HB-1-3550
4.1
OVERVIEW
Ensuring that all applicants served are eligible and receive the correct amount of
assistance is a significant responsibility of Loan Originators and Loan Approval Officials. A
borrower must be income-eligible, demonstrate a credit history that indicates ability and
willingness to repay a loan, and meet a variety of other program requirements. This chapter
provides guidance for each of these areas.
• Section 1: Evaluating Borrower Income provides instructions for calculating and
verifying annual, adjusted, and repayment income.
• Section 2: Evaluating Borrower Assets discusses Agency requirements for cash
contributions to the purchase and methods for computing income from assets.
• Section 3: Credit History identifies indicators of acceptable and unacceptable credit
and provides instructions for reviewing an applicant’s credit history.
• Section 4: Other Eligibility Requirements addresses a variety of other
requirements applicants must meet to be eligible for the program.
• Section 5: Processing the Certificate of Eligibility provides policies and
procedures for processing Form FD 1944-59, Certificate of Eligibility.
SECTION 1: EVALUATING BORROWER INCOME
4.2 OVERVIEW [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]
Loan Originators use income information to: (1) help determine whether an applicant is
eligible for a loan; (2) calculate the applicant’s ability to repay a loan; and (3) determine the
amount of the loan and the amount of payment subsidy the household can obtain. When
reviewing an applicant’s repayment income, the Loan Originator must determine whether the
income is stable and dependable. This will typically be accomplished by reviewing information
provided in the application, paystubs, tax returns, and oral verifications. The Loan Originator
will generally need to look at two years p0of history to determine the dependability of the
income. In addition, the Loan Originator must determine that there is a reasonable expectation
that the income will continue. This section provides guidance for verifying and calculating
income for each of these purposes.
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(01-23-03) SPECIAL PN
Revised (12-12-19) PN 532
CHAPTER 4: BORROWER ELIGIBILITY
HB-1-3550
Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]
A.
Key Concepts for Income Determinations
1.
Income Definitions
Three income definitions are used. Whenever income determinations are made, it is
essential that the Loan Originator use the correct income definition and consider income
from the appropriate household members. To determine whether the applicant will be
able to repay a loan, the Loan Originator must use repayment income. To determine
whether an applicant is income-eligible to receive a program loan or payment subsidies,
the Loan Originator must use adjusted income. Adjusted income is calculated in 2 steps.
First, the annual income of all household members is calculated. Then, certain
household deductions for which the family may qualify are subtracted from annual
income to compute adjusted income.
• Annual Income is the amount of income that is used to determine an
applicant’s eligibility for assistance. Annual income is defined as all amounts,
monetary or not that are not specifically excluded by regulations, that go to, or
are received on behalf of, the applicant/borrower, co-applicant/co-borrower,
or any other household member (even if the household member is temporarily
absent).
• Adjusted Income is used to determine whether a household is income eligible
for payment assistance. It is based on annual income and provides for
deductions to account for varying household circumstances and expenses.
• Repayment Income is used to determine whether an applicant has the ability
to make monthly loan payments. It is based only on the income attributable to
parties to the note and includes some income sources excluded for the purpose
of adjusted income. Repayment Income is used during servicing only to
determine if a borrower is eligible for a Moratorium or Reamortization as
described in Paragraph 5.5 of HB-2-3550.
2.
Whose Income To Count
For repayment income, the Loan Originator must consider only the income of
household members who will be parties to the note. For adjusted income, the income of
all household members must be considered. For both types, live-in aides, foster
children, and foster adults living in the household are not considered household
members.
____________________________________________________________________________________________
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HB-1-3550
Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]
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(01-23-03) SPECIAL PN
Revised (12-12-19) PN 532
Exhibit 4-1
INCOME TO BE COUNTED
NOTE
:
The income of a full-time student 18 years old or older who is not the Applicant, Co-
Applicant/Borrower, or Spouse is excluded after it exceeds $480.
*
Reminder: The family chooses to include or exclude the permanently
confined individual’s income.
An individual permanently confined to a nursing home or hospital may not be the
applicant or co-applicant but may continue as a family member at the family’s discretion.
The family has a choice with regard to how the permanently confined individual’s
income will be counted. The family may elect either of the following:
• Include the individual’s income and receive allowable deductions related to
the medical care of the permanently confined individual; or
• Exclude the individual’s income and not receive allowable deductions
based on the medical care of the permanently confined individual.
Exhibit 4-1 is a table which lists whose income is to be counted.
Employment
Income
Other Income
(including income from assets)
Yes
Yes
Yes
Yes
Yes
Yes
Optional*
Optional*
No
Yes
See Note
Yes
Non-Members
No
No
No
No
No
No
HB-1-3550
Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]
3.
Income Limits
Some program rules differ according to the income of the applicant. Three different
income limits are used for the Section 502 and 504 programs. The National Office
provides the income limits and updates the limits whenever they are revised. The income
limits can be found online at: https://www.rd.usda.gov/files/RD-DirectLimitMap.pdf.
Adjusted income should be compared to the income limit to determine the category
in which each household falls. Income limits are as follows:
• The very low-income limit is an adjusted income limit developed in
consultation with HUD;
• The low-income limit is an adjusted income limit developed in consultation
with HUD; and
• The moderate-income limit is an adjusted income that does not exceed the
moderate-income limit for the guaranteed single family housing loan program.
4.
Applicant Certification and Verification Requirements
Each applicant must provide the income, expense, and household information needed
to enable the Agency to make income determinations. Most of this information is
provided on the application, but some additional follow-up with the applicant may be
required, as described in Paragraph 3.8. The applicant should be requested to provide
two years of history for a reasonable determination of income. The documentation
required will vary with the source of income. In most cases, the Loan Originator will
compare information provided on the application with the tax returns, W-2s, and other
preferred verification sources to evaluate the two-year history of income. For example,
the need to use Form RD 1910-5, Request for Verification of Employment, to document
previous employment (Part III of the form) should be rare and should be limited to cases
where the preferred verification sources are insufficient to document the applicant’s
employment history. In some instances, less than two years of history may be acceptable
when the applicant provides, and the Loan Originator documents sound justification. For
example, an applicant whose compensation changed from hourly to salary income with
the same employer in a similar job/position may be considered to have dependable and
stable income. While not typical, more than two years of history (i.e. obtaining an
additional year’s tax return) may be needed. For example, when an applicant’s income
varies significantly from year to year, the Loan Originator may need to review a longer
work/self-employment history to establish an average income. This can typically be
accomplished by obtaining an additional year’s tax return with accompanying
attachments.
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HB-1-3550
Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]
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(01-23-03) SPECIAL PN
Revised (07-22-19) SPECIAL PN
In the limited situations when verification from a third party is requested, a copy of
Form RD 3550-1, Authorization to Release Information, must accompany the request.
Authorization from each adult household member on the Form RD 3550-1 permits the
Loan Originator to ask for, and verification sources to release, the needed information.
Application processing should not be delayed if a third party does not respond to a
request for information. In these instances, the Loan Originator must seek to obtain the
most relevant information which can be obtained from the applicant to verify the
information. This may include, but is not limited to, evidence of deposits/withdrawals,
copies of cancelled checks, etc.
The verification and certification formats that are provided in Appendix 2 are not
official Agency forms. They are samples that may be adapted as needed for particular
circumstances. In some instances the same format can be used whether a third party is
providing the verification or the applicant is making a certification.
5.
Stable and Dependable Income
The Agency has no minimum history requirement for employment in a particular
position. The key concept is whether the applicant has a history of receiving stable
income and a reasonable expectation that the income will continue. The Loan Originator
must carefully assess the applicant’s income to establish whether it can reasonably be
expected to continue for the next two years (e.g. child support and contract income). The
applicant must provide an explanation letter for employment gaps in excess of 30 days
unless their income history is clearly seasonal in nature. The Loan Originator must
review the employment gap explanation to make a determination on the applicant’s
ability to receive stable and dependable income. If the Loan Originator determines that
an applicant’s income source is unstable and undependable, the income must be excluded
from repayment but included in annual income.
• Wage and Salary Income. Income from employment may include a base
hourly wage or salary, overtime pay, commissions, fees, tips, bonuses,
housing allowances, and other compensation for personal services of all adult
members of the household. When the applicant demonstrates a two-year
history of stable or rising income, current income from each of these sources
may be used unless there is evidence to the contrary (such as the current
employer’s oral confirmation that such income is NOT likely to continue).
HB-1-3550
Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]
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• Self-employment Income. Income based on a two-year history of self-
employment, in the same line of work, is an acceptable indicator of stable and
dependable income.
• Other Sources of Income. Income from public assistance, child support,
alimony, or retirement that is consistently received is considered stable when
such payments are based on a law, written agreement or court decree, the
amount and regularity of the payments, the eligibility criteria for the
payments, such as the age of the child (when applicable), and the availability
of means to compel payments.
Example – Stable Income
Steven Green has been working for the last 6 months for LMN Contractors as a Construction Foreman.
Before that, he worked for PDQ Building Supply for 8 months as a Shift Supervisor. There is a 6-week
gap in his employment history that he explains as being the result of a lay-off after a large construction
project (where he was employed for 15 months as a construction worker) was completed. Mr. Green’s
income is considered stable because the reasons for his job changes were related to changes in job
opportunities. Even though his job changed several times, his line of work was similar.
Example – Dependable Income
Mary Brown receives SSI income for her dependent child who is 17 years of age. The SSI income
should not be counted as repayment income because it clearly cannot be expected to continue. It
would be counted as annual income since it is current verified income.
Example – Self-Employment, Commission and Other Irregular Income
Julie McAhren sells beauty products door-to-door on commission. She makes most of her money in the
months prior to Christmas but has some income throughout the year. She has no formal records of her income
other than a copy of the IRS Form 1040 she files each year. With no other information available, use the
income reflected on Julie’s copy of her Form 1040 as her annual income and make the income adjustments
according to Attachment 4-C.
Betty House sells real estate on commission. She makes most of her money during the summer months. She
has no formal records of her income other than a copy of a 1099 and the Tax Return (Form 1040) she files each
year. The gross earning on the 1099 should not be used as her annual income. Use the income and other
information on the tax return in conjunction with Attachment 4-C to calculate the self-employment income.
HB-1-3550
Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]
• Irregular Income. Irregular income from employment are earnings that may vary on
a weekly, monthly, or seasonal basis depending on the type of income. This income
is not guaranteed, nor received on a regular basis. Irregular income includes over-
time, bonus, second job, part-time, and seasonal income. Irregular income may be
considered stable when the applicant has worked in the same line of work (not
necessarily the same employer) for at least two years. Loan Originators may accept
less than a two-year history (but no less than 12-months) of irregular income if there
is a strong likelihood that the applicant will continue to receive that income. Loan
Originators must establish the income trend and calculate a monthly average for the
irregular income. When the applicant receives seasonal unemployment
compensation, it must be clearly associated with seasonal layoffs expected to recur
and be reported on the applicant’s federal income tax returns. Commission-based pay
is also considered irregular income. Additional guidance on calculating commission
income is provided in Attachment 4-C.
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Examples – Other Sources of Income
Janis Phillips is not always well enough to work full-time. When she is well, she works as a typist with a
temporary agency. Last year was a good year and she worked a total of nearly six months. This year,
however, she has more medical problems and does not know when or how much she will be able to work.
Because she is not working at the time, it will be best to exclude her employment income and remind her
that she must report the date when she resumes work.
Sam Shah receives social security disability. He reports that he works as a handyman periodically. He
cannot remember when or how often he worked last year; he says it was a couple of times. Sam’s earnings
appear to fit into the category of nonrecurring, sporadic income that is not included in annual income. Tell
Sam his earnings are not being included in his annual income this year, but he must report any regular work
or steady jobs he takes. Jane Smith receives child support payments for her sixteen and a half-year old son.
She has a copy of the court appointed child support agreement, which states that the child support will end
when son turns 18, and a computer print-out of a 12-month child support payment history. The child support
income should be counted in the annual income but excluded from the repayment income calculation
because it is not expected to continue for the next two years.
Example – Irregular Income
Ross Bosser is a roofer who works from April through September. He does not work in rain or windstorms. His
employer orally confirmed the total number of regular and overtime hours Ross worked during the past two years.
To calculate Ross’s anticipated income, use the average number of regular hours over the past two years times his
current regular pay rate, and the average overtime hours times his current overtime rate.
HB-1-3550
Paragraph 4.2 Overview [7 CFR 3550.53(a) and (g), 7 CFR 3550.54]
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• Less Than Two Years of History. In some cases, a history of less than two years is
acceptable. The determination requires a careful analysis by the Loan Originator. This may
include an applicant who is either new to the work force, is on a probationary period, or has
returned to the work force after an extended absence. The Loan Originator may consider
reasonable allowances for less than a two-year history under the following circumstances:
• The applicant has recently changed jobs but remains in the same line of work.
• The applicant frequently changes jobs but demonstrates income continuity.
• The applicant is a recent graduate, as evidenced by college transcripts, or a recent
member of the military, as evidenced by discharge papers, entering the civilian
workforce.
• The applicant has recently re-entered the workforce after an absence due to an extended
medical illness, to care for a family member or minor child, or other similar
circumstances.
B.
Using UniFi and the Income Worksheet to Compute Income
All 3 types of income are calculated in UniFi using data entered by the Loan Originator.
Attachment 4-A, a Worksheet for Computing Income calculator that helps Loan Originators
organize applicant information for data entry and provides instructions to calculate each type of
income, will be completed and placed in the applicant’s file.
4.3
SOURCES OF INCOME
Loan Originators will consider sources of income to determine annual and repayment
income. This section provides guidance on income that will and/or will not be counted.
A.
Income Considered for Annual and Repayment Income
For annual income, consider income from the following sources that are attributable to
any household member. For repayment income, consider income from the following sources
that are: attributable to parties to the note and represent a source of dependable income.
Example – Less Than Two Years History
For the last few years, Ellen Dixon has been a homemaker with no outside employment. Now that her children
are old enough, she has taken a job as a teacher for which she has the necessary education and certifications. She
is currently half way through her 6-month probation period and her employer orally confirmed that she is a
permanent employee. Ms. Dixon’s income can be considered stable and dependable
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Revised (12-12-19) PN 532
HB-1-3550
Paragraph 4.3 Sources Of Income
1. The gross amount, before any payroll deductions, of base wages and salaries,
overtime pay, commissions, fees, tips, bonuses, housing allowances, and other
compensation for personal services of all adult members of the household. If a cost
of living allowance or a proposed increase in income has been estimated to take
place on or before loan approval, loan closing, or the effective date of the payment
assistance agreement, it will be included as income. For annual income, count only
the first $480 of earned income from adult full-time students who are not the
borrower, co-borrower, or spouse.
2. The net income from the operation of a farm, business, or profession. The
following provisions apply:
• Expenditures for business or farm expansion, capital improvements, or payments
of principal on capital indebtedness shall not be used as deductions in
determining income. A deduction is allowed in the manner prescribed by Internal
Revenue Service (IRS) regulations only for interest paid in amortizing capital
indebtedness.
• Farm and non-farm business losses are considered "0" in determining
annual income. A negative amount must not be used to offset other family
income.
Employer paid and provided fringe benefits are not included in annual income regardless of whether
the benefits are reported on the employee wage statement. Fringe benefits may include, but are not
limited to:
• Child care/pet-sitting,
• Medical/life insurance,
• Car/mileage allowance,
• Stock options,
• Discounts for merchandise,
• Sport/concert/movie tickets or entertainment,
• Charity donations in employee name,
• Any reimbursement of actual work expenses.
Housing allowances may include, but are not limited to:
• Cash or non-cash contributions paid on behalf of the applicant/borrower
by persons not living in the house,
• Allowances for members of the Armed Forces,
• Allowances for members of the Clergy,
• Allowances paid by employer.
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HB-1-3550
Paragraph 4.3 Sources of Income
• A deduction, based on straight line depreciation, is allowed in the manner
prescribed by IRS regulations for the exhaustion, wear and tear, and obsolescence
of depreciable property used in the operation of a farm, business, or profession by
a member of the household. The deduction must be based on an itemized
schedule showing the amount of straight-line depreciation.
• Any withdrawal of cash or assets from the operation of a farm, business, or
profession, or salaries or other amounts distributed to family members from the
farm, business, or profession, will be included in income, except to the extent the
withdrawal is for reimbursement of cash or assets invested in the operation by a
member of the household.
• A deduction is allowed for verified business expenses, such as lodging, meals,
and fuel, for business trips made by salaried employees, such as long-distance
truck drivers, who must meet these expenses without reimbursement.
• For home-based operations such as child care, product sales, and the production
of crafts, housing related expenses for the property being financed such as
mortgage interest, real estate taxes, and insurance, which may be claimed as
business expense deductions for income tax purposes, will not be deducted from
annual income.
3. Interest, dividends, and other net income of any kind from real or personal property,
including:
• The share received by adult members of the household from income distributed
from a trust fund.
• Any withdrawal of cash or assets from an investment except to the extent the
withdrawal is reimbursement of cash or assets invested by a member of the
household.
