Download Understanding Loan Terms, Costs, and Repayment Periods for Rural Housing Agency Loans and more Exercises Construction in PDF only on Docsity!
SECTION 1: OVERVIEW OF THE UNDERWRITING PROCESS
6.1 INTRODUCTION
The underwriting process brings together the applicant eligibility requirements discussed in Chapter 4 and the property requirements discussed in Chapter 5 with the loan and subsidy requirements that are discussed in detail in this chapter. By putting all of this information together, the Loan Originator can determine the applicant’s repayment ability, whether a loan can be approved, and the amount of the loan. This chapter is structured as follows:
- Section 1 reviews the concept of underwriting;
- Section 2 describes loan terms and requirements;
- Section 3 provides policies and procedures for determining whether the applicant is eligible for payment subsidy and the amount of the subsidy; and
- Section 4 provides policies and procedures for underwriting a loan for a specific property and preparing the loan approval recommendation.
6.2 WHAT IS UNDERWRITING?
Through the underwriting process, the Loan Originator evaluates an applicant’s circumstances and the condition and value of the property to determine whether making a particular loan is a prudent use of funds. Exhibit 6-1 summarizes key underwriting decisions.
Underwriting has both objective and subjective elements. For example, income eligibility is an objective factor -- if the applicant’s income exceeds program income limits, the applicant cannot receive a program loan. On the other hand, analyzing an applicant’s credit history and estimating the value of the property both involve some degree of judgment. The underwriter’s challenge is to make both objective and subjective decisions in a fair and impartial manner for all applicants.
6- (01-23-03) SPECIAL PN Revised (02-01-18) PN 508
CHAPTER 6: UNDERWRITING THE LOAN
Paragraph 6.2 What is Underwriting?
The Agency’s underwriting standards and procedures are similar in many respects to those used by private lenders. However, because the Agency’s mission, in part, is to serve home buyers who are unable to obtain private credit, the underwriting process differs in 4 key respects:
- The Agency’s criteria for an acceptable credit history are somewhat less stringent than those used by private lenders;
- Agency loan-to-value requirements enable many applicants to become homeowners with little or no down payment;
- In most circumstances, the Agency has the ability to offer subsidies that enhance an applicant’s ability to repay the loan; and
- The Agency conducts quality checks on new loans as well as on withdrawn and rejected applications to confirm that the Loan Originator complied with the underwriting standards and procedures. Refer to Attachment 6-B for guidance on monitoring requirements.
6-
Exhibit 6- Key Underwriting Decisions Does the Applicant Meet Program Requirements? The applicant must:
- Have the legal capacity to enter into a loan agreement;
- Have the financial resources to repay the loan;
- Have an acceptable credit history; and
- Meet the specific requirements for participation in the program, such as eligibility based on income and citizenship status.
- A first-time homebuyer must complete a homeownership education course prior to entering into a contract to purchase or construct a home for maximum benefit (or shortly thereafter). Does the Property Meet Program Requirements? The property must:
- Meet Agency standards regarding location and housing quality;
- Meet the Agency’s environmental review requirements;
- Not have legal hindrances to the borrower’s ownership of the property; and
- Have sufficient value to protect the Agency’s financial investment in the property. Does “The Deal” Work?
- Can the Agency offer loan terms and conditions that enable the applicant to afford the loan?
- Is the applicant willing and able to meet the terms and conditions the Agency can offer?
6 - 4
SECTION 2: LOAN TERMS AND REQUIREMENTS
6.4 ELIGIBLE LOAN PURPOSES AND USES [7 CFR 3550.52]
The Section 502 program is intended to help those who do not currently own adequate housing buy, build, relocate, rehabilitate, or improve a property to use as a permanent residence. All improvements must be on land that, after closing, is part of the security property. Eligible costs are listed below.
A. Site-Related Costs
Eligible site-related costs include:
- Providing a minimum adequate site, as described in Section 1 of Chapter 5, if the applicant does not already own an adequate site;
- Providing adequate utilities, including adequate and safe water supply and wastewater disposal facilities; and reasonable connection fees, assessments, or the pro rata installment costs for utilities such as water, sewer, electricity and gas; and
- Site preparation, including grading, foundation plantings, seeding or sodding, trees, walks, yard fences, and driveways.
B. Dwelling-Related Costs
In addition to costs for acquisition, construction, repairs, or the cost of relocating a dwelling, eligible dwelling-related costs include:
- Special design features or equipment necessary because of a physical disability of a member of the applicant’s household;
- Approved energy saving materials, equipment, or construction methods (heating systems must use a type of fuel that is commonly used, economical, and dependably available);
- Storm cellars and similar protective structures; and
- Purchase and installation of essential equipment including range, refrigerator, clothes washer and/or dryer, if these items are normally sold with dwellings in the area, and if the purchase of these items is not the primary purpose of the loan.
