Microsoft PowerPoint - Module4B- Credit Requirements-FINAL 6-26-23

Section502and504DirectLoanProgram

CreditRequirements

Presentedbythe:

SingleFamilyHousingDirectDivision

RevisionDate:September1,2023

Thepurposeofthispresentationistogive viewersabasicoverviewofthecredit

requirementsfortheSection502and504DirectLoanPrograms.Whilethisrecorded

webinaristargetedtoRuralDevelopment(RDorAgency)staff,others(suchasloan

applicationpackagers)mayfindtheinformationuseful.

Creditworthiness

• Evaluatinganapplicant’screditworthinessrequiresa

determinationoftheapplicant’sability andwillingness to

meettheirdebtobligations

 Ability:Incomeavailabilityandreliability

 Willingness:Creditpaymenthistory

• Exhibit4‐4,IndicatorsofUnacceptableCreditisusedto

evaluatetheapplicant’scredithistory.

Toqualify,anapplicantmustmeettheprogram’sincome,credit,repayment,and

othereligibilityrequirements.Whenconsideringcreditworthiness,theAgency

considersboththeapplicant’sabilityandwillingnesstomeettheirdebtobligations.

Abilityhastodowiththeapplicant’savailable,reliableincomeandconsiderswhether

theapplicanthasadequateincometo

repaytheirdebtobligations fromstable

incomesource(s).

Willingnessontheotherhandmeansthattheapplicantnotonlyhasfundsavailable

butiswillingtousethosefundstopaytheircreditors.Inotherwords,youcouldbea

millionairewithmorethanenoughabilitytopayyourbills,but

ifyouchoosenotto

paythosetowhomyouowedebts,thenyoudon’tshowawillingnesstodoso.

Bothcomponents:ABILITYandWILLINGNESStopayarecriticaltothecreditanalysis.

TheindicatorsofunacceptablecreditdescribedinExhibit4‐4canbeusedtoevaluate

theapplicants

credithistory.

TypesofCreditReports

• Tri‐MergeCreditReport(TMCR)

• Infilecreditreport

• Freecreditreport:

Call:1‐877‐322‐8228or

Visit:https://www.annualcreditreport.com

Therearethreetypesofcreditreportsmentionedintheprogram’shandbook(known

asHandbook‐1‐3550).

Whenacompleteapplicationisreceived,theAgencyordersaTri‐MergeCredit

ReportorTMCRforeachapplicantthroughtheloanoriginationsystem.TheTMCR

containsinformationfromthethreemajorrepositories,is

usedtodetermineifthe

applicant’scredithistoryandscoremeetstheprogramguidelinesforstreamlined

processing,and isusedtorenderanofficialeligibilitydecision.

AninfilecreditreportisasinglerepositoryreportorderedbytheAgencyatnocostto

theindividual.Infilecreditreportsareprimarilyused

forunsecuredSection504

repairloanslessthan$7,500.

AsoutlinedinA ttachment3‐J,ChecklistofItemstoAccompanytheUniform

ResidentialLoanApplication,anapplicantmustprovide(amongotheritems)a

nonrefundablecreditreportfeefortheTMCRandawrittenexplanationforanylate

payments,collections,judgments,orotherderogatoryitemsintheircredithistory.

Attachment3

‐Jinformstheapplicantthatiftheyareunsurewhattheircredithistory

lookslike,theycanobtainafreecreditreportbycalling1‐877‐322‐8228orbyvisiting

https://www.annualcreditreport.com.Bylaw,individualsareentitledtoreceiveone

freecreditfiledisclosureevery12monthsfromeachofthenationwideconsumer

creditreportingcompanies– Equifax,Experian,andTransUnion.

WhoseCreditisReviewed?

• FORALLSTATES:

Allnotesigners(applicant,co‐applicantandco‐signerifpresent)

• FORCOMMUNITYPROPERTYSTATESONLY:

Non‐purchasingspouse(NPS)

• NPS’sobligationsareconsideredintheapplicant’sTotalDebt

• Theapplicant’sNPSmustprovideacopyofthecreditreport

• NPS’scredithistoryisnev erconsideredareasontodenya

loan

• Judgementsmustbepaidinfullunlessanexceptionisgranted

bytheLoan

ApprovalOfficial

Forallstates,acreditreportisobtainedonanyonewhowillsignthepromissorynote.

Notesignersincludetheapplicant,co‐applicants,andaco‐signerifpresentto

supplementtotheapplicant’srepaymentability.

Ifyouareinacommunitypropertystate,whenonespouseisanotesigner,

butthe

otherisnot,thespousewhowillnotbeanotesigneriscalledaNon‐Purchasing

SpouseorNPS.Thenon‐purchasingspouse’sobligationsmustbeconsideredinthe

totaldebtratiotodeterminetheapplicant’spurchasingcapacity,unlessexcludedby

Statelaw.

Theapplicantmustprovide

theAgencywithacopyoftheirnon‐purchasingspouse’s

creditreport.TheNPS’screditreport(orreports)mustcontaininformationfrom

Equifax,Experian,andTransUnionandcancomefromasourcethatwasfreeorpaid

for.Thereport(s)providedcannotbemorethanninemonthsoldwhenthe

underwriting

decisionistobemadeoratthetimeofloanclosing.WhiletheNPS’s

debtsareev aluatedandincludedintheapplicant’sTotalDebtratio,thenon‐

purchasingspouse’scredithistorywillnotbeareasontodenyaloansincetheyare

notpartytothenote.Any

judgmentagainsttheNPSmustbepaidinfullunlessan

exceptionisgrantedbytheLoanApprovalOfficial.Communitypropertystates

include: Arizona,California,Idaho,Louisiana,Nevada,NewMexico,Texas,

WashingtonandWisconsin.PuertoRicoallowspropertytobeownedas

communitypropertyasdoseveralIndianjurisdictions.Alaskaisanoptout

communitypropertystate.