4. The full amount of periodic payments received from Social Security (including
Social Security received by adults on behalf of minors or by minors intended for
their own support, or by an applicant who is a representative payee for an adult
household member who will reside in the property), annuities, insurance policies,
retirement funds, pensions, disability or death benefits, and other similar types of
periodic receipts. However, deferred periodic amounts from supplemental income
and social security benefits that are received in a lump sum amount or in prospective
monthly amounts are not counted.
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Revised (12-12-19) PN 532
HB-1-3550
Paragraph 4.3 Sources of Income
5. Payments in lieu of earnings, such as unemployment and disability compensation,
worker’s compensation, and severance pay. Unemployment income requires a
two year documentation of receipt and reasonable assurance of its
continuance. This may be appropriate for individuals employed on a
seasonal basis (e.g., farm laborers, construction workers, etc.).
6. Public assistance except as indicated in Paragraphs 4.3 C. and D.
7. Periodic allowances, such as:
• Alimony and child support received by the household; or
• Recurring monetary gifts or contributions from an organization or person who is
not a member of the household.
8. All regular pay, special pay (except for persons exposed to hostile fire), and
allowances of a member of the armed forces who is the applicant or spouse, whether
or not that family member lives in the home.
Example – Adjustment for Prior Overpayment of Benefits
Dan Steven’s social security payment of $250 per month is being reduced by $25 per month
for a period of six months to make up for a prior overpayment. Count Dan’s social security
income as $225 per month for the next six months and as $250 per month for the remaining
six months.
Examples – Regular Cash Contributions
The father of a young single parent pays her monthly utility bills. On average, he provides $100 each month.
The $100 per month must be included in the family’s annual income.
The daughter of an elderly applicant gives her mother $175 each month to assist with her living expenses.
The daughter plans to continue subsidizing her mother’s expenses. The $175 per month must be included in
the annual income.
HB-1-3550
Paragraph 4.3 Sources of Income
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B.
Additional Income Considerations for Repayment Income
Consider these additional sources of income that are attributable to parties to the note and
represent a source of dependable income for repayment income only.
1. Housing assistance payment (HAP). (HUD’s Housing Choice Voucher–
Homeownership Program sometimes referred to as Section 8 for Homeownership.)
See Chapter 8.9 on how HAP payments should be handled. For additional
information on the Housing Choice Voucher – Homeownership Program, visit
http://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/pr
ograms/hcv/homeownership
2. Adoption assistance payments in excess of $480 per adopted child.
3. Reparation payments paid by a foreign government arising out of the Holocaust. If
any applicant for an Agency loan was deemed ineligible because the applicant's
income exceeded the low income limit because of the applicant's Nazi persecution
benefits, the Agency Loan Approval Official should notify the applicant to reapply
for a loan.
4. Certain income tax credits regularly received via the applicant’s employer.
5. The full amount of student financial assistance received by household members or
paid directly to the educational institution who are parties to the note. Financial
assistance includes grants, educational entitlements, work study programs, and
financial aid packages. It does not include tuition, fees, student loans, books,
equipment, materials and transportation. Any amount provided for living expenses
may be counted as repayment income.
6. Amounts received by the family in the form of refunds or rebates under State or local
law for property taxes paid on the dwelling unit.
7. Any other revenue which a Federal statute exempts will be considered repayment
income. This includes:
•
The imminent danger duty pay to a service person applicant or spouse away from
home and exposed to hostile fire.
• Payments to volunteers under the Domestic Volunteer Service Act of 1973,
including, but not limited to:
____________________________________________________________________________________________
HB-1-3550
Paragraph 4.3 Sources of Income
◊
National Volunteer Antipoverty Programs which include Volunteers In
Service To America (VISTA), Peace Corps, Service Learning Programs, and
Special Volunteer Programs.
◊
National Older American Volunteer Programs for persons age 60 and over
which include Retired Senior Volunteer Programs, Foster Grandparent
Program, Older American Community Services Program, and National
Volunteer Programs to Assist Small Business and Promote Volunteer Service
to Persons with Business Experience, Service Corps of Retired Executives
(SCORE), and Active Corps of Executives (ACE).
• Payments received after January 1, 1989, from the Agent Orange Settlement Fund
or any other fund established pursuant to the settlement in the "In Re Agent
Orange" product liability litigations, M.D.L. No. 381 (E.D.N.Y.).
• Payments received under the "Alaska Native Claims Settlement Act" or the
"Maine Indian Claims Settlement Act."
• Income derived from certain sub-marginal land of the United States that is held in
trust for certain American Indian tribes.
• Payments or allowances made under the Department of Health and Human
Services Low-Income Home Energy Assistance Program.
• Payments received from the Job Training Partnership Act.
• Income derived from the disposition of funds of the Grand River Band of Ottawa
Indians.
• The first $2,000 of per capita shares received from judgment funds awarded by
the Indian Claims Commission or the Court of Claims, or from funds held in trust
for an American Indian tribe by the Secretary of Interior.
• Payments received from programs funded under Title V of the Older Americans
Act of 1965.
• Any other income which is exempted under Federal statute.
8. Amounts paid by a State Agency to a family with a developmentally disabled family
member living at home to offset the cost of services and equipment needed to keep
the developmentally disabled family member in the home.
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HB-1-3550
Paragraph 4.3 Sources of Income
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9. The special pay to a family member serving in the Armed Forces who is exposed to
hostile fire.
10. Income received from the Supplemental Nutrition Assistance Program (SNAP) may
be considered to calculate repayment income in an amount not to exceed 20 percent
of the total repayment income (“not to exceed” amount). The following provisions
apply:
• Only the SNAP benefits attributable to the note signers can be considered for
repayment income.
• Only the lesser of the “not to exceed” amount or the actual SNAP benefits can be
included in the applicant’s repayment income.
_________________________________________________________________________________________
Example – Income from SNAP Benefits
Eloise Thompson’s monthly income from employment is $800. She also receives $200 per month in
child support payments for her
6-year-old daughter and $200 per month in SNAP benefits. To consider
the SNAP benefits in the repayment income calculation, the “not to exceed” amount must be calculated.
Monthly repayment income excluding SNAP benefits ($800 + $200): $1,000
To calculate Income from SNAP benefits:
1. Equalize the repayment income ($1,000 / .80): $1,250
2. Calculate the “not to exceed” amount ($1,250 - $1,000): $ 250
3. Compare to actual SNAP benefits received:
$ 200
The lesser of the “not to exceed” amount or the actual SNAP benefits: $ 200
Monthly repayment income after SNAP consideration:
$1,200
HB-1-3550
Paragraph 4.3 Sources of Income
C.
Income Never Considered for Annual and Repayment Income
The following sources are never considered when calculating annual income or
repayment income:
1. Income from the employment of persons under 18 years of age, except parties to the
note and their spouses.
2. Special-Purpose Payments. These are payments made to the applicant's household
that would be discontinued if not spent for a specific purpose. Payments which are
intended to defray specific expenses of an unusual nature and which are expended
solely for those expenses should not be considered as income. Examples include, but
are not necessarily limited to, the following:
a. Medical Expenses. Funds provided by a charitable organization to defray
medical expenses, to the extent to which they are actually spent to meet those
expenses.
b. Foster Children/Adults. Payments for the care of foster children or adults.
NOTE: Foster children are not considered members of the family. Therefore, no
adjustments to income are to be made because of their presence.
3. Temporary, nonrecurring, or sporadic income (including gifts).
4. Lump-sum additions to family assets such as inheritances, capital gains, insurance
payments included under health, accident, hazard, or worker's compensation policies,
and settlements for personal or property losses.
5. Amounts that are granted specifically for, or in reimbursement of, the cost of medical
expenses for any family member.
6. Payments received on reverse amortization mortgages (these payments are
considered draw-down on the applicant’s assets).
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Revised (07-22-19) SPECIAL PN
HB-1-3550
Paragraph 4.3 Sources of Income
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7. Income received by foster children or foster adults who live in the household, or
live-in aides, regardless of whether the live-in aide is paid by the family or a social
services program (family members cannot be considered live-in aides unless they are
being paid by a health agency and have an address, other than a post office box,
elsewhere).
8. Amounts received by any family member participating in programs under the
Workforce Investment Act of 1998 (29 U.S.C. 2931).
• Amounts received by a person with a disability that are disregarded for a
limited time for purposes of Supplemental Security Income eligibility and
benefits because they are set aside for use under a Plan to Attain Self-
Sufficiency (PASS).
• Amounts received by a participant in other publicly assisted programs which
are specifically for or in reimbursement of out-of-pocket expenses incurred
(special equipment, clothing, transportation, child care, etc.) and which are
made solely to allow participation in a specific program.
9. Earned income tax credits.
10. Incremental earnings and benefits resulting to any family members from
participation in qualifying State or local employment training programs (including
training programs not affiliated with a local government) and training of a family
member as resident management staff. Amounts excluded by this provision must
be received under employment training programs with clearly defined goals and
objectives, and are excluded only for the period during which the family
participates in the employment training program.
11. Allowances, earnings and payments to AmeriCorps participants under the National
and Community Service Act of 1990 (42 E.S.C. 12637{d}).
HB-1-3550
Paragraph 4.3 Sources of Income
D.
Additional Income Never Considered for Annual Income
In addition, the following sources are never considered when calculating annual income:
1. Payments received for the care of foster children, or foster adults (usually individuals
with disabilities who are unable to live alone).
2. Deferred periodic payments of supplemental security income and Social Security
benefits that are received in a lump sum amount or in prospective monthly amounts.
3. Any amount of crime victim compensation received through crime victim assistance
(or payment or reimbursement of the cost of such assistance) because of the
commission of a crime against the applicant under the Victims of Crime Act (42
U.S.C. 10602).
4. Any allowance paid under 38 U.S.C. 1805 to a child suffering from spina bifida who
is the child of a Vietnam veteran.
5. Payments by the Indian Claims Commission to the Confederated Tribes and Bands of
Yakima Indian Nation or the Apache Tribe of Mescalero Reservation
(Pub.L. 95-433).
6. Housing assistance payment (HAP) (HUD’S Housing Choice Voucher
Homeownership Program, sometimes referred to as Section 8 for Homeownership).
The HAP is not included in the household’s annual income for the purpose of
determining the income category in which the household falls or determining
payment assistance.
7. Adoption assistance payments in excess of $480 per adopted child.
____________________________________________________________________________________________
4-17
(01-23-03) SPECIAL PN
Revised (12-12-19) PN 532
HB-1-3550
Paragraph 4.3 Sources of Income
4-18
E.
Verifying Sources and Amounts
The Loan Originator must verify income information provided by the applicant.
Paragraph 3.15 describes the different types of verifications. Federal Income Tax Returns
with supporting documentation are the preferred verification source for prior
income/previous employment. These documents along with paystubs (supported by oral
verification) and/or award letters are preferred when reviewing current income sources and
projecting both annual and repayment income. Written verifications provided by third-party
sources or documents prepared by third-party sources are required when the applicant is
unable to provide sufficient recent, reliable and consistent documentation.
____________________________________________________________________________________________
Examples – Income Exclusions
• The Value of Food Provided through the Meals on Wheels Program or Other
Programs Providing Food for the Needy. Shane Michaels received a hot lunch each
day during the week in the community room and an evening meal in his apartment. One
meal is provided through the Meals on Wheels program. A local church provided the
other. The value of the meals he receives is not counted as income.
• Groceries provided by persons not living in the household. Melissa Bostic’s mother
purchases and delivers groceries each week for Melissa and her two year old. The value
of these groceries is not counted as income despite the fact that these are a regular
contribution or gift.
• Amounts Received Under WIC or the School Lunch Act. Cody Britt’s two children
receive a free breakfast and reduced priced lunches at school every day through the
Special Supplemental Food Program for Women, Infants and Children (WIC). The
value of this food is not counted as income.
• Deferred periodic payments of social security benefits. Andrew Ray received
$32,000 in deferred social security benefits following a lengthy eligibility dispute. This
delayed payment of social security benefits is treated as an asset, not as income.
• Income from training programs. Jamey Hawkins is participating in a qualified state-
supported employment training program every afternoon to learn improved computer
skills. Each morning, she continues her regular job as a typist. The $250 a week she
receives as a part-time typist is included in annual income. The $150 a week she
receives for participation in the training program is excluded in annual income.
• Student financial assistance. Dylan Nessel won a scholarship from the local civic
association. The association sends him a $1,000 check each semester to help with tuition
costs. These funds are excluded from annual income.
HB-1-3550
Paragraph 4.3 Sources of Income
Each applicant must sign Form RD 3550-1, Authorization to Release Information, at
the time of application. Copies of this form must accompany any request for verification
from third-party sources. Form SSA-3288, Consent for Release of Information, may also be
used for Social Security verifications when the applicant is unable to provide a copy of an
award letter. A complete copy of the last two filed and signed IRS Form 1040, U.S.
Individual Income Tax Returns must be provided by the applicant. IRS Form W-2, Wage
and Tax Statement, and/or IRS Form 1099-MISC, Miscellaneous Income, must be attached
to the applicant’s federal income tax return in order for it to be considered a complete return.
For electronically filed tax returns, it is not necessary to require the applicant(s) to manually
sign the return for application purposes if there is sufficient documentation the applicant has
signed and filed the return electronically (e.g. use of Self-Select PIN for Free File Fillable
Forms, Electronic Filing PIN, authorized E-File Provider, etc.).
The Agency will ask the applicant to directly request, obtain, and provide a copy of their
tax return transcript for the previous two tax years (using IRS Form 4506-T, Request for
Transcript of Tax Return) if additional income validation is needed. If there are
inconsistencies between the income verifications (e.g. pay stubs, tax returns, etc.), or if the
applicant was unable to furnish complete copies of their last two filed returns (e.g. a W-2
was missing), then the transcript should be requested. The transcript should also be
requested if the income verifications appear suspicious (e.g. there is evidence of alteration).
Appendix 2 provides sample certification and verification formats for a number of
purposes.
The following chart provides guidance on acceptable alternative sources of
verifications of different types of income:
4-19
(01-23-03) SPECIAL PN
Revised (12-12-19) PN 532
HB-1-3550
Paragraph 4.3 Sources of Income
4-20
INCOME
(If Preferred Source of Verification cannot be obtained without cost,
Acceptable Alternative may be used.)
Type of Income or
Verification Source
Verification Requirements and Procedures
WAGES or SALARY
Paycheck Stubs or
The applicant must list all household members on the application and provide
Payroll Earnings
their employment status. They must be consecutive and “most recent” as of
Statements for not less
the date the loan application is made; must clearly identify the applicant (or
than four (4) consecutive
adult household member) as the employee by name and/or social security
weeks
number; must show the gross earnings for that pay period and year-to-date;
Preferred Source
and must be computer-generated or typed. Oral verifications should only be
used if the applicant has worked for the employer for less than a year or the
other types of verifications are inconsistent or suspicious, documented as
follows:
AND
Document in the running record the date of contact and list: The employer’s
name/address/phone number/contact person and title; the employee’s name,
Oral Verification as
date of employment, present position and probability of continued
permitted in Paragraph
employment; the source of the phone number (applicant, realtor, yellow
3.15 A.3.
pages, website); and the name and title of the Rural Development employee
Preferred Source
that contacted the employer. Note: The oral verification is conducted with a
current employer to confirm the applicant’s present employment and to verify
the probability of continued employment only. Income information should
not be discussed during an oral verification of employment.
Electronic Verification
It must clearly identify the applicant (or adult household member) as the
Acceptable Alternative
employee by name and/or social security number, cover the most recent pay
(in lieu of paycheck
period as of the date the initial loan application is made, and show the gross
stubs only)
earnings for the most recent 30-day pay period and year-to-date. Obtain oral
verification of employment only if the applicant has worked for the
employer for less than a year or the other types of verifications are
inconsistent or suspicious.
Written Verification of
Employment
Acceptable Alternative
If paycheck stubs or earnings statements are inconsistent or not available, the
Loan Originator must send Form RD 1910-5, Request for Verification of
Employment, to each employer for verification.
HB-1-3550
Paragraph 4.3 Sources of Income
Type of Income or
Verification Source
Verification Requirements and Procedures
For SELF-EMPLOYED
PERSONS
Income & Expense
Statement
Preferred Source
Self-employed applicants (or adult household members) must provide
current documentation of income and expenses, which cannot be older than
the previous fiscal year. The Loan Originator must compare the income and
expense information provided by the applicant with the last two complete
Federal Income Tax Returns (IRS Form 1040) along with Schedules C & F
and/or other applicable schedules, and clarify any discrepancies. IRS Form
W-2 must be attached to the applicant’s Federal Income Tax return in order
for it to be considered a complete return when the applicant has wage
income.
(NOTE: Other sources of commercial software such as Turbo Tax are not
acceptable alternatives.) Appendix 2 provides a sample format for
recording business expenses.
SUPPLEMENTAL
VERIFICATION
Seasonal Employment
Preferred Source
A household member who is a seasonal worker must provide the most recent
Federal income Tax return, the prior year’s W-2s and/or prior year’s 1099-
MISC statements.