6 - 5 (01- 23 - 03) SPECIAL PN Revised (09- 19 - 18) PN 516
Paragraph 6.4 Eligible Loan Purposes and Uses [7 CFR 3550.52]
C. Fees and Related Costs
Other eligible costs include:
- Reimbursement for certain items paid by the borrower outside of closing (i.e. earnest money deposit, inspection fees required by the Agency, and the first year’s hazard insurance premium); legal fees; architectural and engineering services; costs of title clearance and loan closing services; the Agency-approved appraisal fee; surveying, environmental and tax service services; personal liability insurance fees under Mutual Self-Help Housing; and other incidental expenses approved by the Loan Approval Official. Commissions, finders’ fees, homeowner association fees, placement fees, and administrative fees charged to the buyer by the real estate agent are not eligible costs;
- Fees for acceptable homeownership education under 7 CFR 3550.11 provided the fee does not exceed the reasonable costs determined by the State Director. Fees may be added to the loan amount in excess of the area loan limit and the appraised value of the house in cases where the borrower requests it be included in the loan;
- The buyer’s portion of real estate taxes that the applicant must pay at the time of closing including delinquent taxes on a property owned by the applicant;
- Real estate taxes that become due during the construction period on houses to be built;
- The borrower’s share of Social Security taxes and similar taxes for labor hired by the borrower in connection with making the planned improvements;
- Establishment of escrow accounts, including the initial escrow deposit, for the payment of taxes and property insurance premiums;
- Payment of recapture amounts deferred by a former borrower;
- Costs associated with implementation of mitigation measures to ensure environmental compliance;
- For leveraged loans, lender charges and reasonable fees related to obtaining the non- Agency loan; and
6 - 7 (01- 23 - 03) SPECIAL PN Revised (02- 01 - 18) PN 508
Paragraph 6.5 Refinancing
B. Refinancing Non-Agency Debt [7 CFR3550.52(b)]
1. Situations in Which Refinancing is Permissible
Refinancing of non-Agency debt, except for debt on manufactured homes, is permissible in 3 circumstances.
- Refinancing for an existing home at risk of foreclosure. An applicant who owns a home but is clearly unable to continue making payments and risks losing the home through foreclosure may be eligible for Agency refinancing if the risk is due to circumstances beyond the applicant’s control. Risk of foreclosure doesn’t necessarily mean that the applicant’s mortgage is currently delinquent; it means that foreclosure is a highly likely eventuality because the mortgage payments are no longer sustainable due to circumstances beyond the applicant’s control.
- Refinancing for an existing home in need of repairs. Debt on an existing home may be refinanced if the home is in need of repairs totaling $5,000 or more to correct major deficiencies and make the dwelling decent, safe, and sanitary; and refinancing is necessary for the borrower to show repayment ability. In such cases the owner need not be at risk of losing the property through foreclosure.
- Refinancing for a site without a dwelling. Agency funds may be used to refinance non-Agency debt on a building site without a dwelling if the debt is for the sole purpose of purchasing the site, the applicant is unable to pay the debt, and the applicant is otherwise unable to acquire decent, safe, and sanitary housing. The site must meet the conditions described in Section 1 of Chapter 5. The Agency loan must include adequate funds to construct a dwelling on the site that conforms to the requirements of Section 2 of Chapter 5, and the applicant must occupy the property once it is constructed.
In any of these circumstances, a non-Agency loan, including a Single Family Housing Guaranteed Loan, can be refinanced only if the Agency will have adequate security.
2. Eligible Debt
In general, Agency funds can be used to refinance only debt that was incurred for eligible purposes, as described in Paragraph 6.4. For applicants who are in danger of foreclosure, Agency funds also may be used to repay a protective advance made by a mortgagee for costs related to the delinquency, such as accrued interest, insurance premiums, real estate tax advances, or preliminary foreclosure costs.
6 - 8
Paragraph 6.5 Refinancing
The primary debt to be refinanced must be secured with a lien against the security property. For existing dwellings, but not for sites without a dwelling, short-term or unsecured debts also may be included in the refinancing if refinancing of these debts is necessary to establish sound repayment ability, the debts were incurred for purposes that are eligible under Section 502, and they do not represent a significant portion of the loan.
