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Applications are made at the Rural Development County or Local Office serving the county where the housing will be located, and are made in one of two basic ways.

• An applicant can bring in his or her own application and supportive material.
• An application package can be prepared, on his or her behalf, by a packager. Packagers are usually builders, developers, real estate brokers, or nonprofit groups who compile the required materials to facilitate processing. Instructions for packaging are found as Attachment 3-A in the RHS handbook, which is included as Appendix 14-A to this guide, along with copies of the necessary forms.

There are two possible application forms: Form 410-4, for households wanting to buy or build on nonfarm land; and Form 410-1, for households situated on farms.

Applicants should become familiar with all relevant RHS Instructions, particularly those listed in Section II.E.

Rural Development calls an application "complete" if it includes the following three forms, although many more forms will be needed before final approval. These forms are used to decide basic eligibility, not necessarily feasibility. (Eligibility refers to the factors listed in Section III.C, while feasibility refers to the applicant’s ability to repay the loan, as explained here.)

• Form 410-4, "Uniform Residential Loan Application" (or, for on-farm property, Form 410-1) properly filled out, dated and signed;
• Form 1910-5, "Request for Verification of Employment" addressed to each employer and signed by the applicable household member;
• Form 3550-1, "Borrower’s Certification and Authorization" (signed copies for each household member).

Worksheets for the necessary feasibility calculations are provided in Appendix 12 to this guide.

Applications not completed, dated or signed will be returned by the Rural Development office within five days of receipt. Rural Development will notify the applicant, in writing, what information is needed.

• All applications are reviewed for completeness and date stamped upon receipt by Rural Development.
• Complete applications will be processed in the order received except that preference will be given to:

1. correcting health and safety hazards for current borrowers;
2. loans in agency’s interest (inventory sales, transferred);
3. hardship cases, including refinancing to avoid foreclosure and those living in deficient housing (housing that lacks complete plumbing, is overcrowded, or is structurally unsound) for at least six;
4. mutual self-help housing and leveraged (participation) loans;
5. all others.

• Veterans’ preferences apply.
• If an on-line profile credit report indicates adverse credit information Rural Development will notify the applicant. Rural Development will also provide the applicant with the address and phone number for the credit report vendor.
• Rural Development will provide an eligibility determination within 30 days of receipt of a complete application. If it is an adverse decision the applicant will be given appeal rights.

The agency handbook’s information on the selection process is included in Appendix 19 of this guide.

When funds are not sufficient to process all applications, Rural Development will not order a credit report or request income verification. Applicants will be notified within 30 days of their preliminary eligibility determination. In offices with 50 or more unprocessed applications, applicants will be informed of their status at least every six months. If applicants do not respond to a query on continued interest their application will be withdrawn in 30 days.

Where there is no backlog and funds are available, Rural Development will make a preliminary eligibility determination and request the following:

• An on-line profile credit report (optional) and determine credit evaluation information.
• Verification of income.

F. Selection for Processing

Loans fitting the first four preference categories listed under Section IV.C will be processed on receipt.

All other loans are processed in the order received, subject to the availability of funds.

Rural Development will, on a quarterly basis, process applications that will potentially utilize 175 percent of anticipated loan funds.

Those whose applications are selected will be given 30 days to furnish the balance of required information, including credit report fees.

Selected applications will be funded in the order that information is provided.

A list of verification forms is included in Appendix 13 of this guide, and copies of the forms are in Appendices 13 and 14. The following verifications must pass directly from the verifying third party to Rural Development:

• income verification;
• Rural Development/RHS will request the State Labor Department to spot check wages for 5 percent of randomly selected applicants (wage matching), in states where there is a memo of understanding;
• verification of disability (Form 1944-4) from state review boards or Social Security;
• credit history and debts (credit report);
• RHS reference letters (Form 410-8);
• landlord verifications (Form 1944-60).

The Rural Development loan official may conduct a pre-qualification interview with the applicant. It will cover affordable debt, verification on household occupants, other credit, full disclosure requirements, financial and credit counseling, tax and insurance responsibilities, loan caps, incurring costs prior to loan approval, and recapture.

Following receipt of satisfactory verifications Rural Development issues a certificate of eligibility (Form 1944-59, included as Appendix 15 of this guide) and the applicant is given up to 90 days to provide a credit report fee and a reasonable time to provide sufficient information to underwrite (determine final approval for) the loan. Applicants with a low priority, or applying when funds are very limited, will be advised of their eligibility status and advised not to provide additional information until requested by Rural Development. The complete list of documentation required before the agency can approve a loan is included in Appendix 17 to this guide.

