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USDA Rural Development Mortgage Training

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Presentation on theme: "USDA Rural Development Mortgage Training"— Presentation transcript:

1 USDA Rural Development Mortgage Training

2 Why use a USDA Loan? 100% Financing of purchase price
Can cover closing costs up to appraised value – IF property appraises over purchase price Low rates Low Monthly MI – lowest in industry Flexible Credit Qualifications Meets income limitations as set by USDA – low/medium income

3 Basics of a USDA Credit Qualification
How to know if your borrower qualifies

4 A borrower will not qualify for USDA IF:
RD , “Request for Single Family Housing Loan Guarantee” requires both the lender and the applicant to certify that the applicant is unable to secure credit from other sources upon terms and conditions which the applicant can reasonably fulfill. The certification can be made if the applicant does not meet the requirements to obtain a traditional conventional credit loan. Traditional conventional credit is defined for Agency purposes as: The applicant has available personal non-retirement liquid asset funds of at least 20% of the purchase price that can be used as a down payment; The applicant can, in addition to the 20% down payment, pay all closing costs associated with the loan; The applicant can meet qualifying ratios of no more than 28% PITI and 36% TD when applying the 20% down payment; The applicant demonstrates qualifying credit for such a loan. Qualifying credit consists of at least two credit bureau trade lines open and paid as agreed for at least a 24- month period to include that: The applicant was not currently 30 days or more past due on any trade line; and The applicant had not been 60 days or more past due on any trade line over the past 24 month period; and The applicant did not have a foreclosure or bankruptcy in their credit history over the past 36- month period. The conventional mortgage loan term is for a 30 – year fixed rate loan term without a condition to obtain private mortgage insurance (PMI) If the applicant meets the cumulative criteria of traditional conventional credit, as defined by USDA above, the applicant is ineligible for USDA financing.

5 Borrower Credit Profile
620 credit score or better required for FSB Borrower must have at least 3 tradelines that have existed for 12 months. These tradelines can be closed accounts, but must have been within the most recent 24 – 36 months. Tradelines may be non traditional, but must be added to the credit report as a supplement The most important look back at the credit is 12 – 24 months. Late payments and collections within the most recent 12 months are not acceptable Open judgments are not allowed and must be paid prior to CTC. If judgments are within 12 months, may result in a denial. Bankruptcy – CH 7 must be 3 years old Bankruptcy – CH 13 must be discharged and 12 months old Bankruptcy – CH 13 in progress is acceptable, but 12 months of payment to courts must have elapsed, payment performance must be satisfactory and written permission from BK court/trustee must be obtained for new mortgage. A Credit Waiver by the lender is required and compensating factors must be part of the loan. Foreclosure – must be 3 years old The borrowers credit profile is extremely important. USDA has added as of 12/1/2014 the following criteria: At least one applicant whose income or assets are used for qualification must have at least three historical (any account that is open and active with repayment underway or any account that has been open, but may now be closed) trade line payment references that have existed for at least 12 months to establish a credit reputation and validate the credit score. If not on the credit report, establish a minimum payment history through use of a non-traditional report. Nontraditional credit may not be used to enhance poor payment records or low credit scores. Loans underwritten with the assistance of the Agency’s automated underwriting system that receive an “Accept” recommendation are also subject to the credit score validation of this Paragraph. A trade line in a documented dispute with 12 months of history is considered an eligible trade line. The inability to validate credit scores used by GUS will require lenders to downgrade an “Accept” underwriting recommendation to a “Refer” and establish minimum payment history through use of a non-traditional report.  Any non traditional accounts must be placed on the credit report as a supplement. Any verification of paid accounts or ANY update to accounts must be documented through a supplement to the credit report.

6 Derogatory Credit Requires LOX on ALL negative credit reporting on credit report. Letter from borrower must explain all occurrences and demonstrate how situation was out of their control and how it was resolved to insure it will not happen again. Financial Mismanaging, divorce and “forgetting” are not acceptable reasons for negative credit. The letter must make sense and if required, be supported by documentation. The letter is signed by the borrower making it a legal document to prosecute for fraud.

