USDA Underwriting Guideline Updates
August 13, 2020
Overview
In response to a recent USDA audit Carrington Mortgage Services, LLC (CMS) has implemented the following USDA product Underwriting updates and clarifications (highlighted in red). Please note this is an abbreviated summary of the guideline changes.
| USDA Underwriting Guidelines | |
| Old Requirements | Updated Requirements |
| Non-Purchasing Spouse Except for debt obligations specifically excluded by state law, the debts of the non-purchasing spouse must be considered in the qualifying ratios.If the debts are the sole responsibility of the non-purchasing spouse, do not consider debt in the debt-to-income ratio. See the Community Property States section below for obligations excluded by state law in Arizona, Nevada, and Wisconsin. |
Non-Purchasing Spouse Except for debt obligations specifically excluded by state law, the debts of the non-purchasing spouse must be considered in the qualifying ratios. See theCommunity Property States section below. |
| Requesting the Guarantee Certificate CMS must submit a fully executed form RD 3555-21 to RD for the issuance of the Loan Guarantee Certificate. The document must be signed by the CMS authorized representative and all applicants that are a party to the note. An additional form must be utilized if more than two applicants are on the loan. Original signatures are not required. CMS must complete the entire form with accurate loan information and document the interest rate agreed to by the applicants (s). Electronic signatures are not accepted. |
Requesting the Guarantee Certificate CMS must submit a fully executed form RD 3555-21 to RD for the issuance of the Loan Guarantee Certificate. The document must be signed by the CMS authorized representative and all applicants that are a party to the note. An additional form must be utilized if more than two applicants are on the loan. Original signatures are not required. CMS must complete the entire form with accurate loan information and document the interest rate agreed to by the applicants (s). In addition, Form RD 3555-21 “Request for Single Family Housing Loan Guarantee” must contain all pages from the currently published version on USDA LINC and include the Income Calculation worksheet completed with all income calculations fully documented. The top of page 4 “Worksheet For Documenting Eligible Household and Repayment Income |
| Updated Requirements | |
| Hazard Insurance Deductible The maximum allowable deductible for policy types for USDA transactions must not exceed the greater of $1,000.00 or 1% of the coverage amount. |
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| Old Requirements | Updated Requirements |
| Installment and Revolving Accounts Installment debts with more than six months repayment remaining must be included in the debt ratio. Installment debts with less than six months repayment may continue to be included in the debt ratio at the discretion of the underwriter. For GUS loans, the “Liability Type” must be changed from “Installment” to “Revolving” in order to include the debt in the ratios. Revolving debts with reported loan balances on the credit report must have a monthly payment included in the debt ratios. If a payment is not listed the underwriter estimates a monthly payment of 5% of the loan balance. If the applicant provides documentation from the creditor to confirm a lower monthly payment is due, this payment may be used. Evidence to support the lower payment used must be retained in the lenders permanent case file. Revolving accounts with no outstanding balance do not require an estimated payment. |
Installment Accounts Accounts that will be paid in full through a specified number of fixed payments such as auto, personal, secured/unsecured, etc. must have the monthly payment included. Installment debt may be paid down to ten months or less of remaining debt. If ten or less months of repayment remains per the credit report, creditor verification, etc., the monthly debt may be excluded if the payment does not exceed five percent of the monthly repayment income. Revolving Accounts Credit cards, lines of credit, secured/unsecured, etc. must include the minimum monthly payment documented on the credit report or other creditor verification in the total debts. If the credit report shows an outstanding balance, but no minimum monthly payment, the payment must be calculated as five percent of the balance reported on the credit report. A current account statement or creditor verification may be obtained to document the actual monthly payment and include that amount in the monthly debts. |
| Second Job or Multiple Job Employment A borrower must have at least two-years, uninterrupted history on all second or multiple jobs and have a strong likelihood of continuance in order to use for qualification purposes. Income received for less than two-years may be considered on a case-by-case basis. Otherwise, the income may be considered as a compensating factor only. |
Part Time and Secondary Employment Part time and secondary employment must be included in the annual income calculation when the income will be received in the ensuing 12 months. Evidence of resignation, termination, retirement, or relocation from these positions may result in the exclusion of this income. To include part time or secondary employment as repayment income, verify the borrower has received the income for a minimum of 12 months. Obtain a current pay stub, W2s, written VOE, and IRS tax returns/transcripts with all schedules. |
| Disability Income Disability benefit payments (e.g., Social Security disability insurance benefits, maternity/parental, or Veterans disability compensation benefits, etc.) may be treated as acceptable, stable income as long as it is properly documented. A review date on a Social Security award letter for disability is not considered a defined expiration date. The borrower's current eligibility for the disability benefits must be confirmed by obtaining a statement from the benefit's payer (e.g., insurance company, employer, or other qualified and disinterested party). Permanent Disability If the income does not have a defined expiration date, the income may be considered stable, predictable, and likely to continue. Additional documentation evidencing continuance of the income does not need to be provided by the borrower. |
Disability Income Long-Term Disability (Not disability income received from the Social Security Administration): Include all disability income in the annual income calculation. To include in the repayment income, document the applicant is currently receiving the income at the time of the application, the amount of the income received each month, and if there is a contract termination or modification date. Income must be confirmed to continue a minimum of three years into the mortgage. No history of receipt is required. Long-term disability may be documented with:
Disability Income received from the Social Security Administration: |
| Private Wells Certifications are only required if the appraiser suspects a problem with the system, or problems are customary in the area. In those instances, the appraiser will condition for a certification by the local health authority or an individual determined to be qualified by the USDA Certified Underwriter. Individual water wells are owned and maintained by the homeowner, and are subject to compliance with all requirements of the local and or State Health Authority having jurisdiction. Individual Water Systems/Wells should be located on the subject property site. If not, they must be on an adjacent property, and evidence of water rights and recorded maintenance agreement must be provided for acceptance of the well as the primary source of water for an USDA insured property. HUD testing requirements are the minimum standards acceptable for private wells. The test should include all microbiological and chemical test parameters. Properties serviced by private wells must have an elevation certificate showing the well opening is above the flood elevation or the well must have a sanitary well cap that prevents the back flow of water entering the well. |
Private Wells Individual water systems are owned and maintained by the homeowner and subject to compliance with all requirements of the local and/or State Health Authority codes. A water quality analysis is required to show the water quality of the well meets the requirements of the state or local authority. If the state or local authority does not have specific requirements, the maximum contaminant levels established by the Environmental Protection Agency (EPA) will apply. The local health authority or a state certified laboratory must perform a water quality analysis. The water analysis report must be no greater than 150 days old at loan closing. If USDA is aware of any recent environmental impacts that may render the previous analysis invalid (for example – chemical spills, natural disasters, etc.) a new report may be required. |
| Shared Wells Shared wells may serve existing properties which cannot feasibly be connected to an acceptable public or community water supply system. A shared well is acceptable provided:
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Shared Wells Shared wells may serve existing properties which cannot feasibly be connected to an acceptable public or community water supply system. A shared well is acceptable provided:
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