USDA 7 CFR3555 Regulation - Sun West Mortgage Co€¦ · USDA Streamline Refinance •US can be used for Streamline Refinanced Loans. G • Direct Guarantee loans were previously

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USDA 7 CFR 3555 Regulation

Underwriting Guide

Introduction

• This presentation will provide a brief overview of changes in

underwriting as per new USDA regulation.

• Effective December 1st, loan submitted to USDA for conditional

CONFIDENTIAL ©2014 Sun West Mortgage Company, Inc. All Rights Reserved. Company NMLS ID 3277. 2

• Effective December 1st, loan submitted to USDA for conditional

commitment needs to meet requirement of new 7 CFR 3555

regulation which will replace previous 7 CFR 1980 regulation.

• USDA has launched new Handbook HB-1-3555 in accordance with the

new regulation.

• USDA also launched new forms in accordance with the new regulation.

Important Notice

• For effective transition of new regulation from old regulation,

USDA will not accept any loan submission from Nov 21st , 2014

till Nov 30th , 2014.


till Nov 30 , 2014.

• Any loans which have not received conditional commitments

need to be underwritten by new guideline.

• You may continue to enter new applications into GUS; however,

GUS will not be permitted to perform a final submission of the

application to USDA during Nov 21st , 2014 till Nov 30th , 2014.

USDA Streamline Refinance

• GUS can be used for Streamline Refinanced Loans.

• Direct Guarantee loans were previously not eligible for Streamline

except Rural Refinance Pilot Programs. Now Direct Guarantee loans


except Rural Refinance Pilot Programs. Now Direct Guarantee loans

where Payment Subsidy not received are eligible for Streamline

Refinance.

• Streamline loans must have a 12 month history with no late

payments in the past 180 days.

• Any late payments in last 36 months will be considered as risk and

LOE for the same is required.

USDA Rate and Term Refinance

• Permissible discount points financed may not exceed two

percentage points of the loan amount for a rate and term

refinance.


refinance.

Borrower Eligibility

• Updated eligibility for Military Borrower:

• Proof of discharge must be received within 1 year and the

service person's family will continue to occupy the property if


service person's family will continue to occupy the property if

they are assigned to combat zone or other hazardous duty prior

to discharge.

Borrower Eligibility

• Tax Transcript Requirement:

• Each adult (18 or older) member of the household must

complete and execute an IRS Form 4506-T for previous 2 year.


complete and execute an IRS Form 4506-T for previous 2 year.

• Note: The information gathered from the IRS on household

members not included on the loan is not intended to

document income, but to validate the income documentation

and disclosures provided by the applicant(s) on all adult

members of the household in order to verify eligibility for the

loan program only.

Allowable Age of Credit Documents

• All credit document validity periods have reduced from 180

days to 120 days for new construction.


Departing residence Guideline

• In case of departing residence, it needs to be verified that

current home no longer meets the applicants' need by

documenting change of status.


documenting change of status.

• Example of change status includes, but is not limited to:

• Verification of severe overcrowding (i.e. 1.5 household resident per

room) for past 90 days and future continuation for at least 9 months.

• Proof of deficiency of departing residence over suitability of new

residence for any household member with disability or limited

mobility.

Short Sale, Pre Foreclosure Sale or Deed in Lieu

• A short sale is considered a pre-foreclosure activity or event.

An applicant is ineligible for a mortgage loan if applicant takes

advantage of declining market conditions and purchases a new


advantage of declining market conditions and purchases a new

property at a reduced price, a similar or superior property

within a reasonable commuting distance.

• 3 years from date of Pre-foreclosure sale.

• No waiting period if borrower had no late payments on any mortgages

and installment debts within the 12-month period preceding the short

sale.

Disputed Account

• Loans underwritten with the assistance of GUS that receive an

underwriting recommendation of “Accept” will be

downgraded to a manual “Refer” unless the following


downgraded to a manual “Refer” unless the following

conditions are met on the credit report

• The disputed trade line has a zero dollar balance.

• The disputed trade line is marked “paid in full” or “resolved.”

• The disputed trade line has a balance owed of less than $500 and is

more than 24 months old.

Collection Account – Capacity Analysis

• If total outstanding balance of all open collection accounts excluding

medical collection and charge off accounts, including collection account of

Non Borrowing Spouse where subject property is in community property

state, are equal or greater than $2,000, then any of the following


state, are equal or greater than $2,000, then any of the following

restriction will apply

• Payment in full of all collection account at or prior to closing.

• Proof of payment arrangement for each outstanding collection account along

with agreed upon monthly payment for each outstanding collection account

which will be considered in DTI Ratio.

• In absence of a payment arrangement, 5% of outstanding balance of each

collection account should be considered in DTI Ratio.

Student Loan

• Student loan must be included in DTI ratio with greater of 1% of the

outstanding balance or the verified monthly payment reported in

the credit report; unless one of the below exceptions are met:


• If the student loan is a fixed payment loan verified by credit

supplement or letter from loan servicer verifying applicant is on fixed

payment plan, which is not subject to change under the current plan

and monthly payment amount due.