7 Collection Accounts 1) Determine if the total outstanding balance of all collections accounts of all applicants is equal to or greater than $2,000. Unless excluded by state law, collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance of all collections. 2) Remove all medical collections and charge off accounts from the total balance. Medical collections and charge off accounts must be clearly identifiable on the credit report. 3) If the remaining outstanding balance of collection accounts are equal to or greater than $2,000, any of the following actions will apply: a. Payment in full of all collection accounts at or prior to closing. b. Payment arrangements are made with each creditor for each collection account remaining outstanding. A letter from the creditor or evidence on the credit report is required to validate the payment arrangements. The agreed upon monthly payment for each outstanding collection account will be included in the borrower’s debt-to-income ratio. c. In the absence of a payment arrangement, the lender will utilize in the debt-to-income ratio a calculated monthly payment. For each collection utilize 5% of the outstanding balance to represent the monthly payment.

8 Disputed Accounts Disputed accounts are not considered in the score calculation for the borrower’s credit scores. For the disputed accounts to be disregarded they must 1) have a zero balance 2) be marked “paid in full” or resolved and 3) balance owed is less than $500 and is more than 24 months old. If the disputed account does not meet the above criteria the loan will be downgraded to a manual underwrite.

9 Basics of Income Qualification
Does your borrower make too much money for USDA loan?

10 Income Eligibility Check
VERY, VERY important to check that your borrower does not exceed the income limitations for the county he/she is purchasing in prior to working the loan in this direction. Utilize USDA’s online calculator to confirm Income Eligibility All income for the household must be included – even for adults that are not on the loan but will be living in the home. The calculator will walk you through several screens and provide a final answer. Accuracy of information is very important.

11 Site will provide Eligible or Ineligible Response


13 How to calculate Qualifying Income
Wage Earner Paystubs for most recent 30 days 2 Years most recent W-2’s If using Overtime, Bonus or other income Verification of Employment must be provided to show breakdown of income for calculation purposes Proof of receipt for a 2 year consecutive period must be demonstrated Further information may be requested from the underwriter for clarification purposes Self Employed 2 years tax returns for personal and business as applicable (signed) YTD P&L – to be signed by borrower Cash Flow Analysis worksheet Further information may be requested from the underwriter for clarification purposes If borrower does not have a 2 year history of being self- employed, the borrower is not eligible for financing 2nd Job Only allowed if a 2 year history of having multiple employment is demonstrated. Verification of employment for all employment is required

14 Child Support Must be documented accordingly Receiving Child Support
12 months proof of receipt required to consider in income totals Divorcee decree required Birth certificates of children may be required to establish continuance of 3 years Paying Child Support May not be delinquent – verified through credit report or other verification process Must be included in Ratios – include on 1003 Divorce Decree required

15 Employment Borrower must be currently employed
Employment must be stable and a history of 2 years in same line of work preferred. However, if the borrower can demonstrate a valid and documentable reason for a career change, the income may be used at the underwriter’s discretion New employment under 6 months is generally not acceptable as it has not determined stability, however if in the same line of work it can be considered. Previous specialized training will allow use of new employment if not in the same line of work. Training must be documented and can include recent graduation from college if degree shows they have been trained for the job they are in. Gaps in employment must be explained. Gaps longer than 6 months are only allowed at underwriter’s discretion

16 4506T Form & Transcripts A 4506T form will be required on all adult household members that will reside in the home. Transcripts will be ordered on all members USDA will not accept a file for review without transcripts included IF transcripts are not included, the file WILL be rejected for submission by USDA and the waiting period will start over once transcripts are added to the file If a correspondent will be requesting the commitment from USDA, they will be required to order the transcripts and include in the package to FSB 4506T forms are extremely sensitive and must be filled out correctly to avoid being rejected by the IRS.

17 4506T Completion Transcript orders are taking 5 – 14 days. With a form that is completed correctly, we can expedite the first time it is submitted. A few pointers to follow: Insure that only the address is showing in the address sections. Verbiage such as “lives with family” or “lives rent free” sometimes sneaks in from your LOS system. Make sure this is not showing. Addresses should match what the IRS has on file. It is wise to compare with the borrower tax returns to insure correct information. Recently married or divorced women may have different names on previous returns. It will matter and may require more than one 4506T to be signed. It will be better to have several signed than to go back to the borrower multiple times. Make sure the correct years are showing that are needed. They must match the income information you are providing to us.