WhiletheNPS’sdebtsareevaluatedandincludedintheapplicant’sTotalDebtratio,

the non‐purchasingspouse’s

credithistorywillnotbeabasisonwhichtodenyaloan

sincetheyare nottheapplicant.AnyjudgmentagainsttheNPSmustbepaid infull

unlessanexceptionisgrantedbytheLoanApprovalOfficial.

Ifthenon‐purchasingspouseisnotacitizenoremancipatedminor,

andobtaininga

creditreportisn’tfeasible,theHousingProgramDirectormaywaivethisrequestona

case‐by‐casebasis.

Ifanon‐purchasingspouseinacommunitypropertystateisunwillingorunableto

provideacreditreport,theapplicationwillnotbeconsideredcomplete.

CreditHistoryReview

• CreditdecisionsarebasedontheTMCRorderedbyRural

Development(RD)

• Creditreportsareusedtodetermineif anapplicanthasa

recent historyofconsistentlyanddependablymaking

payments

RegardlessofwhethertheSection502applicationisreceiveddirectlybyRD,orfrom

aloanapplicationpackager,RuralDevelopmentwillalwaysorderaTri‐MergeCredit

Report(TMCR)via itsloanoriginationsystemtoevaluatetheapplicant’scredit.

Thecreditreportisusedtodetermineiftheapplicanthasarecent

historyof

consistentlyanddependablymakingpayments.Whilethreeyearsofhistoryis

evaluated,preferenceisgiventothemostrecent24monthsasitismostreflectiveof

theapplicant’scurrentcircumstances.Inthefollowingslideswewillreviewhow

creditscoresareevaluated,howanapplicantcanqualify

forastreamlinedcredit

analysis,andwhatstepsaretakenifanapplicanthasadversecredit.

ReviewingtheCr editReport

Review

•FormRD410‐4vsCredit

Report

•Askapplicanttoclarify

discrepancies/writeletter

ofexplanation

•Askaboutrecent

inquiries;confirm

whetheropened

•Isapplicantresponsibleor

onlyanauthorizeduser?

Verify

•Ifscoreunder640for502

loans(620for504loans),

obtain

• Verificationof

rent/mortgage

•Iftraditionalcreditisnot

used,orthereare<2

scores,consider

nontraditional/

alternativecredit

Explain

•ReviewforIndicatorsof

UnacceptableCredit

handlingoutlinedin

Exhibit4‐4,ifapplicable

•Ifscorebelow640(502

loans)orbelow620(504

loans),applicantprovides

explanationletterfor

derogatorycredit

It’simportanttocomparetheinformationonthecreditreportwiththeFormRD410‐

4,UniformResidentialLoanApplication.Verifytheapplicant’sname,address,and

socialsecuritynumber;comparetheemploymentinformationandrentaldataif

available.Ifthereareanyquestionableitems,obtainaletterofexplanation. Review

recentinquiries

andconfirmifanewaccountwasrecentlyopenedthatisnot

reflectingontheTMCRandreviewiftheapplicantisresponsibleoronlyan

authorizeduser.

If,andonlyif,theapplicanthasacreditscoreunder640,theLoanOriginatorshould

obtaintheverificationofrent/mortgage,&applicantreferenceletterstoparties

identifiedintheapplication.

Iftraditionalcreditisnotused,ortherearelessthan2scores,theLoanOriginator

should request must develop a credit history from at least 3 sources, whichcanbea

combinationoftraditionalandnontraditionalsources.However,onlytwosources

arerequiredifoneofthoseisaverificationofrentormortgagepayments.

If the applicant does have derogatory credit, the Loan Originator should request a

letter of explanation for the applicant to provide additional details.

ReviewforIndicatorsofUnacceptableCredithandlingoutlinedinExhibit4‐4,and

completeFormRD1944‐61,theCreditHistoryWorksheettoconductafullcredit

CreditDisputes‐ Non‐DerogatoryDisputedAccounts

Whatisneeded?

• Documentationtosupportthe

reasonandbasisofthedispute

withthecreditor.

• DeterminetheImpact

• Includetheminimummonthly

paymentstatedonthecredit

report,fivepercentofthebalance

oftheaccount,ortheamount

documentedfromthecreditor

Thedisputedaccountisconsiderednon‐derogatory

ifoneofthefollowingapply:

• Thedisputedaccounthasazerobalance;

• Thedisputedaccountstates“paidinfull”or

“resolved”onthecreditreport;

• Thedisputedaccountwithlatepaymentsareaged

24monthsorgreater;

• Thedisputedaccountiscurrentandpaidasagr

eed.

Non‐DerogatoryDisputedAccounts

IftheLoanOriginatorcandeterminethenon‐derogatorydisputedaccountacceptable,

theycanproceedwithunderwriting

HB‐1‐3550,Paragraph4.12 B states that consumers also have the right to dispute

information on their credit report, which they believe to be inaccurate. This can be

done directly with the furnisher of credit, as well as a consumer reporting agency.

Generally, disputes are investigated by the consumer reporting agency(s) within 30 to

45 days of receipt of the notice of dispute from the consumer; and written results of

the investigation are provided to the consumer within 5 business days after

completion of the investigation. For more information visit https://www.ftc.gov/ and

also, https://www.consumerfinance.gov/askcfpb.

If the applicant has a non-derogatory disputed account, the Loan Originator can

determine the non-derogatory disputed account acceptable and proceed with

underwriting. The disputed account is considered non-derogatory if one of the

following apply.

The disputed account has a zero balance;

The disputed account states "paid in full" or "resolved" on the credit report;

The disputed account with late payments are aged 24 months or greater; or

The disputed account is current and paid as agreed.

The applicant must provide the Agency with applicable documentation to support

the reason and basis of the dispute with the creditor. The Loan Originator must

determine the impact of the disputed account on the repayment of the proposed

mortgage debt. The Loan Originator must include the minimum monthly payment

stated on the credit report, five percent of the balance of the account, or the amount

documented from the creditor for each account.