Unemployment and
All applicants (or adult household members) must complete Form RD
Unemployment Benefits,
3550-4, Employment and Asset Certification, which provides his/her current
Disability & Worker’s
employment status and requires them to agree to inform the Agency
Compensation, Severance
immediately, in writing, if the employment status changes. If an applicant
Pay (except lump-sum
has recently become unemployed, the Loan Originator should contact the
additions)
former employer to confirm that the applicant is no longer employed and that
re-employment is not expected.
Preferred Source
Applicants (or adult household members) receiving unemployment benefits
must provide the most recent award or benefit letter prepared and signed by
the authorizing agency to verify the non-employment income. Appendix 2
provides a sample format for requesting information about unemployment
benefits.
It must clearly identify the adult household member as the employee by
name and/or social security number and cover the most recent earnings as of
the date the verification is submitted.
____________________________________________________________________________________________
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(01-23-03) SPECIAL PN
Revised (01-06-17) PN 492
HB-1-3550
Paragraph 4.3 Sources of Income
4-22
Electronic Verification
Acceptable Alternative
Electronic verification for that period, copy of checks, or bank statements, all
showing gross earnings. All authorized deductions must be added back to
checks or bank statements to reflect gross amount.
Mortgage Credit
An applicant receiving a MCC must file IRS Form W-4, Employee’s
Certificates (MCC)
Withholding Allowance Certificate. This IRS form enables the applicant’s
employer to include a portion of the applicant’s income tax credit in their
regular paycheck. Income tax credits not advanced through the applicant’s
employer on at least a monthly basis cannot be included in repayment
income but may warrant consideration as a compensating factor.
Preferred Source for
MCC
The documents must be the “most recent” and identify the applicant by name
and/or social security number.
Applicable IRS Form or
Signed copies of the applicable IRS Form or a letter from the employer
Letter from Employer
stating the applicant has executed and the employer has accepted the
document.
Regular, Unearned
The applicant (or adult household member) must provide a copy of the most
Income (e.g., Social
recent award or benefit letter prepared and signed by the authorizing agency.
Security, SSI, Retirement
If the date of the letter is not within the last 12 months, require the applicant
Funds, Pensions,
to submit information updating the award, for example, a cost-of-living
Annuities, Disability or
(COLA) payment notice, Social Security Benefits Statement, or a notice of
Death Benefits) (except
change in benefits. Appendix 2 provides sample formats for requesting this
deferred periodic
information.
payments)
Preferred Source
Acceptable Alternative
The two most recent bank statements showing the amount of monthly
benefits received and IRS Form 1099 for the previous year. Loan
Originators must verify that the benefit shown on the bank statement reflects
the gross amount of the benefit prior to deductions for items such as taxes,
health benefits, insurance premiums, etc.
HB-1-3550
Paragraph 4.3 Sources of Income
4-23
(01-23-03) SPECIAL PN
Revised (07-22-19) SPECIAL PN
Alimony or Child Support
Payments
Preferred Source
Electronic Verification
Acceptable Alternative
The applicant (or adult household member) must obtain a payment history
for the last 12 months from the court appointed entity responsible for
handling payments. The average amount received will be used in the income
calculations.
The two most recent bank statements showing electronic deposit of the
monthly alimony and/or child support received AND a copy of the court
appointed divorce decree or separation agreement (if the divorce is not final)
that provides for the payment of alimony or child support and states the
amount and the period of time over which it will be received.
Divorce Decree
If (and only if) a source of income was awarded in the decree, and there is
Acceptable Alternative
not a court appointed entity responsible for handling payments, the applicant
(or adult household member) may provide a copy of the divorce decree,
separation agreement, or other document indicating the amount of the
required support payments. If the applicant reports that the amount required
by the agreement is not being received, the applicant must provide adequate
documentation of the amount being received (i.e. copies of the checks or
money orders from the payer, etc.) and certify the payments are being
received or not received.
Cancelled Checks
Acceptable Alternative
If (and only if) there is not a court appointed entity responsible for handling
payments and formal documents were never issued, support payments can be
certified as being received or not received.
Verification of Assets and
Form RD 3550-4, Employment and Asset Certification, will be used to
Income from Assets and
confirm the level of the household’s combined net assets. Obtain the two
Investments
most recent complete bank or brokerage statements showing the transaction
Preferred Source
history and the current balance. If account information is reported on a
quarterly basis, obtain the most recent quarterly statement. To further
document interest and dividend income the applicant must provide copy of
Federal tax forms and schedules clearly identifying income from interest,
dividends, and capital gains. For some assets such as mutual funds or 401(k)
accounts, copies of year-end statements can provide information about
annual income.
HB-1-3550
Paragraph 4.3 Sources of Income
4-24
If the Loan Originator has reasons to question the accuracy of the applicant’s
self-certification or bank statements, the Loan Originator sends Form RD
1944-62, Request for Verification of Deposit, to financial institutions to
verify account balances.
Verification of Gifts
Preferred Source
If funds needed for the purchase will be provided by an organization or
another person not living in the household, the Loan Originator must send
the donor Form RD 3550-2, Request for Verification of Gift/Gift Letter, to
verify whether the gift must be repaid and whether the funds have already
been transferred. Form RD 3550-2 is used to verify gifts that are non-
recurring and intended for down payment or closing costs purposes only.
Verification of Recurring
Gifts
Preferred Source
For recurring gifts, if there is no history of the gift being received prior to
application and the gift amount is needed to establish the applicant has
repayment ability, the Loan Originator must determine and document that
the gift is stable and dependable.
DEDUCTIONS
Type of Expense or
Verification Source
Verification Requirements and Procedures
Disability Assistance
Expenses
Preferred Source
To qualify for disability deductions, the applicant must describe the nature of
the expense, provide documentation of the costs, and demonstrate that the
expense enables a family member to work. If the household member
receives a form of income because of a verified disability (such as social
security disability or disability compensation), that may be used as a method
to verify the disability. Otherwise, Form RD 1944-4, Certification of
Disability or Handicap, should be used to have a physician or other medical
professional verify the household member’s disability.
Medical Expenses
Preferred Source
For elderly households only, allowable medical expenses may be deducted
from annual income. Therefore, documentation of medical expenses is not
generally required for non-elderly households. In such cases, these medical
expenses must be verified as well. Appendix 2 provides a sample format for
documenting medical expenses.
Childcare Expenses
Reasonable childcare expenses may be deducted from annual income. To
qualify for the deduction, the applicant must:
•
Identify the children receiving child care and the family member who
can work or go to school as a result of the care;
•
Demonstrate there is no adult household member available to care for
the children;
•
Identify the child care provider, hours of care provided, and costs (e.g.,
letter on the child care provider’s letterhead or a copy of a signed child care
contract); and
•
Identify the educational institution and provide documentation of
enrollment (if appropriate).
Appendix 2 provides a sample format for requesting childcare information.
HB-1-3550
Paragraph 4.3 Sources of Income
4-25
(01-23-03) SPECIAL PN
Revised (07-22-19) SPECIAL PN
1. Timing
Documentation used to verify employment, income, assets, and deductions must be
no more than 120 days old, or 180 days old for new construction by closing date. If any
of the verification documents are older than allowed, the Loan Originator must update
them before settlement. The age of certain documents, such as divorce decree and tax
returns, do not necessarily affect the validity of the underwriting decision. These types of
documents are exempt from the document age restriction unless there is evidence that the
applicant’s circumstances have changed thus warranting updated verifications.
2. Projecting Expected Income for the Next 12 Months
Once an income source is verified, the Loan Originator must project the expected
income from this source for the next 12 months. This projection should be based on a
comparison and analysis of the figures derived from using all applicable calculation
methods. To establish earning trends and avoid miscalculating income (especially from
seasonal income), the more methods used the better. However, some income sources will
only lend themselves to one method. In some cases, there may be multiple types of
income generated from one source (overtime, bonus, hourly); therefore the income
calculation method used will depend on the type of income received, rather than the
source of income. The four calculation methods are:
• Straight-based where the benefit or wage amount is converted to the annual
equivalent.
• Average where the income as reported on the benefit statements or pay stubs for
the last 30 days is averaged and then converted to the annual equivalent.
• Year-to-date (YTD) where the YTD gross earnings are divided by the YTD
interval, which is the number of calendar days elapsed between January 1 of the
current year and the last date covered by the most recent income verification, and
then multiplied by 365. The earning activity during the YTD interval should be
closely examined to determine the appropriateness of this method. Do not use
this method if the earning activity during the YTD interval is insufficient to make
an annual projection or is not reflective of the likely earning activity for the period
outside the YTD interval (the time between the last date covered by the most
recent income verification and December 31 of the current year).
• Historical where the income as reported on the previous year’s tax return is used.
Any declining income trend, especially for repayment income, must be carefully
document in the underwriting analysis.
_______________________________________________________________________________________
HB-1-3550
Paragraph 4.3 Sources of Income
4-26
After the Loan Originator determines the suitable methods and performs the
calculations, he/she must determine which figure is most representative of income likely
to be received during the next 12 months. If the figures are disparate and one figure is
not clearly the most representative, an average of the resulting figures may be used.
Selecting the lowest figure without analysis is not acceptable. The selection must be
carefully deliberated and may require additional verification.
Example - Projecting Expected Income for the Next 12 Months
Ken Anderson has worked for B & N Auto for the last two years. According to the application, Mr.
Anderson reported that he earns $10/hour, works 40 hours per week. His employer orally verified that he is expected
to work 25 hours of overtime in the next 12 months. Since Mr. Anderson is paid weekly, he submitted his last four
pay stubs through the pay period ending May 1st that show gross pay (including overtime) of $460, $415, $475, and
$445. It also shows gross YTD earnings of $5,885. Mr. Anderson’s tax return for last year showed gross wages of
$16,640.
Straight-based: Base pay: $10/hour x 40 hours/week x 52 weeks/year = $20,800
Overtime: $15/hour x 25 hours/year = $375
Total wages: $21,175
Average: ($460 + $415 + $475 + $445) / 4) x 52 weeks/year
= $23,335
YTD: ($5,885 / 121 days) x 365 = $17,754
Historical: $16,640
Looking at the four results, there is no clear earning pattern. The Loan Originator should investigate
further to determine why significant discrepancies exist between the calculation methods and what figure should be
used. Is B & N experiencing an unusual and temporary large workload? Was Mr. Anderson absent from work for
an extended period of time? Did Mr. Anderson receive a pay increase from last year? These are just a few
examples of the questions that should be answered.
NOTE: These calculations should be documented in writing and included in the case file.
HB-1-3550
Paragraph 4.3 Sources of Income
4-27
(01-23-03) SPECIAL PN
Revised (01-06-17) PN 492
3. Income of Temporarily Absent Family Members
Household members may be temporarily absent from the household for a variety of
reasons, such as temporary employment or students who live away from home during the
school year. The income of these household members is considered when computing
annual income and, if the person is a party to the note, for repayment income.
If the absent person is not considered a member of the household and is not a party to
the note, the Loan Originator must not count their income, must not consider them when
determining deductions for adjusted income, and must not consider them as a family
member for determining which income limit to use.
Examples - Temporarily Absent Family Member
James Brown and his wife have applied for a loan. At the moment, James is working on a
construction job on the other side of the State and comes home every other weekend. He earns
$600/week and uses approximately one-third of that amount for temporary living expenses. The full
amount of the income earned would be counted for both repayment and annual income.
Adam Watson works as an accountant. However, he suffers from a disability that
periodically requires lengthy stays at a rehabilitation center. When he is confined to the
rehabilitation center, he receives disability payments equaling 80% of his usual income. During the
time he is not in the unit, he will continue to be considered a family member. Even though he is not
currently in the unit, his total disability income will be counted as part of the family’s annual
income.
Desirae Bitz accepts temporary employment in another location and needs a portion of her
income to cover living expenses in the new location. The full amount of the income must be
included in annual income.
Terri Glass is on active military duty. Her permanent residence is her parents’ home where
her husband and children live. Terri is not currently exposed to hostile fire. Therefore, because her
spouse and children are in the parents’ home, her military pay must be included in annual income.
(If her spouse or dependents were not in the parent’s home, she would not be considered a family
member and her income would not be included in annual income.)
HB-1-3550
4-28
4.4
CALCULATING ANNUAL AND ADJUSTED INCOME
Adjusted income is used to determine eligibility for the Section 502 and 504 programs, as
well as eligibility for and the amount of payment subsidies under Section 502.
A.
Calculating Annual Income
Annual income is used as the base for computing adjusted income. Income of all
household members, not just parties to the note, should be considered when computing annual
income.
B.
Calculating Deductions from Annual Income
Adjusted income is calculated by subtracting from annual income any of 5 deductions
that apply to the household. Not all households are eligible for all deductions. Exhibit 4-2
summarizes these deductions. The remainder of this paragraph provides guidance on
determining whether a family is eligible for each deduction and verifying and calculating these
amounts.
Exhibit 4-2
Allowable Deductions from Annual Income
Deduction
Elderly
Households
Nonelderly
Households
Dependent Deduction
Yes
Yes
Child Care Expenses
Yes
Yes
Elderly Household
Yes
No
Medical Expenses
Yes
No
Disability Assistance
Yes
Yes
C.
Dependent Deduction
A deduction from annual income of $480 is made for each household member who
qualifies as a dependent. Dependents are members of the household who are not the borrower,
co-borrower, or spouse, are age 17 or younger, are an individual with a disability, or are a full-
time student. The applicant/borrower, co-applicant/co-borrower, or spouse of applicant/borrower
(even if the household member is temporarily absent) may never qualify as a dependent. A
foster child, an unborn child, a child who has not yet joined the family, or a live-in aide may
never be counted as a dependent.
____________________________________________________________________________________________
HB-1-3550
Paragraph 4.4 Calculating Annual and Adjusted Income
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(01-23-03) SPECIAL PN
Revised (12-12-19) PN 532
D.
Child Care Expenses
Reasonable unreimbursed child care expenses for the care of children age 12 and under
are deducted from annual income if:
(1)
the care enables a household member to work, actively seek employment, or go to
school;
(2)
no other adult household member is available to care for the children; and
(3)
in the case of child care that enables a household member to work, the expenses
deducted do not exceed the income earned by that household member. This limitation
does not apply if the child care allows a household member to go to school.
If the child care provider is a household member, the cost of the children’s care cannot be
deducted.
Child care attributable to the work of a full-time student (except for applicant/borrower,
co-applicant/co-borrower, or spouse of applicant/borrower) is limited to not more than $480,
since the employment income of full-time students in excess of $480 is not counted in the annual
income calculation. Child care payments on behalf of a minor who is not living in the household
cannot be deducted.
To qualify for the deduction, the applicant must:
• Identify the children who are receiving child care and the family member who can
work, seek employment or go to school (academic or vocational) as a result of the
care;
• Demonstrate there is no adult household member available to care for the children
during the hours care is needed;
• Identify the child care provider, hours of child care provided, and costs;
• Verify the expense is not reimbursed by an agency or individual outside the family;
and
• If the expenses enable a family member to go to school, identify the educational
institution. The family member need not be a full-time student.
____________________________________________________________________________________________
4-30
HB-1-3550
Paragraph 4.4 Calculating Annual and Adjusted Income
____________________________________________________________________________________________
Verification of Child Care Expenses
Child care hours must parallel the hours the family member works or goes to school. Appendix 2
provides a sample format applicants can use to document child care. Other acceptable formats
include a letter on the child care provider’s letterhead or a copy of a signed child care contract.
Example – Child Care Deduction
Separate Expenses for Time at Work and Time at School
Lou and Bryce have two children. Both parents work, but Lou works only part-time and goes to
school half-time. She pays $4 an hour for eight hours of child care a day. For four of those
hours, she is at work; for four of them she attends school. She receives no reimbursement for her
child care expense.
Her annual expense for child care during the hours she works is $4,000 and at school is $4,000.
She earns $6,000 a year. Bryce earns $18,000.
Lou’s child care expense while she is working cannot exceed the amount she is earning while at
work. In this case, that is not a problem. Lou earns $6,000 during the time she is paying $4,000.
Therefore, her deduction for the hours while she is working is $4,000.
Lou’s expense while she is at school is not compared to her earnings. Her expense during those
hours is $4,000 and her deduction for those hours will also be $4,000.
Lou’s total child care deduction is $8,000 ($4,000 + $4,000). The total deduction exceeds the
amount of Lou’s total earnings, but the amount she pays during the hours she works does not
exceed her earnings. If Lou’s child care costs for the hours she worked were greater than her
earnings, she would not be able to deduct all of her child care costs.
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Revised (12-12-19) PN 532
HB-1-3550
Typical Disability Expenses
• Care attendant to assist an individual with disabilities
with activities of daily living directly related to
permitting the individual or another family member to
work.
• Special apparatus, such as wheelchairs, ramps, adaptations
to vehicles or work place equipment, if directly related to
permitting the individual with disabilities or another family
member to work.
Paragraph 4.4 Calculating Annual and Adjusted Income
E.
Elderly Household Deduction
A single $400 deduction is subtracted from annual income for any elderly household. To
be considered an elderly household, a party
to the note must be 62 years of age or older
or an individual with a disability. Because
this is a “family deduction” each household
receives only one deduction, even if more
than one member is elderly or disabled.