18 Ratios Allowed per USDA Guidelines

19 DTI Ratios Are a hot topic on USDA loans. Delinquency in the past has been reported as higher on USDA loans than their FHA or VA counterparts. In an effort to control excessive delinquency, USDA has adopted a stance on DTI that does not allow for exceptions. This section will outline the DTI rules that are in effect as of 12/1/14. For loans under 680, the general rule of thumb is DTI will not exceed 29/41 unless the loan receives an Approve/Eligible through GUS allowing for higher ratios. For loans above 680, a higher DTI is allowed with compensating factors. The higher ratios allowed are 32/44

20 Compensating Factors for higher ratios
There are only 3 Compensating Factors that will be allowed for a higher ratio to be used and the borrower must have a credit score above 680 and meet one of these for use of the higher ratios: 1) The proposed PITI is equal to or less than the applicant’s current verified housing expense for the 12 month period preceding loan application. Verification of housing expenses may be documented on a verification of rent (VOR) or credit report. The VOR or credit report must include the actual payment amount due and report no late payments or delinquency for the previous 12 months. Rent or mortgage payment histories from a family member will not be considered unless 12 months of canceled checks, money order receipts, or electronic payment confirmations are provided. A history of less than 12 months will not be considered an acceptable compensating factor. 2)Accumulated savings or cash reserves available post loan closing are equal to or greater than 3 months of PITI payments. A verification of deposit (VOD) or two most recent consecutive bank statements document the average balance held by the applicant are required. Cash on hand is not eligible for consideration as a compensating factor. 3) The applicant(s) (all employed applicants) has been continuously employed with their current primary employer for a minimum of 2 years. A “Request for Verification of Employment” (VOE) (Form RD , comparable HUD/FHA/VA or Fannie Mae form, or other equivalent), or VOEs prepared by an employment verification service (e.g., The Work Number.) must be provided. This compensating factor is not applicable for self- employed applicants. A debt ratio waiver must be prepared by the lender for any requests of DTI exceptions that exceed the standard 29/41 outlining the compensating factors.

21 Student Loans Must be included in ratios regardless of deferment status. Lenders must include the greater of one (1%) percent of the loan balance reflected on the credit report or the verified fixed payment due by the loan servicer. Fixed payments have a monthly amount that is not subject to change through the fixed repayment time frame. Income Based Repayment (IBR) plans, graduated plans, adjustable rates, interest only and deferred plans are examples of repayment plans that will require a calculation of one percent of the loan as these plan types do not represent a fixed payment.

22 Debts that should be included in ratios:
Any open installment or revolving debts showing on credit report Any new debts that have not reported to credit, yet…but show as an inquiry on the credit report Any debts that are owed but do not report to credit reporting agencies. We will need a supplement added to credit report to verify terms. Full PITI of new home If retaining current residence, full PITI payment Child support payments

23 Debts that are allowed to be excluded from DTI:
401K loans Co-signed loans that have documentation that an outside party is paying the debt. This can be proven with 12 months cancelled checks or bank statements showing the payment from their account. Any late payment will negate the removal of the payment from the DTI. Business debt that can be documented as paid by the business for 12 consecutive, most recent months. The debt must show paid from the business account and proof supplied accordingly.

24 Application Verification
Validating the 1003 information

25 1003/Application The information contained in the 1003 must be fully documented. This section will provide tips and clarification on how your should be completed for the best possible outcome in underwriting. The highlighted section should be accurate and match the GFE/TIL. If a Joint account, the top section should be signed by both applicants. The refinance section should only be completed IF a refinance and all sections should be completed.

26 It is important to list their current address and any addresses the borrower/co- borrower may have had over the past 2 years. If the address does not match the Driver’s License that is submitted, the underwriter will require an LOX. If RENT is marked in the residence history, a VOR will be requested. If Own is marked in the residence history, the REO section should contain coordinating information. IF the applicant does not rent or own, neither should be marked and an LOX from the originator or processor should be included noting the circumstances of the housing for the borrower. All forms that show a section for initials or signatures must be fully executed to meet compliance requirements.

