Underwriting Guidelines (USDA Loans)

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2 OVERVIEW Purpse The fllwing dcument describes the respnsibilities and requirements f the Carringtn Mrtgage Services, LLC (CMS) USDA Certified Underwriter when reviewing and underwriting United States Department f Agriculture Office f Rural Develpment (USDA) mrtgage lan applicatins. Table f Cntents Overview... 2 Purpse... 2 Table f Cntents... 2 Revisin Histry USDA Underwriting Overview USDA Lan Prgrams and Cmpliance Overview USDA Guarantee Prgram Overview Prperty Eligibility USDA Lan Eligibility Overview LDP and GSA Prcurement/Nn-Prcurement Requirements USDA Case Number Dcumenting Clearances Unifrm Residential Lan Applicatin Lan Applicatin Requirements Face-T-Face Interview Overview Identity and Scial Security Number Validatins Identity Verificatin Scial Security Number Validatin Occupancy Types Overview Primary Residence Brrwers, C-Brrwers, C-Signers, and Nn-Purchasing Spuses Brrwers and C-Brrwers Nn-Purchasing Spuse Cmmunity Prperty State-Specific Infrmatin Additinal Requirements fr Cmmunity Prperty States Additinal State-Specific Requirements Transactin Types Overview Purchase Mrtgage Refinance Mrtgages Principal Curtailment Refinance Transactins with Escrw Credits Leasehld Estates Overview CMS Plicies & Prcedures Page 2 f 204

3 Leasehld Estate Requirements Lease Requirements Maximum Mrtgage Limits Requirements Lan-t-Values Calculating Cmbined Lan-t-Value Maximum Interest Rates Allwed fr GRH Prgram Minimum Brrwer Investment Overview Acquisitin Cst Seller Cntributin Limitatins Cntributins/ Cntributrs Inducements t Purchase Premium Pricing Secndary Financing Dwn Payment Assistance Allwable Brrwer Paid Clsing Csts Requirements Guarantee Fee Overview Up-Frnt Mrtgage Insurance Premiums Examples Mnthly/Annual Premium USDA Risk Management Overview Requesting the Lan Guarantee Certificate Requesting the Guarantee Certificate Insuring an USDA Guarantee Lan Requirements Risk Cntrls Verificatins Sent t Pst Office Bxes Fraud/Red Flags Appraisal Transfer Appraisal Assignment USDA Dcumentatin Overview Minimum Dcumentatin Requirements Dcumentatin Requirements t Clse an USDA Lan Dcumentatin Requirements t be Eligible fr Underwriting Electrnic Signatures Requirements USDA Autmated Underwriting Overview Eligibility Requirements USDA TOTAL Mrtgage Screcard Eligible Lan Types Eligible Lan Types Ineligible Lan Types Autmated Underwriting Decisins Overview CMS Plicies & Prcedures Page 3 f 204

4 Obtaining Access t GUS Apprve/ Accept Using GUS Using GUS Final Underwriting Submissin t RD Prperty Tax and Insurance Other Data Tlerances Lan Resubmissin Requirements Credit Dcumentatin Requesting the Cnditinal Cmmitment fr Guarantee GUS Rati Requirements Credit Exceptins Debt Rati Waivers Appraisal Waivers USDA Credit Overview Requirements Credit Reprt Red Flags Age f Credit Reprt Three Repsitry Merged In-File Credit Reprt (Trimerge) Residential Mrtgage Credit Reprt (RMCR) Nn-Traditinal Credit Insufficient Credit Undisclsed Debt Credit Scres Overview Credit Scre Risk Factrs Credit Scre Requirements Selecting Credit Scre Credit Histry Evaluatin Overview Number and Age f Accunts Payment Histries Credit Utilizatin Inquiries Disputed Trade lines Credit Cmpnents Verificatin f Credit Requirements Student Lans Installment and Revlving Accunts Husing Payment Histry Business Lans Bankruptcy/ Freclsure/ Deed-in-Lieu Shrt Sales Direct Verificatin f Other Debts Shrt Sales Cnsumer Credit Cunseling Services (CCCS) Extenuating Circumstances Majr Adverse Credit GUS Accept GUS Refer r Refer with Cautin Unacceptable Credit Ecnmic Event Credit CMS Plicies & Prcedures Page 4 f 204

5 Payment Shck Disputed Trade lines Credit Reprt Nn-Purchasing Spuse Rural Develpment Lans Delinquent Federal Debt Judgments and Tax Liens Child Care Expenses (k) Lans/Persnal Asset Lans Child Supprt, Alimny, Garnishments USDA Emplyment and Incme Evaluatin and Dcumentatin Overview Dcumentatin Age Requirements Stability f Incme and Emplyment Requirements Annual Incme Limits Adjusted Incme Repayment Incme Requirements Tax Infrmatin Authrizatin IRS Frm 4506-T/Tax Transcripts Requirements Dcumentatin Requirements and Standards Dcumentatin Requirements Dcumentatin Standards Incme Types Overview Wage Earner Bnus r Overtime Cmmissin Emplyment by a Relative Self-Emplyed Incme Overview Incme Dcumentatin and Evaluatin by Tax Returns Meal Deductins Dcumentatin Requirements Rental Incme Overview Calculatin f Rental Incme Other Incme Overview Alimny, Child Supprt and Maintenance Payments Aut Allwances and Expense Accunt Payments Child Care Expenses Disability Incme Emplyer Differential Payments Emplyment Gaps VA Benefits, Schlarships, Tuitin Family Size -Dependent Deductin Fster Care Incme Future Emplyment Husehld Assets Interest and Dividend Incme CMS Plicies & Prcedures Page 5 f 204