In the case of a family where the
deceased applicant/borrower or spouse was at
least 62 years old or an individual with
disabilities, the surviving family member shall continue to be classified as an “elderly
household” for the purposes of determining adjusted income if:
• At the time of death of the deceased family member, the dwelling was financed by the
Agency;
• The surviving family member occupied the dwelling with the deceased family
member at the time of death; and
• The surviving spouse (if any) has not remarried.
F.
Deduction for Disability Assistance Expense
Families are entitled to a deduction for un-reimbursed, anticipated costs for attendant care and
“auxiliary apparatus” for each family member who is a person with disabilities, to the extent these
expenses are reasonable and necessary to enable any family member 18 years of age or older who may
or may not be the member who is a person with disabilities (including the member who is a person with
disabilities) to be employed. The applicant must describe the nature of the expense, provide
documentation of the costs, and demonstrate that the expense enables a family member to work.
Reasonable documented expenses for care of the individual with disabilities in excess of 3 percent of
annual income may be deducted from annual income if the expenses:
• Enable the individual with disabilities or another family member to work;
• Are not reimbursable from insurance or any other source; and
______________________________________________________________________________________________________
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HB-1-3550
Paragraph 4.4 Calculating Annual and Adjusted Income
• Do not exceed the amount of earned income included in annual income by the person
who is able to work as a result of the expenses. If the disability assistance enables more than
one person to be employed, the combined incomes of all persons must be included.
To qualify for this deduction, applicants must identify the individual with a disability on
the application. Form RD 1944-4, Certification of Disability or Handicap should be used to
request verification of the individual’s disability from a physician or other medical professional.
Example – Eligible Disability Assistance Expenses
The payments made on a motorized wheelchair for the 42-year-old son of the applicant/borrower enable the
son to leave the house and go to work each day on his own. Prior to purchase of the motorized wheelchair, the
son was unable to make the commute to work. These payments are an eligible disability assistance expense.
NOTE: Auxiliary apparatus includes, but is not limited to, items such as wheelchairs, ramps,
adaptations to vehicles, or special equipment to enable a sight-impaired person to read or type, but only
if these items are directly related to permitting the disabled person or other family member to work. If
the apparatus is not used exclusively by the person with a disability, the total cost must be prorated to
allow a specific amount for disability assistance.
• Include payments on a specially-equipped van to the extent they exceed the payments that
would be required on a car purchased for transportation of a person who does not have a disability.
• The cost of maintenance and upkeep of an auxiliary apparatus is considered a disability
assistance expense (e.g., veterinarian and food costs of a service animal; cost of maintaining
equipment that is added to a car, but not the cost of maintaining the car).
Payments to a care attendant to stay with a disabled 16-year-old child allow the child’s mother to go to work
every day. These payments are an eligible disability assistance expense. When the same provider takes care of
children and a disabled person over age 12, prorate the total cost and allocate a specific cost to attendant care.
The sum of both child care and disability assistance expenses cannot exceed the employment income of the
family member enabled to work.
NOTE: Attendant care includes, but is not limited to, expenses for home medical care, nursing services,
housekeeping and errand services, interpreters for hearing-impaired, and readers for persons with
visual disabilities.
HB-1-3550
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(01-23-03) SPECIAL PN
Revised (07-22-19) SPECIAL PN
Example – Calculating a Deduction for Disability Assistance Expenses
(NOTE: $3,034 is not greater than amount earned by co-applicant/co-borrower, who is enabled to work.)
Paragraph 4.4 Calculating Annual and Adjusted Income
Applicant/Borrower earned income
$14,500
Co-Applicant/Co-Borrower earned income
+$12,700
Total Income
$27,200
Care expenses for disabled 15-year-old $ 3,850
Calculation:
$ 3,850
(3% of annual income)
-$ 816
Allowable disability assistance expenses
$ 3,034
G.
Deduction for Medical Expenses (for Elderly Households Only)
Medical expenses may be deducted from annual income for elderly households if the
expenses: (1) will not be reimbursed by insurance or another source; and (2) when combined
with any disability assistance expenses are in excess of 3 percent of annual income.
If the household qualifies for the medical expenses deduction, expenses of the entire
family are considered. For example, if a household included the head (grandmother, age 64), her
son (age 37), and her granddaughter (age 6), the medical expenses of all 3 family members
would be considered.
____________________________________________________________________________________________
Examples - Typical Medical Expenses
• Services of physicians, nurses, dentists, opticians, chiropractors, and other health care
providers
• Services of hospitals, laboratories, clinics, and other health care facilities
• Medical, Medicaid and long-term care premiums, and expenses to HMO
• Prescription and nonprescription medicine prescribed by a physician
• Dental expenses, x-rays, fillings, braces, extractions, and dentures
• Eyeglasses, contact lenses, and eye examinations
• Medical or health products or apparatus (hearing aids, batteries, wheel chairs, etc.)
• Attendant care or periodic medical care (visiting nurses or assistance animal and its
upkeep)
• Periodic scheduled payments on accumulated medical bills
• Travel expense and lodging for medical treatment
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HB-1-3550
Paragraph 4.4 Calculating Annual and Adjusted Income
One of the most challenging aspects of
determining allowable medical expenses is
estimating a household’s medical expenses for
the coming year. While some anticipated
expenses can be documented easily (for
example, Medicare or other health insurance
premiums and ongoing prescriptions), others
need to be estimated. The Loan Originator
should use historical information about
medical bills to estimate future expenses.
However, the estimates should be realistic.
For example, if the household has a
significant medical bill, the Loan Originator
would count only that portion of the bill that is likely to be paid during the coming year.
Examples - Excluded Medical Expenses
• Unnecessary cosmetic surgery to improve the patient’s appearance such as face lifts, hair
transplants/removal, and liposuction
• Health Club or YMCA dues, steam baths for general health or to relieve physical or mental discomfort not
related to a particular medical condition
• Household help even if recommended by a doctor
• Medical savings account (MSA)
• Nutritional and herbal supplements, vitamins, and “natural medicines” unless these can be obtained legally
only with a physician’s prescription
• Non-prescription drugs unless prescribed by a physician for a particular medical condition
• Personal use items unless used primarily to prevent or alleviate a physical or mental defect or illness
Example – Medical Expense Paid over a Period of Time
Chynna Ray and Justin Grog did not have insurance to cover Justin’s operation four years ago. They have
been paying $105 a month toward the $5,040 debt. Each year that amount
($105 x 12 months or $1,260) has been included in total medical expenses. A review of their file indicates
that a total of $5,040 has been added to total medical expenses over the four-year period. Over the four-year
period they have missed five payments and still owe $525. Although they still owe this amount, the bill
cannot be included in their current medical expenses because the expense has already been deducted.
Example - Calculating the
Medical Expense Deduction
The Jensons are an elderly household with annual
income of $25,000 and anticipated medical expenses
of $3,000 that are not covered by insurance or another
source. The allowable medical expenses would be:
Total Medical Expenses
$3,000
(less) 3% Annual Income
$ 750
($25,000 x 0.03)
Allowable Medical Expenses
$2,250
HB-1-3550
Paragraph 4.4 Calculating Annual and Adjusted Income
H.
Calculating Repayment Income
Repayment income is the amount of the household’s income that is available to repay the
Agency’s debt. To compute repayment income, the Loan Originator should count only the
income of persons who will be parties to the note.
The Standard PITI and TD ratio limitations are based on an assumption that applicant
income is taxable. If a particular source of income is not subject to Federal taxes, for example,
certain types of disability payments or military allowances, the amount of continuing tax savings
attributable to the nontaxable income source will be added to the applicant’s repayment income.
Nontaxable income, such as Housing Choice Vouchers, social security, and child
support (provided it is stable and is expected to continue for at least two years), will be
multiplied by 120 percent to “gross up” such income.
Under current tax law some State and local issuers of mortgage bonds may issue MCC to
provide a Federal income tax credit to assist low-income home buyers and home owners. The
credit permits an eligible household to claim a specific percentage of the annual interest paid on
a mortgage as a tax credit rather than a deduction. If an applicant will receive the credit, the
benefit of the credit will be “grossed up” for the repayment ability income calculation as
described in Paragraph 4.4 H when the applicant adjusts their Federal tax withholdings via IRS
Form W-4 to reflect the decrease in their tax liability. MCCs are issued through private lenders
and rarely encountered in the 502 Direct program.
____________________________________________________________________________________________
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Example – “Grossing Up” Nontaxable Income
The applicant’s repayment income of $22,000 includes $5,000 of nontaxable income.
The revised repayment income for the applicant would be calculated as follows:
$17,000
+ 6,000
Taxable income
“Grossed-Up” Nontaxable Income ($5,000 x 1.2)
$23,000
Revised Repayment
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HB-1-3550
SECTION 2: EVALUATING BORROWER ASSETS [7 CFR 3550.54(d)]
4.5
OVERVIEW OF POLICIES RELATED TO ASSETS
Assets affect an applicant’s ability to obtain a loan in 2 ways. First, applicants may be
required to use non-retirement assets to make a down payment covering some of the costs of
purchasing a home. Second, many types of assets generate income that must be included in the
calculations of annual and repayment income. An applicant’s assets are considered for annual
and repayment income, as well as for down payment purposes, as applicable. Net family assets
are considered for annual income and down payment purposes, as applicable, but shall be
excluded from repayment income. Asset documentation may also provide useful information for
loan underwriting. Exhibit 4-3 presents a list of assets that must be considered when making
these determinations and also identifies certain types of assets that are not considered.
Exhibit 4-3
Types of Assets
The following types of assets must be
considered. Non-retirement assets including:
• Savings accounts; the average 2-month balance of checking accounts; safe deposit boxes;
• Stocks, bonds, Treasury bills, savings certificates, money market funds, and other investment accounts;
• Equity in real property or other capital investments;
• Revocable trust funds that are available to the household;
• Lump-sum receipts, such as inheritances, capital gains, lottery winnings and settlement on insurance
claims (including health and accident insurance, worker’s compensation, and personal or property losses);
• Assets held in foreign countries; and
• Personal property (such as jewelry, coin collection or antique cars) held as an investment.
Retirement assets (applicants only) including:
• Amounts in voluntary retirement plans that can be withdrawn, such as individual retirement
accounts (IRAs), 401(k) or 403(b) plans, and Keogh accounts; and
• Amounts in other retirement and pension plans that can be withdrawn without retiring or
terminating employment.
The following types of assets are not considered.
• The value of necessary items of personal property, such as furniture, clothing, cars, wedding rings and
other jewelry not held as an investment, and vehicles specially equipped for persons with disabilities;
• Assets that are part of any business, trade, or farming operation in which any member of the household
is actively engaged;
• The value of an irrevocable trust fund, or the value of any trust over which no member of the household
has control;
• Term life insurance policies where there is no cash value;
• Interests in American Indian restricted land;
• The value of tax advantaged health, medical savings or spending accounts, and college savings plans; and
• For income calculations, any assets on hand that will be used to reduce the amount of loan.
HB-1-3550
4.5 Overview of Policies Related to Assets
A.
Reporting Assets
Applicants must provide information about household assets at the time of loan
application and whenever an income determination is made. Applicants must provide sufficient
documentation to enable the Loan Originator to verify the asset information and compute the
market and cash value of the asset. Applicants must provide assets documentation as required on
Paragraph 4.3 regardless of the balance or value of the assets disclosed. In addition, Form RD
3550-4, Employment and Asset Certification, will be used to confirm the level of the
household’s combined net assets.
B.
Verification of Assets
Copies of bank or brokerage company statements provide more information than just
account balances. The transaction history reveals recurring deposits or debits that may impact
the applicant’s ability to qualify for a loan. Assets statements must cover account activity for the
most recent two-month period (or, if account information is reported on a quarterly basis, for the
most recent quarter). Loan originators must:
• Confirm that the applicant has enough funds for closing.
• Obtain a credible explanation from the applicant regarding the source of funds for any
large deposits or increase in the account balance. A large deposit may be the
proceeds from a new personal loan not yet reported to the credit bureaus.
C.
Calculating Market and Cash Value
The market value of an asset is simply its dollar value on the open market. For example,
the market value of $2,000 in a savings account is $2,000 and the market value of real estate is
its appraised value. The cash value of an asset is the market value, less reasonable expenses to
convert the asset to cash. For example, the cash value of stock worth $5,000 would be $5,000
less any broker’s fee.
____________________________________________________________________________________________
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Example – Assets that are Part of an Active Business
Megan and Tylar Wasson own a copier and courier service. None of the equipment that they use in their
business is counted as an asset (e.g., the copiers, the fax machines, the bicycles).
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HB-1-3550
Paragraph 4.5 Overview of Policies Related to Assets
D.
Retirement Assets
Retirement assets are savings and
investments that have been specifically
designated as retirement funds. Access
to retirement assets is restricted by law,
employer policy, or both, depending on
the retirement arrangement’s legal form.
Typical restrictions include retirement
age, vesting requirements, and ability to
access funds.
Example – Withdrawals from IRAs or 401(k) Accounts
Jim Dunn retired recently. He has an IRA account but is not receiving periodic payments from it
because his pension is adequate for his routine expenses. However, he has withdrawn $2,000 for a trip
with his children. The withdrawal is not a periodic payment and is not counted as income.
Typical Retirement Plans
• Employer-sponsored retirement plans: 401(k), 403(b), 457
plans, employer and employee association trust accounts,
money purchase plans, profit-sharing plans, SEP-IRAs
(Simplified Employee Pensions) and SIMPLE IRAs (Savings
Incentive Match Plans for Employees).
• Individual Retirement Arrangements (IRAs): Traditional IRA,
Roth IRA, and Keogh plans.
HB-1-3550
4.6
LIMITATIONS ON ASSETS
If the cash value of non-retirement assets is greater than $15,000 for nonelderly
households or $20,000 for elderly households, the cash value in excess of these amounts must be
used toward the purchase of the property.
Applicants will not be required to use retirement assets as a down payment, regardless of
their retirement status.
4.7
CALCULATING INCOME FROM ASSETS FOR ANNUAL INCOME
For the purpose of computing annual income, the current assets (retirement and
non- retirement) of all applicants and co-applicants, as well as applicable net family assets,
are considered. Reference Exhibit 4-1 for additional information.
4.8
CALCULATING INCOME FROM ASSETS FOR REPAYMENT INCOME
When calculating assets for repayment income, only the assets of the note signers are
considered, and the actual income derived from the assets, which are determined stable and
dependable, are used. Form RD 3550-4, Employment and Asset Certification, should be used
to certify the level of the household’s net family assets.
____________________________________________________________________________________________
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Revised (12-12-19) PN 532
HB-1-3550
SECTION 3: CREDIT HISTORY [7 CFR 3550.53(h)]
4.9
OVERVIEW
To be eligible for a Section 502 loan, applicants must demonstrate that they are
reasonably able and willing to repay an Agency loan. This section discusses the credit
requirements, the additional credit checks, how to conduct the full credit history review, when
to use Form RD 1944-61, and the criteria for making credit exceptions.
4.10
CREDIT REQUIREMENTS
The Loan Originator must evaluate the credit history of each proposed party to the
note. An applicant’s credit record does not have to be perfect; a few instances of credit
problems can be acceptable if an applicant’s overall credit record demonstrates an ability and
willingness to repay obligations. Exhibit 4-4 outlines indicators of unacceptable credit that
must be investigated by the Loan Originator. These indicators are not automatic disqualifiers.
The Loan Approval Official can make exceptions in limited circumstances, as described in
Paragraph 4.14.
The Loan Originator must investigate
indicators of unacceptable credit to determine
whether they are accurate, and whether there is
an acceptable explanation for the problem that
might justify an exception. Failure to understand
the nature of a credit problem could put the
Agency at risk of providing financing to an applicant who is unable or unwilling to repay the
debt, or could cause the Agency to reject an applicant on the basis of inaccurate or
incomplete information.
For instance, an applicant with little or no credit history reflected on a credit report
will require further examination. Since some creditors do not report to the credit repositories,
the Loan Originator should identify nontraditional credit sources to develop a credit history.
Nontraditional credit information that may demonstrate the applicant’s ability and willingness
to meet debt obligations should be verified using the guidelines in Paragraph 4.12, which
include third party verifications from impartial and unrelated parties, canceled checks that cover
a sufficient period of time, or other acceptable means.
____________________________________________________________________________________________
4-40
Cosigners
Cosigners must meet the same credit-
worthiness requirements as applicants and cannot
be used to compensate for an applicant’s
unacceptable credit history.
HB-1-3550
Paragraph 4.10 Credit Requirements
Exhibit 4-4
Indicators of Unacceptable Credit
• Little or no credit history. The lack of credit history on the credit report may be mitigated if the applicant
can document a willingness to pay recurring debts through other acceptable means such as third party
verifications or canceled checks. Due to impartiality issues, third party verifications from relatives of
household members are not permissible.
• Payments on any installment account, on a per account basis, where the amount of the delinquency
exceeded one installment for more than 30 days within the last 12 months.
• Payments on any revolving account, on a per account basis, which was delinquent for more than 30 days on
two or more occasions within the last 12 months.
• A foreclosure that has been completed within the last 36 months.
• An outstanding Internal Revenue Service (IRS) tax lien or any other outstanding tax liens with no
satisfactory arrangement for payment.
