Microsoft Word - 3555-1chapter08

HB-1-3555

(03-09-16) SPECIAL PN 6-1

Revised (03-31-23) PN 580

CHAPTER 6: LOAN PURPOSES

7 CFR 3555.101

6.1 INTRODUCTION

SFHGLP loan funds can be used to acquire new or existing housing that will be the

applicant’s principal residence. This section describes loan purposes, restrictions, and

refinance opportunities. The lender is responsible to ensure that loan funds are used only

for eligible purposes.

6.2 ELIGIBLE LOAN PURPOSES

Guaranteed loan funds must be used to acquire a new or existing dwelling to be used

as a permanent residence and may be used to pay costs associated with such an

acquisition. Properties must be residential in use, character, and appearance. Loan funds

may be used for the following purposes:

• Acquiring a site with a new or existing dwelling;

• Repairs and rehabilitation when associated with the purchase of an existing

dwelling;

• Reasonable and customary expenses associated with purchasing a dwelling; and

• Refinancing under specific situations.

A. Acquiring a Site and Dwelling

Loan funds may be used to acquire a site with a new or existing dwelling that meets

the Agency’s site, dwelling, and environmental requirements, or will meet the Agency’s

requirements once planned rehabilitation or repair work is completed. These

requirements are addressed in Chapter 12 of this Handbook.

B. Repairs and Rehabilitation

The lender may request the loan note guarantee prior to work completion if all

requirements as outlined in Chapter 12 of this Handbook are met.

HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

6-2

C. Reasonable and Customary Expenses Associated with the Purchase of an

Existing Dwelling or New Construction

Loan funds may be used for expenses associated with purchase of a dwelling if they

are reasonable and customary for the area. These expenses may include the following

items:

• Loan Acquisition Expenses. These include legal, architectural, and engineering

fees, title clearance costs, and insurance costs. The up-front guarantee fee and fees

for appraisal, environmental inspections, surveying, tax monitoring, expenses for

homeownership education counseling, and other technical services associated

with obtaining the loan.

• Reasonable Lender Fees. Reasonable lender fees, when financed, may include

an origination fee and other fees and charges. Lender fees and charges must meet

the points and fees limits published by the Consumer Financial Protection Bureau

(CFPB) in the Federal Register at 12 CFR 1026.43(e)(3) and cannot exceed those

charged other applicants by the lender for similar transactions such as FHA-

insured or VA-guaranteed first mortgage loans. It is the lender’s responsibility to

ensure CFPB requirements are met. Payment of finder’s fees or placement fees

for the referral of an applicant to the lender may not be included in the loan

amount. Discount points to “buydown” or permanently reduce the effective

interest rate may be financed. Loan discount points and the loan origination fee

must be itemized separately on the Closing Disclosure. The SFHGLP up-front

guarantee and annual fee are not included in the lender fees and charges

calculation.

• Closing Costs. Closing costs that are reasonable and customary for the area can

be financed with loan funds. Closing costs cannot exceed those charged to other

applicants by the lender for similar transactions such as FHA-insured or VA-

guaranteed first mortgage loans. If the lender does not participate in such

programs, the loan closing costs may not exceed those charged other applicants

by the lender for a similar program that requires conventional mortgage insurance

or a guarantee.

• Interested Party Concessions. Seller contributions (or other interested parties)

are limited to six percent of the sales price and must represent an eligible loan

purpose in accordance with this paragraph. Closings costs and/or prepaid items

paid by the lender through premium pricing are not included in the seller

contribution limitation. Funds provided by the seller for repairs are not included

in the interested party contribution limitation. However, seller concessions for

HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

(03-09-16) SPECIAL PN 6-3

Revised (03-31-23) PN 580

repairs must be held in an escrow account. Refer to Chapter 12 for repair escrow

guidance. The approved lender is responsible to ensure applicable limitations and

eligible loan purposes are met. Seller contributions cannot be used to pay an

applicant’s personal debt or as an inducement to purchase by including movable

articles of personal property such as furniture, cars, boats, electronic equipment,

etc. This does not include household appliances that are typically part of the

purchase transaction.

• Single Close to Permanent Construction. Lenders have the option to escrow a

borrower’s regularly scheduled principal, interest, taxes, and insurance (PITI)

payment established at loan closing to make the loan payments during the

construction period. The inclusion of all reserve accounts (e.g. contingency and

payment) are considered an eligible loan purpose. Seller contribution limits do not

apply to single close construction to permanent loans.