6 Military Incme Nn-Taxable Incme Nte Incme Public Assistance Prgrams Sectin 8 Husing Vuchers Retirement, Pensin, Annuity Incme and IRA Distributins Seasnal Incme Scial Security Incme Teachers Trust Incme Unin Members VA Benefits Unacceptable Surces f Incme Surces f Unacceptable Incme USDA Liabilities and Debt Ratis Overview Debt Rati Waivers Mnthly Husing Expenses Ttal Qualifying Primary Husing Expense-t-Incme Rati Payment Shck Calculatin Mnthly Debt Obligatins Debt Pay Off/Pay Dwn Prjected Obligatins Ttal Qualifying Debt-t-Incme Ratis Cntingent Liabilities Other Cnsideratins Cmpensating Factrs C-Brrwers USDA Assets Overview Dcumentatin Age Requirements Minimum Dwn Payment and Cash t Clse Requirements Asset Surces Overview Bank Accunts Earnest Mney Depsits Emplyer Assistance Plans Equity frm Other Assets Freign Assets Gift Funds Incme Tax Refund Life Insurance Cash Value Lan Frm A Relative Real Estate Cmmissin frm Sale f Subject Prperty Repayment Of A Persnal Lan Retirement Accunts Stcks / Bnds Sweat Equity Systematic Savings Trade Equity CMS Plicies & Prcedures Page 6 f 204

7 Cash Reserves Requirements Cash n Hand Unacceptable Surces f Assets Requirements USDA Prperty Types and Appraisal Dcumentatin and Review Overview USDA Appraisal and Prperty Cnditins Assessment Requirements Appraisal Independence Overview Appraisal and Appraisal Management Cmpany (AMC) Third Party Organizatin Fees Appraisal Dcumentatin Age f Appraisal Required Appraisal Frms Changes in Purchase Price Fr Yur Prtectin Get a Hme Inspectin Selecting an Appraiser Overview Appraisal Transfer Overview Secnd Appraisal REO Appraisal Appraisals in Remte Areas/New Cnstructin Appraisal Fees Overview Setting Prperty Related Cnditins Unifrm Appraisal Dataset (UAD) Overview Cnditin Quality Unacceptable Appraisal Practices Requirements Prperty and Prject Types Prperty Type Classificatins Eligible Prperty/ Prject Types Ineligible Prperty/ Prject Types Eligible Prperty Types Single Family Residence Manufactured Hmes Mdular Hme, Pre-cut Hme, Panelized Hme Mixed-Use Prperty Cndminium Planned Unit Develpment (PUD) Leasehld Estates Appraisal Prcedures Fr Leasehld Estates Envirnmental Hazards Requirements Lcatins Near High-Pressure Gas and Liquid Petrleum Transprtatin Lines. 142 CMS Plicies & Prcedures Page 7 f 204

8 Overhead High-Vltage Transmissin Lines Operating and Abandned Oil and Gas Wells Operating and Abandned Statinary Fuel Strage Tanks Grund Subsidence Prperties Affected by Lead Base Paint Asbests Insulatin Chinese Drywall Heavy Traffic Railrad Tracks and Other High Nise Surces Prperties Affected By Airprt Nise and Hazards Water and Sewage Systems Private Water Systems Cisterns Hauled Water Cmmunity Water and Sewer Systems Shared Wells Individual Sewage Systems Private Rads Requirements Certificatins Overview Utilities Carbn Mnxide (CO) Detectrs Prperty Inspectin Termite Inspectin New Cnstructin Prperty Requirements Prpsed Cnstructin Under Cnstructin Existing Cnstructin (less than ne year ld) New Cnstructin Exhibits and Inspectin Checklist Stages f Cnstructin Prcessing Prcedures fr New Cnstructin Lan-t-Value Rati HUD Apprved Ten Year Warranty Cmpanies Thermal Requirements Cnditinal Cmmitment Site Built Using Building Permits and Certificates f Occupancy Municipalities That D Nt issue Building Permits and/r Certificates f Occupancy Mve-On Manufactured Hmes Manufactured Hmes Certificatin Label and Data Plate Manufactured Hme Prperty Eligibility Requirements Manufactured Hme Ineligible Prperty Fundatin Systems Engineer s Certificatin n Fundatin Cmpliance New Cnstructin Engineer s Certificatin n Fundatin Cmpliance Existing Cnstructin Fld Zne Inspectins fr Manufactured Hmes Termite Prtectin/Inspectin Perimeter Enclsures Cndminium Prjects PUD Prjects CMS Plicies & Prcedures Page 8 f 204

9 Title Maximum Mrtgage Amunt Cndminium Prjects Overview Cndminium Requirements Cntinuing Prject Eligibility Ineligible Cndminium Prjects Warranty Prcess fr Units in Apprved Cndminium Prjects Cmpliance Inspectins Overview Initial Inspectin Framing Inspectin Final Inspectin New Cnstructin Exhibits Builder's Certificatin f Plans, Specificatins, and Site (HUD Frm ) Termite Cntrl Carpet Identificatin Manufacturer's Warranties and Insulatin Certificate Ten Year Insured Prtectin Plan Warranty Certificate Of Occupancy Appraisal Review Overview The Subject Prperty Neighbrhd Analysis Site Analysis Imprvement Analysis Sales Cmparisn Apprach Cst Apprach Incme Apprach Recnciliatin Natural Disasters Overview Inspectin Requirements Escrw Accunts USDA Cndminium Prject Matrix USDA New Cnstructin Required Exhibits and Inspectins Checklist CMS Plicies & Prcedures Page 9 f 204