CreditDisputes‐ DerogatoryDisputedAccounts

Iftherearederogatorydisputedcreditaccounts:

• TheAgency’screditdeterminationmaybesubjecttochangeuponresolutionofthederogatory

disputedaccounts.

• DeterminetheImpact

• Includetheminimummonthlypaymentstatedonthecreditreport,fivepercentofthebalanceof

theaccount,ortheamountdocumentedfromthecreditor

• Fo

rmRD1944‐59,CertificateofEligibilitymaybeissued,subjecttothereceiptofthedisputed

resolutionpriortoapproval.

Derogatorydisputedcreditaccountsreferto:

• Charge‐offaccounts

• Disputedcollectionaccounts

• Disputedaccountswithlatepaymentsinthelast24‐months

Disputedderogatorycreditaccountsrefertodisputedcharge‐offaccounts,disputed

collectionaccounts,anddisputedaccountswithlatepaymentsinthelast24months.

The Agency’s credit determination may be subject to change upon resolution of the

derogatory disputed account. The Loan Originator must determine the impact of

the disputed accounts on the repayment of the proposed mortgage debt. The Loan

Originator must include the minimum monthly payment stated on the credit report,

five percent of the balance of the account, or the amount documented from the

creditor for each account. The Loan Originator may issue Form RD 1944-59,

Certificate of Eligibility, subject to the receipt of the disputed resolution prior to

approval.



CreditDisputes–ExcludedDisputedAccounts

Thefollowingdisputedaccountscanbeexcludedfromconsiderationintheunderwritinganalysis:

• Disputedmedicalaccountsandcollections;

• Disputedderogatoryaccountsthataretheresultofidentifytheft,creditcardtheft,or

unauthorizedusewhenevidence(policereport,attorneycorrespondence,creditorstatement)is

providedtosupporttheapplicant’sexplanation;or

• Disputedaccoun

tsofanon‐purchasingspouseinacommunitypropertystate

SeeHB‐1‐3550,Chapter4,Paragraph4.12B.forfurtherguidanceon

DisputedAccounts(non‐derogatory,derogatoryandexcluded)

Thefollowingdisputedaccountscanbeexcludedfromconsiderationintheunderwriting

analysis:

• Disputed medical accounts/collections;

• Disputed derogatory accounts that are the result of identity theft, credit card theft,

or unauthorized use when evidence (police report, attorney correspondence,

creditor statement) is provided to support the applicant’s explanation; or

• Disputed accounts of a non-purchasing spouse in a community property state.

The FACT Act added a section to the Fair Credit Reporting Act to prohibit creditors from

obtaining or using medical information pertaining to a consumer in connection with any

determination of the consumer's eligibility, or continued eligibility, for credit.

Consumer reporting agencies are prohibited from providing a lender with a credit report

that contains identifying information for medical debts (be it a collection, judgment,

etc.). The name of the medical service provider and the nature of the medical service is

suppressed or coded so that lender decisions are not based on discriminatory factors.

However, suppression or coding of identifying information for medical debts does not

eliminate the need for consideration. Medical debts that are chronically late, placed in

collection, or turned into judgments remain indicators of unacceptable credit handling

that must be addressed (unless the applicant has a credit score of 640 or higher).

Please refer to HB-1-3550, Chapter 4, Paragraph 4.12 B. for further guidance regarding

non-derogatory, derogatory and excluded disputed accounts.

WhichCreditScoreisUsed?

If3scores–usethemiddlescore

If2scores‐ usethelowestscore

If1scoreor0isreported

TheTMCRmaycontainupto3creditscoresforeachapplicant.

Ifthereportcontains3scores,themiddlescoreisused;ifthereare2scores,the

lowestscorewillbeused.Having2‐3scoresindicatesthatthereisanadequate

depthofcredithistory.

Howev er,ifthereisonlyonesc

oreornoscore,thentheapplicanteitherhasvery

littlecredit,ornocredithistory,theLoanOriginatormustcompleteafull/manual

creditanalysisusingalternative/nontraditionalcreditverifications.Forinstance,an

applicantmayhaveacellphonebillpaidmonthlythatisnotonthecreditreport,but

billings

tatementscouldbeusedtodocumenttheirwillingnesstopaytheir

obligations.RDwillconductafullcreditanalysisusingthesealternate/nontraditional

creditverifications.

Itisimportanttonotethatnontraditionalcreditmayneverbeusedtoenhancethe

creditofanapplicantwithanegligentcredithistoryortoof

fsetderogatorycredit

referencesfoundintheapplicant’straditionalcreditreport.

Thereviewandanalysisofthecreditreportiscompletedforallapplicantsseparately.

Iftherearetwoapplicantsandonehas3scores,buttheotherhasonly1,then

alternatecreditwouldbeneededfortheapplicantwithonescore,andthereferences

wouldneedtoindicatethatthecreditisinthatapplicant’sname(eitherjointlyor

individually).

Aninfilecreditreport

creditscoreisconsideredvalidforunsecuredSection504

repairloansbutcannotbeusedfordenialofcreditpurposes.

WhichCr edit Sc oretoUse‐ Ex am ple

ExampleA:

JohnDay&MaryKnight

John

700 640 620

Mary

640 630

ExampleB:

BenCherry&JeriGarcia

Ben

580

Jeri

800 740 680

Let’slookattwoexamplestodeterminewhichcreditscoretouse.

ExampleAisJohn DayandMaryKnight.

Johnhas3creditscores:700,640,and620.Becausehehasthreescores,themiddle

scoreof640isselectedashis score.Maryonlyhastwoscores:640and

630.Since

shehastwoscores,thelowerscoreof630isselected.

ExampleBisBenCherryandJeriGarcia.Benhasonescoreof580whichcannotbe

usedandwillrequirealternativecreditverifications.Jerihasthreescores,solike

Johninthefirstexample,weuse

themiddlescorewhichinJeri’s caseis740.