• Contract for Deed. Loan funds can be used for the conversion of a seller-

financed mortgage with an existing dwelling. These contracts are also known as a

conversion of contract for deed or land contract. The Agency considers this a

“purchase” transaction. The dwelling must meet the requirements for existing

dwelling outlined in Chapter 12 of this Handbook.

• Design Features or Equipment for Physical Disabilities. Special design

features or permanently installed equipment to accommodate a household

member who has a physical disability is an eligible loan purpose. The purchase of

personal items for such individuals, such as wheelchairs, is not an eligible loan

purpose.

• Connection, Assessment, and Installment Fees. Reasonable and customary

connection fees, assessments, or the pro rata installment costs for utilities such as

water, sewer, electricity, and gas for which the buyer is liable are eligible costs.

• Taxes and Escrow Accounts. A pro rata share of real estate taxes that are due

and payable on the property at the time of closing and funds for the establishment

of escrow accounts for real estate taxes, hazard and flood insurance premiums,

and related costs are eligible costs.

• Essential Household Equipment. Loan funds can be used to pay for essential

household equipment such as wall-to-wall carpeting, ovens, ranges, refrigerators,

washers, dryers, and heating and cooling equipment if the equipment is conveyed

with the dwelling, and such items are normally sold with dwellings in the area.

HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

6-4

• Energy Efficiency Measures. Loan funds can be used for purchase and

installation of measures to promote energy efficiency, such as insulation, double-

paned glass, and solar panels.

• Broadband. Loan funds may be used to install fixed broadband service to the

household if the equipment is conveyed with the dwelling.

• Site Preparation. Site preparation activities, including grading, foundation

plantings, seeding or sod installation, trees, walks, fences, and driveways, are

eligible costs.

D. Refinance [7 CFR 3555.101(d)]

SFHGLP provides opportunities to refinance an existing loan. Borrowers must meet

all eligibility requirements outlined in this Handbook, except where noted.

1. Construction Financing and Sites without a Dwelling

A refinance of a debt for a site without a dwelling, interim construction financing

to build a new dwelling, or associated with the purchase and improvement of an

existing dwelling prior to the issuance of a loan note guarantee is allowed. The

Agency considers this a “purchase” transaction.

• These types of transactions typically utilize two separate loan closings with

two separate sets of legal documents.

• A modification may not be used to update the original note. A new note will

be signed by the borrowers.

• The first transaction/closing obtains the interim construction financing. The

second closing obtains the permanent financing when construction or

improvements are completed.

• The lender is responsible to ensure all costs involved in both transactions

represent an eligible loan purpose in accordance with Section 6.2 of this

Chapter.

• The construction period is limited to no greater than 12-months. The 12-

month period must have occurred directly prior to permanent financing.

• New construction documentation (certified plans and specifications,

inspections, and warranty) must be obtained. Refer to Chapter 12 for

HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

(03-09-16) SPECIAL PN 6-5

Revised (03-31-23) PN 580

documentation requirements.

• In the case of a site without a dwelling, the debt to be refinanced was incurred

for the sole purpose of purchasing the site with the intent to build.

For combination construction to permanent financing, also known as single-close

loan transactions, refer to Section 6 of Chapter 12.

2. Existing Section 502 Direct and Guaranteed Loans

Existing mortgage loans for existing guaranteed and direct borrowers may be

refinanced. SFHGLP cannot refinance mortgage debt that is not financed or

guaranteed by USDA. Three refinance options are available:

a. Non-streamlined refinance.

• A new appraisal is required.

• The maximum loan may include the principal and interest balance of the

existing loan, reasonable and customary closing costs up to the new

appraised value. The appraised value may only be exceeded by the amount

of the financed up-front guarantee fee.

• Direct loan borrowers can refinance or defer the amount of subsidy

recapture due. Borrowers choosing to refinance subsidy recapture may be

eligible for a discount on the amount that is due. Borrowers that do not

refinance subsidy recapture will be required to enter into a second lien

securing that amount and are not eligible for a discount.

• Additional borrowers may be added to the new guaranteed loan. Existing

borrowers on the current mortgage note may be removed when one of the

original borrowers remains on the refinanced loan.

• The existing loan must have closed 12 months prior to the Agency’s

receipt of a Conditional Commitment request and have a mortgage

payment history which must not reflect a delinquency equal to or greater

than 30 days within the previous 180-day period.

• The borrower must meet credit requirements as outlined in Chapter 10 of

this Handbook.

HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

6-6

• Lenders may request a debt ratio waiver when strong compensating factors

in accordance with Chapter 11 are documented.