10 Revisin Histry Date Versin Descriptin f Change 04/10/ In the USDA Lan Eligibility sectin, mdified the fllwing: Added the Dcumenting Clearances sub-sectin. Updated the fllwing sub-sectins: Scial Security Number Validatin Purchase Mrtgage Refinance Mrtgages Principal Curtailment In the USDA Emplyment and Incme Evaluatin and Dcumentatin, updated the Dcumentatin Standards subsectin. In the USDA Assets sectin, mdified the fllwing: Updated the Asset Surces sub-sectin. Added the Freign Assets sub-sectin. In the USDA Prperty Types and Appraisal Dcumentatin and Review sectin, mdified the fllwing: Added the Changes in Purchase Price sub-sectin. Updated the Cndminium Requirements sub-sectin. 03/13/ In the USDA Lan Eligibility sectin, updated the Risk Cntrls subsectin t remve the prperty flipping requirements. 02/17/ In the USDA Lan Eligibility sectin, updated the Brrwers and C-Brrwers sub-sectin. In the USDA Autmated Underwriting sectin, updated the Credit Exceptins sub-sectin. In the USDA Liabilities and Debt Ratis sectin, added the Payment Shck Calculatin sub-sectin. 01/02/ In the Asset Surces sectin, updated the Bank Accunts subsectin. 12/09/ In the Prperty and Prject Types sectin, added the Hauled Water sub-sectin. 10/08/ In the USDA Lan Eligibility sectin, updated the Identity Verificatin sub-sectin. In the USDA Autmated Underwriting sectin, updated the fllwing sub-sectins: Bankruptcy/Freclsure/Deed-in-Lieu Shrt Sales 09/18/ In the USDA Lan Eligibility sectin, updated the Nn- Purchasing Spuse sub-sectin. In the USDA Autmated Underwriting sectin, updated the GUS Refer r Refer with Cautin sub-sectin. 07/22/ In the Eligible Prperty Types sectin, updated the Manufactured Hmes sub-sectin. 06/02/ Mved Maximum Interest Rates Allwed under the Maximum Mrtgage Limits sectin 05/05/ In the Self-Emplyed Incme sectin, added the Meal Deductins sub-sectin. 04/04/ In the Ineligible Prperty/Prject Types sectin, added Singlewide manufactured hmes. Updated the Manufactured Hmes sectin t remve the 1992 verlay. 02/20/ New dcument. CMS Plicies & Prcedures Page 10 f 204

11 USDA UNDERWRITING Overview This dcument describes hw t review and underwrite USDA Office f Rural Develpment (USDA) mrtgage lan applicatins. USDA LOAN PROGRAMS AND COMPLIANCE Overview This sectin describes the eligible lan prgrams and cmpliance requirements necessary t btain a USDA lan guarantee and Cnditinal Cmmitment. CMS must ascertain whether the specific prvisins f the lan prgram are permissible under all applicable laws and regulatins. CMS must als take the necessary steps t verify the cntinued validity f the lan prgram prvisins under applicable laws and regulatins, and must ntify any investrs in the event it believes that any prvisins might be restricted r impermissible under such laws r regulatins. The requirements utlined in this sectin represent USDA cre requirements fr underwritten lans. The GUS Underwriting Mdified TOTAL Screcard finding reprt decisin and recmmendatins fr reduced dcumentatin may be fllwed, unless therwise nted in this dcument. Requirements that vary frm ne lan prgram t anther are described in the CMS Prduct Matrices. Waivers d nt apply t state specific cmpliance restrictins. USDA Guarantee Prgram Overview This sectin describes the USDA Guarantee 502 lan prgram. The prgram is designed t prvide mrtgage financing fr lw and very lw incme individuals in rural areas that are unable t btain financing frm a private surce. The USDA prgram is a part f the USDA Rural Develpment s effrts t imprve the quality f life in rural areas. The basic requirements f the brrwer t qualify fr a USDA 502 lan are as fllws: Be unable t btain sufficient credit frm anther surce; Agree t persnally ccupy the dwelling; Meet citizenship r eligible nncitizen requirements; Demnstrate bth the willingness and ability t repay the lan. Prperty Eligibility Fr a prperty t be eligible fr the USDA Guarantee the prperty must be lcated in a qualified area. T cnfirm a prperty is eligible fr the prgram g t: CMS Plicies & Prcedures Page 11 f 204

12 USDA LOAN ELIGIBILITY Overview This sectin prvides eligibility standards that all apply t the USDA guarantee lan prgrams. LDP and GSA Prcurement/Nn-Prcurement Requirements If any party t the transactin appears n either list, the fllwing must ccur: It must be verified that the persn n the list is the same persn in the transactin. If evidence can be prvided prving that he r she is nt the same persn listed, the prcess may cntinue. The fllwing are examples acceptable dcumentatin: Evidence f residency fr the brrwer fr the past seven years t verify brrwer has nt lived at the address listed n the LDP r GSA. Evidence that the brrwer's full name differs frm the name n the list (e.g., Dcument brrwer has a different middle initial). If the persn listed is the same persn in the transactin, then that persn must be remved frm the transactin. USDA Case Number The USDA Case number is autmatically assigned frm USDA s Cnditinal Cmmitment. The case number cnsists f the State Cde (3 digits), the Cunty Cde (3 digits) and the Brrwer s ID. All 3 can be fund n the Cnditinal Cmmitment, which is received after the underwriter submits t USDA Rural Husing fr apprval. The underwriter will enter the USDA case number withut any dashes r spaces in the fllwing rder: State Cde (with an additinal 0 added in frnt), Cunty cde, and then the Brrwer s ID fr a ttal f 15 digits. The case number des nt expire, but the cnditinal cmmitment which it is tied t expires after 90 days. Dcumenting Clearances USDA cnditin fr SAM clearance: USDA- LDP/GSA Review Prvide evidence f clear LDP and GSA fr all parties in transactin. Must include screen prints frm SAM fr all GSA verificatins f all parties. Dcumentatin f the clearance must be cmpleted thrugh the SAM website ( fr all USDA lans as USDA des nt permit thirdparty verificatins such as the DataVerify reprt. Nte: T search mre than ne name at a time, the SAM website permits multiple name searches (up t six names at nce) thrugh the Advanced Search Exclusin ptin. CMS Plicies & Prcedures Page 12 f 204