3. Timing of the Debt
In general, the debt to be refinanced must have been incurred before the application was filed. Costs incurred after the application date, but before loan closing, may be refinanced if: (1) they are incurred for legal fees or other technical services related to the property, or for materials, construction or site acquisition; (2) the applicant is unable to pay the costs from personal resources or to obtain credit from other sources; and (3) failure to authorize the use of Agency funds to pay such costs would jeopardize the applicant’s ability to repay the loan. The applicant should consult with the Loan Originator before incurring such expenses.
4. Verification of Debt To verify that the debt to be refinanced meets these requirements, the Loan Originator should send Form RD 3550-30, Verification of Debt Proposed for Refinancing, to each creditor whose debt is proposed for refinancing. The form, which asks for account information as well as a copy of the original debt and security instrument, should be accompanied by a preaddressed, postage-paid envelope (sufficient enough to cover the cost of and large enough to hold the multiple-paged instruments) and Form RD 3550-1, Authorization to Release Information, which authorized the respondent to release this information.
6 - 10
Paragraph 6.6 Maximum Loan Amount [7 CFR 3550.63]
Exceptions also can be granted for subsequent loans that may cause the entire indebtedness to exceed the area loan limit only if necessary to protect the Government’s interests. The State Director can authorize subsequent loans that exceed the area loan limits to accommodate the cost of necessary repairs, reasonable closing costs, and allowable excess costs (including the appraisal fee, tax service fee, homeownership education fee, and initial deposit to fund the escrow account), without authorization from the Deputy Administrator, Single Family Housing, even if the increase exceeds $5,000.
B. Special Situations
To further ensure that only modest housing is financed, the maximum loan amount will be limited in the following situations:
1. Housing Other than Self-Help - If the applicant owns the building site free and clear or if an existing non- Agency debt on the site will not be refinanced with Agency funds, the market value of the lot will be deducted from the area loan limit. - If Agency funds will be used to refinance non-Agency debt on the building site, the equity (market value minus the debt owed against the site) will be deducted from the area loan limit. - When the applicant is purchasing a site below the market value, the difference between the market value and the sales price will be deducted from the area loan limit. - When an applicant is receiving a housing grant or other form of affordable housing assistance for eligible loan purposes other than closing costs, the amount of such grants and other affordable housing assistance will be deducted from the area loan limit. 2. Self-Help Housing
The maximum loan amount for self-help housing will be determined by adding the total of the market value of the lot (including reasonable and typical costs of site development), the cost of construction, and the value of sweat equity. The total of these factors cannot exceed the area loan limit for the area.
6 - 11 (01- 23 - 03) SPECIAL PN Revised (03- 15 - 19) PN 522
Allowable Excess Costs
- Appraisal fee
- Tax service fee
- Homeownership education fee
- Initial contribution to escrow
6.7 LOAN-TO-VALUE (LTV) RATIO [7 CFR3550.63(b)]
The LTV ratio is the relationship between the amount to be financed, including all leveraged loans and grants (where a lien will be taken), and the market value of the security property. The value of the property is determined using the appraisal procedures described in Section 5 of Chapter
5. A loan may exceed the LTV limitations discussed in Paragraphs 6.7 A. and B. to allow the borrower to finance certain allowable excess costs. For any Agency loan, the amount that can be financed in excess of the allowable LTV includes the Agency-approved appraisal fee, the tax service fee, homeownership education fee, and the initial contribution to the escrow account.
A. Loans for Existing Dwellings (100% LTV)
For existing dwellings, the LTV limitation for a Section 502 loan, plus any other liens on the security property, is 100 percent of value plus allowable excess costs.
B. Loans for New Dwellings (90-100% LTV)
For loans on new dwellings, the permitted LTV ratio depends upon whether the applicant provides documentation that the construction quality is acceptable to the Agency. If construction that meets the Agency standards can be documented, the LTV limitation is 100 percent of value plus allowable excess costs.
If construction quality is not adequately documented, loans for new dwellings are limited to 90 percent of the market value plus allowable excess costs.
The following are acceptable documentation of construction quality:
- The Agency has issued a conditional commitment and inspected the property, as described in Section 1 of Chapter 9.
Example - Maximum Loan Based on Loan to Value Ratios $50,000 Appraised Value $51,740 Total Costs Including: $49,500 Purchase Price $ 340 Appraisal and Tax servicing $ 1,500 Closing Costs $ 400 Costs to Establish Escrow If the allowable LTV is 100%, the maximum loan is $50,740 (the appraised value plus allowable excess costs). $1,000 of the closing costs must be paid by the borrower in cash. If the allowable LTV is 90%, the maximum loan is $45,740 (90% of the appraised value plus allowable excess costs). $6,000 must be paid by the borrower in cash.