StreamlinedCreditAnalysis

Yes,when:

• 502–CreditScore640+

• 504–CreditScoreis620+

• Twoormorecreditscoresonthe

TMCR

• Nooutstandingfederaljudgments

• Nosignificantdelinquency

• NoDoNotPay(DNP)matches

AgencyAction

Applicantsqualifiesfor

streamlinedanalysisand

areclassifiedashaving

acceptablecredit

Streamlinedcreditanalysisisusedwhentheapplicanthasmorethanonecreditscore

of640oraboveforthe502Directprogramand620oraboveforthe504RepairLoan

Program.Applicantsmustnot haveanyoutstandingfederaljudgments,significant

delinquencies,andnomatches ontheDepartmentofTreasury’sDoNotPay(DNP)

port

al.

Applicantswhoqualifyforthestreamlinedcreditanalysisareclassifiedashavingan

acceptablecredithistory,evenifthereareitems(suchascollectionsorlate

payments)reflectedontheircreditreport.Thosefactorshavebeenconsideredinthe

creditscore.Exhibit4‐4,IndicatorsofUnacceptableCr

edit,landlordverification,and

FormRD1944‐61CreditHistoryWorksheetarenotrequired.Theseapplicantsare

automaticallyclassifiedashavinganacceptablecredithistory.To avoidpotential

disparatetreatment,additionalcreditanalysisisnotappropriate.

RequiredWhen: CreditScoreisbelow640

Lessthantwoscoresornoscore

SignificantDelinquency

Obtain: Verificationofrent/mortgage

Non‐traditional/Alternativecredit(ifneeded)

Agency: ReviewforIndicatorsofUnacceptableCredithandling

outlinedinExhibit4‐4andcompletesFormRD1944‐61,

CreditHistoryWorksheet

FullCreditReview

Afullcreditreviewisrequiredwhentheapplicant’screditscoreisbelow640,hasone

orzerocreditscores,ortheapplicanthasasignificantdelinquencyonthecredit

report(evenwithacreditscoreof640orabove.)

Iftheapplicant’screditscoreislessthan640for502loans(or620fo

r504loans),the

LoanOriginatormustdevelopmentacredithistoryfromatleastthreesources.

Howev er,onlytwosourcesarerequiredifoneofthoseisaverificationofrentor

mortgagepayments.Acombinationoftraditionalandnontraditionalsourcesmaybe

usedtodevelopthecredithis

tory.

OtherCreditVerificationsinclude:

• Verificationofrent–FormRD1944‐60,Landlord’sVerificationcanbeusedto

verifythepast2yearsofrentalhistoryorobtainingthepast24monthsof

canceledchecks,moneyorderreceipts,orelectronicpaymentconfirmation

reflectingpaymentsweremadedirectlytothelandlord.

• ApplicantRe

ferenceLetter–FormRD410‐8isusedtoobtaininformationaboutan

applicant’scredithistorythatmightnotappearonacreditreport,forexample,

creditfromalocalstore.

• Non‐traditionalcredit/AlternativeCr edit–Forapplicantswhodonotuse

traditionalcredit,orthathavelessthantwocreditscores,nontraditionalsources

maybeusedtodevelopthecredithistory;andthenontraditionalpaymentsshould

havebeenmadeforatleast12monthswithinthepast24mon

thsfromthedate

ofthecreditreport. Wewilldiscussnontraditionalcreditinfurtherdet aillaterin

themodule.

Paymentsmadetorelativesforcreditsourcesareineligibleasanontraditionalcredit

reference.

FormRD1944‐61,CreditHistoryWorksheet,mustbeusedtosummarizethe

applicant’scredithistoryandtode

terminewhetherthereareanyIndicatorsof

UnacceptableCreditasoutlinedinExhibit4‐4.TheLoanOriginatorshouldcomplete

thisformandincludeitinthecasefiletoaidtheLoanApprovalOfficialinreviewing

theapplicant’scredithistory.TheLoanApprovalOfficialmustconfirmthe

completenessandaccur

acyofthisformbeforemakingacreditdecision.

HB‐1‐3550,Paragraph1.9Dstates:Iftheapplicationisdeniedduetoadversecredit,

thesupportingdocumentationshouldincludeacompletedFormRD1944‐61,Credit

HistoryWorksheet,whichmustbesignedbytheLoanApprovalOfficial.Theanalysis

mustdocumen

ttheconsiderationofparagraph4.14(a)compensatingfactorsand

includetheapplic ant’swrittenexplanationforderogatorycredit.

SignificantDelinquency

Regardlessoftheirscore,anapplicantwithasignificantdelinquency

willbesubjecttofurthercreditanalysisandFormRD1944‐61mustbe

completed.

SignificantDelinquencyincludes:

• Aforeclosure,deed‐in‐lieuofforeclosure,shortsale,ormortgage

charge‐offthathasbeencompletedwithinthelast36months

• AChap

ter7bankruptcydischargedlessthan36monthspriortothe

applicationdate

• Agencydebtthatwasdebtsettledwithinthepast36monthsorare

beingconsideredfordebtsettlement

SignificantDelinquencyisdebtthatreflectsahigh‐risksituationwheredebtswere

notpaid;however,theyarenotautomaticdisqualifiers.

An applicant with significant delinquency on the credit report, even with a credit

score of 640 or higher, will be subject to further credit analysis and Form RD 1944-61

must be completed.

The Loan Approval Official will need to determine the reason for the delinquency,

what the applicant did to correct the situation and what the applicant’s credit status is

now.