J. Environmental Review

The agency completes an environmental review in accordance with Instruction 1940-G, for each site, prior to loan approval or obligation of funds.

If Rural Development or RHS does not approve the loan, the applicant will be informed in writing the reasons why, specifically, the applicant did not meet the requirements for the assistance requested. The letter must also remind the applicant that an appeal may be made to the USDA national appeals staff under Instruction 7 CFR Part 11. (Form 3550-3, "Notification and Statement of Reasons for Credit Denial, Termination or Change" is included as Appendix 16 to this guide.) The applicant may request an interview with the decision maker to discuss the reasons for rejection and to request that the application be reconsidered. If the loan still is not approved, the Rural Development must notify the applicant by letter, indicating the reasons and noting the applicant’s right to appeal.

Certain reasons for rejection, listed in the instructions, are not appealable. (These include, for example, the property not being in a rural area as defined by RHS/Rural Development.) However, a review of the decision may be requested. Certain others are appealable only after the applicant has first requested a review by the State Director.

For more information, see A Guide to Appealing Rural Housing Service/Rural Development Decisions, a HAC publication.²

L. Loan Approval

When an application is approved, the applicant is notified of any conditions of approval, such as a request for title search. Internal RHS forms are mailed to the RHS finance office for obligation of funds and the title process is begun. When Rural Development receives a satisfactory preliminary opinion of title, the check can be ordered and the loan closed. Applicants are responsible for paying title costs, either from loan funds or their own resources.

Appendix 11 of this guide is RHS’s list of information an applicant should know when a loan is approved, Form 3550-23, "Applicant Orientation Guide."

Loans of more than $7,500 scheduled for repayment in more than 15 years are secured by a real estate lien (mortgage or deed of trust), with full title services. Loans of less than $7,500 scheduled for 15 years or less may be secured by the best real estate lien that can be obtained.

Loans of $2,500 or less scheduled for no more than 10 years may be secured solely by a promissory note, provided the applicant has a good reputation for debt payment, appears in a strong financial position, and has equity in the real estate.

When real estate security is taken, title clearance is obtained on the property. Depending on the state, either a local designated attorney or an authorized title insurance company is employed.

Generally, RHS requires that its security interest not be jeopardized by other liens against the property or other interests in the property. However, there are some significant exceptions such as when the excess liens are held by a public body, hospital or welfare institution for medical bills, welfare payment or state motor vehicle judgments. In addition, the borrower must be unable to settle the outstanding liens, RHS interest must be paramount and not jeopardized by the liens, and the borrower must be able to meet the payments. Liens junior to RHS will be allowed at closing, or immediately following closing, if they do not interfere with the purposes of the Section 502 direct loan, and the total of all liens does not exceed the market value of the property, with the exceptions noted.

RHS may take a junior lien position (second or third mortgage, etc.), when there are no provisions in the prior lien that will jeopardize RHS security or, if there are such provisions, they are satisfactorily limited, modified, or waived. A junior position is routine when participation loans are utilized.

When the applicant owns an undivided interest in the property, the co-owners’ interests need not be included in the mortgage if the property fits into one of the following two scenarios.

1. When one or more of the co-owners is not legally competent or cannot be located, or the ownership rights are divided among such a large number of co-owners that it is not practical for all their interests to be mortgaged, the mortgaging of interests not exceeding 50 percent may be excluded from the security requirements upon prior approval by the State Director. All legally competent co-owners using or occupying the property will be required to sign the mortgage. Co-owners will be required to sign the note when necessary for a sound loan or to obtain the required security.
2. When an applicant owns an undivided interest in part of a farm and seeks a loan to build or improve facilities on another part in which the applicant owns the entire interest, or the applicant owns only an undivided interest in a building site that will be part of the farm, the interest of the applicant’s co-owners may be excluded from the security requirements under certain conditions.

When the applicant owns a life estate interest in the property, the remaindermen’s interest need not be included in the mortgage if one or more of the remaindermen are not legally competent or cannot be located or if the remainder rights are divided among such a large number of remaindermen that it is not practicable to obtain the signatures of all the remaindermen. In that case, the mortgaging of remainder interests, not exceeding 50 percent of the total remainder interest, may be excluded from the security requirements upon prior approval by the State Director. In such cases, the loan may not exceed the percentage of market value of the property represented by the interests of those remaindermen who sign the mortgage, determined with due regard to all adverse factors involved. Remaindermen will be required to sign the note when necessary for a sound loan or to obtain the required security.