6 - 13 (01- 23 - 03) SPECIAL PN Revised (09- 19 - 18) PN 516
Paragraph 6.7 Loan-to-Value (LTV) Ratio [7 CFR 3550.63(b)]
E. Refinanced Loan for Existing Agency Borrower
When the Agency refinances an existing Agency loan, the loan may exceed the market value of the property and/or the area loan limit only as necessary to cover the borrower's outstanding indebtedness, closing costs associated with the new loan, and allowable excess costs.
F. Affordable Housing Products
In those cases where participation may include a soft, silent or forgivable subordinate affordable housing product, which includes funding for purposes that are not listed in the eligible loan purposes (Paragraph 6.4) but are consistent with our objectives in affordable housing, the loan to value ratio may exceed the market value by 5 percent or by the amount of those costs, whichever is lower. The sources of the additional funding should define the purpose. Examples include, but are not limited to, homeownership education, credit counseling, and gap funding.
Only affordable housing products that result in a lien against the property need to be considered in evaluating the loan to value ratio. Grants and similar funding that do not result in a lien and are not required to be paid back should not be considered in evaluating the loan to value ratio.
6.8 REPAYMENT PERIODS [7 CFR 3550.67]
Loans must be scheduled for repayment over a period that does not exceed the useful life of the property. The standard maximum loan term for most Section 502 loans is 33 years.
6 - 14
Paragraph 6.8 Repayment Periods [7 CFR 3550.67]
A. Exceptions to the Standard 33-Year Maximum Term
Repayment may be scheduled over a 38-year term for:
- Initial loans, or subsequent loans made in conjunction with an assumption, if the applicant’s adjusted income does not exceed 60 percent of the applicable area median income and the longer term is necessary to show repayment ability; and
- Subsequent loans not made in conjunction with an assumption, if the borrower’s initial loan was for a period of 38 years, the borrower’s adjusted income at the time the subsequent loan is approved does not exceed 60 percent of the applicable area median income, and the longer term is necessary to show repayment ability.
The repayment period is limited to a maximum of 10 years for loans under $2,500 and for unsecured loans as described in Paragraph 5.12 A. Manufactured homes are eligible for a maximum loan term of 30 years.
B. Effect of Repayment Period on Payment Subsidy
Loans may be approved for less than the maximum period. However, before approving a loan with a payment term that is less than the maximum period, the Loan Originator should consider the effect this may have on any payment subsidy for which the applicant may be eligible. Because a shorter loan term could require the Agency to contribute a higher payment subsidy, an applicant with an initial loan term of less than 25 years cannot obtain payment subsidy. An applicant may receive payment subsidy on a secured subsequent loan with a term of less than 25 years if the initial loan had a term of 25 years or more. Section 3 of this chapter provides additional information about payment subsidies.
6.9 INTEREST RATES [7 CFR 3550.66]
A. Note Rates
The note rate is the interest rate shown in the promissory note. Exhibit B of RD Instruction 440.1 provides current interest rates for program and nonprogram loans. For program loans, the note rate used for the promissory note must be the lower of the Rural Housing (RH) 502 very low or low-income limit interest rates in effect at loan approval and obligation of funds (or the moderate-income limit in effect at loan closing).
6 - 16
Paragraph 6.10 Use of Assets [7 CFR 3550.64]
B. Eligible Uses of Assets
Eligible uses for excess assets or assets the applicant has elected to contribute include making payments to:
- Reduce the principal balance;
- Pay architectural, engineering, inspection, or testing fees related to new construction or repairs;
- Establish the escrow account for taxes and insurance;
- Pay closing costs and related fees;
- Reduce non-housing debts;
- Contribution to a retirement asset; or
- Purchases not considered a net family asset (Exhibit 4-3).
C. Ineligible Uses of Assets
If an applicant has excess assets, those assets cannot be used for purposes other than those listed in Paragraph 6.10 B.
Required Down Payment
If an applicant was issued a Certificate of Eligibility that listed a required down payment and they subsequently spend or dispose of those funds for ineligible loan purposes and now no longer have assets sufficient to cover the required down payment, the Loan Approval Official will re-evaluate eligibility at the time of approval or denial. If the applicant is no longer eligible, the reasons for denial will include Attachment 1-B with appeal rights.
SECTION 3: PAYMENT SUBSIDIES [7 CFR 3550.68]
6.11 AN OVERVIEW OF PAYMENT SUBSIDIES
The Agency uses payment subsidies to enhance an applicant’s repayment ability for Section 502 loans. UniFi calculates the applicant’s payment subsidy. The sample calculations provided in this section are intended to help the Loan Originator understand how the calculation works so that it can be explained to the applicant.