• IBR, Graduated payment plan, interest only and deferred plans are

example of plans that are subject to change and do not qualify for the

exception.

Authorized User Account

• When the loan is manually underwritten, the primary wage earner should

be treated as the applicant and all other applicants are considered co-

applicants.


• Credit trade-lines that list the applicant as an “authorized user” cannot be

considered in the underwriting decision unless:

• Another applicant in the mortgage transaction is the owner of the trade-line, or

• The owner of the trade-line is the spouse of an applicant, or

• The applicant can provide documented evidence that they have made the

payments on the authorized user account for 12 months preceding application.

Verification of Previous Rental History

• Borrower with FICO less than 680 will require 12 months of

previous rental history.

• There can be no late rent payments, paid 30 or more days


• There can be no late rent payments, paid 30 or more days

late, within the last 12 months.

Verification of Previous Rental History

• If the borrower does not have previous rental history, or Housing Payment

Shock is more than 100%, then loan may be manually underwritten if any

other risk factor present in the file. Risk factor, include but not limited to, is

below


below

• Borrowers with FICO less 640, Housing Ratio exceeding 29% or Past derogatory

event

• Strong compensating factor should be present in the file. Acceptable

Compensating factor include, but are not limited to, the following example:

• History accumulated savings, Borrowers with FICO more than 680, Potential

for Increased earning or demonstrated conservative attitude towards credit.

Rental Income

• Rental income for annual income

• Include in annual income regardless of duration

• Include total rental real estate income reported on most recent IRS


• Include total rental real estate income reported on most recent IRS

Form 1040 Schedule E for previous 12 months

• No Schedule E = canceled checks, money order receipts,

bank statements, or other documents may be used to support

amount of rents received

Note: As per Sun West Mortgage Company, Inc. policy, maximum

financed property per borrower is only one.

Rental Income

• Rental income for repayment

• Rents received less than 24 months:

• Cannot be used for repayment


• Cannot be used for repayment

• Newly signed leases are not stable and dependable

• Include mortgage liability in debt ratio

• The below restrictions on property have been removed:

• Minimal income producing activity is now allowed in property (garden,

not farm).

Restriction on Property


not farm).

• The previous land to Total Value limitation of 30% has been removed.

• In ground Swimming Pool restriction has been removed.

• Update on property restrictions

• Either the “Estimated Reproduction Cost” or the “Estimated

Replacement Cost” will be required in the appraisal for all dwellings

that have an actual age of more than 1 year.

• Funds of gifts from any source will not to be included in the

cash reserves calculation in GUS.

• 401K or IRA accounts may be used for loan closing but can not

Cash Reserves


• 401K or IRA accounts may be used for loan closing but can not

be included in reserves

• The most recent 2 month average of liquid accounts such as

checking or savings accounts may be considered as cash

reserves.

• Refinancing is allowed for “take out” purposes when financing

to construct a new dwelling, or to improve an existing

dwelling. However previous loan must be a USDA transaction

Construction Financing


dwelling. However previous loan must be a USDA transaction

• If previous loan is not a USDA loan then the file must be

treated as a purchase transaction.

• If any adult member of the household is not presently employed

but there is a recent history of such employment, that person’s

income will be considered in the calculation of annual household

income.

Annual Household income


income.

• If the adult member is not presently employed and does not intend

to resume employment in the foreseeable future, or if interest

assistance is involved, then during the term of the Interest

Assistance Agreement, the applicant(s) and the person involved

must sign a statement to such and statement must be provided.

• A deduction from annual income of $480 is made for each household member

who qualifies as a dependent and will make the home their principal

residence.

If it is unclear or if parents share custody of children, a determination as a

Dependent Deduction


• If it is unclear or if parents share custody of children, a determination as a

qualifying dependent deduction for a child who lives in the home part of the

time can be made by the lender through guidance provided in Internal

Revenue Service (IRS) Publication No. 501. IRS considers the custodial parent

the parent authorized to claim the dependent on a Federal Income tax return.

• A divorce decree, custody agreement and/or Federal income tax returns are

documentation evidence the applicant is authorized to claim the dependent.

• Lenders must meet all agency requirements (FHA/HUD, VA,

Fannie Mae, Freddie Mac) when qualifying a loan that is a

condominium.

Condo Requirements


condominium.

New Forms - Matrix

Form Description Old Forms New Forms

Request for Single Family Housing Loan

Guarantee

Form RD 1980 - 21 Form RD 3555 – 21


Guarantee

Conditional Commitment for Single Family

Housing Loan Guarantee

Form RD 1980 - 18 Form RD 3555 - 18

Loan Note Guarantee Form RD 1980 - 17 Form RD 3555 – 17

Loan Note Guarantee – Electronic Version Not Available Form RD 3555 –

17E

This brings us to the end of the 7 CFR 3555

Regulation Presentation !


Regulation Presentation !

Thank you

All products are subject to credit and property approval. Program terms and conditions are subject to change without prior notice. Not all productsare available in all states or for all amounts. Other restrictions and limitations apply. The content in this booklet is for informational purposes onlyand not meant for legal, tax or professional accounting advice.