• Two or more rent or mortgage payments paid 30 or more days late within the last 2 years. If the applicant
has experienced no other credit problems in the past 2 years, only 1 year of rent history will be evaluated.
This requirement may be waived if the program loan will reduce shelter costs significantly and contribute
to improved repayment ability.
• Outstanding collection accounts with a record of irregular payments with no satisfactory arrangements for
repayment, or collection accounts that were paid in full within the last 6 months, unless the applicant had
been making regular payments previously.
• Non-Agency debts written off within the last 36 months, unless the debt was paid in full at least 12 months ago.
• Agency debts that were debt settled within the past 36 months, or are being considered for debt settlement.
• Delinquency on a federal debt.
• A court-created or court-affirmed obligation or judgment caused by nonpayment that is currently
outstanding or has been outstanding within the last 12 months, except:
◊ A bankruptcy in which:
◊ Debts were discharged more than 36 months prior to the date of application; or
◊ Where an applicant successfully completed a bankruptcy debt restructuring plan and has
demonstrated a willingness to meet obligations when due for the 12 months prior to the date of
application.
◊ A judgment satisfied more than 12 months before the date of application.
An applicant with an outstanding judgment obtained by the United States in a Federal court, other than
the United States Tax Court, is not eligible for a Section 502 loan. This requirement is statutory and
cannot be waived.
____________________________________________________________________________________________
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Revised (12-12-19) PN 532
Paragraph 4.10 Credit Requirements
If an applicant’s credit history is unacceptable, the Loan Originator should counsel the
applicant about the specific problems identified, and ways to improve the household’s credit
record for the future. The Loan Originator should make it clear that establishing a pattern of
meeting obligations that conforms to the Agency’s standards might make it possible for the
applicant to qualify for a Section 502 loan in the future.
The Loan Originator must use consistent standards and procedures when
evaluating credit qualifications to ensure equity and fairness. Special areas of concern
include:
• Determining what constitutes acceptable documentation;
• Counseling applicants about ways to correct adverse credit; and
• Interpreting subjective information.
4.11
CONDUCTING ADDITIONAL CREDIT CHECKS
Over and above ordering a Tri-Merge Credit Report (TMCR), the Loan Originator should
check the Department of Treasury’s Do Not Pay (DNP) portal and MortgageServ’s “SSN CROSS
REFERENCE” softlink key.
A.
Do Not Pay Portal
Except in very unusual circumstances, an applicant who is delinquent on a Federal debt is
not eligible for the direct programs. The Loan Originator can verify whether the applicant has
delinquent Federal debt through the DNP portal.
Rural Development staff should visit the Agency’s DNP SharePoint page for more information including
training, FAQ’s, newsletters, etc.:
https://usdagcc.sharepoint.com/sites/rd_cfo/icd/DoNotPay/SitePages/Home.aspx
____________________________________________________________________________________________
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HB-1-3550
Paragraph 4.11 Conducting Additional Credit Checks
Through the DNP portal, the following data sources will be checked: Credit Alert
System; SAM Exclusion Records; SSA Death Master File; and Treasury Offset Program Debt
Check.
For the Credit Alert System, a checked result (i.e. a hit was return) could indicate a “Case
Type” of B (multiple hits), C (claim), D (default), F (foreclosure), or J (judgment). The applicant
has no adverse credit found in the Credit Alert
System if there is no checked result.
The Loan Originator should print the DNP
results page and file it in the applicant’s case file to
document that the applicant’s delinquency status
has been checked.
If DNP indicates that the applicant has a
delinquent Federal debt, the Loan Originator should suspend application processing, notify the
applicant of the reason for the suspension, and
provide the telephone number DNP lists as a point of contact for resolving the delinquency. If
the applicant does not notify the Agency within 15 days that the problem has been resolved, the
Loan Approval Official must reject the application and the applicant should be notified in
writing. The Administrator may grant an exception to this requirement if it is in the best interest
of the Government.
If the delinquency is paid in full or otherwise resolved within the 15-day time frame,
application processing can continue. If the applicant resolves the issue after the application has
been rejected, and wishes to reapply, the applicant must submit a new application, which must be
processed according to the new submission date.
B.
Infile Credit Report
Infile credit reports can only be used for pre-qualification reviews completed by
Agency staff, which should be limited as outlined in Section 1 of Chapter 3.
Infile credit reports will not be obtained for 502 direct packaged loan applications, as the
packager is responsible for conducting the pre-qualification review. The only credit report
pulled by the Agency will be a TMCR when a complete 502 direct application is received.
Infile credit reports will be obtained by the Agency for all 504 applicants with adjusted income greater
than 30% of adjusted median income, regardless of the size of the loan being requested.
____________________________________________________________________________________________
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Exceptions to
Delinquent Federal Debt
If the applicant has a delinquent Federal
debt, the Administrator has the authority to grant
an exception if arrangements for payment have
been made and it is in the best interest of the
Government.
HB-1-3550
Since infile credit reports for pre-qualifications and TMCRs for complete applications are
considered a hard inquiry on the applicant’s credit report, care must be taken to avoid
unnecessary orders. Do not order an infile credit report to confirm that a debt has been paid or
for other similar reasons and do not order an infile credit report once an application has been
received.
4.12
CONDUCTING FULL REVIEW OF CREDIT HISTORY
Once a complete application is received,
the Loan Originator must order a tri-merge
credit report through UniFi. When an
incomplete application packet and credit report
fee have been received, the Loan Originator will
order the tri-merge credit report through UniFi
as long as, at a minimum, Form RD 3550-1,
Authorization to Release Information has been received. Otherwise, the fee must be returned to
the applicant if it cannot be deposited within 3 business days of receipt.
A credit report from another party (e.g. Self-Help Grantee, loan application packager, or
leveraged lender) cannot be used in the Agency’s decision-making process. The Loan Originator
must also obtain the applicable third-party credit verifications to determine whether the
applicant’s credit history meets the Agency’s criteria.
Procedures for obtaining third-party verifications are described in Paragraph 3.15.
Guidelines for reviewing the applicant’s credit history are provided here.
If an applicant is denied assistance based upon information contained in a tri-merge credit
report, the Agency must provide the applicant:
• The name, address, and toll free number of the credit bureau;
• A statement to the applicant that the denial of their loan request was made by the
Agency, and not the credit bureau;
• Notice of their right to obtain a free copy of their credit report from the credit bureau
within 60 days from the date of the Agency’s adverse action; and
• Notice of the applicant’s right to dispute to the credit bureau the accuracy or
completeness of the credit report provided to the Agency.
____________________________________________________________________________________________
4-44
Helpful Hint
Unless the applicant makes a written request for a
copy of their tri-merge credit report, the Agency will
not provide a copy. Applicants are not entitled to a
copy of their infile credit report that may have been
pulled during the pre-qualification process.
HB-1-3550
Paragraph 4.12 Conducting Full Review Of Credit History
A.
Tri-Merge Credit Report
The Tri-Merge Credit Report (TMCR) will include Equifax Beacon 5.0, TransUnion
FICO Risk Score 04, and Experian Fair Isaac v2 credit scores, if available. The report will include
data from the three main repositories, updated verifications on all trade lines with a balance
(updated to within 90 days), and a court records check that includes adverse items for the prior 7-
year period. The TMCR will also provide the results of a check against the U.S. Department of
the Treasury’s Office of Foreign Assets Control (OFAC) database. OFAC administers and
enforces economic and trade sanctions against targeted foreign countries, terrorists, international
narcotics traffickers, and those engaged in activities related to the proliferation of weapons of
mass destruction. If an OFAC match message appears on the TMCR, refer to the U.S. Treasury
website at https://www.treasury.gov/about/organizational- structure/offices/Pages/Office-of-
Foreign-Assets-Control.aspx for guidance on how to determine if the match is valid. If a due
diligence review concludes that the match is valid, the applicant should be denied assistance and
referred to the OFAC contact number for further information as per the aforementioned website.
If there is no OFAC match message on the TMCR, or the match was not valid, processing may
continue as directed in the following paragraphs.
For applicants with no outstanding judgments obtained by the United States in a Federal
court, with no significant delinquency, and who have more than one credit score listed on their
TMCR that result in a credit score of 640 or higher on their TMCR, Exhibit 4-4 need not be used
to identify indicators of unacceptable credit handling. In addition, a verification of rent and Form
RD 1944-61, Credit History Worksheet, need not be completed. These applicants are
automatically classified as having acceptable credit histories regardless of what is listed on the
TMCR. To avoid potential disparate treatment, additional credit analysis is not appropriate.
Credit scores are used to reduce the time necessary to conduct credit analyses, but under no
circumstance can credit scores be used to make adverse decisions.
An applicant with significant delinquency on the credit report, even with a credit score of
640 or higher, will be subject to further credit analysis and Form RD 1944-61 must be completed.
Significant delinquency includes the following:
• A foreclosure, deed-in-lieu of foreclosure, short sale, or mortgage charge-off that has
been completed within the last 36 months.
• A Chapter 7 bankruptcy discharged less than 36 months prior to the application date.
____________________________________________________________________________________________
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HB-1-3550
Paragraph 4.12 Conducting Full Review Of Credit History
• A Chapter 13 bankruptcy where the applicant has not successfully completed the
debt restructuring plan or has not demonstrated a willingness to meet obligations
when considering the last 12-month payments made under the restructuring plan.
• Agency debts that were debt settled within the past 36 months, or are
being considered for debt settlement.
Having an insufficient credit score does not mean the applicant has demonstrated
inability or unwillingness to repay debt; it means the Loan Originator must obtain
nontraditional credit sources to make this determination and use Form RD 1944-61, Credit
History Worksheet to conduct the credit analysis. To preclude the use of Exhibit 4-4 to identify
indicators of unacceptable credit handling, the following practice will be established:
• If the three credit scores are listed on the TMCR, the middle numerical score
should be used.
• If the TMCR only contains two scores, the lower of the two should be used.
• If the TMCR only contains one score, a full credit analysis must be completed.
• If no score is available, the credit bureau will report a “zero.” Zero in these cases
has the literal meaning of null, or indicating there was not enough information or
credit references for the statistical model to compute a credit score value.
• If there is more than one applicant, each applicant must be viewed separately.
____________________________________________________________________________________________
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HB-1-3550
Paragraph 4.12 Conducting Full Review of Credit History
• Loan Originators must obtain nontraditional credit verifications to augment a credit
report if the applicant has less than two scores. However, non- traditional credit must
never be used to enhance the credit of an applicant with a negligent credit history
(poor payment history, excessive use of credit, over the credit limit balances, etc.) or
to offset derogatory references found in the applicant's traditional credit report, such as
collections and judgments, even if the traditional credit is insufficient.
If the resulting credit score is less than 640 and the TMCR contains any indicators of
unacceptable credit as outlined in Exhibit 4-4, the Loan Originator should discuss the findings
with the applicant and ask for third-party verifications that support the applicant’s assertions. A
copy of the TMCR must be retained in the case file. If the TMCR is expected to be more than
nine months old when the underwriting decision is to be made or at the time of closing, a new
report must be ordered at no cost to the applicant.
B.
Fair and Accurate Credit Transactions
In accordance with the Fair and Accurate Credit Transactions (FACT) Act of 2003, the
Agency is required to disclose to the applicant, upon request, the score that a credit bureau
distributed and was used in connection with their loan. In addition, we are required to disclose
the key factors affecting the applicant’s credit scores. Therefore, Attachment 3-H, Credit Score
Disclosure, must be provided to the applicant. It must be explained to the applicant that the credit
score was not used to determine loan approval. The Agency only uses the credit score to presume
acceptable credit in lieu of other credit underwriting practices.
Consumers also have the right to dispute information on their credit report, which they
believe to be inaccurate. This can be done directly with the furnisher of credit, as well as a
consumer reporting agency. Because the Agency’s credit review may be subject to change upon
resolution of a disputed account, Form RD 1944-59, Certificate of Eligibility, or loan approval
should not be issued until the dispute is resolved. Generally, disputes are investigated by the
consumer reporting agency(s) within 30 to 45 days of receipt of the notice of dispute from the
consumer; and written results of the investigation are provided to the consumer within 5 business
days after completion of the investigation. For more information visit https://www.ftc.gov/ and
http://www.consumerfinance.gov/askcfpb/.
The FACT Act also added a new section to the Fair Credit Reporting Act to prohibit
creditors from obtaining or using medical information pertaining to a consumer in connection
with any determination of the consumer's eligibility, or continued eligibility, for credit.
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Revised (12-12-19) PN 532
HB-1-3550
Paragraph 4.12 Conducting Full Review of Credit History
Consumer reporting agencies are prohibited from providing a lender with a credit report
that contains identifying information for medical debts (be it a collection, judgment, etc.). The
name of the medical service provider and the nature of the medical service is suppressed or
coded so that lender decisions are not based on discriminatory factors. However, suppression or
coding of identifying information for medical debts does not eliminate the need for
consideration. Medical debts that are chronically late, placed in collection, or turned into
judgments remain indicators of unacceptable credit handling that must be addressed (unless the
applicant has a credit score of 640 or higher).
Since the indicators of unacceptable credit handling are general guidelines that aid in
determining the degree of risk and are not absolute underwriting criteria, the Loan Originator
must subjectively consider the circumstances that resulted in the blemished debt. If the
identifying information for a medical debt is suppressed or coded and the applicant is claiming
that the debt resulted from a situation that was beyond their control, the applicant must provide
adequate third-party documentation to support their claim.
If the applicant cannot identify the medical debt given the payment information (date
opened, balance owing, etc.), the applicant will have to contact the repository directly to obtain a
copy of their credit report. Credit reports provided by a repository directly to a consumer will
not have the medical information suppressed. To avoid a fee, the applicant can obtain a free
credit report by calling 1-877-322-8228 or logging into https://www.annualcreditreport.com. By
law, individuals are entitled to receive one free credit file disclosure every 12 months from each
of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion.
An exception cannot be granted on that the applicant’s assertion that they were unaware
of the blemished debt or that the blemished debt is not theirs. Supporting documentation must be
furnished before a Loan Approval Official considers granting an exception.
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Paragraph 4.12 Conducting Full Review of Credit History
C.
Other Credit Verifications
If, and only if, the applicant’s credit score is less than 640, the Loan Originator should
send Form RD 1944-60, Landlord’s Verification, and Form RD 410-8, Applicant Reference
Letter, to the parties indicated in the application. The forms should be accompanied by a
preaddressed, pre-stamped envelope and Form RD 3550-1, Authorization to Release
Information, which authorizes the respondent to release the information.
1. Landlord’s Verification
Form RD 1944-60 is used to verify the applicant’s past record of making timely rental
payments. The Loan Originator should generate separate copies of Form RD 1944-60 for
each landlord listed on the application for the past 2 years. A landlord’s verification is
required when the applicant’s credit score is less than 640.
If the landlord reports that during the past 24 months (or whatever is applicable) the
applicant “always pays by the due date” and is current on the rent, the applicant’s rental
history should be considered satisfactory. If the landlord reports that the applicant “pays
over 30 days late” or “generally stays behind schedule,” or if the applicant is currently
behind on the rent, the Loan Originator should follow up with a call to the landlord.
Confirmation that the applicant has paid 2 or more rent payments 30 or more days
late within the last 2 years generally would be an indicator of unacceptable credit.
However, if the amount of rent paid by the applicant was significantly higher than the
likely cost of principal, interest, taxes and insurance (PITI) with a Section 502 loan, an
exception might be appropriate.
2. Applicant Reference Letter
Form RD 410-8 is used to obtain information about an applicant’s credit history that
might not appear on a credit report, for example, credit from a local store. It can be used
to document an ability to handle credit effectively for applicants who have not used
sources of credit that appear on a credit report. It also provides a mechanism for
following up on repayment history for debts reported by the applicant on the application
that do not appear on the credit report.
3. Non Traditional / Alternative Credit
For applicants who do not use traditional credit, or that have less than two credit
scores, the Loan Originator must develop a credit history from at least three sources.
However, only two sources are required if one of those is a verification of rent or
mortgage payments.
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Paragraph 4.12 Conducting Full Review of Credit History
A combination of traditional and nontraditional sources may be used to develop the
credit history; and the non-traditional payments should have been made for at least 12
months within the past 24 months from the date of the credit report.
Loan Originators must verify that the providers of nontraditional credit exist, and
confirm that the applicant, in fact, has credit history with the creditor. Payments made to
relatives for credit sources are ineligible as a nontraditional credit reference.
a. Verification of a Nontraditional Credit Provider: To verify the credit provider
information, Loan Originators must use a published address or telephone number for
that creditor, such as listing in the yellow pages.
b. Confirming the Existence of a Nontraditional Credit: Documentation to confirm
that the nontraditional credit exists and that the applicant has sufficient credit
references to evaluate his/her ability and willingness to repay debt may include a
sufficient payment history from the following sources:
• Preferred Sources: Rental housing; utilities (if not included in the rent
payment); telephone service, cable television, and internet service; insurance
payments (payroll deductions to pay for insurance premiums are not
considered alternative credit).
