i)  An applicant’s qualifying income may be different than the “adjusted annual income” which is used to determine program eligibility.  In considering qualifying income, the Lender must determine whether there is a historical basis to conclude that the income is likely to continue.  Typically, income of less than 24 months duration should not be included in qualifying income.  If the applicant is obligated to pay child care costs, the amount of any Federal tax credit for which the applicant is eligible may be added to the applicant’s qualifying income.

(ii)  In considering income that is not subject to Federal income tax, the amount of tax savings attributable to the nontaxable income may be added for use with the repayment ratios.  Adjustments for other than the applicable tax rate are not authorized.  The Lender must verify that the income is not subject to Federal income tax and that the income (and its nontax status) is likely to continue.  The Lender must fully document and support any adjustment made.

(3)  The applicant meets RHCDS requirements for repayment ability when the applicant’s total debt ratio is less than or equal to 41 percent and the ratio of the proposed PITI to income does not exceed 29 percent.

(4)  Applicants who do not meet the requirements of this section will be considered ineligible unless another adult in the household has adequate income and wishes to join in the application as a coapplicant.  The combined incomes and debts then may be considered in determining repayment ability.

(5)  If the applicant’s total debt ratio and/or PITI ratio exceed the maximum authorized ratio, the Lender may request RHCDS concurrence in allowing a higher ratio based on compensating factors.  Acceptable compensating factors include, but are not limited to, the applicant having a history over the previous 12 month period of devoting a similar percentage of income to housing expense to that of the proposed loan, or accumulating savings which, when added to the applicant’s housing expense and shows a capacity to make payments on the proposed loan.  A low total debt ratio, by itself, does not compensate for a high PITI.

(d)  Credit history.  The applicant must have a credit history which indicates a reasonable ability and willingness to meet obligations as they become due.

(1)  Any or all of the following are indicators of an unacceptable credit history unless the cause of the problem was beyond the applicant’s control and the criteria in paragraph (d)(3) of this section are met:

(i)  Incidents of more than one debt payments being more than 30 days late if the incidents have occurred within the last 12 months.  This includes more than one late payment on a single account.

(ii)  Loss of security due to a foreclosure if the foreclosure has occurred within the last 36 months.

(iii)  Outstanding tax liens or delinquent Government debts with no satisfactory arrangements for payments, no matter what their age as long as they are currently delinquent and/or due and payable.

(iv)  A court-created or affirmed obligation (judgment) caused by nonpayment that is currently outstanding or has been outstanding within the last 12 months.

(v)  Two or more rent payments paid 30 days or more past due within the last 3 years.

(vi)  Accounts which have been converted to collections within the last 12 months (utility bills, hospital bills, etc.).

(vii)  Collection accounts outstanding, with no satisfactory arrangements for payments, no matter what their age as long as they are currently delinquent and/or due and payable.

(viii)  Any debts written off within the last 36 months.

(2)  The following will not indicate an unacceptable credit history:

(i)  “No history” of credit transactions by the applicant.

(ii)  A bankruptcy in which applicant was discharged more than 36 months before application.

(iii)  A satisfied judgment or foreclosure with no loss of security which was completed more than 12 months before the date of application.

(3)  The Lender may consider mitigating circumstances to establish the borrower’s intent for good credit when the applicant provides documentation that:

(i)  The circumstances were of a temporary nature, were beyond the applicant’s control, and have been removed (e.g., loss of job; delay or reduction in government benefits or other loss of income; increased expenses due to illness, death, etc.); or

(ii)  The adverse action or delinquency was the result of a refusal to make full payment because of defective goods or services or as a result of some other justifiable dispute relating to the goods or services purchased or contracted for.

(e)  Previous RHCDS loan.  RHCDS shall determine whether the applicant has had a previous RHCDS debt which was settled, or is subject to settlement, or whether RHCDS otherwise suffered a loss on a loan to the applicant.  If RHCDS suffered any loss related to a previous loan, a loan guarantee shall not be issued unless RHCDS determines the RHCDS loss was beyond the applicant’s control, and any identifiable reasons for the loss no longer exist.