• The Guaranteed Underwriting System (GUS) may be utilized to

underwrite the non-streamlined refinance.

b. Streamlined refinance.

• A new appraisal is not required to refinance an existing guaranteed loan. A

direct loan borrower will be required to obtain a new appraisal if they have

received payment subsidy to determine the amount of subsidy recapture

due. If subsidy recapture is due, the amount cannot be included in the new

refinance loan. Subsidy recapture must be paid with other funds or

subordinated to the new guaranteed loan.

• The maximum loan amount may include the principal and interest balance

of the existing loan, and reasonable and customary closing costs, including

any financed portion of the up-front guarantee fee.

• Additional borrowers may be added to the new guaranteed loan. Existing

borrowers on the current mortgage note may be removed, when one of the

original borrowers remains on the refinance loan.

• The existing loan must have closed 12 months prior to the Agency’s

receipt of a Conditional Commitment and have a mortgage payment

history which must not reflect a delinquency equal to or greater than 30

days within the previous 180-day period.

• Lenders may request a debt ratio waiver when strong compensating factors

are documented in accordance with Chapter 11 of this Handbook.

• GUS may be utilized to underwrite the streamlined refinance loan.

c. Streamlined-assist refinance

• A new appraisal is not required for existing guaranteed loan borrowers. A

direct loan borrower will be required to obtain a new appraisal if they have

received payment subsidy to determine the amount of subsidy recapture

due. If subsidy recapture is due, the amount cannot be included in the

newly refinanced loan. Subsidy recapture must be paid with other funds or

subordinated to the new guaranteed loan. If an applicant elects to finance

HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

(03-09-16) SPECIAL PN 6-7

Revised (03-31-23) PN 580

the subsidy recapture into the new refinance loan, refer to the non-

streamlined refinance guidance.

• The maximum loan amount may include the principal and interest balance

of the existing loan, and reasonable and customary closing costs, including

any financed portion of the up-front guarantee fee.

• The borrower must receive a tangible benefit to refinance under this

option. A tangible benefit is defined as a $50 or greater reduction in their

principal, interest, and annual fee monthly payment compared to the

existing principal, interest and annual fee monthly payment.

• The borrower is not required to meet the repayment ratio provisions as

outlined in Chapter 11 of this Handbook.

• The existing loan must have closed 12 months prior to the Agency’s

receipt of a Conditional Commitment request.

• The borrower is not required to meet all the credit requirements as

outlined in Chapter 10 of this Handbook. Prior to the request for a

Conditional Commitment, the existing mortgage payment history must not

reflect a delinquency equal to or greater than 30 days within the previous

12 months. Lenders may verify mortgage payment history through a

verification of mortgage obtained directly from the servicing lender or a

credit report. When a credit report is ordered to determine timely mortgage

payments, other credit accounts are not to be considered.

• Additional borrowers may be added to the new guaranteed loan. Existing

borrowers on the current mortgage note must remain on the refinanced

loan; however, deceased borrowers may be removed from the loan.

• Lenders are required to document their annual income calculations on the

FNMA 1008/FHLMC 1077, Attachment 9-B, or similar form in order to

support the household income does not exceed the allowable maximum

income limits.

• GUS is unavailable for this product and these loans must be manually

submitted and underwritten; however, the documents can be submitted

through GUS. A job aid for this type of submission is available in the

https://www.rd.usda.gov/page/usda-linc-training-resource-library in the

“Loan Origination” tab.

HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

6-8

The following terms and conditions are applicable to non-streamlined, streamlined

and streamlined-assist refinance transactions:

• Loan terms must be fixed for 30 years.

• The interest rate of the new loan must be fixed and not exceed the interest rate of

the loan refinanced.

• The loan security must include the same property as the original loan and owned

and occupied by the applicants as their principal residence.

• Properties located in areas since determined by the Agency to be non-rural

(ineligible) remain eligible for a refinance. Lenders may continue to submit loan

requests in the Guaranteed Loan System (GUS) with an ineligible property

determination. USDA will correct the property determination during loan review

and processing.

• Property inspections as outlined in Chapter 12 of this Handbook are not required.

If the lender requires repairs as a condition of loan approval, the expenses related

to property inspections and repairs may not be financed into the new loan amount.

• Secondary financing such as leveraged loans, down payment assist loans or home

equity lines of credit cannot be included in a new guarantee refinance loan. These

types of financing must be subordinated to the new guaranteed loan or be paid in

full.

