5.1

OVERVIEW

This chapter explains the processes by which lenders request a Section 184 case number, prospective borrowers are qualified, and loan applications are submitted for firm commitment review. Section 1 describes processing requirements for individual borrowers, Indian Housing Authorities (IHAs)/Tribally Designated Housing Entity (TDHE) and Tribal borrowers.

Section 2 covers how lenders request a case number, calculate the maximum mortgage amount and submit the loan for firm commitment processing. The following list outlines key steps in processing the loan.

• Prospective borrowers submit an application to an approved lender.
• The lender requests a case number from the Program ONAP to reserve Loan Guarantee funds (if available). Case numbers are valid for 180 days from issuance.
• Lenders determine whether (1) the prospective borrower has sufficient income, adequate monies for the down payment and satisfactory credit to qualify for the loan and (2) the acceptability of the property and the status of the proposed home site.
• Once the lender has determined that the borrower and site qualify for the program, the lender submits a firm commitment package to the Program ONAP.
• The Program ONAP reviews the application for completeness and, if necessary, gives the lender up to 60 days to provide additional information.
• Complete submissions are reviewed by the Program ONAP Office. The Director, Office of Loan Guarantee, Program ONAP, acts as Chief Underwriter for all Section 184 applications.
• Lenders are notified of approval or rejection via facsimile transmission. Lenders have 60 days from the date of a rejection to submit additional information and request the Program ONAP to reconsider the application.
• Firm commitments are in most cases valid for 60 days. Lenders may request from the Program ONAP an extension of up to 60 additional days for the firm commitment if credit documents are current. Firm commitments will be issued up to 180 days on new construction (where the lender is carrying the interim construction loan) depending on the date of the oldest credit documentation.

The Department has established parameters for the maximum loan amount and terms for the Section 184 Program. Within these parameters, lenders have significant latitude to set appropriate loan conditions. The Department wishes to encourage a flexible approach that promotes lending to a wide variety of Indian households, while ensuring that prudent underwriting practices are followed.

SECTION I: QUALIFICATION OF BORROWERS

5.2

GENERAL APPROACH

1. Application Format. Lenders must submit a Uniform Residential Loan Application (URLA) form for all borrowers.
1. Some URLA information may not be available at the time of the initial application. For example, for new construction projects a site may not yet be identified and applicants may not have complete information regarding project costs.
2. Application forms must be signed and dated by all borrowers intending to assume responsibility for the mortgage debt. The application must be signed by the borrower before underwriting, and the lender’s certification on the HUD Addendum A must not pre-date that of the borrower.
2. Criteria for Review of Application. In essence, the firm commitment process determines the borrower’s ability and willingness to repay the mortgage debt, and thus limits the probability of default or collection difficulties.
1. The borrower’s willingness to repay the mortgage debt is assessed by considering the borrower’s payment history including payments 30 or more days late as well as judgments, collections, bankruptcies, and foreclosures.
2. The borrower’s ability to repay the debt is assessed by considering:
• Income history and stability.
• Cash reserves following loan closing.
• The extent of other non-mortgage obligations.
3. Verifications.
1. Timing. Credit and income verification information may be up to 120 days old (180 days for new construction) at the time a Section 184 loan closes. HUD’s loan approvals are conditioned by this requirement. This means that lenders may have to update credit and income information periodically during loan processing and, if the borrower’s circumstances change significantly, resubmit the loan application to HUD for reconsideration. Verification forms must pass directly between the lender and creditor, depository or employer.
2. Forms. Rather than requiring borrowers to sign multiple verification forms, the lender may have the borrower sign a general authorization form that gives the lender blanket authority to verify the information needed to process the mortgage loan application. When used, lenders must attach a copy of the authorization to each verification it requests.

Verification authorizations may be transmitted by facsimile machine. However, the lender’s file must contain an original verification authorization form with the borrower’s signature.