(f)  Other Federal debts.  The loan approval official will check HUD’s Credit Alert Interactive Voice Response System (CAIVRS) to determine if the applicant is delinquent on a Federal debt.  The Lender will clearly document both its CAIVRS identifying number and the borrower and coborrower’s CAIVRS access code near the signature line on the mortgage application form.  No decision to deny credit can be based solely on the results of the CAIVRS inquiry.  If CAIVRS identifies a delinquent Federal debt, the Lender will immediately suspend processing of the application.  The applicant will be notified that processing has been suspended and will be asked to contact the appropriate Federal agency, at the telephone number provided by CAIVRS, to resolve the delinquency.  When the applicant provides the Lender with official documentation that the delinquency has been paid in full or otherwise resolved, processing of the application will be continued.  An outstanding judgment obtained by the United States in a Federal Court (other than the United States Tax Court), which has been recorded, shall cause the applicant to be ineligible to receive a loan guarantee until the judgment is paid in full or otherwise satisfied.  RHCDS loan guarantee funds may not be used to satisfy the judgment.  If the judgment remains unsatisfied or if the applicant is delinquent on a Federal debt and is unable to resolve the delinquency, the Lender will reject the applicant.

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USDA Loan Guidelines – Collateral

1980.331  Collateral

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(a)  General.  The entire loan must be secured by a first lien on the property being financed (second lien when the loan is for a subsequent loan to an existing borrower or there is a transfer and assumption of an existing loan) and the Lender will maintain this lien priority.  The Lender is responsible for assurance that proper and adequate security interest is obtained, maintained in existence, and of record to protect the interests of the Lender and RHCDS.

(b)  Third party liens, suits pending, etc.  Among other things in obtaining the required security, it is necessary to ascertain that there are no adverse claims or liens against the property or the borrower, and that there are no suits pending or anticipated that would affect the property or the borrower.

(c)  All collateral must secure the entire loan.  The Lender will not take separate collateral, including but not limited to mortgage insurance, to secure that portion of the loss not covered by the guarantee.

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USDA Loan Guidelines – Applicant equity requirements

1980.330  Applicant equity requirements

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A loan to purchase a new or existing dwelling may be made up to the appraised market value of the security.

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USDA Loan Guidelines – Transactions which will not be guaranteed

1980.325  Transactions which will not be guaranteed

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(a)  Lease payments.  Payments made on a lease will not be guaranteed.

(b)  Loans made by other Federal agencies.  Loans made by other Federal agencies will not be guaranteed.  This does not preclude guarantees of loans made by an FCS institution with direct lending authority.  This also does not preclude loans made by state or local government agencies assisted by a Federal agency.

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USDA Loan Guidelines – Charges and fees by Lender

1980.324  Charges and fees by Lender

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(a)  Routine charges and fees.  The Lender may establish the charges and fees for the loan, provided they are the same as those charged other applicants for similar types of transactions.

(b)  Late payment charges.  Late payment charges will not be covered by the guarantee.  Such charges may not be added to the principal and interest due under any guaranteed note.  Late charges may be made only if:

(1)  Maximum amount.  The maximum amount does not exceed the percentage of the payment due as prescribed by HUD or Fannie Mae or Freddie Mac.

(2)  Routine.  They are routinely made by the Lender in similar types of loan transactions.

(3)  Payments received.  Payments have not been received within the customary timeframe allowed by the Lender.  The term “payment received” means that the payment in cash, check, money order, or similar medium has been received by the Lender at its main office, branch office, or other designated place of payment.

(4)  Calculating charges.  The Lender does not change the rate or method of calculating the late payment charges to increase charges while the loan note guarantee is in effect.

(5)  Interest-assisted loans.  The Lender will not penalize or charge any fee to the borrower when the only delinquency is a loan subsidy payment, which the Lender is entitled to but has not received.

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USDA Loan Guidelines – Guarantee fee

1980.323  Guarantee fee

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The Lender will pay a nonrefundable fee which may be passed on to the borrower.  The amount of the fee is determined by multiplying the figure in exhibit K of subpart A of part 1810 of this chapter (RD Instruction 440.1, available in any RHCDS office) times 90 percent of the principal amount of the loan.

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USDA Loan Guidelines – Loan guarantee limits

1980.322  Loan guarantee limits

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The amount of the loan guarantee is 90 percent of the principal amount of the loan.

(a)  The maximum loss payment under the guarantee of Single Family Housing loans is the lesser of:

(1)  Any loss of an amount equal to 90 percent of the principal amount actually advanced to the borrower, or

(2)  Any loss sustained by the Lender of an amount up to 35 percent of the principal amount actually advanced to the borrower, plus 85 percent of any additional loss sustained by the Lender of an amount up to the remaining 65 percent of the principal amount actually advanced to the borrower.

(b)  Loss includes only:

(1)  Principal and interest evidenced by the guaranteed loan note;

(2)  Any loan subsidy due and owing; and

(3)  Any principal and interest indebtedness on RHCDS approved protective advances for protection and preservation of security.

(c)  Interest (including any subsidy) shall be covered by the loan note guarantee to the date of the final loss settlement when the Lender conducts liquidation in an expeditious manner in accordance with the provisions of §1980.376 of this subpart.

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