27 The employment history section must be completed in detail
The employment history section must be completed in detail. Any missing information will result in conditions from the underwriter to complete the section. Phone number should be accurate and not a number that will reach the borrower. This number will be used to complete the Verbal Verification of Employment that will be completed within 48 hours of closing. If a borrower has multiple W-2’s for the most recent 2 years, all W-2 employment must be listed on the Dates must be correct and a verification may be requested at the discretion of the underwriter.

28 Monthly Income and Housing Expense
Accurate income is always crucial in a mortgage loan. Income should be broken down according to its correct classification and not lumped together if containing OT, Bonus or Commission. SSI can be grossed up 125% and will be listed under Other Income. Self employment income will also be referenced in this section. If rent/own are checked in the residence history, then Present Housing Expense must be completed. This section allows the underwriter to verify how much payment shock the borrower will experience. Proposed housing should include the full PITI payment that the loan will generate.

29 Assets: If assets are listed in the application, then 2 months bank statements MUST be provided. Bank statements will also be required regardless if on application or not when verifying fixed income, down payment funds (to verify borrower used own funds for Earnest Money Deposit if cancelled check not provided) or cash to close is noted in details of transaction. If bank statements note NSF, overdrafts or other negative activity on accounts, USDA does note that this is financial mismanagement and will not approve the borrower for a loan. It is important that the Loan Officer/Processor review statements prior to submission to underwriting. If the circumstance was a one time occurrence, an exception may be made based on the reason for the NSF. Liabilities: Must all be included that are on the credit report and any that might not report on the report, but should be a part of the DTI. Paystubs should be reviewed for child support garnishments prior to underwriting submission.

30 Under Assets Section, many LO’s will list household goods and Automobiles in this section. For the purposes of mortgage loans, this information is not required. Liquid assets are more important to an applications than non liquid assets. Alimony, Child Support, Maintenance will required documentation to support. A divorce decree and verification of children’s ages are basic documents needed. Job related expenses: Listed here will be union dues, unreimbursed expenses taken from tax returns and other misc amounts that are the borrower’s responsibility based on their employment. These are recurring expenses. Unreimbursed expenses are typically a surprise to the LO and 8 out of 10 times a deal killer. FSB strongly suggests requesting the tax returns from the borrower to verify there are not any surprises before it is underwritten.

31 REO Section Full disclosure of properties owned is required. This should include lots, land, commercial property, residential property, etc. USDA is very specific about a borrower only retaining a single residential property in addition to purchase the new one. They must qualify with BOTH PITI payments. Only one USDA loan per borrower is allowed at a time. If they currently have a USDA loan, there are a couple of exceptions to that rule: The current home must be documented as unlivable or inadequate for the family needs The borrower must be relocating closer to his/her employment Both reasons must be completely documented and borrower must qualify with both payments. Properties that are pending sale or recently sold should be referenced in this section, too.

32 Details of transaction:
Purchase price should match the contract If escrow is being held for repairs to property, include this amount here. N/A – only for construction lending If a refi – debts to be paid off should transfer to this section from marked to be paid liabilities Prepaid items as showing on GFE Closing costs as showing on GFE USDA Guarantee Fee of 2.00% Discount points – if applicable Total costs of transaction DPA/Grant will show in this box Closing costs paid by seller per contract Other Credits such as property tax credit, broker credit, etc will reflect here Base loan amount USDA Guarantee Fee of 2.00% (should match g) Total Loan amount Cash from/to borrower. If cash from borrower, assets to cover this amount need to show in Assets section of No cash back allowed to borrower except for reimbursement of fees paid in advance

33 All questions must be marked correctly
All questions must be marked correctly. The borrower does sign acknowledging that all information contained in the applications is true and accurate. The questions we see that are normally marked inaccurately are: B C G Double check the answers with the borrower to insure accuracy and eliminate surprises later in the loan process.

34 Borrowers signatures will be matched to driver’s license signatures to confirm identity and verify matching. Date of application should match date of GFE/TIL and other initial application disclosures. Date of 1003 may be after credit report date on a purchase. Typically the receipt of the purchase contract is a simple reference date for determining when the 3 day rules begins for disclosures. On a refinance it should be dated within 3 days of the credit report per compliance rules.