13 Unifrm Residential Lan Applicatin Lan Applicatin Requirements The lan applicatin submitted fr underwriting must be reviewed during the underwriting prcess t ensure it is cmplete: A full tw-year histry f emplyment and residency is required (unless therwise exempted by the lan prgram) and all persnal infrmatin fr each brrwer (scial security number, date f birth, address, and educatin) must be cmplete. All declaratin questins must be marked as well as whether the applicatin was taken face-t-face, by telephne, r by mail. All applicatins must be signed by the brrwers. The interviewer's name and emplyer must be cmpleted in all cases. The final applicatin fr clsing must adhere t the requirements abve, including the brrwer's cmplete and accurate financial infrmatin relied upn by the USDA Certified Underwriter, and the applicatin must be signed and dated by all brrwers. The final applicatin must include all debt incurred during the applicatin prcess and thrugh lan clsing f the mrtgage. During the underwriting prcess, all transactins must be reviewed fr reasnability, including the feasibility f ccupancy claims and the verall financial picture f the brrwers. An adequate explanatin must be btained and dcumented in the lan file if cnflicting infrmatin exists between r within dcuments, All dcuments in the riginatin file relevant t underwriting must be reviewed fr signs f alteratin r fabricatin. An adequate explanatin must be btained and dcumented in the lan file if cnflicting infrmatin exists between r within dcuments. Face-T-Face Interview Overview The brrwer must be given the ptin t cmplete the applicatin face-t-face fr all lan transactins. The file must be dcumented accrdingly t verify that this ptin was prvided if the applicant declines a face-t-face applicatin. The supprting dcumentatin must be cmpleted and maintained in all purchase files when the applicatin is cmpleted by mail, telephne, vide cnferencing, r electrnically. CMS Plicies & Prcedures Page 13 f 204

14 Identity and Scial Security Number Validatins Identity Verificatin Scial Security Number Validatin The brrwer's identity must always be established even thugh a face-t-face interview is nt a requirement. The brrwer must prvide ne piece f acceptable identificatin t the clsing agent as evidence f his r her identity at clsing. The fllwing are acceptable frms f identificatin: Passprt (gvernment issued, valid, and unexpired) Resident Alien Card (gvernment issued, valid, and unexpired) Driving License (state issued, valid, and unexpired) State ID Card (state issued, valid, and unexpired) The brrwer's Identify Certificatin must be cmpleted and returned by the clsing agent. The frm must clearly indicate which f the abve dcumentatin was prvided as identificatin. T be eligible fr Agency assistance, the applicant must be a U.S. citizen, a U.S. nncitizen natinal, r a qualified alien and prvide acceptable evidence f eligible immigratin status. Any applicant wh is nt a U.S. citizen, a U.S. nn-citizen natinal, r a qualified alien shuld be rejected. Aliens and alien nn-citizen natinals must prvide acceptable evidence that they are qualified aliens. The Rural Develpment (RD) has entered int an Interagency Agreement with the Department f Hmeland Security, U. S. Custms and Immigratin Service (USCIS) t allw access t the Systematic Alien Verificatin fr Entitlements (SAVE) prgram database. This prgram enables USDA t btain nline immigratin status infrmatin t determine a nn-citizen applicant s prgram eligibility. In mst cases, SAVE will prvide immediate respnses cncerning the immigratin status f an applicant. Nte: A nn U.S. Citizen wh applies fr a USDA lan guarantee must prvide dcumentatin t dcument they are a qualified alien. Applicants with nine digit alien verificatin numbers must be verified thrugh the RD SAVE system. Upn receipt f dcumentatin f immigratin status the USDA Certified Underwriter will submit it t RD fr verificatin. Brrwers classified under Diplmatic Immunity, Temprary Prtected Status, Deferred Enfrced Departure, r Humanitarian Parle are nt eligible fr FHA financing. All brrwers must prvide evidence f a valid Scial Security number regardless f the Lan transactin. Acceptable dcumentatin fr Scial Security number includes the fllwing: Valid scial security card Current pay stub W-2 frm The Scial Security number prvided fr the brrwers will be validated by CMS. The validatin prcess is intended t recncile cnsistency with the numbering frmat, the brrwers names, and dates f birth. Nte: Any use f a Scial Security r Individual Taxpayer Identificatin Number fr purpses f filing taxes that was nt issued legally t an applicant is cnsidered fraud. As such, the applicant will nt be eligible fr a lan thrugh Carringtn and evidence f such fraud will be reprted as required under Carringtn plicy. CMS Plicies & Prcedures Page 14 f 204

15 Occupancy Types Overview If a brrwer indicates that the subject prperty will be his r her primary residence, the viability f the brrwer ccupying the prperty must be assessed. Fr refinance transactins, the current address reprted n the Unifrm Residential Lan Applicatin (Fannie Mae frm 1003) must be cmpared t the addresses listed n the credit reprt. Any red flags r incnsistencies fund within the last 12 mnths must include a full explanatin. Primary Residence A primary residence is a prperty that is physically ccupied by the brrwer as his r her principal residence. A primary residence is a prperty that: The brrwer ccupies the prperty as his r her principal residence. The brrwer ccupies the prperty fr the majr part f the year. The lcatin is cnvenient t the brrwer's principal place f emplyment. The address is f recrd fr ne r mre f the fllwing: federal incme tax reprting, vter registratin, driver's license, ccupatinal licensing, etc. The brrwer must ccupy the prperty within 30 days f clsing. An applicant wh wns a dwelling generally is nt eligible fr a Sectin 502 lan, except fr refinancing an existing Sectin 502 r 504 lan fr a rate reductin, n cash ut refinance lan. Hwever, if the applicant s dwelling is structurally unsund, functinally inadequate, t small t accmmdate the needs f the husehld, r the brrwer s current hme is at least 50 miles away frm the subject prperty funds may be prvided t purchase a new ne. Increase in Family Size The brrwer may be permitted t btain anther primary residence with an FHA mrtgage if the number f legal dependents increases where the present huse n lnger meets the family's needs. The brrwer must prvide satisfactry evidence f the increase in dependents and the prperty's failure t meet the family's needs. The brrwer must pay dwn the utstanding mrtgage balance n the present prperty t 75% LTV r less. A current residential appraisal must be used t determine LTV cmpliance. Tax assessments, market analyses by real estate brkers, etc. are nt acceptable prf f LTV cmpliance. Vacating a Jintly Owned Prperty If the brrwer is vacating a residence that will remain ccupied by a cbrrwer, the brrwer is permitted t btain anther USDA mrtgage. In all ther cases, existing USDA guaranteed mrtgages must be paid ff befre brrwers may btain anther USDA lan. CMS Plicies & Prcedures Page 15 f 204