Significant Delinquency includes:

• A foreclosure, deed-in-lieu of foreclosure, short sale, or mortgage charge-off

that has been completed within the last 36 months

• A Chapter 7 bankruptcy discharged less than 36 months prior to the application

date

• Agency debt that was debt settled within the past 36 months or is being

considered for debt settlement

Chapter13bankruptcy,onlyiftheapplicant

• Didnotcompletethedebtrestructuringplansuccessfully(i.e.,

quitmakingpayments)AND

• Hasnotmadethelast12monthsofpaymentsaccordingtothe

restructuringplan

Note:ifcurrentlyinbankruptcy,needwrittenauthorizationfrom

bankruptcycourttoincurRDloan

SignificantDelinquency(Continued)

AChapter13bankruptcyisarepaymentplanthatprotectsindividualsfromcollection

actionduringtheplanperiod,fromthreetofiveyears,anddischargesanyunpaid

balanceattheendoftheplan.Therepaymentamountisdeterminedbythecourt

basedontheindividual’sincome.

AnapplicantwithaChapter13Bankruptcyreportedonthecreditreportis

consideredtohaveasignificantdelinquencyiftheapplicant:

• Doesnotsuccessfullycompletethedebtrestructuringplan(i.e.,quitmaking

payments),AND

• Hasnotmadethelast12monthsofpaymentsaccordingtotherestructuringplan

priortothedateofapplication.A

Pleasenote,iftheapplicanthassuccessfullycompletedt

hedebtrestructuringplan

andmadethelast12‐monthsofpaymentsunderthebankruptcyrestructuringplan,

thentheChapter13bankruptcyisnotconsideredunacceptablecredit,andacredit

exceptionisnotrequired.Thepaymenthistoryfromthebankruptcyrepayment

plan

maybeusedtodocumentstheapplicant’swillingnesstorepaydebt.TheLoan

Originatorwillneedtodocumentthatallrequiredpaymentswerepaidontimeand

in the amount identified in the plan.

However, if the applicant is currently in bankruptcy, the applicant must obtain

written permission form the Bankruptcy Court to enter a financial obligation with the

Agency.

WhatiftheApplicanthasaSignificantDelinquency?

DO

Investigate&Document:

• Whydidithappen?

• Whatwasdonetocorrectit?

• Whatdoesthecreditreflect

now?

(AgencywilluseFormRD1944‐61,Credit

HistoryWorksheet)

DONOT

Considerthesignificant

delinquencyasanautomatic

disqualifier;itsimplymeansthe

applicantdoesnotqualifyfor

streamlinedreview

Significantdelinquenciesdonotautomaticallydisqualifyanapplicant;iftheyexist,

thestreamlinedcreditanalysiscannotbeused,andafurtherreviewisneeded.

Credithistoryproblemsmaybemorereflectiveofaninabilitytopay,thanan

unwillingnesstomeetthefinancialobligations.Itmayalsobeanindicatorof



extenuatingcircumstances,causingasignificantreductioninincomeand/oran

increaseinfinancialobligations.TheAgencymaybeabletomakeanexceptionif,in

fact,theadversecreditwasduetoextenuatingcircumstancesbeyondtheircontrol

andtemporaryinnature.

Ifthereissignificantdelinquency,theAgencyshouldin vestigate

anddocumentwhyit

happened,whatwasdonetocorrectitandwhatdoestheapplicant’srecentcredit

looklike.FormRD1944‐61,CreditHistoryWorksheetshouldbeusedtoevaluateand

analyzetheapplicant’scredit.

Non‐TraditionalorAlternativeCredit

(NoScore/OnlyOneScore)

Whatisit?

• Paymenthistorynotreportedtothecreditbureau

• Paymentsmadeforatleast12‐monthswithinthepast24months

Howmanyareneeded?

• Atotalofthreecreditsources(combinationoftraditionaland

alternative)areneeded

• Twosourcesmaybeusedifoneofthosesourcesisaverification

ofrentormortgagepayments

If the applicant has less than two credit scores, the Loan Originator must develop a

credit history from at least three sources; which can be a combination of traditional

and alternative credit.

Non‐traditionalorAlternativecreditisapaymenthistoryfromcreditorswhodonot

reporttothecreditbureau.A12‐monthpaymenthistoryisobtainedfromat

hird‐

partysourcetoverifythatpaymentshavebeenmadeasagreed.Thepaymentsfrom

non‐traditionaloralternativesourcesshouldhavebeenmadeforatleast12‐months

withinthepast24monthsfromthedateoftheapplication.Thepaymenthistory

canbeintheformofFormRD410‐8,ApplicantReferenceLetter,copiesofbilling

statements,cancelledchecks,etc.

Non‐traditionalorAlternativecreditcanbecombinedwiththetraditionalcredit

tradelinesasreportedonthecreditreport(rememberthatthosetradelinesneedto

meettheminimumpaymentactivityhistorytobeconsidered).

Atotalofthreecreditsources(combinationoftraditionalandalternative)are

needed.

Twosourcesmaybeusedifoneofthosesourcesisaverificationofrentormortgage

payments.

Nontraditional/AlternativeCreditSources

PreferredSources:

• Rentalpayments

• Utility(notincludedinrent)

• Internet/cellphone/cableTV

payments

• Insurancepaymentsnot

includedinpayrolldeductions

(auto,life,renter's,etc.)

• Personalloanwithtermsin

writingsupportedwithcanceled

checks(cannotbearelativeof

applicant)

AlternativeSources:

• Childcare(cannotbearelative)

• Schooltuition

• Paymentstolocalretailstores

• MonthlySubscriptions(Hulu,

Netflix,Xbox,etc.)

• Paymentarrangementsfor

medicalbills

• Savingshistory(balanceof3‐

monthsoftheestimatedPITI)

ThepaymenthistorymaybeobtainedbysendingFormRD410‐8,Applicant

ReferenceLetter,tothenontraditionalcreditorsindicatedbytheapplicantorby

obtainingcanceledchecks,moneyorderreceipts,billingstatements,and/orpayment

historyprintoutsfromthecreditor.LoanOriginatorsshouldcarefullyevaluatethe

billingstatementstoestablishthe

paymenthistoryandconfirmtherearenopastdue

amountsorlatepaymentcharges.Generalstatementssuchas“satisfactory”or“in

goodstanding”arenotsufficienttoestablishasatisfactoryrepaymenthistory.When

other payment installments are used, the length of the payment history should be

adjusted accordingly. If the payments are made quarterly, verify that the last four

payments were made. If the payments are made annually, verify that at least the

last two payments were made.