4. Co-Borrowers and Co-Signers. HUD will permit non-occupying co-borrowers under the Section 184 Program if this co-borrower takes title to the property and obligates him or herself on the mortgage note. Similarly, HUD will also permit a co-signer with no ownership interest in the property (does not take title) to execute the loan application and mortgage note and thus, become liable for repayment of the obligation. The co-signer’s income, assets, liabilities, and credit history are included in the determination of credit worthiness.
1. Neither the co-borrower nor the co-signer may be a party that has an interest in the transaction, such as the seller, builder, real estate agent, etc. Exceptions may be granted if the seller and the co-borrower/co-signer is a family member of the owner occupant or is the IHA/TDHE or Tribe.
2. An individual signing the loan application must not otherwise be ineligible for participation in the Section 184 Program (see paragraph 5.5). The occupying borrower must sign the security instrument and the mortgage note.
3. Unless otherwise exempted, any non-occupying co-borrower or co-signer must have a principal residence in the United States.

Except for the distinctions described above, all references to co-borrowers, including the 75 percent loan to value limits (see paragraph 5.22b) apply equally to co-signers.

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5.3

CREDIT HISTORY

1. Approach to Determining Credit Worthiness. The lender should determine credit worthiness for Section 184 borrowers in the same way it does for other prospective homebuyers.
1. HUD is concerned about a borrower’s overall payment pattern. Where there are minor indications of derogatory credit, the lender should use good judgment in determining whether additional clarifying information is needed. For example, the appearance of an occasional late payment over a time period of several years may not need an explanation if the borrower has an otherwise good payment history.
2. Lenders must investigate all major indications of derogatory credit and give the borrower an opportunity to explain in writing the derogatory information. Minor derogatory information occurring two or more years in the past does not require explanation.
3. When delinquent accounts are revealed, the lender must determine whether the late payments were due to a disregard for financial obligations, an inability to manage these obligations, or factors beyond the control of the borrower. HUD requires all collection accounts to be paid off as a condition for loan approval except under unusual circumstances (i.e., documented dispute with collection agency or when a repayment plan with a 12 month acceptable history is provided). However, court-ordered judgments must be paid off before the mortgage loan is eligible for the Section 184 guarantee.
2. Alternative Credit. For those borrowers who choose not to use credit or have not yet established credit, the lender is permitted to develop a credit history from other means such as rent payment history, utility payment records, auto insurance, etc. The lender may also look at the borrower’s rent history with the IHA/TDHE. However, the lack of credit history may not be used as a basis for rejection.

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5.4

CREDIT REPORTS

1. Required Credit Reports. Lenders must request a Three Repository Merged Credit Report (TRMCR) on each Section 184 homebuyer. Although HUD does not generally require it, lenders may request a Residential Mortgage Credit Report (RMCR) as well. The lender must also separately develop credit information for any open debt listed on the loan application but not referenced on the credit report.

While the TRMCR should prove sufficient for processing most loan applications, the following circumstances require ordering an RMCR:

1. The borrower disputes accounts on the TRMCR.
2. The borrower claims that collections, judgments, or liens reflected as open on the TRMCR have been paid but cannot provide separate supporting documentation.
3. The borrower claims that certain debts shown on the TRMCR have different balances and/or payments but cannot provide current statements (less than 30 days old).
4. The lender’s underwriter determines that it would be prudent to utilize a RMCR in lieu of a TRMCR to properly underwrite the loan.
2. Charges for Credit Reports. In all cases, the borrower may be charged only the amount billed by the credit reporting agency.
1. A borrower may not be charged for both a TRMCR and a RMCR on the same loan except when delays on the part of the borrower require the TRMCR to be updated and a RMCR is ordered for one of the reasons described above.
2. Most credit reporting agencies will not charge for the TRMCR if the RMCR is ordered within 15 days of the TRMCR. The lender must make every effort to determine the need for the RMCR within this time frame to avoid the additional charge.
3. Standards for Credit Report Submission to HUD. Credit reports submitted to HUD must:
1. Be the original provided by the credit reporting agency or received electronically and printed by the lender’s printer. If the credit report submitted is not the original, the lender (by submission) certifies this to be an unaltered credit report.
2. Contain all credit that is available in the repositories, be accurate and complete, and provide an account of the credit, residence history, and public record information of each borrower responsible for the mortgage debt. The report must include all credit and legal information not considered obsolete under the Fair Credit Reform Act. This includes bankruptcies, judgments, lawsuits, foreclosures and tax liens that have occurred within the last seven years.
3. Contain a 24-month employment and residency history if not verified otherwise.
4. Identify each borrower’s name, social security number, date accounts were opened, credit limit, required payments, unpaid balance and payment history of each account.
5. Payment history must appear in the "number of times past due" format and be otherwise easy to read and understandable.
6. Must have no whiteouts, erasures, or alterations.
7. Indicate the name and address of the credit reporting agency, and each account listed must show the primary repository from which the particular information was obtained.
8. Show the name of the party ordering the report.