16 Brrwers, C-Brrwers, C-Signers, and Nn-Purchasing Spuses Brrwers and C-Brrwers A brrwer must be an individual. Title must be in the brrwer s name at applicatin fr refinance transactins. Nn-individual legal entities such as crpratins, general partnerships, limited partnerships, real estate syndicatins, investment trusts, and nnccupant brrwers are nt eligible. Nn-Purchasing Spuse Nn-purchasing spuses may be required t sign either the security instrument r dcumentatin evidencing that he r she is relinquishing all rights t the prperty if required by state law in rder t perfect a valid and enfrceable first lien, as is the case in sme cmmunity prperty states. If the nn-purchasing spuse executes the security instrument, he r she is nt cnsidered a brrwer fr underwriting purpses and need nt sign the lan applicatin r nte. In all ther cases, the nn-purchasing spuse is nt t appear n the security instrument r therwise take title t the prperty. Nn-purchasing spuse may be added t title n a purchase transactin r may remain n title when refinancing. N ther party ther than the brrwer r their spuse may be permitted t have a vested interest t the prperty. Cmmunity Prperty States If the prperty is lcated in a cmmunity prperty state r the brrwer resides in a cmmunity prperty state, the fllwing requirements must be fllwed: A credit reprt fr the nn-purchasing spuse is required t determine any jint r individual debts and t determine the debt-t-incme rati. The credit reprt fr the nn-purchasing spuse must nt be a jint reprt, it must be btained separately. Authrizatin frm the nn-purchasing spuse must be btained and dcumented t pull a separate credit reprt. The lan must be rejected if the nn-purchasing spuse refuses t prvide authrizatin fr the credit reprt. In rder t d the recrds check, the Credit Cmpany must be given nnpurchasing spuse infrmatin, including names, address, birth date, and any ther significant infrmatin requested. If the nn-purchasing spuse des nt have a Scial Security number, the fact that the nn-purchasing spuse has n credit histry and n public recrds against him r her must be verified by the credit reprting cmpany. Except fr debt bligatins specifically excluded by state law, the debts f the nn-purchasing spuse must be cnsidered in the qualifying ratis. If the debts are the sle respnsibility f the nn-purchasing spuse, d nt cnsider debt in the debt-t-incme rati. See the Cmmunity Prperty State-Specific Infrmatin sectin belw fr bligatins excluded by state law in Arizna, Nevada, and Wiscnsin. Prir t r at clsing, all defaulted federal debt, pen judgments and liens, including thse f the nn-purchasing spuse, must be satisfied. CMS Plicies & Prcedures Page 16 f 204

17 Brrwers, C-Brrwers, C-Signers, and Nn-Purchasing Spuses (cntinued) Nn-Purchasing Spuse (cntinued) Use the greater f the mnthly payment amunt r 5% f utstanding balance f all debts and include in the debt rati calculatin t calculate the mnthly bligatin f the nn-purchasing spuse. Disputed debts f the nn-purchasing spuse d nt need t be cunted with acceptable dcumentatin f the dispute. The credit histry f the nn-purchasing spuse shuld nt be the sle basis fr declining the lan. Cmmunity Prperty State- Specific Infrmatin The fllwing states are cmmunity prperty states: Arizna Califrnia Idah Luisiana Nevada New Mexic Texas Washingtn Wiscnsin Use the fllwing table fr additinal requirements fr cmmunity prperty states: CMS Plicies & Prcedures Page 17 f 204

18 Additinal Requirements fr Cmmunity Prperty States AZ CA ID LA NV NM TX WA WI When d Cmmunity Prperty State Laws Pertain? Shuld Debts be included in DTI Analysis? Shuld Debts be Excluded in the DTI Analysis if Acquired prir t the Marriage? Can the Nn- Purchasing Spuse Sign the Mrtgage (VA Only)? Married and reside in same state Married and reside in same state Married and reside in same state Married and reside in same state Yes; hwever, see exclusins in the Additinal State-Specific Yes Yes Yes, unless the spuse agrees t waive Hmestead Requirements Rights sectin belw. Yes N. Can nly be excluded with a specific Pre-Marital Agreement. N. Can be excluded with a specific Pre-Marital Agreement. N. Can be Yes excluded with a specific Pre-Marital Agreement. N Yes Yes N, if waiving Hmestead Rights. Married and reside in same state Married and reside in same state Married and reside in same state Married and reside in same state Yes; hwever, see exclusins in the Additinal State-Specific Yes Yes Yes, as lng as prceeds are nt prvided t nnpurchasing Yes Requirements sectin belw. spuse r jint assets f the spuse and nnpurchasing spuse are used in the transactin. See exclusins in the Additinal State-Specific Requirements sectin belw. N. Can be excluded with a specific Pre-Marital Agreement. N. Can be excluded with a specific Pre-Marital Agreement. Yes, as lng Yes as prceeds are nt prvided t nnpurchasing spuse r jint assets f the spuse and nnpurchasing spuse are used in the transactin. Yes Yes Yes N Yes Date determined by day f marriage and/r date residence was established in WI r 01/01/1986 and later (effective date f the Marriage Prperty Act) CMS Plicies & Prcedures Page 18 f 204

19 Additinal Requirements fr Cmmunity Prperty States (cntinued) Additinal State-Specific Requirements The fllwing are additinal state-specific requirements: Arizna Califrnia Luisiana The satisfactin f cllectins and judgments f nn-purchasing spuses fr USDA lans in Arizna are nt required in the fllwing circumstances: The nn-purchasing spuse is nt cntributing twards any f the dwn payment r csts n the transactin, including gifts r mnies frm jint accunts. The nn-purchasing spuse signs the Title Disclaimer in rder t prevent any judgments frm attaching t the prperty. This is a cnditin at clsing. The nn-purchasing spuse cannt sign the Deed f Trust/Security Instrument. All defaulted federal debt, pen judgments, and liens. All delinquent debts, including thse f the nn-purchasing spuse must be satisfied prir t r at clsing. Cllectin accunts f the nn-purchasing spuse t be satisfied at the discretin f the Direct Endrsement USDA Certified Underwriter. The nn-purchasing spuse is permitted t sign r intervene in the mrtgage t indicate his r her intentin t waive hmestead exemptin rights. Item #23 n the Mrtgage addresses the Waiver f Hmestead. When the nn-purchasing spuse chses t intervene in the mrtgage t waive hmestead exemptin rights, the fllwing requirements must be met: Washingtn A cpy f the recrded dcument ( Waiver f Interest and Ownership ), evidencing such waiver, must be included in the lan file. This dcument is executed and recrded at the time f the executin f the sales cntract. The USDA Certified Underwriter must create a clsing cnditin fr the file fr evidence that the nn-purchasing spuse signed the mrtgage as the Intervener. Exclude debts f the nn-purchasing spuse in the qualifying ratis. Debts f the nn-purchasing spuse are excluded frm the qualifying ratis if the nn-purchasing spuse receives n mney frm the transactin. When n funds are received frm the transactin, the nn-purchasing spuse may Quit Claim his/her interest t the purchasing spuse. CMS Plicies & Prcedures Page 19 f 204