35 Ethnicity, Race and Sex should be checked based on information from the LO.
Originator to indicate how application was taken. LO’s information and signature required. Should be dated within the 3 days required per RESPA for initial disclosure.

36 RD Form This form is the equivalent of a 1003 for USDA. The information on page 1 must be fully completed by the Loan Officer. The full document is 7 pages total and we will require all 7 to be submitted to us. The form can be found on our website ( under Forms & Docs in the USDA Section.

37 3555-21 Page 2 Certifications sections
Lender’s Authorization will be completed by the underwriter prior to loan being sent to RD. Applicant’s names are to be filled out at the top and signatures needed at the bottom of the form.

38 Page 3 All household members must be listed on the form and complete information supplied. For pages 3 – 7, the underwriter will complete the remainder of the information from the documentation submitted in the file.

39 Notice to Applicant Income and Household Members Disclosure
This is a required form that certifies all income for the household is being disclosed. It is also certifying that the family assets of $500 or greater have been disclosed for income calculation purposes. FSB does require this form for every USDA loan and it is a 2 page document.

40 GUS Guaranteed Underwriting System

41 GUS Is the equivalent of DO or LP for all Rural Development Loans
GUS does NOT read credit reports – just scores It is the underwriters discretion and responsibility to analyze the credit and determine if it meets guidelines A GUS approve/eligible will streamline the file submission to USDA and allow for a higher DTI as indicted in the approval. A Refer/Eligible will require a manual underwrite and limit the DTI ratios to 29/41 TBD files CANNOT be ran through GUS Multiple submissions by underwriter to GUS will negate the findings Lenders use extreme caution in insuring correct information is in the GUS system to avoid multiple submissions FSB will not run GUS until a full file has been submitted for underwriting

42 Property Identifying a USDA Eligible Property

43 USDA Property Eligibility
Always check website Enter address into map and it will identify if property is in an eligible USDA area. If ineligible, loan must us a different program for financing. Although property is deemed eligible due to location, it must still pass criteria for safety and soundness per HUD guidelines.

44 Property Restrictions
Manufactured homes are eligible BUT must be brand new, just set up homes Condos are acceptable as long as FHA, FNMA, FHLMC or VA approved Purchase price not restricted as long as DTI criteria is met…no limit to loan amount except cannot exceed conforming loan amounts Income producing farms are ineligible Multi-family dwellings are not allowed

45 The property meets minimum requirements of HUD handbooks 4905
The property meets minimum requirements of HUD handbooks and This verbiage must be on every USDA appraisal. FHA and USDA share the same minimum property requirements as reference in HUD Handbooks & If property does not meet handbook criteria, appraiser must provide a detailed explanation of what repairs are required Repairs must be completed prior to closing if possible or an escrow repair holdback may be set up.

46 Escrow Repair Holdback
Per USDA, only 10% of loan amount is allowed to be escrowed for repairs. FSB does require 150% of bids/repairs to be escrowed. Escrow repair agreement to be executed – available on our website Bids for repairs must be provided by a licensed contractor. Licensing laws are determined by the state in which the property resides. FSB will not allow borrower to complete the repairs. Repairs are to be completed within 30 days of closing, unless weather related. A final inspection will be required to approve the release of the funds.

47 Basic Repairs Usually Needed….
Chipped and peeling paint Missing handrails or steps Flooring – subflooring is not acceptable flooring HVAC not working Plumbing not working Roof Holes in drywall Broken windows or doors These are just a few examples….anything that affects safety and soundness will be required to be repaired.

48 Outbuildings & Farm Land
Income-Producing Buildings. The property must not include buildings designed and to be used principally for income- producing purposes. For example barns, silos, greenhouses, or livestock facilities used primarily for income producing agricultural, farming or commercial enterprise are ineligible. However, barn, silos, livestock facilities or greenhouses no longer in use for a commercial operation, used for storage, and outbuildings such as storage sheds are permitted if they are not used primarily for income producing agricultural, farming or commercial enterprise. A minimal income- producing activity, such as maintaining a garden that generates a small amount of additional income, does not violate this requirement. Home-based operations such as childcare, product sales, or craft production that do not require specific features are not restricted. A qualified property must be predominantly residential in use, character and appearance. Income-Producing Land. The site must not have income-producing land that will be used principally for income producing purposes. vacant land or properties used primarily for agricultural, farming or commercial enterprise are ineligible. Sites that have income-producing characteristics (e.g. large tracts of arable land ready for planting) are considered income-producing property. However maintaining a garden for personal use is not in violation of this requirement. A minimal income-producing activity, such as a garden that could generate a small amount of additional income does not violate this requirement