• Cash out is not permitted. Borrowers may receive reimbursement from loan

funds at settlement for eligible closing costs paid from the borrower’s personal

funds for the refinance transaction. Borrower may also receive a refund at

settlement that represents prepaid interest or overage from the borrower’s escrow

account.

• Unpaid fees, past-due interest, and late fees/penalties due the servicer cannot be

included in the new loan amount. Borrowers who are facing repayment hardships

should be considered for loss mitigation under Chapter 18 of this Handbook.

• The lender may establish charges and fees for the refinance loan, provided they

are the same as those as charged to other applicants for similar transactions.

Lenders and the Agency should make every effort to ensure that applicants are not

charged excessive fees.

HB-1-3555

Paragraph 6.2 Eligible Loan Purposes

(03-09-16) SPECIAL PN 6-9

Revised (03-31-23) PN 580

• The entire up-front guarantee fee may be financed into the new refinance loan.

The amount of the up-front fee will be published in Exhibit K of RD Instruction

440.1, available in any Rural Development office or by selecting “Part 1800:

General” on the Rural Development Instructions website located at:

https://www.rd.usda.gov/resources/directives/instructions.

• An annual fee will be charged by the Agency for refinance transactions. The

amount of annual fee will be published in Exhibit K of RD Instruction 440.1,

available in any Rural Development Office or by selecting “Part 1800: General”

on the Rural Development Instructions website located at:

https://www.rd.usda.gov/resources/directives/instructions.

• Lenders should submit the complete application package in accordance with

Chapter 15 and Attachment 15-A, Loan Origination Checklist, of this Handbook.

The lender will follow the same procedures as provided in Chapter 16 of this

Handbook for closing the loan. The Agency will review loan closings for SFHGLP

refinance loans using the same procedures for SFHGLP purchase loans prior to issuance

of the Loan Note Guarantee.

E. Supplemental Loans

When an existing SFHGLP loan is assumed, a supplemental loan can be provided if

funds are needed for seller equity, closing costs, or essential repairs. Refer to Chapter 17

of this Handbook for a detailed discussion of transfers and assumptions in the SFHGLP.

6.3 PROHIBITED LOAN PURPOSES

SFHGLP loan funds cannot be used for any of the following purposes:

• Cash Back to Borrower. Borrowers may be reimbursed out of loan funds for

eligible loan costs incurred prior to closing. Excess loan funds that cannot be

applied towards eligible closings as outlined in paragraph 6.2, or that do not

represent a reimbursement to the borrower for eligible pre-paid fees from their

out-of-pocket expenses, must be applied as a principal reduction.

• Select Loan Discount Points. Loan discount points such as to compensate for a

low credit score or low loan amount are ineligible.

• Income Producing Property. Purchase or improvement of income-producing

land or buildings that will be used principally/specifically for income producing

HB-1-3555

Paragraph 6.3 Prohibited Loan Purposes

6-10

purposes is not allowed. Vacant land or properties used primarily for agricultural,

farming, or commercial enterprise are ineligible. A minimal income-producing

activity, such as maintaining a garden that generates a small amount of additional

income, does not violate this requirement. A qualified property must be

predominantly residential in use, character and appearance. Refer to Chapter 12 of

this Handbook for additional information on qualifying a property.

• Existing Manufactured Homes. Purchase of an existing manufactured home is

not permitted, unless it is a purchase of an existing Rural Development Section

502 direct loan or guarantee, as provided in Section 2 of Chapter 13 of this

Handbook.

• Lease Payments. Payment on any lease agreement associated with the proposed

real estate transaction is prohibited.

• Closing Costs in Excess of Three Percent. Closing costs, including lender fees,

that exceed three percent of the total loan amount are prohibited, unless flexibility

is provided through guidance published by the CFPB’s Ability to Repay and

Qualified Mortgage (ATR/QM) standards.

6.4 AGENCY REVIEW OF LOAN PURPOSES

The Agency will determine if the purposes for the loan guarantee are acceptable

before issuing a Conditional Commitment for loan guarantee. If the Agency determines

loan funds will be used for an ineligible purpose, the Agency will contact the lender and

attempt to resolve the situation prior to issuance of the Loan Note Guarantee. Loan

purposes will also be reviewed during the Agency’s Quality Assurance (QA) internal

monitoring process and Lender Oversight (LO) compliance reviews to ensure that the

lender has an accurate understanding of eligible and prohibited loan purposes. Refer to

Chapter 19 of this Handbook for a detailed discussion of how the Agency handles loss

claims for loan funds that were used for an ineligible purpose.