20 Transactin Types Overview CMS will accept lans made fr the fllwing purpses as defined in this sectin. Purchase Mrtgages Rate/Term Refinance Mrtgages Purchase Mrtgage A purchase mrtgage lan invlves the purchase f a Mrtgaged Premises, as defined by a sale and purchase agreement executed by the brrwer and seller, which represents a first and/r secnd lien n the prperty. The Seller must be the wner f recrd. All purchase transactins must include a cmplete purchase agreement, including all addenda. All purchase agreement terms must be cnsidered in the underwriting decisin and any evidence f undisclsed elements f the transactin must be investigated. Examples f undisclsed elements are evidence f straw buyers (changes in purchaser n the purchase agreement) r pssible undisclsed seller cncessins, such as making mrtgage payments n behalf f the brrwer fr the first few mnths f the lan. In purchase transactins where the seller is a crpratin, partnership, r any ther business entity, the brrwer must nt be an wner f the business entity selling the subject prperty. Lans where the purchase agreement has been assigned are nt eligible. Prf that the prperty seller has wned the prperty fr 12 mnths r a chain f title fr the last 12 mnths is required. Acceptable surces fr the chain f title include the fllwing: Cpies f recrded deeds Tax statements 12-mnth chain f title n the title cmmitment If a prperty was previusly sld within the last 12 mnths, ensure the transactin is legitimate. Sme characteristics f fraudulent transactins include but are nt limited t freclsure bailuts, distressed sales, and inflated values due t stated imprvements that are nt supprted. Purchase transactins d nt allw fr cash back t the brrwer at clsing ther than an amunt representing the earnest mney depsit paid by the brrwer in advance. If the brrwer receives cash back fr the earnest mney depsit, the USDA Certified Underwriter must cnfirm that the minimum brrwer cntributin requirement assciated with the selected mrtgage prduct (if applicable) has been met. CMS Plicies & Prcedures Page 20 f 204

21 Transactin Types (cntinued) Purchase Mrtgage (cntinued) Identity f Interest Transactins (nn-arm s length transactin) An identity f interest transactin is a transactin fr the purchase f a principal residence between ne f the fllwing: Parties with a familial r business relatinship Business affiliates Nte: An identity f interest transactin des nt include an emplyer/emplyee transactin when the emplyee is purchasing the seller's principal residence. Refinance Mrtgages The maximum amunt f financing is determined by the fllwing: Occupancy Use f the lan prceeds Hw and when the prperty was purchased CMS investrs will purchase the fllwing refinance transactin types: Streamline Refinance Credit Qualifying Streamline Refinance f existing USDA insured mrtgages, with r withut an appraisal. A full review and evaluatin f the brrwer's incme, assets and credit is perfrmed. Rate Reductin Refinance - A n cash-ut refinance f an existing USDA lan. Streamline Refinance A streamline refinance is intended t lwer the mnthly principal and interest payments f a current USDA guaranteed mrtgage with n cash back t the brrwer. Dcumentatin requirements are significantly reduced under this refinance ptin. Streamline refinances require the brrwer s t be credit qualified. Streamline refinances can be cmpleted with r withut an appraisal. Except fr health, safety, and lead-based paint related repairs, cmpletin f repairs is nt required n Streamline Refinance transactins. A termite certificatin is nly required when a prblem has been nted by the appraiser. Net Tangible Benefit It must be determined that there is a net tangible benefit t the brrwer as a result f the Streamline Refinance. The net tangible benefit is defined as ne f the fllwing: A 5 percent reductin t the P & I f the mrtgage payment plus the annual MIP. Refinancing frm an ARM t a fixed rate mrtgage. CMS Plicies & Prcedures Page 21 f 204

22 Transactin Types (cntinued) Refinance Mrtgages (cntinued) The fllwing table defines the permissible minimum threshlds t define net tangible benefit: T Frm Fixed Rate One-Year ARM Fixed Rate One-Year ARM Hybrid ARM Reductin f at least 5% f P&I and MIP New interest rate n greater than 2% abve the current interest rate f the ARM Hybrid ARM Reductin f at During Fixed least 5% f P&I Perid and MIP (e.g. fr 3/1 Hybrid ARM, first 3 years is fixed rate perid) Hybrid ARM New interest rate During n greater than Adjustable 2% abve the Perid current interest (Adjustable rate f the ARM perid is perid when rate adjusts annually) New interest rate at least 2% belw the current interest rate f the fixed rate mrtgage Reductin f at least 5% f P&I and MIP New interest rate at least 2% belw the current interest rate f the fixed rate mrtgage Reductin f at least 5% f P&I and MIP Reductin f at least 5% f P&I and MIP New interest rate at least 2% belw the current interest rate f the fixed rate mrtgage Reductin f at least 5% f P&I and MIP New interest rate at least 2% belw the current interest rate f the fixed rate mrtgage A maximum principal curtailment f $2,000 is permitted at the clsing table and must be n the HUD-1. If the amunt exceeds $2,000, then the fllwing steps must ccur: 1. Recalculate the lan. 2. Draw new dcuments, submit fr re-apprval, and btain the brrwer s signature. Nte: The principal curtailment may nt be dne after clsing. CMS Plicies & Prcedures Page 22 f 204