Thefollowingarepreferredandalternativenontraditionaloralternativecredit

sources:

PreferredSources:Rentalhousing;utilities(ifnotincludedintherentpayment);

telephoneservice,cabletelevision,andinternetservice;insurancepayments(payroll

deductionstopayforinsurancepremiumsarenotconsideredalternativecredit).

TheseexpensesmustnotbeincludedintheTotalDebt(TD)ratiowhencalculating

repayment ability.

AlternativeSources:Paymentstochildcareproviders(providedtheproviderisan

establishedchildcarebusiness);schooltuition;paymentstolocalretailstores;storage

unitscompanies;monthlysubscriptions(e.g.,Hulu,Netflix,Xbox,etc.),payment

arrangementsfortheuninsuredportionofanymedicalbills;asavingsaccount

reflectingregulardepositsresultinginabalanceequaltothreemonthsofthe

proposedmortgagepayments;andsimilarcreditsources.Childsupportpaidisnotan

acceptablesource.TheseexpensesmustnotbeincludedintheTotalDebt(TD)ratio

whencalculatingrepaymentability.

AnalyzingtheCreditHistory

ACCEPTABLECREDIT

CompleteFormRD1944‐61,

CreditHistoryWorksheet

Proceedwithprocessing

theapplication

INDICATORSOFUNACCEPTABLECREDIT

CompleteFormRD1944‐61,CreditHistory

Worksheet

ASKandEVALUATE

Isitaccurate?

Whydidithappen?

Whatwasdonetocorrectit?

Isitresolved?

Eitherdenyapplicationorproceedwith

processing,dependingonresultsofreview

If the tradelines on the credit report and the non- traditional credit references

indicate that payments have been paid as agreed, the Loan Originator will complete

Form RD 1944-61, the Credit History Worksheet to document the results of the

analysis and the Loan Approval Official will review the form for completeness and

accuracy before making a credit decision.

Adverse credit items are considered INDICATORS of unacceptable credit. When the

credit report and/or non-traditional references reflect indicators of unacceptable

credit, this does not automatically make the applicant ineligible for a loan. The Loan

Approval Official must ask and evaluate additional questions before making an

eligibility determination:

1. Is it accurately reporting?

2. Why did it happen? The applicant will need to explain the circumstances that

resulted in the delinquency. Was this because of an injury/accident that

prevented the applicant from working for a period of time or did they forget to

pay the bill?

3. Whatwasdonetocorrectthedelinquency?Didtheapplicantmakepayment

arrangementstobringtheaccountcurrent?Ordidthedelinquencyremain

unpaidforaperiodoftime?

4. Whereisthecreditnow?Inotherwords:hastheapplicantrebuilttheircredit

sincethat“onetime”incident,ordotheycontinuetohavelatepaymentstotheir

creditors?

Dependingontheresultsofthatanalysis,theapplicationwilleitherbedenied,dueto

alackofacceptablecredithistory,ortheLoanApproval Officialmaydeterminethat

theapplicanthasanacceptablecredithistoryandmaycontinueprocessingthe

application.

Disqualifier

Regardlessoftheirscore,anapplicantwithanoutstanding

judgmentobtainedbytheUnitedStatesinaFederalcourt,

otherthantheUnitedStatesTaxCourt,isnoteligible.

Thisrequirementisstatutoryandcannotbewaived.

IndicatorsofUnacceptableCredit,whichisoutlinedinExhibit4‐4inHB‐1‐3550,are

generalguidelinesthataidindeterminingthedegreeofriskandarenotabsolute

underwritingcriteria.

IfthereisanIndicatorofUnacceptableCreditontheCreditHistoryworksheet,that

isnotanautomaticdisqualifier.Theonlyautomaticdisqualifierisiftheapplicanthas

anoutstandingjudgmentobtainedbytheUnitedStatesinFederalCourt,otherthan

theUnitedStatesTaxCourt.Thisisastatutoryrequirementthattypicallycannotbe

waived;however,ifthereisapaymentagreementinplace,anditisintheAgency’s

bestinterest,anAdministratorExceptionmayberequested.

IndicatorsofUnacceptableCredit

• Littleornocredithistory.

• Paymentsonanyinstallmentaccount,onaperaccountbasis,notcumulativeof

anyandall oftheseaccounttypes,wheretheamountofthedelinquency

exceededoneinstallmentformorethan30dayswithinthelast12months.

• Paymentsonanyrevolvingaccount,onaperacc

ountbasis,notcumulativeof

anyandall oftheseaccounttypes,whichwasdelinquentformorethan30days

ontwoormoreoccasionswithinthelast12months.

• Aforeclosurecompletedwithinthelast36months.

• AnoutstandingIRStaxlienoranyotheroutstandingtaxlienswithnosa

tisfactory

arrangementforpayment.

As stated previously, the Indicators of Unacceptable Credit, which is outlined in

Exhibit 4-4 in

HB-1-3550, are general guidelines that should be used when reviewing eligibility.

If the applicant’s credit score is below 640, or there is one or no credit score, Rural Development

will determine if there are any indicators of unacceptable credit.

The Indicators of Unacceptable Credit include:

• Little or no credit history. The lack of credit history on the credit report may be mitigated if

the applicant can document a willingness to pay recurring debts through other acceptable

means such as third-party verifications or canceled checks. Third party verifications from

relatives of household members are not permissible.

• Payments on any installment account, on a per account basis, not cumulative of any and all

of these account types, where the amount of the delinquency exceeded one installment for

more than 30 days within the last 12 months.