• Alternative Sources: Payments to child care providers (provided the
provider is an established child care business); school tuition; payments to
local retail stores; storage units companies; payment arrangements for the
uninsured portion of any medical bills; a history of saving by regular deposits
resulting in a balance equal to three months of the proposed mortgage
payments; and similar credit sources. Child support paid is not an acceptable
source.
The payment history may be obtained by sending Form RD 410-8, Applicant
Reference Letter, to the nontraditional creditors indicated by the applicant or by obtaining
canceled checks, money order receipts, billing statements, and/or payment history print-
outs from the creditor. Loan Originators should carefully evaluate the billing statements
to establish the payment history (past due amounts, late payment charges) for the Loan
Approval Official’s review. General statements such as “satisfactory” or “in good
standing” are not sufficient to establish a satisfactory repayment history.
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Paragraph 4.12 Conducting Full Review Of Credit History
The payment history should cover 12 months within the past 24 months from the date
of the application. However, other payment installments (such as quarterly or annually)
can be considered when verifying nontraditional credit sources. When other payment
installments are used, the length of the payment history should be adjusted accordingly.
If the payments are made quarterly, verify that the last four payments were made. If the
payments are made annually, verify that at least the last two payments were made.
D.
Non-Purchasing Spouse Credit History
In community property states, the non-purchasing spouse’s obligations must be
considered in the total-debt ratio to determine the applicant’s purchasing capacity, unless
excluded by State law. However, the non-purchasing spouse’s credit history is never considered
a reason to deny a loan application. The Loan Originator must comply with applicable lending
laws in community property states.
To assist the Agency in verifying the non-purchasing spouse’s obligations, and since
UniFi will allow the ordering of credit reports on applicants only, the applicant’s non-purchasing
spouse must provide a copy of a credit report (or reports) which contains information from each
of the nationwide consumer credit reporting companies – Equifax, Experian, and TransUnion.
The application will be considered incomplete until this information is provided. Ideally, the
non-purchasing spouse will be able to furnish a copy of their free report obtained through
https://www.annualcreditreport.com. The provided report (or reports) cannot be more than nine
months old when the underwriting decision is to be made or at the time of closing. The Housing
Program Director may waive this requirement on a case-by case if obtaining the non-purchasing
spouse’s credit report isn’t feasible. For instance, the non-purchasing spouse is not a citizen or is
an emancipated minor. The non-purchasing spouse’s obligations will be evaluated in the same
way the applicant’s debts are evaluated and in accordance with the guidance in Paragraph
4.22.B. Unless excluded by State law, judgments of a non-purchasing spouse in a community
property state will be paid in full unless an exception is obtained from the Loan Approval
Official.
Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New
Mexico, Texas, Washington and Wisconsin. Puerto Rico allows property to be owned as
community property as do several Indian jurisdictions. Alaska is an opt-in community property
state, where property is separate unless both parties agree to make it community property
through a community property agreement or a community property trust. As laws vary from
state to state, Loan Originators should contact the appropriate Office of General Counsel with
questions regarding the consideration of a non-purchasing spouse’s credit history.
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(01-23-03) SPECIAL PN
Revised (12-12-19) PN 532
HB-1-3550
Paragraph 4.12 Conducting Full Review Of Credit History
Exhibit 4-5
Guidelines for Evaluating Credit Reports
• Different credit bureaus or repositories present information in different formats. Be familiar
with the different formats and take time in reviewing the report to avoid errors.
• Obtain clarification of any questionable items or terms (for example, terms such as “slow” or
“late pay” have varied meanings). No decisions should be made until the terms in question are
translated into defined terms (e.g., for this repository, “slow pay” means 30 days late).
Document clarification of terms in the case file.
• Upon receiving the credit report, verify the name, address, and Social Security Number.
• Compare the employment information and rental data on the credit report, if available, with
the information on the application.
• Compare the remainder of the credit report to the application. Consider the following questions
when reviewing the application.
◊ Are all the accounts reported on the credit report listed on the application? (Note: There
may be additional accounts on the application that are not on the credit reports because
not all creditors furnish information to a credit bureau or repository.)
◊ Does any of the information on the credit report contradict the application?
◊ What information indicates unacceptable credit? List late payments, charge offs and
other relevant information.
◊ Does the credit report have accounts included in a consumer credit counseling program? If
so, document a12-months repayment history under the plan with all payments made on time
and the applicant has written permission from the counseling Agency to enter into a
mortgage transaction.
◊ Does the applicant rely heavily on the use of revolving credit? Account balances that are
at, near, or over the credit limit may indicate that the applicant is overextended.
◊ Is the applicant responsible for the trade line or an authorized user? An authorized user
account may not be considered when determining the applicant’s creditworthiness
unless the applicant provides supporting documentation to demonstrate that they have
made the monthly payments for the past 12 months.
• If the credit report reflects no credit history, ask the applicant for other nontraditional credit that
may demonstrate a willingness to pay recurring debts like rent, utilities, phone, medical, etc.
Third party verifications from impartial and unrelated parties or canceled checks that cover a
sufficient period of time are acceptable forms of documentation.
• Review the number and dates of credit inquiries. The presence of many and recent credit
inquiries in different industries may indicate that the applicant is looking for credit to finance
purchases. Confirm that the applicant has not obtained new credit that is yet to be reflected in
the credit report.
• Highlight areas of concern and develop a list of questions or issues that need clarification
from the applicant.
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4.13
CREDIT HISTORY WORKSHEET
If the applicant’s credit score is less than 640, Form RD 1944-61, Credit History
Worksheet, must be used to summarize the applicant’s credit history and to determine whether
there are any indicators of unacceptable credit as outlined in Exhibit 4-4. The Loan Originator
should complete this form and include it in the case file to aid the Loan Approval Official in
reviewing the applicant’s credit history. The Loan Approval Official must confirm the
completeness and accuracy of this form before making a credit decision.
4.14
ASSESSING ADVERSE CREDIT
A. Making Exceptions
The Loan Originator should review the credit history for any signs of unacceptable
credit using the criteria outlined in Exhibit 4-4. Credit history problems may be more reflective
of an inability than an unwillingness to meet financial obligations. However, derogatory credit
may also be the result of extenuating circumstances causing a significant reduction in income
and/or increase in financial obligations. Extenuating circumstances are events beyond the
applicant’s control and unlikely to reoccur. The applicant must provide a letter to explain the
nature of the event that led to the derogatory credit and provide supporting documentation
accordingly. The Loan Approval Official must carefully review the documentation provided by
the applicant to confirm that the adverse credit was in fact due to extenuating circumstances
(e.g. the dates of the derogatory credit must be consistent with the dates of the event) and not
financial mismanagement. The loan file must include an underwriting analysis explaining the
rationale for the credit exception and determination that the events causing the financial
difficulties were, in fact, beyond the applicant’s control and are unlikely to reoccur.
The Loan Approval Official may consider an exception in the following
types of situations.
• Reduced shelter costs. The applicant’s rental or mortgage payment history has
been unacceptable and the loan will significantly reduce the applicant’s shelter
costs, which will result in improved debt repayment ability. Anticipated utility
cost savings due to energy efficiency improvements (e.g. furnace replacement,
insulation, energy efficient windows, etc.) may also be considered a reduced
shelter cost for an existing homeowner.
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Revised (12-12-19) PN 532
HB-1-3550
Paragraph 4.14 Assessing Adverse Credit
• Temporary situation. The circumstances that caused the credit problems were temporary in
nature and beyond the applicant’s control. Examples include loss of job, delay or reduction
in benefits, illness, or dispute over payment of defective goods or services.
• Benefit to the Government. The applicant is delinquent on a Federal debt, and the
Agency loan will allow the applicant to take actions that benefit the Government. This
type of exception can only be made by the Administrator.
The Loan Approval Official is not authorized to make an exception in the case of an
applicant with an outstanding judgment obtained by the United States in a Federal court, other than
the United States Tax Court.
B. Reviewing Significant Delinquencies
1. Chapter 7 Bankruptcy
A Chapter 7 bankruptcy, also known as liquidation bankruptcy, eliminates all of an individual’s
unsecured debt. Applicants with a Chapter 7 bankruptcy discharged more than 36 months prior to
the loan application are not considered to have unacceptable credit as long as they have re-
established good credit. Re-establishing good credit includes consistently making payments on time,
not incurring additional or excessive debt, and keeping balances significantly below the credit limit.
If the bankruptcy has been discharged less than 36 months from the date of application, the
Loan Approval Official may make a credit exception if the bankruptcy was due to extenuating
circumstances and the applicant has been able to re-establish good credit since the factors leading to
the extenuating circumstance were removed. The loan file must include the loan documentation
requirements for making a credit exception using extenuating circumstances.
2. Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a repayment plan that protects individuals from collection action
during the plan period, from three to five years, and discharges any unpaid balance at the end of
the plan. The repayment amount is determined by the court based on the individual’s income. An
applicant with a Chapter 13 Bankruptcy reported on the credit profile may be able to qualify for a
loan if the following requirements are met:
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Paragraph 4.14 Assessing Adverse Credit
• Successful completion of the debt restructuring plan. The completion date is the
bankruptcy discharge date; and
• Demonstrate willingness to meet obligations when due for the 12 months prior to
the date of application. The last 12-month payments made under the bankruptcy
restructuring plan may be used to document the applicant’s willingness to repay
debt. This means that all required payments were made on time and for the
amount agreed upon under the plan.
A Chapter 13 bankruptcy is not considered unacceptable credit, and a credit exception is
not required, when the aforementioned requirements have been met. However, the applicant
must obtain written permission from the Bankruptcy Court to enter into a financial obligation
with the Agency.
3. Significant Mortgage Delinquency
A foreclosure is a significant mortgage delinquency. Other significant mortgage
delinquencies are deeds-in-lieu of foreclosure, short sales, and mortgage charge-offs. These
are significant mortgage delinquency events that, when present in the credit report,
drastically increase the risk of a loan and must be carefully considered in the loan risk
analysis when reviewing the loan application. For any significant mortgage delinquency
transaction, the Loan Originator must confirm that the applicant has been completely
released from the previous mortgage liability and is not responsible for any deficiency
judgement. The following describes the most common significant mortgage delinquency
actions reported to the credit bureaus that are used as an alternative to a formal foreclosure
because they reduce the time and cost of repossessing a property and borrowers avoid the
public notoriety of a foreclosure:
• Deed-in-lieu of Foreclosure. In a “deed-in-lieu of foreclosure” transaction the borrower
voluntarily transfers the property rights back to the creditor in an exchange for a
mortgage cancellation. These transactions are most common when the property subject to
the potential foreclosure has positive equity or if the homeowner meets the requirements
for financial hardship relief.
• Short Sale. Short sale is a term used to describe a sale where the debt owing against a
property combined with the costs associated with the sale exceeds the property’s market
value. Short sales are also known as pre-foreclosure sales because the lender has not
completed the foreclosure process but plans to foreclose if the property is not sold by the
homeowner under the terms approved by the lien holders. Depending on the short sale
agreement, the applicant may still be responsible for the amount that “fell short” as a
result of the short sale transaction. The loan deficiency remaining after the sale is
typically forgiven; however, this is not always the case.
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Paragraph 4.14 Assessing Adverse Credit
• Mortgage Charge-Off. A mortgage charge-off is a debt classification used by
creditors when they believe a mortgage debt is not collectible. This action does not
mean that the debt is no longer valid or that has been forgiven. An applicant with a
mortgage charge-off reported on the credit report may still be responsible for the
debt.
If the significant mortgage delinquency was due to the applicant’s failure to meet
financial obligations, the applicant is not eligible for a loan for 36 months from the date the
obligation was released. However, if the delinquency was due to extenuating circumstances,
the applicant may be eligible for a loan if:
• More than 12 months have elapsed between the date the applicant was released from
the mortgage debt and the application date; and,
• The applicant has demonstrated an ability and willingness to meet obligations when
due for the 12 months prior to the date of application; and,
• The circumstances leading to the delinquency are properly documented and justified.
Selling a home through a short sale merely because the property value decreased
significantly is not an extenuating circumstance.
4. Agency debts that were debt settled within the past 36 months, or are
being considered for debt settlement.
C. Resolving Collection Accounts
Paying an outstanding account is not, in itself, justification to say the applicant has
demonstrated a willingness to meet obligations. Payment of a collection account could deplete
the applicant’s cash resources that could be used for reserve or closing costs. The Loan
Approval Official may determine it is not necessary to pay a collection account if there is
evidence that the account does not affect the Agency’s first lien position. If there were
extenuating circumstances to the adverse credit, the Loan Approval Official may determine that
the late payments are not reflective of the applicant’s ability to meet financial obligations or
manage debts. All extenuating circumstances must be documented on the Credit History
Worksheet.
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HB-1-3550
SECTION 4: OTHER ELIGIBILITY REQUIREMENTS
4.15
OWNING A DWELLING
An applicant who owns a dwelling generally is not eligible for a Section 502 loan,
except for refinancing assistance, as described in Paragraph 6.5 B. However, if the applicant’s
dwelling is structurally unsound, functionally inadequate, or too small to accommodate the
needs of the household, funds may be provided to improve the existing dwelling or to purchase
a new one.
The following are examples where the Agency can assist an applicant in the purchase of a
new home provided they meet all other eligibility criteria and the existing property is properly
handled (e.g. sold prior to the Agency’s loan closing and the proceeds in excess of the
program’s asset threshold are used for a down payment; the sale of the home is a loan closing
condition and a lien is placed against the property so that any future proceeds in excess of the
program’s asset threshold are used as a principal reduction; and/or any long term debt
obligation is considered in the total debt ratio).
• An applicant lives adjacent to an industrial operation. The business’s operations
result in vibrations that have caused the foundation of the applicant’s home to
severely shift causing cracks in the home and an unsafe living condition.
• An applicant lives in a two-story dwelling which is not accessible to a
household member with a disability.
• An applicant lives in a manufactured home that is not affixed to a permanent
foundation.
• An applicant is dealing with an overcrowded situation now that their family has
grown (i.e. there are more than two household members per bedroom).
4.16
ABILITY TO OBTAIN OTHER CREDIT
To be eligible, the applicant must be unable to obtain credit from other sources on terms
and conditions they can reasonably be expected to fulfill. Due to limited repayment ability, all
very low-income applicants and any applicants qualifying for payment assistance are presumed
to be unable to obtain credit from other sources. For other applicants, the Loan Approval
Official should determine whether the applicant must provide written documentation from
another source that they were unable to obtain credit on reasonable terms and conditions.
Factors to consider include, but are not limited to, the amount of payment subsidy the applicant
may be eligible for, down payment requirements, or fees and other costs, etc.
Applicants must reduce the need for credit by using available non-retirement assets, as
described in Section 2. In addition, applicants should be encouraged to obtain a portion of the
needed funds in the form of affordable housing products.
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HB-1-3550
4.17
OCCUPYING THE PROPERTY [7 CFR 3550.53(C)]
To be eligible for a Section 502 loan, applicants must agree to personally occupy the
dwelling on a permanent basis. On the basis of this requirement, 2 types of applicants require
special review.
Active duty military applicants. Because of the probability of transfer, military
personnel on active duty should not receive loans without proof that a discharge will be
received within a reasonable period of time, usually within 1 year. A military serviceperson
who cannot physically reside in a property because they are on active duty will be considered
to meet the occupancy requirements if their family will occupy the home.
Student applicants. Due to the probability of moves after graduation, full-time students
cannot obtain loans unless they intend to make the home a permanent residence and there are
reasonable prospects of securing employment in the area after graduation.
4.18
LEGAL CAPACITY [7 CFR 3550.53(e)]
To be eligible for a loan, the applicant must be considered an adult under State law, and
must have the legal capacity to incur the loan obligation. An applicant with a court-appointed
guardian or conservator who is empowered to obligate the applicant in real estate matters is
eligible for a loan. The Loan Originator should assume that any applicant has the legal capacity
to enter into the loan unless there is evidence to the contrary.
4.19
SUSPENSION OR DEBARMENT [7 CFR 3550.53(f)]
Individuals who have been suspended or debarred from participation in Federal
programs are not eligible for Agency assistance.
4.20
CITIZENSHIP STATUS [7 CFR 3550.53(b)]
To be eligible for Agency assistance, the applicant must be a U.S. citizen, a U.S. non-
citizen national, or a qualified alien and provide acceptable evidence of eligible immigration
status. Any applicant who is not a U.S. citizen, a U.S. non-citizen national, or a qualified alien
will be denied assistance. Aliens and alien non-citizen nationals must provide acceptable
evidence that they are qualified aliens as listed in Attachment 4-D.
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HB-1-3550
Paragraph 4.20 Citizenship Status [7 CFR 3550.53(b)]
The Rural Development has entered into an “Interagency Agreement” with the
Department of Homeland Security, U. S. Customs and Immigration Service (USCIS) to
allow access to the Systematic Alien Verification for Entitlements (SAVE) database.
This program enables Housing Program staff to obtain online immigration status
information to determine a non-citizen applicant’s program eligibility. In most cases,
SAVE will provide immediate responses concerning the immigration status of an
applicant.
4.21
TRUTHFUL APPLICATION
Applicants must provide truthful information when applying for assistance. Any
inconsistencies discovered throughout the application process must be addressed. The Loan
Originator must obtain sufficient documentation to verify the applicant’s identity.