23 Transactin Types (cntinued) Refinance Mrtgages (cntinued) Rate Reductin Refinance A rate and term refinance mrtgage represents a lien that is used t pay ff the existing mrtgage r lien with a new lan. Cash remval, ther than incidental, is nt permitted. A rate and term refinance transactin is a lan where prceeds are distributed fr ne r mre f the fllwing reasns: Pay ff the utstanding principal balance f an existing first lan plus any required per diem interest. Allwable clsing csts and prepaid expenses. Payff f the utstanding principal balance f a USDA lien. Buyut f a c-wner. Nte: A refinance transactin that results in a buyut f the ther party's interest in his r her primary residence is cnsidered a rate and term refinance. If the new lan is t refinance an existing mrtgage r t buy ut an ex-spuses r ther c-wner's equity, the specified equity t be paid t the ex-spuse is cnsidered prperty-related indebtedness and is eligible fr inclusin in the new mrtgage. The divrce decree, settlement agreement, r ther type f bna fide equity agreement must be prvided t dcument the equity awarded t the ex-spuse r c-mrtgagr. A maximum principal curtailment f $2,000 is permitted at the clsing table and must be n the HUD-1 Settlement Statement. If the amunt exceeds $2,000, the fllwing steps must ccur: Recalculate the lan. Resubmit the lan t Mdified Ttal Screcard. Draw new dcuments, submit fr re-apprval, and btain the brrwer s signature. Nte: The principal curtailment may nt be dne after clsing. CMS Plicies & Prcedures Page 23 f 204

24 Transactin Types (cntinued) Refinance Mrtgages (cntinued) Restructured Lan/Shrt Payff A restructured lan r shrt payff is a mrtgage lan in which the terms f the riginal transactin have been changed resulting in either abslute frgiveness f debt r a restructure f debt thrugh either a mdificatin f the riginal lan r riginatin f a new lan that results in ne f the fllwing: Frgiveness f a prtin f principal and/r interest n either the first r secnd mrtgage. Applicatin f a principal curtailment by r n behalf f the investr t simulate principal frgiveness. Cnversin f any prtin f the riginal mrtgage debt t a sft subrdinate mrtgage. In many cases, a brrwer may nt disclse that their existing mrtgage lan has been restructured. The credit reprt may shw a restructured lan as settled fr less than wed. If the credit reprt des nt specify settled fr less than wed, scrutinize the mrtgage balance reprted n the credit reprt versus the payff balance. If the tw balances d nt match and the difference is mre than unpaid interest r prepayment penalties, the lan may have been restructured. Restructured lans/shrt payffs are eligible fr financing as a rate/term refinance. The lan must cmply with all USDA prduct guidelines and be paying ff a USDA guaranteed lan. The lan may nt currently be delinquent and there can be n late payments in the last 12 mnths. CMS Plicies & Prcedures Page 24 f 204

25 Transactin Types (cntinued) Principal Curtailment Principal curtailments are permitted in the fllwing cases: Lender Paid Transactins n transactins where the lan riginatr is paid by the lender, CMS permits a principal curtailment n purchase and refinance lans unless nted belw as a result f excess premium rate credit. The excess premium must be identified n the HUD-1 Settlement Statement and is limited t the amunt f the excess premium rate credit belw. The premium rate credit is the amunt assciated with the lwest pricing rate ptin that allws fr sme r the entire brrwer s clsing csts t be paid s the brrwer des nt have t pay thse clsing csts ut f pcket. If the premium rate credit is less than r equal t $2,000 fr lan amunts up t $350,000, r $4,000 fr lan amunts exceeding $350,000, then n additinal dcumentatin is required. Fr premium credits exceeding these threshlds, evidence that the next lwer pricing ptin wuld require the brrwer t pay clsing csts ut f pcket must be dcumented in the file (e.g., GFE, Pricing/Rate Sheet, etc.). If the brrwer was nt prvided with the lwest pssible rate while accmmdating the custmer request, the lan is nt eligible. Brrwer Paid Transactins n transactins where the lan riginatr is paid by the cnsumer, principal curtailments are nt permitted. The premium rate credit must nt exceed the amunt f the third-party csts. Refinance Transactins with Escrw Credits USDA prhibits the reductin f lan principal by use f escrw funds. USDA t USDA refinances must nt include credit f the escrw balance deducted frm the principal balance n the payff statement and/r shwn as a credit in the 100 sectin f the HUD-1 Settlement Statement. USDA cntinues t permit lenders t reduce the brrwer s cash-t-clse by crediting the escrw accunt balance t the brrwer in the 200 sectin f the HUD-1 Settlement Statement. CMS Plicies & Prcedures Page 25 f 204

26 Leasehld Estates Overview A Leasehld Estate is an interest in real prperty held by virtue f a lease. Leasehld refers t land that is leased t the individual wh wns appurtenant structures n the land. The leasehld estate may cnsist f bth the imprvement and the land; hwever, in mst cases, the imprvement is purchased in fee simple, subject t grund rent. Grund rent is rent paid fr the right t use and ccupy land. When the term f the lease expires, all rights t pssessin and use revert back t the lessr/fee simple wner and the Leasehld Estate terminates. Leasehld Estate Requirements Prperties that are secured by Leasehld Estates are acceptable prvided they cnfrm t all f the fllwing requirements: The applicant must be unable t btain fee-simple title t the prperty, and the rent charged fr the lease must nt exceed the rate being paid fr cmparable leases. The lease is fr the rental f a prperty with a fee wnership interest. The lessr must wn the fee-simple title (this prvisin des nt apply t a lessr wh is an American Indian pssessing a leasehld interest n tribal alltted r trust land). Residential prperties in the area cnsisting f leasehld r grund rent estates are readily marketable and acceptable in the subject area. The leasehld is in full frce and effect and is nt subject t any prir lien r encumbrance by which the leasehld culd be terminated r subjected t any charge r penalty. The remaining term r exercised renewal f the lease with any renewals enfrceable by the mrtgage des nt terminate earlier than ten years after the maturity date f the lan. Nt eligible n manufactured hmes. CMS Plicies & Prcedures Page 26 f 204