49 Additional Property Requirements
If property contains a private well, a water test must be performed. The test may not be older that 120 days at loan closing. Well distances must meet HUD Handbook and noted in the appraisal or by the well inspection A septic inspection will be required for properties using a septic system. If an FHA appraiser certifies the septic meets HUD requirements and notates the distance of the septic from the home and water source, a full inspection may not be required. If the FHA appraiser notes the septic system needs further inspection or does not mention that the septic system meets HUD guidelines a separate inspection will be required. For properties on a private road, shared road or other non public type road, a road agreement must be on file in the courthouse and provided to the lender for the underwriting of the file. All parties living on the road must execute the agreement. New homes built within the most recent 12 months require additional USDA documents to be completed for “New Construction”. Please contact your AE for these forms that will be required to be completed by the builder/dealer.

50 What to Expect When Submitting A USDA Loan to FSB
The USDA submission flow

51 Prepare your file for submission
Make sure we get as much information to approve (or deny) the file from the initial review. Include all USDA forms noted in this training. To close loans quickly, a full file should be submitted If a prequalification is desired to insure the borrower will qualify, please & Credit to Do not forget your Submission Cover Sheet – located on our website at Upload FNMA 3.2 file to Mortgagebot and Register the file. Upload submission packet and under Actions click FINAL

52 File Initial Review The Jr Underwriter will review your documents for compliance and split the file for the Underwriter to complete the credit review The Underwriter will review the file within 24 hours and provide conditions as needed for further explanation, missing information or clarification of information submitted. The conditional approval will be sent to you by the Jr Underwriter. If you have questions on your conditions, please utilize your Account Executive to assist you with your questions. Most of the time, the AE’s know the answers or will get the answers from the Underwriter. The Underwriter will contact you during the underwriting of the file if they have questions that will simplify the conditions. The initial review will contain 2 – 3 sections. Section 1 will be the compliance conditions that the Jr. Underwriter assigns. Section 2 will be the Prior To Closing conditions that the Underwriter will need to review to provide the CTC and Section 3 will be the PTF or Prior to Funding conditions that will be applicable at closing.

53 Resubmitting Conditions
When you have gather all or good majority of conditions and are ready to resubmit the file, follow the same steps you did for the initial submission. Don’t forget to Final the file! Within 24 hours, your underwriter will have an updated conditional approval notice ready for you. If all the conditions were satisfied with this submission, the file will be sent to the USDA office for Conditional Commitment. Unless you are a Delegated Correspondent that will handle that on your own. This would already be determined with your company approval. USDA Turn times vary by state with the typical time ranging from 2 – 5 days. If your file did not contain all the conditions to allow the file to be sent to USDA, your updated notice will not what is still outstanding. Provide at your earliest convenience and the underwriter will notify you when the file is sent to USDA.

54 CC or Conditional Commitment is Received!
If you have any outstanding conditions while you are waiting for the CC to come back from RD, get them in! The Underwriter will CTC the loan when the CC comes in…if all other conditions are satisfied. Once loan is CTC’d the Loan Officer may schedule the closing with our Closing Department by sending in the Closing Request form located on our website ( FSB will get the loan note guarantee (LNG) after closing unless the delegated Corr has indicated they will complete this task.

55 Scenario? If you have a scenario that you want to run by us….do not hesitate! Send us the 1003 and Credit report with a brief outline of your questions. We will respond back to you within hours and advise you on if this file will work on the USDA program and what will be needed besides the normal submission package.

56 Questions? If you have any questions about this training, please ask! If it is something that comes up later, you can us at or contact us by phone at

57 For additional Reference, please review USDA’s training site at This training is property of Flanagan State Bank, Copyright NMLS All Rights Reserved.

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