Documentation will include picture identification (ID), evidence of age, and evidence of
the taxpayer’s identification number for each person that will sign the promissory note. A
photocopy of these documents shall be placed in the case file. Acceptable forms of identification
include a driver’s license, passport, work related ID cards, or similar documents. If
photographic ID is not available, the Loan Originator must thoroughly document why it is not
available and how identity of the applicant was verified. In addition, if the applicant’s taxpayer
identification number is not included on the picture ID, another means of documentation is
required to verify the taxpayer’s identification number such as a copy of the social security card,
a pay stub, or a bank statement. Applicants who provide false information, or who fail to
disclose relevant information, will be denied program assistance.
If Form RD 410-4, Uniform Residential Loan Application, indicates the applicant is a
U.S. citizen, no additional due diligence is generally required unless there is a reason to believe
the applicant is not a U.S. citizen, such as a Social Security card that reads “work only”. Always
require evidence if Form RD 410-4 indicates that the applicant is a qualified alien.
Non-citizen nationals are persons born in American Samoa or Swains Island or after the
date the U.S. acquired American Samoa or Swains Island, or a person whose parents are U.S.
non- citizen nationals. Always require evidence of this relatively uncommon status.
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Revised (12-12-19) PN 532
HB-1-3550
SECTION 5: PROCESSING THE CERTIFICATE OF ELIGIBILITY
4.22
DETERMINING REPAYMENT ABILITY [7 CFR 3550.53(g)]
The primary consideration in determining whether an applicant can afford to purchase a home is
the applicant's repayment income. Repayment income, as described in Paragraph 4.4 H., is the amount
of income parties to the note will have available to repay the debt.
However, other household expenses and debts
and the availability of payment subsidies also greatly
affect an applicant's repayment ability. The Agency
bases underwriting decisions on an analysis of the
percentage of income the applicant would be required
to spend on housing costs and the applicant’s Total
Debt (TD) if the loan is approved. Using these 2
percentages, called ratios, is a standard practice throughout the lending industry. Borrowers must
meet the Agency’s standards for both ratios.
A. The PITI Ratio
The PITI ratio compares the amount the
applicant must spend on housing costs
(including Principal on the loan, Interest on the
loan, real estate Taxes, and property Insurance)
and flood Insurance (as applicable) to the
applicant's repayment income. The leveraged
loan payment is included in PITI.
For new construction, the fully assessed tax amount will be used to determine repayment ability.
Very low-income applicants are considered to have repayment ability if they do not have to pay more
than 29 percent of Repayment income for PITI expenses. Applicants with incomes above the very low-
income limit are considered to have repayment ability if they do not have to pay more than 33 percent
of repayment income for PITI expenses.
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4-60
Maximum Ratios
PITI Ratio
Very low-income applicants
Other applicants
TD Ratio (all applicants)
29%
33%
41%
Example - Calculating PITI Ratios
$360 Principal and Interest payments
$ 50 Taxes
$ 10 Flood Insurance
$ 50 Insurance
$470 Total for PITI
$18,000 Annual Repayment Income
$ 1,500 Monthly Repayment Income ($18,000 ÷ 12)
PITI Ratio = $470 ÷ $1,500 = 31.33%
Taxes: Must be on full assessed value
HB-1-3550
Paragraph 4.22 Determining Repayment Ability [7 CFR 3550.53(g)]
B. The TD Ratio
1. Maximum TD Ratio
The TD ratio compares the applicant’s total debt to repayment income. Applicants,
regardless of income, are considered to have repayment ability when they do not have to
spend more than 41 percent of repayment income on total debt.
2. Establishing TD
Total debt includes PITI, all long-term obligations, and short term-obligations that
have a significant impact on repayment ability. The following items should be counted:
• PITI -- Principal, Interest, Taxes, and Insurance (including leverage loan
payments).
• Regular assessments, such as homeowner association or condominium
assessments.
• Long-term installment obligations with more than 6 months repayment remaining,
including loans, alimony, and child support but excluding revolving accounts.
Funds borrowed from a retirement account are excluded since the applicant is
repaying a loan to themselves. In the event an applicant does not repay the loan as
agreed, the debt is reported as taxable income during that tax year, but will be
treated as sporadic income.
• Payments that come due in the next 12 months.
• Deferred debt regardless of the length of the deferment period. If the credit report
does not reflect the anticipated monthly payment due at the end of deferment, the
Loan Originator should obtain verification of the monthly payment directly from
the creditor or request a copy of the loan agreement from the applicant.
____________________________________________________________________________________________
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HB-1-3550
Paragraph 4.22 Determining Repayment Ability [7 CFR 3550.53(g)]
• Student loan payments. The Loan Originator must use the actual monthly
payment under the existing repayment plan (as verified by the lender) if (1) the
loan is in repayment status, (2) the applicant has a credit score of 640 or
higher, (3) the applicant has no significant delinquency as outlined in
Paragraph 4.14 B., and (4) the applicant’s payment shock can be measured and
is not more than 100%. If all four conditions are met and the applicant who is
responsible for the student loan has, for example, a $0 monthly payment
because they are on an income-driven repayment plan, there will be no student
loan payment considered in the TD ratio. The State Office may grant a case-
by-case waiver to any condition if the overall risk assessment on the
application warrants it and is well documented in the casefile. When the above
does not apply (e.g. because the loan is in deferment or forbearance), the
higher of the monthly student loan payment listed on the credit report or one-
half percent (.50%) of the student loan balance must be used in the TD ratio.
• Short-term obligations that are considered to have a significant impact on
repayment ability, such as large medical bills and car or other credit payments.
• The minimum monthly payment required for revolving credit card debts using the
following applicable approach: 1) Use $0 if the credit report indicates no
outstanding balance. 2) Use the minimum monthly payment as reflected on the
credit report if the credit report indicates an outstanding balance and a minimum
monthly payment. 3) Use 5 percent of the outstanding balance if the credit report
indicates an outstanding balance but no specific minimum monthly payment or
obtain a copy of the most recent billing statement that reflects the actual monthly
payment and use that amount if lower. 4) If the credit report indicates an
outstanding balance but the applicant indicates that it will be (or has been) paid in
full, a monthly payment will not be used provided the Loan Originator obtains
documentation of payment in full.
____________________________________________________________________________________________
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HB-1-3550
Example - Calculating TD Ratios
$300
Principal and Interest payments
$810
Total Debt
$25,000 Annual Repayment Income
$ 2,083 Monthly Repayment Income ($25,000 ÷ 12)
TD Ratio = $810 ÷ $2,083 = 38.89%
Paragraph 4.22 Determining Repayment Ability [7 CFR 3550.53(g)]
• Debt from which the
applicant has not been
released need not be counted
if the applicant can
demonstrate that another party
$ 60
Taxes
has assumed responsibility for
$ 50
Insurance
the debt. For example, if a
$410
PITI Subtotal
divorced applicant can show
$300
Car payment
that the former spouse has
$100
Payments on credit card debt
made the last 12 months of
mortgage payments, the
mortgage payments on that
property need not be
counted when establishing
total debt.
• Contingent liabilities. If the applicant is a cosigner on a loan or any other
obligation, the debt must be included in the TD ratio. The Loan Originator should
never omit a credit report liability with a balance greater than zero from the loan
application unless strong supporting documentation is provided to evidence that the
primary signer has been making on time payments during the previous 12 months.
• If the applicant recently obtained additional credit, verify the terms of the
new obligation and include the monthly payment in the total debt ratio.
C. Determining the Maximum Loan Amount
The Loan Originator enters information provided by the applicant about household
size, income and debts, and general program information, including the Maximum loan limit
and median income for the area. Because a specific dwelling has not yet been identified,
estimates can be used for taxes, insurance, and purchase-related costs. Once this information
is entered, UniFi:
• Computes the PITI and TD ratios;
• Determines whether the applicant is eligible for payment subsidy, and how
much payment subsidy the applicant would receive; and
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Paragraph 4.22 Determining Repayment Ability [7 CFR 3550.53(g)]
• Computes the maximum loan amount for which the applicant qualifies, first using
standard loan terms and then using any adjusted terms for which the applicant may
qualify. Once a property is identified, if the adjusted term is not necessary than the
loan should be closed using the standard loan term.
• The Loan Originator will print out and sign the estimated UniFi Eligibility Summary
and place it in position 3 of the applicant case file.
D. Using Market Data to Interpret UniFi Results
Each Field Office should collect and maintain sales information for each market area in
its jurisdiction. By comparing the results of an applicant’s maximum loan calculation to market
data, Loan Originators can provide appropriate counseling for applicants and identify candidates
for 100 percent private financing or leveraged loans. MLS and comparable sales data collected
through appraisals are valuable sources of market information.
4.23
RESERVED
4.24
OTHER CONSIDERATIONS RELATED TO MAXIMUM LOAN AMOUNTS
The maximum loan amount that the applicant qualifies for as shown on the Eligibility
Summary generated from UniFi may be too low to enable the applicant to purchase a property that
meets program standards. Exhibit 4-6 outlines the procedure on how to handle this situation.
Conversely, the maximum loan amount and the resulting payment may be too high; setting the
stage for payment shock.
This paragraph provides guidance on additional financial resources and compensating
factors that the Loan Originator should consider to improve the applicant’s purchasing ability
only and concludes with a discussion on payment shock.
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Paragraph 4.24 Other Considerations Related To Maximum Loan Amounts
A. Using Compensating Factors
Exceptions to the standard method of determining repayment ability may be made if there
is information -- called compensating factors -- that indicates the prospective borrower may be
able to make larger regular loan payments than the ratio analysis suggests. Compensating factors
must be clearly documented in the applicant’s case file.
All compensating factors must be approved by the next level supervisor. To obtain
approval, the Loan Originator must prepare a written request that supports the use of
compensating factors and the higher amount requested. The Loan Originator should forward the
request and case file to the next level supervisor for approval.
Some of the compensating factors that can affect the amount of debt an applicant is permitted to
have are discussed below:
1. Payment History
The PITI and TD ratio analyses assume that households are able to contribute a
specified percentage of income toward housing costs. However, if an applicant has
historically paid a greater share of income for housing with the same income and debt
level, a higher payment may be approved. Utility and maintenance costs must be
considered as part of this analysis.
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Exhibit 4-6
Establishing an Area’s Minimum Loan Amount
Each Field Office should set, following the methodology provided by their State Office, a
minimum loan amount in each area that is “clearly less than” the amount needed to purchase a
decent, safe, and sanitary dwelling in that area. For example, if a county’s area loan limit is
$140,000, but based on an examination of properties financed by the Agency in that county
during the last 12 months shows that the lowest amount of financing needed to purchase a
decent, safe, and sanitary home was $75,000, a minimum loan amount of $60,000 may be set.
Consideration should be made for properties with a purchase price below the minimum loan
amount parameters when, if repaired (using loan funds or other means), would provide a
decent, safe, and sanitary dwelling.
If the applicant does not qualify for the minimum loan amount and the Loan Originator has
concluded that compensating factors are not applicable and adding a party to the application is not
viable, Handbook Letter 15 (3550), Standardized Adverse Decision Letter, should be sent to the
applicant along with Attachment 1-B. The letter should state that the applicant’s qualifying loan
amount (be sure to enter that amount) is not sufficient to meet the program’s purpose as outlined
in the 7 CFR Part 3550, Paragraph 3550.2.
HB-1-3550
Paragraph 4.24 Other Considerations Related To Maximum Loan Amounts
2.
Savings History
Applicants with accumulated
savings and a savings history that
shows a capacity to set aside a larger-
than- average portion of income may be
approved for a higher payment.
3. Job Prospects
If an applicant has recently entered
a profession in which they can expect
significant pay increases, the Loan
Originator may base repayment income
on the anticipated future earnings of that applicant.
Similarly, if overtime income is available to increase the applicant’s income, the
Loan Originator may project the household’s income with extra overtime included.
4. Homes Constructed Under Specific Energy Efficiency Programs
A new home built to exceed the prevailing International Energy Conservation Code
is more energy efficient, which significantly lowers the homeowner’s utility costs. The
lower utility costs associated with these energy efficient homes indicate that a
prospective borrower may be able to make larger loan payments than the ratio analysis
suggests.
Given their resulting energy efficiency savings of up to 30 percent relative to typical new homes, as
well as their progressive and routinely updated building standards, new homes constructed under
the following national programs may be considered as a compensating factor (when approved by
the next level supervisor):
• Energy Star for New Homes under the U.S. Environmental Protection
Agency (https://www.energystar.gov/index.cfm?c=new_homes.hm_index)
• Zero Energy Ready Home under the U.S. Department of Energy
(http://energy.gov/eere/buildings/zero-energy-ready-home)
• Leadership in Energy and Environmental Design (LEED) for Homes under the
U.S. Green Building Council
(http://www.usgbc.org/leed/rating-systems/residential)
• Home Innovation’s “National Green Building Standard” under the National
Association of Home Builders (http://www.nahb.org/en/research/nahb-
priorities/green-building-remodeling-and-development/icc-700-national-green-
building-standard.aspx)
____________________________________________________________________________________________
4-66
Example - Using Savings History
As A Compensating Factor
An applicant is currently paying $400 per
month in rent and putting $175 per month in a
savings account. Utility costs should be similar
to those the applicant is currently paying, but
maintenance costs will be about $50 per month
higher. According to ratios, the applicant’s
repayment ability is $500 per month. However,
since the applicant is currently using a total of
$575 per month for a combination of rent and
savings, a loan that requires a monthly payment
of up to $525 ($575-$50) may be considered.
HB-1-3550
Paragraph 4.24 Other Considerations Related to Maximum Loan Amounts
• Green Communities under the Enterprise Community Partners
(http://www.enterprisecommunity.com/solutions-and-innovation/enterprise-green-
communities)
• Passive House under the Passive House Institute US
(http://www.phius.org/home-page)
• Living Building Challenge under Insurance Institute for Business and Home
Safety (http://living-future.org/lbc)
When a new home to be constructed under a specific energy efficiency program
will be used as a compensating factor, the qualifying ratios may exceed the established
thresholds by up to two percentage points provided the Field Office obtains reasonable
documentation that the property will be built to certification standards through one of the
above programs. Once construction is complete, the Field Office must obtain verification
that the property is certified through one of the above programs.
B. Adding Additional Parties or Cosigners to the Note
Additional financial resources may be added by adding additional parties to the note or
locating cosigners.
1. Additional Parties to the Note
Additional parties to the note must agree to occupy the dwelling and must qualify as
borrowers, as described in this chapter. Counting the income of the additional parties
increases repayment income.
2. Cosigners
Individuals who will not reside in the dwelling, but who are willing to be responsible
for the debt may be consigners to the note. To supplement the applicant’s purchasing
power, a cosigner must demonstrate an ability and willingness to meet debt obligations as
outlined in Section 3 and possess a TD ratio that does not exceed 41 percent. The
cosigner’s TD calculation would include the applicant’s full note payment through Rural
Development, the applicant’s leveraged loan payments (if applicable), the applicant’s
escrow payment, and all of the cosigner’s long-term obligations (including their
mortgage) as well as their short-term obligations that have a significant impact on
repayment ability.
Again, cosigners can only be used to improve the applicant’s purchasing power.
Cosigners cannot be used to compensate for an applicant’s unacceptable credit history
____________________________________________________________________________________________
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HB-1-3550
.Paragraph 4.24 Other Considerations Related to Maximum Loan Amounts
C. Payment Shock
Payment shock represents the applicant’s projected increase in housing expenses. The
following formula is used to calculate payment shock as a percentage:
Payment shock = (Total proposed principal, interest, taxes, and insurance payment
after subsidy / current housing expense excluding utilities) – 1
By way of example, presume that the Rural Development payment after subsidy is $550,
the leveraged lender’s payment is $250, taxes and insurance are approximately $120, and the
applicant’s current rent is $400. In this scenario, the applicant’s payment shock is 130 percent:
($550 + 250 + 120) / 400 = 2.30; 2.30 – 1 = 1.30 = 130 percent
In cases where payment shock is greater than 100 percent or could not be measured since
the applicant does not currently have any housing expenses, no additional risk layering (i.e.
adverse credit waivers, use of compensating factors, etc.) should be allowed without strong
justification. Multiple layers of risk may be justified if the applicant has an excellent credit
history reflecting timely repayment of credit obligations or a credit score of 640 or higher on
their TMCR. Perhaps the applicant has demonstrated a careful attitude toward the use of credit
and an ability to accumulate savings or a stable employment history over the past two years,
demonstrating a dependable income stream. Regardless of the justification, the Loan Approval
Official must thoroughly document their rationale for allowing multiple layers of risk in the
running case record.
In addition, the Loan Approval Official must counsel the applicant on this occurrence and
emphasize that purchasing a home at their maximum qualification amount may strain their
budget and not allow for unexpected expenses. Discuss the additional costs associated with
homeownership (taxes, insurance, utilities, maintenance, etc.) and document the counseling
effort in the running case record.
4.25
ISSUING THE CERTIFICATE OF ELIGIBILITY
If the Loan Originator determines that an applicant is eligible for a loan, the decision will
be documented in the form of a written narrative in the running record of the applicant case file.