A. Three Types of Subsidy
1. Interest Credit
A borrower who initially received subsidy in the form of interest credit can continue to do so as long as the borrower remains eligible and continuously receives interest credit assistance. Subsequent loans to these borrowers should be subsidized with interest credit. Paragraph 6.13 describes the method for calculating subsidies using the interest credit method.
2. Payment Assistance Method 1
A borrower currently receiving payment assistance using payment assistance method 1 will continue to receive it for the initial loan as the borrower is eligible for payment assistance method 1. However, if a borrower receiving payment assistance method 1 receives a subsequent loan, payment assistance method 2 will be used to calculate the subsidy for the initial loan and subsequent loan. Paragraph 6.12 B describes the method for calculating subsidies using payment assistance method 1.
3. Payment Assistance Method 2
All other eligible applicants will receive payment assistance method 2. This includes: applicants who receive new initial loans; borrowers obtaining subsequent loans who qualify for payment subsidy, but who are not currently receiving interest credit or payment assistance method 1; and applicants who assume loans under new rates and terms. Borrowers who cease to receive interest credit or payment assistance method 1 for 6 months or more will receive payment assistance method 2 if they subsequently begin to receive payment subsidies. Paragraph 6.12 A describes the method for calculating payment assistance method 2.
6- (01-23-03) SPECIAL PN Revised (07-22-19) SPECIAL PN
6 - 19 (01- 23 - 03) SPECIAL PN Revised ( 03 - 19 - 20 ) PN 534
Paragraph 6.11 An Overview of Payment Subsidies
D. Annual and Interim Reviews
Subsidy agreements are effective for a period not exceeding 24 months. For agreements that exceed 12 months, an annual review is conducted by NFAOC to determine whether the borrower is eligible to continue to receive payment subsidies. Annual and interim reviews of borrowers receiving payment subsidies are the responsibility of NFAOC. Borrowers who receive payment subsidies must notify the Agency if any adult household member changes or obtains employment, the household composition changes, or if income increases by more than 10 percent. Borrowers may report other changes that would result in increased payment subsidies. The review period may be different in certain circumstances. Borrowers receiving payment assistance via method 1 with adjusted incomes above 80 percent of the applicable adjusted median income will pay the Equivalent Interest Rate (EIR) for the appropriate income contained in Exhibit 6-4.
1. Self-Employed Applicants
For a self-employed applicant, the initial payment subsidy agreement will run from the effective date to 3 months after the end of the applicant’s business fiscal year, but not more than a 12-month period. This will allow subsequent agreements to coincide with the applicant’s business fiscal year, with a 3-month overlap, to provide sufficient time for the applicant to supply verification of the previous year’s income.
2. Unemployed Applicants
For an applicant receiving unemployment benefits, the agreement will be effective for the period during which the applicant will receive unemployment benefits, or, if the period is unknown, no longer than 6 months. The expiration date of the agreement will be established by the Loan Originator.
Paragraph 6.11 An Overview of Payment Subsidies
6-
3. Annual Payment Borrowers
For an applicant currently paying an annual installment who receives a subsequent loan, the initial payment subsidy agreement, including the subsequent loan, will be in effect until the next January 1st.
E. Recapture Requirement
Borrowers are required to repay all or a portion of the payment subsidy received over the life of the loan when the title to the property transfers or when the borrower ceases to meet the occupancy requirement described in Paragraph 6.11 B. 2. The borrower must sign Form RD 3550-12, Subsidy Repayment Agreement, at the time of loan closing for existing properties, when a construction loan is converted to a permanent loan, or whenever the borrower qualifies for payment subsidy for the first time.
6.12 CALCULATING PAYMENT ASSISTANCE
A. Payment Assistance Method 2
The amount of payment assistance granted is the lesser of the difference between:
- The annualized promissory note installments for the combined RHS loan and eligible leveraged loans plus the cost of taxes and insurance less 24 percent of the borrower’s adjusted income, or
- The annualized promissory note installment for the RHS loan less amount the borrower would pay if the loan were amortized at an interest rate of 1 percent.
Borrowers receiving payment assistance method 2 must pay the greater of:
- A payment to RHS based on 24 percent of their adjusted annual income less the amortized payment for the eligible leveraged loan less the cost of taxes and insurance; or
- A payment to RHS based on an interest rate of 1 percent plus the amortized payment for the eligible leveraged loan plus the cost of taxes and insurance.
An eligible leveraged loan is a loan with payments amortized over a period of not less than 30 years and an interest rate that does not exceed 3 percent.