HB-1-3555

Attachment 6-A

Page 1 of 2

(03-09-16) SPECIAL PN

Revised (03-31-23) PN 580

REQUIREMENTS FOR ALL REFINANCE OPTIONS

• Only loans financed or guaranteed by USDA are eligible.

• Existing loan must have closed 12 months prior to the request for Conditional Commitment.

• Fixed interest rate and 30-year term.

• Borrower must meet applicable adjusted annual household income.

• No cash out from collateral equity. Only reimbursement of borrower prepaid eligible closing costs and/or

refund from escrow overage.

• Borrowers must occupy the property.

• Properties located in areas now deemed ineligible remain eligible for refinance.

• Existing leveraged loans or subordinate liens must be paid in full or be subordinated.

REFINANCE OPTIONS FOR SECTION 502 DIRECT AND

GUARANTEED LOANS

REQUIREMENT

NON-

STREAMLINED

STREAMLINED-

ASSIST

New Appraisal

Yes

Only for Direct 502 with

recapture subsidy due

Only for Direct 502 with

recapture subsidy due

Maximum Loan Amount

Up to the new appraised

value plus the amount of

the financed up-front

guarantee fee and

include:

• Principal & interest

balance

• Eligible closing

costs

• Subsidy recapture

May include:

• Principal & interest

balance

• Eligible closing costs

• Up-front guarantee

fee

May include:

• Principal & interest

balance

• Eligible closing

costs

• Up-front guarantee

fee

Net Tangible Benefit

Yes

$50 or greater reduction

of the total principal,

interest and monthly

annual fee payment

Include Subsidy Recapture

Yes

Up to the new appraised

value

Add/Remove Borrowers

(one original borrower

must remain)

Yes

• Add borrowers

• Remove only

deceased borrowers

Credit

• No defaults in

previous 180 days

prior to Agency

request

• Meet Chapter 10

requirements

• No defaults in

previous 180 days

prior to Agency

request

• Meet Chapter 10

requirements

• No defaults in

previous 12 months

prior to Agency

request

Ratio waivers

GUS Refers only

Must meet Chapter 11

requirements

GUS Refers only

Must meet Chapter 11

requirements

No ratio calculations

required

Utilize GUS

Yes

Soft seconds and/or

subsidy recapture may be

subordinated

Yes

HB-1-3555

Attachment 6-A

Page 2 of 2

Guidance for Refinancing Section 502 Direct Loans

The Section 502 Direct Loan Program provides loans to low and very-low income borrowers

that may include payment assistance, or payment subsidy that reduces the mortgage payments

determined by the borrower’s adjusted household income.

Subsidy Recapture

Arrangements must be made to either pay off or defer repayment of any subsidy recapture

due when a Section 502 loan is refinanced. Any recapture amount owed as part of the 502 direct

loan pay off may be included into the amount being financed with the SFHGLP non-streamline

refinance loan subject to the maximum loan amount. A discount on recapture may be offered if

the customer does not defer recapture (pays amount due in full) or includes the recapture amount

due into a non-streamlined refinance loan. Alternatively, any 502 direct recapture amount that is

owed at the time of refinance may be deferred if the recapture amount takes a subordinate lien

position to the new SFHGLP loan.

Obtaining a “Statement of Loan Balance” Letter for Direct Loan Borrowers

Lenders may determine an applicant has a direct loan when the credit report reflects “USDA”

or “Farmers Home Administration” as the mortgage creditor or the applicant informs the lender

they applied and received their mortgage loan through a USDA Service Center. Direct loans are

serviced by the Servicing and Asset Management Office (Servicing Office). Obtaining a

“Statement of Loan Balances” letter will assist lenders to determine if subsidy recapture is due.

The “Statement of Loan Balances” will also include instructions for the lender to follow

regardless of information submitted at the time of payoff request.

To obtain a “Statement of Loan Balance”, submit a request on lender letterhead which

includes the borrower’s name, account number and address along with a signed authorization

from the customer to release the information. The “Statement of Loan Balance” will reflect the

maximum amount of subsidy recapture that may be due. It is not a payoff statement. Requests

can be faxed to 314-457-4433.

The Servicing Office will not provide payoff quotes verbally or over the phone. The

Servicing Office also assists lenders with subordination agreements when direct loan borrowers

elect to subordinate the subsidy recapture due. Lenders and direct loan borrowers that have

questions regarding a direct loan account may contact the Servicing Office at (800) 414-1226.