____________________________________________________________________________________________
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HB-1-3550
Paragraph 4.25 Issuing The Certificate Of Eligibility
When funds are available, eligible applicants who have not yet located properties or, who
own their building site but have not provided a construction package, should be issued Form RD
1944-59, Certificate of Eligibility. First-time homebuyers must be informed that by accepting a
Certificate of Eligibility they agree to provide documentation of completion of an approved
homeownership education course prior to entering into a contract to purchase or construct a
home for maximum benefit (or shortly thereafter). The Loan Originator must note on the
running record that they informed the Applicant of the homeownership education requirement.
Applicants who are not seeking leveraged loans should be informed that the certificate is valid for a
period of 45 days. Applicants seeking leveraged loans should be informed that the certificate is valid
for a period of 60 days. Within that time the applicant must provide sufficient information to enable
the Agency to conduct an appraisal of the property to be financed. COE will be honored even if loan
limits change before the expiration of the commitment. Up to two 30 day extensions may be granted
for applicants who demonstrate that they have been actively looking for a property. Area loan limits
changes must be considered on any COE extension and the applicant needs to be checked against the
DNP portal. If the applicant has already submitted a contract for a property, Form RD 1944-59 will
not be issued. If an applicant’s sales contract falls through, a new Form RD 1944-59, good for 45
days or 60 days, as applicable, should be issued. An application is no longer considered active and
will be withdrawn when the certificate of eligibility has expired and all authorized extensions have
been exhausted.
Applicants for a self-help loan will be issued Handbook Letter 16 (3550), Eligibility of Self-
Help Applicants. UniFi may indicate the applicant qualifies for a higher loan amount than the actual
cost of building a modest home using the self-help method. The dollar amount to be inserted in the
eligibility letter will be based on the following:
A. The average cost of the most recent group of homes built in the area by the self-help
method with consideration given to known price increases or decreases in materials, labor, land
and/or time of construction (unless the applicant qualifies for less); or
B. The average cost of the homes that are to be built by the self-help method as determined
by detailed cost estimates of the plans and specifications prepared by the self-help grant
organization, in consultation with the local Rural Development staff and/or Technical and
Management Assistant (T&MA) contractor. Consideration will also be given to known price
increases or decreases in material, labor and/or time of construction (unless the applicant
qualifies for less).
If the Loan Originator determines that a loan applicant cannot be determined eligible,
Handbook Letter 15 (3550), Standardized Adverse Decision Letter, should be sent to the applicant.
The form explains why the loan is not approvable. The appropriate attachment from Chapter 1
should be attached to provide the applicable review, mediation, and appeal rights.
____________________________________________________________________________________________
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HB-1-3550
4.26
APPLICANT ORIENTATION
Applicants should be well-informed of Agency requirements and borrower responsibilities.
After an applicant is determined eligible, the Loan Originator should provide them with Form RD
3550-23, Applicant Orientation Guide. The Loan Originator should instruct the applicant to watch
the Agency’s Applicant Orientation Guide video on YouTube and sign and return Form RD 3550-23
within 15 days.
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HB-1-3550
ATTACHMENT 4-A
WORKSHEET FOR COMPUTING INCOME
Attachment 4-A
Page 1 of 1
To access the worksheet and a tutorial on the worksheet, visit the Forms & Resources page for
the Single Family Housing Direct Home Loans.
(01-23-03) SPECIAL PN
Revised (01-06-17) PN 492
(01-23-03) SPECIAL PN
Revised (01-6-17) PN 492
HB-1-3550
Attachment 4-B
Page 1 of 1
ATTACHMENT 4-B
[RESERVED]
HB-1-3550
Attachment 4-
C
Page 1 of 5
ATTACHMENT 4-C
REVIEWING A SELF-EMPLOYED APPLICANT’S INCOME AND DEBT
LOAD
The purpose of this attachment is to provide guidance on how to properly analyze a self-
employed applicant’s income.
An applicant who has a 25% or greater ownership interest in a business is considered “self-
employed” and a cash flow analysis of the applicant’s income is required. The legal structure of
a business determines the way business income or loss is reported to the IRS. Loan Originators
must understand the applicant’s business structure to effectively document, calculate, and
analyze annual and repayment income.
Step 1: Understand the Business Structures
The legal structure of a business determines the way business income or loss is reported to the
IRS. Loan Originators must understand the applicant’s business structure to effectively
document, calculate, and analyze annual and repayment income. The following are the most
common business structures for self-employed applicants.
a. Sole Proprietorship: The business structure most often encountered is a sole
proprietorship (be it a business, farming, or profession). A sole proprietor is someone
who owns an unincorporated business by himself or herself and has unlimited personal
liability for all debts of the business. Business income or loss is folded into the
individual owner's tax return.
b. Partnership: A partnership is an arrangement between two or more individuals who
have put together their assets and/or skills to operate a business and who will share, as
stated in the agreement, profit and losses.
c. Limited Liability Corporation (LLC): A LLC is a legal business structure designed to
offer its members (owners) the tax efficiencies of a partnership and the limited liability
advantages of a corporation. Although the member-owners generally have limited
liability, there may be some instances in which they are required to personally
guarantee some of the loans that the limited liability corporation obtains.
d. S-Corporation: An S Corp is a legal entity that has a limited number of stockholders
(up to 75) and elects not to be taxed as a regular corporation. The small business gains
and losses are passed on to the stockholders in proportion to each stockholder’s
percentage of business ownership and it is taxed at their individual tax rates. This is
another commonly encountered type of business.
____________________________________________________________________________________________
(01-23-03) SPECIAL PN
Revised (01-06-17) PN492
(01-23-03) SPECIAL PN
Revised (01-06-17) PN 492
HB-1-3550
Attachment 4-
C
Page 2 of 5
Step 2: Document Self-Employment Income:
Since self-employment income reporting may vary depending on the business structure, and can
be quite complex, the Loan Originator must obtain a complete copy of the individual and
business tax returns. A self-employed applicant must submit signed copies of his/her last two
complete IRS Form 1040, U.S. Individual Income Tax Returns (IRS Form 1040) with IRS Form
W-2 attached, if the applicant also has wage income, along with the appropriate IRS forms and
schedules as noted in the table below. If the business is a corporation, S corporation or
partnership, a complete, signed copy of the business income tax return for the last 2 years, with
all applicable schedules, is also required. For electronically filed tax returns, it is not necessary
to require the applicant(s) to manually sign the return for application purposes if there is
sufficient documentation the applicant has signed the return electronically (i.e. use of Self-Select
PIN for Free File Fillable Forms, Electronic Filing PIN, or authorized E-File Provider). The
following table provides general guidance regarding the minimum documentation required for
self-employed applicants. (Please note that the place the information is found is based on a tax
return from a certain year and may be different)
Form of Business or
Commission Income
Individual Profit & Loss will
be reported in…
Business Profit or Loss will
be reported in…
Sole Proprietorship
Form 1040, Line 12: Business
Income or (loss)
Schedule C (Form 1040), Profit
or Loss from Business
Form 1040, Schedule C:
Profit or Loss from Business
Partnerships
and
Limited Liability
Corporations
Form 1040, Line 17: Rental real
estate, royalties, partnerships, S
corporations, trusts, etc.
Schedule E (Form 1040),
Supplemental Income and Loss
IRS Form 1065, U.S.
Partnership Return of Income
Schedule K-1 (Form 1065),
Partner’s Share of Income,
Deductions, Credits, etc.
S Corporations
Form 1040, Line 17: Rental real
estate, royalties, partnerships, S
corporations, trusts, etc.
Schedule E (Form 1040),
Supplemental Income and Loss
IRS Form 1120S, U.S.
Income Tax Return for an “S”
Corporation (IRS Form
1120S)
Schedule K-1 (Form 1120S),
Shareholder’s Share of
Income, Deductions, Credits,
etc.
____________________________________________________________________________________________
HB-1-3550
Attachment 4-
C
Page 3 of 5
(01-23-03) SPECIAL PN
Revised (12-12-19) PN 532
The applicant must also submit current documentation of income and expenses using the
verification of business expenses form located in Appendix 2. If the applicant cannot provide
copies of the actual returns filed, they can directly request, obtain, and provide a copy of their
tax return transcripts (using IRS Form 4506-T, Request for Transcript of Tax Return).
If an applicant has been self-employed between one and two years, the applicant must
demonstrate and the Loan Originator must document two years of previous successful
employment in a similar line of work. The applicant’s individual tax returns must reflect a
history of receiving income at the same (or greater) level in a field that provides the same
products or services as the current business.
The income for an applicant that has been self-employed for less than one year is not to be
considered stable for repayment purposes.
Step 3: Calculate Self-Employment Income:
Individuals and businesses complete tax forms to calculate taxable income or loss. Tax forms by
themselves do not tell lenders how much qualifying income an applicant has for a mortgage. To
calculate self-employment income, it is necessary to make a cash flow analysis of the applicant’s
income.
The Loan Originator needs to make certain adjustments to the income (or loss) reported in IRS
Form 1040 in order to have an accurate picture of the applicant’s cash flow. The IRS allows
self-employed applicants and business owners to make non-cash deductions to reduce taxable
income. Depreciation is the classic example of how a non-cash deduction reduces taxable
income but increases the applicant’s income for loan qualification purposes. The Loan
Originator must carefully review all tax forms to identify non-cash deductions (increasing
income) and/or additional expenses (reducing income). The following are the most common
adjustments to the net profit/income reported in the applicable tax forms/schedules:
HB-1-3550
Attachment 4-
C
Page 4 of 5
Add Back
Subtract
Depreciation
Employee Business Expenses
Depletion Meals and Entertainment Exclusion
Nonrecurring Losses
Nonrecurring income (generally reported as
“Other Income”
Amortization / Causality Loss (if non
Nonrecurring Capital Loss
recurring)
Recurring Capital Gains
Step 4: Analyze the Self-Employment Income:
When analyzing self-employment income the Loan Originator must perform a detailed review of
the applicant’s individual and business tax returns to confirm that the income is stable and
dependable (likely to continue).
In general, income from self-employment is considered stable if the applicant has been self-
employed for two or more years. Because self-employment income may change each year, the
Loan Originator should always develop an average monthly income by using at least two full
years of the applicant’s self-employment income. An average takes in consideration typical
market fluctuations, thus better predicting the applicant’s long-term earning ability.
Dependable income refers to the likelihood of continuity of the income. Making this
determination requires the Loan Originator to predict future income. The Loan Originator
should look at income trends and the stability of the income source. Any specific indication of
an upcoming event that might change the applicant’s employment or income should be addressed
in the loan file and considered in the underwriting decision. For example, if the most recent tax
return shows an income considerable higher than reported in the previous tax year, the Loan
Originator should investigate further to determine whether the higher income is due to business
expansion or a onetime event unlikely to reoccur and continue. Income from a nonrecurring
transaction should be excluded from the income calculations. Similarly, a nonrecurring loss
should not be deducted from the income calculation.
HB-1-3550
Attachment 4-
C
Page 5 of 5
(01-23-03) SPECIAL PN
Revised (01-06-17) PN 492
Other Types of Income Needing a Cash Flow Analysis:
Special Attention to Commission / Contract Income and Other Business Expenses
An applicant that receives 25% or more of the annual income in commission, bonuses or tips
most likely engages in business activities needing a cash flow analysis. This income may be
reported in the IRS Form W-2 or IRS Form 1099 (e.g. real estate agents/contract employees).
Non-reimbursed business expenses reported in IRS Form 2106, Employee Business Expenses,
should be deducted from the income reported on the applicant’s tax return.
Commission, bonuses and, tips income may be considered stable if the applicant has received
this income for the past two years. After making the cash flow analysis, the Loan Originator
should develop a two year average to make an income determination.
Summary
Income from self-employment may be unpredictable, subject to market/economic fluctuations.
Due to the inherent risk of self-employment income, the Loan Originator must consider internal
and external economic factors when analyzing self-employment income.
When an applicant is self-employed, or has income needing a cash flow analysis, do not use the
total income reported on IRS Form 1040, IRS Form W-2, or IRS Form 1099. Instead, analyze
each income line item individually and make the necessary adjustments to the total
income/profit. If the Loan Originator fails to perform a detailed review and analysis of the
borrower’s tax return both annual and repayment incomes will be miscalculated.
HB-1-3550
Attachment 4-D
Page 1 of 6
ATTACHMENT 4-D
REVIEWING DOCUMENTATION FOR CITIZENSHIP STATUS
The purpose of this attachment is to provide guidance on acceptable evidence that a non-U.S.
citizen is a qualified alien and to provide guidance on the use of the Systematic Alien
Verification for Entitlements (SAVE) database maintained by the Department of Homeland
Security (DHS).
A “qualified alien” is defined under the Personal Responsibility and Work Opportunity
Reconciliation Act (PRWORA) (8 U.S.C. Section 1641) as:
1)
An alien who is lawfully admitted for permanent residence under the Immigration and
Nationality Act;
2)
An alien who is granted asylum under Section 208 of such Act;
3)
A refugee who is admitted to the United States under Section 207 of such Act;
4)
An alien who is paroled into the United States under Section 212(d)(5) of such Act for a
period of at least 1 year;
5)
An alien whose deportation is being withheld under Section 243(h) of such Act; or
6)
An alien who is granted conditional entry pursuant to Section 203(a)(7) of such Act as in
effect prior to April 1, 1980;
7)
An alien who is a Cuban/Haitian Entrant as defined by Section 501(e) of the Refugee
Education Assistance Act of 1980; or
8)
An alien who has been battered or subjected to extreme cruelty under Section 431 of the
Immigration and Nationality Act (INA).
Native Americans covered by the Jay Treaty of 1794 and born in Canada may also be eligible as
lawfully admitted for permanent residence if they meet the requirements of 8 U.S.C. Section
1359. Since the Agency might not be able to verify their status through SAVE, the Native
American should provide all of the documentation listed below.
A letter from their Native American tribe stating that the alien has at least 50
percent Native American or Aboriginal blood (also referred to as the blood
quantum);
Their Canadian “Certificate of Indian Status Card” with a red stripe along the top;
Their birth certificate;
If an Haudenosaunee, their Red I.D. Card;
If an Inuit, an Inuit enrollment card from one of the regional Inuit lands claim
agreements;
Their Social Security Card issued by the U.S. Social Security Administration; and
Their Canadian or U.S. driver license.
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SAVE System Access:
Rural Development has entered into an “Interagency Agreement” with DHS’s United States
Citizenship and Immigration Service (USCIS) to allow access to the SAVE database. This
database enables staff to obtain immigration status information to assist in determining a non-
citizen applicant’s program eligibility. In most cases, SAVE will provide an immediate response
concerning the immigration status of an applicant.
The Loan Originator must secure proof of identity and evidence that non-citizens who apply for
program assistance are qualified aliens. In all cases, non-citizens legally admitted into the
United States will have an Alien Identification Number. In cases where a number is not
available or known, the applicant should contact the USCIS. (There are cases where an alien has
been legally in the U.S. for a period of time and DHS has supplied them with a number, but the
alien did not receive or has misplaced the number.) The Loan Originator should obtain the non-
citizen’s Alien Identification Number and submit it to SAVE to obtain the applicant’s eligibility
status based on the alien’s Class of Admission (COA).
Each State Office should have one person that administers accesses to SAVE. This person will
have “supervisor” access which enables them to establish other SAVE supervisors and users
within their state. Before requesting a verification, new users should complete the SAVE tutorial
available through the site.
After logging into the system, the Loan Originator will enter the applicant’s Alien Identification
Number (9 digits) into the “Alien Number” field, select the program for which the alien is
seeking a benefit, and submit the information for processing. NOTE: Only enter the Alien
Identification Number into SAVE. Social Security numbers, driver’s license numbers, or any
other number other than an Alien Identification Number will not yield a valid result.
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The system will normally respond within seconds with the applicant’s eligibility and a COA
code. In most cases SAVE will give a “System Response” indicating the alien’s status.
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The applicant is eligible for program assistance if the response is “LAWFUL PERMANENT
RESIDENT – EMPLOYMENT AUTHORIZED”. Other acceptable responses include, but are
not limited to “ASYLEE”, “PAROLEE”, “REFUGEE”, and “USC” (UNITED STATES
CITIZEN).
The applicant is not eligible for program assistance if the response is “TEMPORARY
RESIDENT – TEMPORARY EMPLOYMENT AUTHORIZED”.
If the response is “INSTITUTE ADDITIONAL VERIFICATION”, the system was unable to
determine the alien’s status.
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SAVE is asking the Agency user to supply additional information for a second step process.
Agency staff should click on the “Request Additional Verification” button, follow the
instructions, and reply via the SAVE site within three to five days. Agency staff must return to
their case verification screen to view the system response. In the event that SAVE is unable to
determine a COA code, the system will respond “submit copies of documentation”.
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If this is the case, the Agency staff will complete the CIS Form 845 (prefilled by SAVE) from
the verification screen and electronically submit the form and scanned copies of all immigration
documentation (front and back) provided by the applicant. The USCIS personnel have three to
five business days from receipt of the documents to reply. The reply will be via the case
verification screen in the SAVE program so Agency staff must return and check for the reply.