Written By: Frankie Lacy, Op-Ed Writer
USDA’s new 7 CFR Part 3555 program became effective December 1, 2014. As a result, all lenders have begun to “re-learn” USDA loan origination and processing. There is a new guideline hand book, along with fillable pdf documents posted on the USDA LINC website: https://usdalinc.sc.egov.usda.gov/USDALincTrainingResourceLib.do
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The changes to USDA’s loan program are extensive and in-depth. There is a renewed focus on holding the lender accountable for all decisions made. Credit decisions, such as whether to include collection accounts in the debt ratio, must be fully explained on the loan transmittal and in the comments sections of GUS (Guaranteed Underwriting System). USDA has stressed that an accept finding from GUS is not a final approval.
In addition, USDA does not re-underwrite the loan when lenders submit their packages for issuance of the conditional commitment. Their role is more of a quality assurance function to meet certain minimum standards for the conditional commitment. However, lenders are advised that USDA is within their rights to request additional information when the loan is submitted for purchase.
I encourage you to take the Single Family Guaranteed Loan Program: 7 CFR Part 3555 Origination Overview pre-recorded training. The link to this training was sent to lenders in an announcement, however you can also access it by contacting your local USDA field office. A few of the highlights from that training are as follows:
The new request form replacing the 1980-21 is the 3555-21. This form merges the USDA application and the income calculation form into one document. USDA has recently announced that it no longer requires the borrower to initial each page. However, all other signatures are still required.
Although GUS may give an Accept rating, it is up to the underwriter to validate the borrower’s credit profile. GUS cannot “read” the credit report, nor does it take adverse credit into account in the decision.
Acceptable credit includes:
-3 trade lines seasoned for at least 12 months
-No bankruptcy or foreclosure within the most recent 3 years
-No late mortgage payments
-640 FICO or greater
USDA now has a capacity analysis for collection accounts. Cumulative balances equal to $2,000 or more are required to be paid in full, or the underwriter must include them in the debt ratios at 5% of the outstanding balance. If the borrower has made a payment arrangement, they may provide proof of this arrangement in place of the 5% rule.
USDA has a very specific definition of reserves. This definition includes averaging the borrower’s balance over the most recent 2 month period to determine a pattern of reserves. USDA does not recognize funds recently placed in the borrower’s account for the specific purpose of obtaining mortgage financing as an indication of the borrower’s available reserves. To this point, gift funds may not be included in the reserve total.
USDA has improved their guidelines for borrower’s retaining a home. We now have specific guidance on what circumstances are eligible for this loan scenario. For example, severe overcrowding is defined as more than 1.5 household members per room (not bedroom). If overcrowding is the rationale for the borrower needing to immediately vacate a residence, it must have been in place for at least 90 days (and will continue to be an issue for at least the next 9 months).
VOR’s are required for all borrowers whose FICO score is less than 680.
IRS transcripts are now required on all adult household members (18 years or older).
Compensating factors are defined in specific detail. Some examples are :
680 or greater FICO
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Minimal housing expense increase (payment shock). Cash reserves (averaged over the last 2 months) of 3 months PITI or more. Continuous employment with the current primary employer
About The Author
Frankie Lacy - As an op-ed writer, Ms. Frankie Lacy is a 15+ year mortgage industry veteran with extensive conventional mortgage underwriting experience. Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration.