When the applicant is the owner of a farm, a mortgage may be taken only on the dwelling and dwelling site provided the following conditions can be met:

1. The tract to be mortgaged must not include or be close to farm service buildings, must be in a good residential location, be otherwise suitable as a residential type of nonfarm tract, provide adequate security for the loan, be contiguous to and have direct access to a public road, or
2. The tract to be mortgaged must contain at least enough land to provide clearly adequate security for the loan and to make the tract readily saleable in the area.

When the ownership interest is by virtue of a land purchase contract, a prior lienholder’s agreement must be obtained (Instruction 1927-B, 1927.57(b)(12)).

Loans can also be made on farm and nonfarm leasehold lands, provided Rural Development can obtain an enforceable mortgage.

Mortgages on Indian land in trust or restricted status must be approved by the Secretary of Interior (Bureau of Indian Affairs). State Offices are required to have State Instructions covering making and securing loans under these conditions. Note: The law changed in 1990. In the case of default Rural Development/RHS must first try to transfer the loan to another tribal member, the tribe or the Indian housing authority prior to liquidation. After actual liquidation Rural Development/RHS may sell the property only to one of the aforementioned. The change in law was meant to remove the threat of land alienation and thus encourage participation.

When security involves possessory rights on an Indian reservation or state-owned land, RHS may accept a form of insurance or guarantee from a state agency or Indian tribe.

When real estate will not be mortgaged or when the best real estate mortgage obtainable is taken as security without title clearance or use of legal services, the applicant will be required to submit evidence of ownership of the farm or nonfarm tract. This may be the original or a certified or photostatic copy of the deed, purchase contract, or other instrument evidencing ownership. When Rural Development is uncertain as to whether the applicant is a qualified owner, such action will be taken as the Agency considers necessary, such as requiring the applicant to furnish additional information or obtaining the advice of the USDA Office of General Counsel regarding the evidence of ownership submitted and any further information or action that may be needed. Proof of ownership need not be as much as that normally required. For example, it may include such evidence as the levy and payment, in the applicant’s name, of taxes on the real estate and affidavits by others in the community to the effect that the applicant has occupied the property as the apparent owner for a given length of time and is believed and generally reputed to be the owner.

At the time of loan closing a number of actions must be taken and forms executed. Normally, the actual closing takes place in the office of the attorney or title company, and the Rural Development approval official is not expected to be present. At this time Rural Development/RHS needs some or all of the items listed in Appendix 18 (some of which are collected by the loan closing official).

All legal expenses associated with the loan closing are paid by the borrower. However, in some cases these expenses may be included in the loan.

Construction or rehabilitation occurs either prior to or after loan closing depending on the arrangements among the builder, the applicant and Rural Development/RHS (see Instruction 1924-A). Rural Development can issue the builder a conditional commitment assuring the builder that if the proposed house is built to specifications, it will be suitable for purchase by a qualified Section 502 direct loan applicant, at a price not above a specific maximum.

The conditional commitment does not reserve funds for the loan or guarantee that an applicant will be available. (In fact, the builder does not necessarily have to have a specific buyer lined up for each house.) RHS requires a fee of $350 for conditional commitments, which includes the appraisal fee of $280.

The applicant family and the builder can also enter into an RHS approved construction contract (Form 1924-6), which lays out plans and specifications (planned construction must meet or exceed HUD-FHA minimum property standards), payment terms, time considerations and a penalty clause for nonperformance. Loans under this contract method can be closed either prior to construction or after construction is completed.

If a loan is to be closed after construction is completed, no construction should be started without authorization from Rural Development. The starting of construction may be authorized only after the loan has been approved, loan funds are obligated by the Finance Office and a conditional commitment has been issued to the builder.

When loans are closed prior to construction, initial payment(s) of principal and interest are deferred, usually until the estimated date for occupancy. At that later date accrued interest is capitalized and amortized over the remaining life of the loan. This practice serves to prevent dual payments (rent plus mortgage).

A builder’s warranty which covers defects in materials and workmanship for a one-year period must be signed on all new construction and rehabilitation under the contract or conditional commitment method. (See Appendix 21.) The one-year period for new construction begins with the conveyance of title or initial occupancy, whichever occurs first. For rehabilitation, the period begins upon completion of work. Rural Development notifies the borrower during the eleventh month of the warranty period that the warranty is about to expire and that the borrower should bring any complaints to the attention of the builder. An insured ten-year warranty may be substituted for this process. In such cases, Rural Development is required to make only a final inspection.

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