27 Leasehld Estates (cntinued) Lease Requirements The lease must be in writing and cmply with the fllwing requirements: The lessr s cnsent t allw the Agency s mrtgage; The right f the Agency t freclse and sell the prperty withut restrictins that adversely affect the market value f the prperty; The right f the Agency t bid at a freclsure sale r t accept vluntary cnveyance f the prperty in lieu f freclsure; The right f the Agency t ccupy, sublet, r sell the prperty shuld the leasehld be acquired thrugh freclsure, vluntary cnveyance, r abandnment; The right f the applicant t transfer the leasehld and Agency mrtgage t an eligible transferee wh will assume the Agency s debt, if the brrwer defaults r is unable t cntinue with the lease; Advance written ntice f at least 90 days t the Agency f the lessr s intentin t cancel r terminate the lease; Prvisins are negtiated with the lessr befre the leasehld interest is apprved regarding the Agency s bligatin t satisfy unpaid rent r ther charges accrued befre r during the time the Agency has pssessin f r title t the leasehld. During negtiatins, the Lan Originatr shuld cnsider the length f time it will take t freclse, hw much the Agency wuld be respnsible fr, and when the Agency wuld have t pay; Prvisins t ensure fair cmpensatin t the brrwer fr any part f the prperty taken by cndemnatin; and The unexpired term f the lease must be at least 150 percent f the term f the mrtgage, unless the lan is guaranteed by a public authrity, Indian Tribe, r Indian Husing Authrity. Fr guaranteed lans, the unexpired term f the lease must be at least 2 years lnger than the mrtgage term. In n case may the unexpired term f the lease be less than 25 years. Maximum Mrtgage Limits Requirements The maximum lan amunt is determined by qualifying ratis and cunty maximum incme limits. Maximum lan amunt cannt exceed 100% f the appraised value. Maximum lan amunt including financed guarantee fee cannt exceed 102% f the appraised value. On purchase transactin, if the sales price is lwer than the appraised value, clsing csts may be financed int the lan amunt up t a maximum f 100% f the appraised value. CMS Plicies & Prcedures Page 27 f 204

28 Lan-t-Values Calculating Cmbined Lan-t-Value Maximum Interest Rates Allwed fr GRH Prgram Purchase Transactins The maximum cmbined lan t value fr a purchase transactin is calculated as fllws: Principal balance f the first mrtgage (excluding financed Guarantee Fee) Divided by The lwer f the appraised value r sales price Rate/Term and Cash-ut Transactins The maximum cmbined lan t value fr a Rate/Term refinance transactin is calculated as fllws: Principal balance f the first mrtgage (Excluding financed Guarantee Fee) Divided by The appraised value USDA Rural Develpment des nt establish the interest rate fr the lan. CMS and ur custmer must negtiate the interest rate, hwever, Rural Develpment des establish a maximum rate that may be charged. The maximum rate is based n the 90 day FANNIE MAE 30 year Remittance rate + 60 basis pints and runded up t the next ¼%. Example: Fannie Mae 90 day 30 year fixed A/A 3.07% Add 60 basis pints +.60 Ttal 3.67% Runded up t next ¼% 3.75% maximum These rates can be fund n the Fannie Mae website Histrical Daily Required CMS shuld dcument the interest rate n the Frm under item 4 and 5. If the rate is nt lcked at the time f submissin f the applicatin t Rural Develpment, CMS must prvide a lck sheet with the clsing dcuments t verify the rate did nt exceed the maximum allwed rate as f the date f the lck. If the interest rate increases abve what was submitted n the Frm , CMS must submit t Rural Develpment new underwriting dcumentatin with the increased rate PRIOR t clsing. CMS Plicies & Prcedures Page 28 f 204

29 Minimum Brrwer Investment Overview There is n minimum brrwer cash investment required fr USDA guarantee purchase lans. Acquisitin Cst The acquisitin cst is calculated as fllws: Sales price + Cst f any required repairs paid by the brrwer + all brrwer-paid clsing csts The difference between the ttal cst t acquire the prperty and the mrtgage amunt can be prvided frm any f the fllwing surces: Brrwer's wn funds Seller cncessins. Any additinal csts fr prepaid expenses, MIP paid in cash, and discunt pints may be reduced by premium pricing. CMS Plicies & Prcedures Page 29 f 204

30 Seller Cntributin Limitatins Cntributins/ Cntributrs Cntributins are any csts that are typically the respnsibility f the brrwer, but paid by anther individual. Cntributrs may include direct participants such as the prperty seller, builder, develper r real estate agent. Financing cntributins subject t the maximum 6% cntributin limitatin include, but are nt limited t, the fllwing: 1. Discunt pints 2. Buy dwn funds 3. Seller-paid clsing csts 4. Prepaid expenses 5. Guarantee Fee Inducements t Purchase A dwnward adjustment t the prperty's sales price by the amunt f the Inducement t Purchase must be made t reflect the amunt f the lesser f the adjusted sales price r appraised value. Inducements t Purchase include, but are nt limited, t the fllwing: Persnal prperty items such as cars, bats, riding lawn mwers, furniture, televisins Mving csts Vacatins Autmbiles Other items cnsidered giveaways Decrating allwances, repair allwances, and ther csts as determined by the Hme Ownership Center Excess rent credit The seller r builder paying a prtin f the brrwer's sales cmmissin n the sale f the brrwer's present hme If the real estate brker is invlved in bth transactins and the seller paid a real estate cmmissin exceeding the amunt typical fr the area and the brrwer is nt paying a sales cmmissin n the sale f his r her present hme. In this type f situatin, the excess amunt paid by the seller is cnsidered an Inducement t Purchase. Cntributins in excess f actual csts Depending n lcal custm, certain csts may be cnsidered part f the real estate transactin and their value will nt be subtracted frm the sales price. Examples include ranges, refrigeratrs, dryers, washers, carpeting, and windw treatments. CMS Plicies & Prcedures Page 30 f 204