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5.5

REVIEWING CREDIT

1. General. Accounts listed as "rate by mail only" or "need written authorization" require separate verification. Each account with a balance must have been checked with the creditor within 90 days of the date of the credit report. The borrower must explain all inquires shown on the credit report for the last 90 days.
2. Recent Debts. The lender must ascertain whether any recent debts were incurred to obtain part of the required cash investment on the property being purchased.
3. Projected Increase in Obligations. The projected increase in the borrower’s housing expense from the present housing expense must be carefully analyzed. If the new housing expense will significantly exceed the previous housing expense and the borrower has not exhibited an ability to accumulate savings or otherwise manage financial affairs, strong compensating factors must be present to allow for borrower approval. (The projected mortgage interest deduction on the borrower’s federal income tax return, while beneficial to the borrower, is not a compensating factor and may not be included in the analysis.)
4. Payment History on Previous Mortgages. If the lender uses the credit report for this verification, it must cover at least the previous 12 months of activity.
5. Undisclosed Debt. If the credit report reveals significant debt not disclosed on the application, the borrower may have been attempting to conceal liabilities to qualify for the mortgage. The borrower must provide a written explanation for the omission.
6. Revolving Accounts. When revolving accounts with outstanding balances do not have stated minimum payments, payments should be calculated at the greater of five percent of the outstanding balance or $10 per month.
7. Judgments, Garnishments, or Liens. Any judgments, garnishments, or liens must be paid in full before closing. The borrower must furnish a satisfactory letter of explanation and must have reestablished good credit.
8. Bankruptcy. The bankruptcy must have been discharged fully, and the borrower must have reestablished good credit and demonstrated an ability to manage financial affairs. There must be at least two years between the discharge of the bankruptcy and the mortgage application. A shorter elapsed time–but not less than 12 months–is justified if the lender is able to document that extraordinary circumstances caused the bankruptcy (such as an extended illness that was not covered by health insurance) and that the borrower’s current situation is such that the events that led to the bankruptcy are not likely to recur. In all cases, the lender must have sufficient documentation to support the decision that the borrower is credit worthy.

A borrower paying off debts under Chapter 13 of the Bankruptcy Act or making payments through a Consumer Credit Counseling plan may also qualify if:

