The final rule is final!

On Feb. 7, 2022, a final rule was published in the Federal Register, which updates and improves the direct single family housing loans and grants programs. The changes are intended to increase program flexibility, allow more borrowers to access affordable loans, better align the program with best practices, and enable the programs to be more responsive to economic conditions and trends, including revisions to the refinancing provisions, which will help provide relief to homeowners who have difficulty keeping their accounts current. A Special Procedure Notice dated March 9, 2022 provides a summary of the corresponding changes to Handbook-1-3550. Key points are summarized here:

Definition Updates in the Glossary

Modest Housing – Excludes in-ground swimming pools for existing homes for both Section 502 and 504 loans. In-ground pools with new construction, or with dwellings that are purchased new, will still be prohibited.

Market Value – The most probable price that a property should bring in a competitive and open market under all conditions that are requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions (conditions listed in HB-1-3550).

Moratorium – A period of up to two years during which scheduled payments are not required but are subject to repayment at a later date.

Principal Residence – The home domicile physically occupied by the owner on a permanent basis (i.e., lives there for the majority of the year and is the address of record for such activities as federal income tax reporting, voter registration and occupational licensing).

Veterans’ Preference – A preference extended to a veteran applying for a loan or grant under this part, or the families of deceased servicemen, who meet criteria in 42 U.S.C. 1477.

LoanServ – The mainframe-based computer application that is used by the Field Office to electronically communicate with, and transmit information to Servicing Office, and by Servicing Office to service and track a borrower’s loan.

Servicing and Asset Management Office (Servicing Office) – The agency branch located in St. Louis, Missouri that is responsible for servicing Section 502 and 504 loans.

PITI Ratios and Determining Repayment Ability – The principal, interest, taxes and insurance (PITI) is 33 percent regardless of income category. The Worksheet for Computing Income & Max Loan Calculator has been updated and is on the Packagers page of USDA – RD’s website here.

Site Value – Removed the requirement that the value of the site must not exceed 30 percent of the “as improved” market value of the property. This has also been removed from the definition of “Modest Site.”

Processing Priorities – Makes applications submitted through the Self-Help Housing program or submitted through an intermediary fourth priority for processing at all times, not just during times of insufficient funding. Refinancing has been added to Priority #2, “REO Property or Transfer/Purchase of Agency-Financed Property.”

Active Duty Military and Student Applicants – Occupying the Property requirements no longer include Active Duty Military and Student applicant restrictions.

Swimming Pools – Existing properties that include in-ground pools may be financed, provided the home meets the other modest dwelling requirements and the pool has been inspected by a qualified inspector. In-ground pools with new construction or with properties that are purchased new are prohibited.

Homeownership Education – Removes the requirement placed on State Directors to update the list of homeownership education providers annually. The Agency will require State Directors to update the list on an as-needed basis, but no less frequently than every three years. The Agency will determine preferences for education format (i.e., online, in-person, telephone) based on availability and industry practice. The Agency will publish the education format preferences in a publicly available format, such as the program handbook.

Affordable Housing Products Security Requirements – In those cases where a junior lien is a soft, silent or forgivable subordinate affordable housing product, the loan to value ratio may exceed the market value certain conditions as outlined in Chapter 6.7, F. This is not applicable to Self-Help Housing. 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.

Assumption of an RD Loan – A new borrower will typically use new loan funds to purchase a dwelling from an existing Rural Housing Service (RHS) borrower. When purchasing a property currently financed by a Section 502 loan, the new borrower will typically receive new loan funds. However, new rates and terms assumptions must be used when funding is limited (i.e., in September as a fiscal year is coming to a close and in October when the fiscal year begins).

Non-Certified Loan Packaging Fee – The initial limit for non-certified loan packaging in the program handbook will be $750. The Agency will determine the exact fee limit for the non-certified loan packaging process within the one-half percent threshold based on factors such as the level of service provided and the prevailing cost to provide the service and will publish the exact limit in a publicly available format such as the program handbook. For example, the current national average area loan limit is approximately $285,000, so the packaging fee for the non-certified loan packaging process could not exceed $1,425. The initial limit for non-certified loan packaging in the program handbook will be $750, which is the packaging fee permitted for Section 504 loan applications. The packaging fee is paid only if the loan closes.

Refinance Eligibility Requirements – The borrower may exceed the low-income limit at time of approval for the refinance. This change provides the Agency with flexibility by recognizing that holding existing borrowers and new applicants to the same standard at time of loan approval is detrimental to the existing borrowers who are having difficulty keeping their accounts current and demonstrate that they may benefit from a refinance at more favorable rates and terms. It would be harmful to the existing borrower and the Agency to deny an opportunity to refinance, and improve the affordability of the loan, simply because the borrower may exceed the low-income limit at time of approval for the refinance.

Refinancing RHS Debt – Depending on the availability of funds and program priorities, an existing RHS loan may be refinanced to allow refinancing as a special servicing action including, but not limited to, to allow refinancing, including subsidy recapture, at the end of a moratorium.

Section 504 specific changes

Repayment Periods, 10 Year Term – The repayment period is limited to a maximum of 10 years for loans under $24,000, and for unsecured loans. Loans under $24,000 should first be considered at 10 years; however, a longer term may be used when necessary to show repayment ability. Manufactured homes are eligible for a maximum loan term of 30 years. If the total outstanding balance on Section 504 loans is $25,000 or less, title insurance is not required.

Loan Closing – If the total outstanding balance on Section 504 loans is $25,000 or less, the loan may be closed by the Loan Originator or designee. If the total outstanding balance on Section 504 loans is greater than $24,000 the loan must be closed by a closing agent.

Section 504 Grant Maximum Lifetime Allowance – Recipients may receive multiple grants, up to a lifetime maximum of $10,000.

Section 504 Loan Maximum Lifetime Allowance – Applicants may obtain multiple Section 504 Loans, but the sum of the outstanding balance on all Section 504 loans cannot exceed $40,000.

Flood Insurance – Flood insurance is required when any form of federal financial assistance that is intended in whole or in art for the acquisition, construction, reconstruction or substantial improvement of any building located in a Special Flood Hazard Area, as identified by the National Flood Insurance Program.