• Payments on any revolving account, on a per account basis, not cumulative of any and all of

these account types, which was delinquent for more than 30 days on two or more occasions

within the last 12 months.

• A foreclosure that has been completed within the last 36 months

• An outstanding Internal Revenue Service (IRS) tax lien or any other outstanding tax liens with

no satisfactory arrangement for payment

• Twoormorerentormortgagepaymentspaid30ormoredayslatewithinthe

last2years.

• Outstandingcollectionaccountswithirregularpayments/nosatisfactory

arrangementsforrepayment,orCollectionaccountsthatwerepaidinfullwithin

thelast6months,unlesstheapplicanthadbeenmakingregularpayments

previously.

• Non‐Ag

encydebtswrittenoffwithinthelast36months,unlessthedebtwas

paidinfullatleast12monthsago.

• Agencydebtsthatweredebtsettledwithinthepast36monthsorarebeing

consideredfordebtsettlement.

• Delinquencyonafederaldebt.

IndicatorsofUnacceptableCredit(Continued)

AdditionalIndicatorsofUnacceptableCreditinclude:

• Two or more rent or mortgage payments paid 30 or more days late within the

last 2 years. If the applicant has experienced no other credit problems in the

past 2 years, only 1 year of rent history will be evaluat

ed.

• Outstanding collection accounts with irregular payments or no satisfactory

arrangements for repayment, or collection accounts that were paid in full

within the last 6 months, unless the applicant had been making regular

payments previously

• Non-Agency debts written off within the last 36 months, unless the debt was

paid in full at least 12 months ago

• Agency debt that was debt settled within the past 36 months or is being

considered for debt settlement, and lastly

• Delinquency on a federal debt

As we discussed previously, Rural Development may determine that the cause of the

adverse credit was beyond the applicant’s control and they have since corrected or

have made arrangements to correct the delinquency.

Remember that each applicant is evaluated on their own merits. An applicant with

an acceptable credit history cannot compensate for a co-applicant with an adverse

credit history. The analysis of the credit determines whether the applicant has an

ability and a willingness to repay obligations.

We will review a few examples shortly.

• Acourt‐created/affirmedobligationorjudgmentthatisoutstandingorhasbeen

outstanding(seeParagraph8.5regardingrequiredclearanceorapprovalupon

closing),orhasbeenoutstandingwithinthelast12months,except:

o Abankruptcyinwhich:

 Debtsweredischargedmorethan36monthspriortothedateof

application(i.e.,Chap

ter7);or

 Asuccessfullycompletedbankruptcydebtrestructuringplan(i.e.,

Chapter13)whichdemonstratesawillingnesstomeetobligationswhen

dueforthe12monthspriortothedateofapplication.

o A judgmentsatisfiedmorethan12monthsbeforethedateofapplication.

IndicatorsofUnacceptableCredit(Continued)

ThelastIndicatorofUnacceptablecreditis:

• Acourt‐createdorcourtaffirmedobligationorjudgementcausedbynonpayment

thatiscurrentlyoutstanding(seeParagraph8.5regardingrequiredclearanceor

approvaluponclosing),orhasbeenoutstandingwithinthelast12months,except:

• Abankruptcyinwhich:

o Debtsweredischargedmorethan36monthspriortot

hedateof

application;or

o Whereanapplicantsuccessfullycompletedabankruptcydebt

restructuringplanandhasdemonstratedawillingnesstomeet

obligationswhendueforthelast12monthspriortothedateof

application.

• Ajudgementsatisfi edmorethan 12monthsbefore thedateof

application.

EvaluatingAdverseCredit–ExampleA

Applicants:

JohnDayandMaryKnight

John’sCreditScores:

700,620,640,

Mary’sCreditScores:

640,630

Analysis:

John–

Validscoreof640

Mary–

Scoreunder640

• Onetradeline(open6months)

• Collectionaccount‐ $500balance

• Noalternativescreditref erencesin

hername

ThefirstexampleisJohnDayandMaryKnight.

Inthisexample,Johnhas3creditscores,sowewillusethemidscoreof640.Mary

onlyhastwoscores,sowewillusethelowerscoreof630.

John’screditreportshowsthereare3ormoretradelines;therefore his

creditscoreis

valid.

Mary’sscoreisunder640.Thereisonlyonetradelinethathasonlybeenopenfor6

months,andanunpaidcollectionaccountintheamountof$500reflectingonher

creditreport.WeaskedMaryforalternativecreditref erences,butshedoesnothave

anything

inhername.Maryindicatesthatthecollectionaccounthappenedbecause

shemovedfromtheareaanddidnotpaytheoutstandingutilitybill.Thereisnot

enoughevidencethatMaryhastheabilityandwillingnesstorepaytheloan.Thereis

anindicatorofunacceptablecreditreflectingonhercredit

reportandshehasnot

providedevidencethatitwasbeyondhercontrolorattemptedtoresolvethe

delinquency.

Inthisexample,Johnhasanacceptablecredithistory,butMarydoesnot.The

application would be denied due to lack of acceptable credit because both applicants

do not meet the credit requirements.

EvaluatingAdverseCredit–ExampleB

Applicants:

BenGerryandJeriGarcia

Ben’sCreditScore:

580

Jeri’sCreditScore:

800,740,680

Analysis:

Ben–

• Scoreof580

• Noadversecredit

• Lowscoreduetolackofrecenttradelines

• Obtainedlandlordreference&powerbill

Jeri–

Scoreof740

3unpaidcollectionaccounts

ThesecondexampleisBenGerryandJeriGarcia.

Benhasonescoreof580.

Hisreportindicatesnoadversecredit,buthehasjustoneopenandactivetradeline.

Alltheotheraccountsreflectingonhiscreditreportareold,andinactiveaccounts.

Alternativecreditwasrequestedtosupplementthe

report.Alandlordref erenceand

a12‐monthhistoryofhismonthlypowerbillwasobtained.Thepaymenthistoryfor

alternativecreditthatwasobtainedreflectthathemadehispaymentsasagreed.