1. One year of the pay-out period has elapsed and performance has been satisfactory; and
2. The borrower receives court approval (if Chapter 13) to enter into the mortgage transaction.
9. Previous Mortgage Foreclosure. Generally, HUD will not guarantee a mortgage if the borrower has been a defendant in mortgage foreclosure proceedings that were completed within the past three years. However, an exception may be made if the foreclosure was the result of extenuating circumstances that were beyond the control of an owner-occupant borrower and the lender’s underwriting confirms that the borrower has re-established good credit and has demonstrated an ability to manage financial affairs. This exception does not apply if the borrower used the foreclosed property as a second home or for investment purposes.
10. Suspensions and Debarment. A borrower suspended, debarred, or otherwise excluded from participation in the Department’s other programs is not eligible for a Section 184 mortgage. The lender must examine HUD’s "Limited Denial of Participation (LDP) List" and the Government-wide General Services Administration’s (GSA’s) "List of Parties Excluded from Federal Procurement or Nonprocurement Programs." If the name of any party to the transaction appears on either list, the application is not eligible for a loan guarantee. (An exception is made when a seller appears on the LDP list and the property being sold is the seller’s principal residence.)
11. Delinquent Federal Debts. If the borrower is presently delinquent on any federal debt (e.g., U.S. Department of Veterans Affairs (VA)-guaranteed mortgage, HUD/FHA insured or guaranteed mortgage, HUD Section 312 Rehabilitation loan or Title I loan, federal student loan, Small Business Administration loan, delinquent federal taxes) or has a lien, including taxes, placed against property for a debt owed to the United States, the borrower is not eligible until the delinquent account is brought current, paid, or otherwise satisfied, (e.g., satisfactory repayment plan is made between the borrower and the federal agency owed). Lenders must verify through HUD’s Credit Alert Interactive Voice Response System (CAIVRS) that borrowers are not presently delinquent on any federal debt. To obtain additional information about CAIVRS and a CAIVRS access number, lenders should contact their local HUD Office or the Program ONAP.
12. HUD’s Credit Alert Interactive Voice Response System (CAIVRS). Lenders must screen all borrowers by using CAIVRS. If CAIVRS indicates the borrower is presently delinquent or has had a claim paid within the previous three years on a loan made or insured by HUD, the borrower is not eligible. Exceptions may be granted under the following circumstances:
1. Assumptions. If the borrower sold the property with or without a release of liability to a mortgagor who subsequently defaulted and the loan was not in default at the time of the assumption, the borrower is eligible.
2. Divorce. A borrower may be eligible if the divorce decree or legal separation agreement awarded the property and the responsibility for payment to the former spouse.
3. Bankruptcy. When the property was included in a bankruptcy caused by circumstances beyond the borrower’s control (such as the death of the principal wage earner, loss of employment due to illness, etc.), the borrower may be eligible.

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5.6

DETERMINING INCOME

The anticipated amount of income, and likelihood of its continuance, must be established. Income from any source that cannot be verified, is not stable, or will not continue cannot be used in calculating the borrower’s income ratios. This paragraph describes acceptable types of income, procedures for calculating effective income, and requirements for establishing income stability.

1. Stability of Income.
1. While HUD does not impose an eligibility requirement of a minimum length of time a borrower must have held a position, the lender must verify the most recent two full years’ worth of employment. If a borrower’s employment history indicates participation in school or in the military during any of this time, the borrower must provide supporting evidence (usually college transcripts or discharge papers).
2. The borrower must also explain any gaps in employment of a month or more. Such gaps are not necessarily cause for loan disapproval. Allowances for seasonal employment, such as is typical in the fishing industry, should be made.
3. In some cases, a borrower may have recently returned to the work force after an extended absence. In these circumstances, the borrower’s income may be considered effective and stable provided:
• The borrower has been employed in the current job for six months or more; and
• The borrower can document a two-year work history prior to the absence from the work force. This can be accomplished by providing traditional employment verifications, copies of W-2’s, etc.

An example of an acceptable employment situation includes a nurse that took several years off to raise children and is now returning to the nursing profession. Scenarios not meeting the criteria above should be considered as compensating factors only.

4. To analyze the probability of continued employment, lenders must examine the borrower’s past employment record, qualifications for the position, previous training and education, and the employer’s confirmation of continued employment. A borrower who changes jobs frequently within the same line of work, but continues to advance in income, may be considered favorably.
2. Salaries, Wages, and Other Forms of Income. The income of each borrower to be obligated for the mortgage debt must be analyzed to determine whether it can be expected to continue through the first three years of the mortgage loan. If the borrower intends to retire during this period, the effective income will be the amount, for example, of retirement benefits or social security payments. No inquiry may be made regarding possible future maternity leave.

   In most cases, borrower income will come primarily from salaries or wages (whether from full or part time employment). However, income from most other sources, provided it is properly verified by the lender, also can be included as income. Procedures for treating other acceptable income sources are described below. Sources of income not meeting the criteria for documentation of income may be considered as a compensating factor (see Paragraph 5.8b).

