Rural Development issued Procedural Notice 513 in June making changes to the Section 502 Direct and the Guaranteed programs and handbooks. For 502 Direct program packagers there appear to be two worth calling out that directly affect you:

Attachment 3-J CHECKLIST OF ITEMS TO ACCOMPANY THE UNIFORM RESIDENTIAL LOAN APPLICATION is updated so packagers will want to make sure they are using the most current version. The changes are minor: is revised to clarify that the credit report fee must be paid via check or money order; to stress that receipt of alimony and/or child support must be reported; to specify that verification of assets must be provided for the entire household, not just the applicants; and to ask for evidence of the applicant’s valid/full taxpayer identification (such as a copy of the Social Security card, pay stubs with the full taxpayer ID listed, etc.).

The other clarification worth noting is in paragraph 7.6 Construction Loan, it states consideration must be given for paying both the course of construction/builder’s risk policy and the hazard insurance policy at occupancy/move-in.

Within 30 days of the anticipated construction completion date, the borrower will provide the Field Office with a copy of the binder for a hazard insurance policy and a receipt showing it has been paid in full for one year, OR a request for a draw from the construction loan to pay one year’s hazard insurance premium in full, as applicable. If the borrower does not provide this information to the field office, does not pay the premium as agreed, or if there are insufficient funds to establish the escrow account when the loan is converted, the Field Office will task CSC and provide the estimated amount of shortage, and the facts in the case. CSC will generally increase the monthly payments scheduled for the remainder of the escrow cycle to compensate for any shortage. CSC may also elect to charge the borrower’s account for the shortage and reamortize the loan.

This means the initial builders risk policy can be paid from the loan and then the first year of homeowner’s insurance, if budgeted for, would also be paid out of the loan. Here’s another run down on how it works and the conditions that must be met:

1. Self-help loans with multiple draws are construction loans, not permanent loans.
2. At construction loan closing, a full year’s builder’s risk premium must be paid and remain in force until replaced by hazard insurance coverage according to 12C and 7.13 (HB-1-3550).
3. At the time of move-in (which may pre-date the conversion to a permanent loan on the first day of the following month), a full year’s hazard insurance coverage must be paid and in force.
4. A 12 month escrow analysis at the time of conversion from construction to a permanent loan determines the escrow starting balance.  The next insurance premium due might be in month 11 or 12.
5. HB-1-3550 no longer prohibits the payment or reimbursement of insurance premiums as an eligible closing cost, but premiums are not an allowable excess cost, which can exceed the appraised value:

It is very important to include all anticipated costs in the construction budget equal to the loan amount that the borrower is not paying or receiving reimbursement at closing. Make sure all budgets reflect the Builders Risk Policy, First Year Hazard Premium and the Escrow Deposit so the appraised value of the property is not exceeded.