Basedonthecombinationoftraditionalandnon‐traditionalsources,itisdetermined

thatBenhasacceptable

credit.ThesefindingsmustbedocumentedonFormRD

1944‐61,CreditHistoryWorksheet.

Jerihasthreescoresandnosignificantdelinquencies,soshequalifiesforstreamlined

processing.Shedoesnotneedtopayoffthecollectionaccounts,asthoseare

factoredintothescorethatisdeemedacceptablebythe

Agency.

ExceptionstoCreditStandards

RDmayconsiderexceptionstothecreditstandardsinthe

followingsituations:

• Reducedsheltercosts

• Temporarysituation

• Benefittothegovernment

RuralDevelopmentmaygrantanexceptionfortheapplicant’sadversecredithistory,

if:

1) Makingtheloanwillsignificantlyreducetheapplicant’ssheltercosts.For

example,theapplicant’scredithistoryindicatesthatforthelast3months,they

havehadpayments30dayslate.Theyexplainthattheirrentwentupto



$1,000/month4monthsagowhichwasa$200/monthincreasefromwhatthey

hadbeenpaying.Theyhavebeenstrugglingtomakealltheirpaymentsontime

sincetherentincrease.However,priortotherentincreasetheircreditreport

indicatesthatallpaymentsweremadeontime.Theloanamount

requestedwill

resultinapaymentof$750/monthwhichreducestheirsheltercostsandwould

likelyresultintheirabilitytomakethemortgagepaymentaswellasother

obligations.

2) Thecircumstancesweretemporaryandbeyondtheapplicant’scontrol.What

thismeansisthattheapplicantmayhaveadversecredit,but

itisduetoareason

beyondtheircontrolsuchas:unexpectedlossofjob,delayinbenefits,inabilityto

workduetoinjury,increasedexpensesduetoillness,etc.Andtheissueis

temporaryinnature.Asanexample–thecreditreportshowsexcellentpayments

until18monthsago.

Thenthereisa6‐monthperiodwhichreflectslate

payments;butsincethen,allpaymentswerepaidontime.Theapplicant

indicatesthatshewashitbyacar18monthsago,wasunabletoworkforthefirst

2weeks,thenwasonaparttimebasisfor3months.Shedidnothaveanysick

leaveanddid

notqualifyforotherbenefitsandwasunabletopayherbillson

time.However,onceshewasonafull‐timeschedule,shemadearrangements

withthecreditorsandwasabletobringheraccountscurrentandhassincepaid

herbillsontime.Inthisexample,it’sevidentthat

thereasonforthedelinquency

wasbeyondhercontroland shecorrectedtheissueassoonaspossible.

3) BenefittotheGovernment.Inthiscase,theapplicantmaybedelinquentona

Federaldebtandbymakingtheloan,thehousingexpenseswillbereduced,

allowingtheapplicanttotak e

actionsonthatdebtwhichwillbenefitthe

government.Whilethisisanexceptionwhichcanbeconsidered,beawar ethat

thisrequiresreviewandapprovalbytheAgency’sAdministratorandisrare.

CreditInquiries

Whatarethey?

Whattypeofdebt?

Howmany?

CreditInquiries

Whatarethey?Whilecreditinquiriesar enotnecessarilyanindicatorof

unacceptablecredit,theyareanindicatorthatanapplicantmayhaverecentlyapplied

forcreditandmayhaveincreasedtheirdebtobligations.Sinceinquiriesaretypically

arecentevent,it’simportanttoasktheapplicantquestionsabout

theinquiries.

Whattypeofdebt?Iftheapplicantisapplyingforacarloan,thiscouldbe

significant.Apaymentof$300permonthmaymeanthattheynolongerqualifyfor

theloanamountrequested.However,iftheyappliedforaretailstorecreditcard,

withasmallcredit

limitand alowpayment,itmaynothaveasmuchofanimpacton

theireligibility.Itisimportanttofindoutthetypeofcredit,thepotentialamountof

debtandresultingpayment,andiftheyhaveopenedorintendtoopenthecredit.

Howmanycreditinquiriesare

reflected?Thenumberofrecentcreditinquiriesis

alsoimportant.Openingcreditcardwithalowcreditlimitisdifferentthanthe

applicantopeningtencreditcards.Itisimportanttoreviewthenumberanddatesof

creditinquiriesreflectingonthecreditreport.

Creditinquiriesareanindicationthattheapplicantmayhaveadditionaldebtthatis

not reflecting on the credit report; therefore, it is important to discuss recent credit

inquiries with the applicant.

GovdeliveryNotices

SignupforGovdeliverytoreceiveemailupdatesonthisprogram.

Usingthelinkbelow,enteryouremailandselectthe“SFHDirectLoan

andGrantPrograms”(andanyotherprogramsofinterest)andthenclick

“Submit”:

https://public.govdelivery.com/accounts/USDARD/subscriber/new?qsp=

USDARD_25

Ifyouhaven’talready,weencourageallstafftosignupforGovDelivery,whichisa

subscription serviceisusedtoprovideupdatesregardingthe:

• Program’sinterestrate,

• ChangestoHandbook‐1‐3550,

• Certifiedpackagingprocess,

• Andmuchmore.

EndSlide

AreyouinterestedinlearningmoreabouttheSingleFamilyHousingDirectPrograms?

PleasecontactyourapplicableRDStateOffice.

https://www.rd.usda.gov/contact‐us/state‐offices

USDAisanequalopportunityprovider,employer,andlender.

Inthiswebinar,wehaveexaminedtheprogram’sbasiccreditrequirements.

Ifyouareinter estedinlearningmoreabouttheSection502Directloanprogram,visit

thewebsiteonthisscreen.

Finally,pleasenotethatthecontentsofthiswebinariscurrentasofthis

presentation’srevisiondate.Pleaserefer toHandbook‐1‐3550fo

rthemostrecent

programguidance.