   1. Overtime and Bonus Income. Overtime and bonus income may be counted as effective income if the borrower has received such income for the past two years and there are reasonable prospects of its continuance. Periods of less than two years may be acceptable provided the lender adequately justifies and documents his or her reason for using the income for qualifying purposes. The lender must adequately document the file and justify his or her reasons for using the income for qualifying purposes. Only if the employment verification specifically states that bonus or overtime is not likely to continue may that income not be considered in the qualifying ratio. An earnings trend over the period of receipt should be analyzed for either source of income. If either type of income shows a continual decline, the lender must provide a sound rationalization for including the income as effective income.
   2. Seasonal Income. Income from seasonal employment may be counted if the borrower can show a history of seasonal income for at least two years, and expects to be rehired during the next season. Unemployment income expected to be received for some period of the "off season" may be counted if the borrower has received it for the past two years and there is reasonable assurance of its continuance. This may be appropriate for individuals employed on a seasonal basis, such as farm workers or fishing crews.

      HUD recognizes that many Native American families rely on seasonal income. Lenders must not arbitrarily restrict the consideration of such income sources in qualifying borrowers.

   3. Part-Time Income. Borrowers are likely to have two types of part-time employment: (1) regular, part-time employment which is the borrower’s primary source of income (e.g., a nurse who regularly works 24 hours/week) and (2) part-time employment which supplements the borrower’s regular sources of income. Income from regular part-time employment can be counted as effective income if its receipt can be documented and is expected to continue. The criteria for the analysis of such regular part-time income are identical to those used for full-time wages and salaries. Income from supplementary part-time income may be counted if the borrower has worked the part-time job for the past 2 years and will continue to do so.
   4. Commission Income. Commission income must be averaged over the previous two years. The borrower must provide tax returns from the previous two years and a recent pay stub. (Business expenses not reimbursed must be subtracted from gross income.)

      Commissions earned within less than one year are not considered income. Exceptions may be made when the borrower’s compensation changed from a salary to commission for a similar position with the same employer.

   5. Retirement and Social Security Income. Such income requires verification from the source (e.g., former employer, Social Security Administration) or through federal tax returns. Any benefits that will expire within the first three years of the mortgage may not be considered income but may be used as a compensating factor.
   6. Alimony, Child Support, or Maintenance Payments. Income in this category may be considered if such payments are likely to be consistently received for the first three years of the mortgage. The borrower must provide a copy of the divorce decree or legal separation agreement and evidence that payments have been made during the past 12 months. Acceptable evidence of regularity of payments includes cancelled checks, deposit slips, tax returns, or court records. Periods of less than 12 months maybe acceptable provided the payer’s ability and willingness to make timely payments can be documented by the lender.
   7. Notes Receivable. A copy of the note must be presented to establish the amount and length of payment. The borrower must also provide evidence, which may include deposit slips, cancelled checks, or tax returns that payments have been received consistently for the previous 12 months.
   8. Interest and Dividends. Interest and dividend income may be used provided documentation (tax returns or account statements) supports a two-year history of receipt. This income must be averaged over the two years. Any funds derived from these sources and required for the cash investment must be subtracted before the projected interest or dividend income is calculated.
   9. VA Benefits. Direct compensation verified by the VA, such as for a service-related disability, is considered income. Education benefits used to offset education expenses are not considered income.
   10. Government Assistance Programs. Assistance income (e.g., welfare, workman’s compensation, or payments for foster children) is considered income subject to documentation from the paying agency provided the income is expected to continue for the first three years of the mortgage. If not expected to last the first three years, the income is considered a compensating factor.
   11. Net Rental Income. Rent received for other properties owned by the borrower may be counted as income, assuming proper documentation such as tax returns is submitted. Income from roommates, or sub-leasers in a single-family property to be occupied as the borrower’s primary residence, is not considered income.
   1. Schedule E of IRS form 1040. Depreciation should be added back into the net income or loss shown on Schedule E. Positive rental income is considered as gross income for qualifying purposes. Negative rental income must be treated as a recurring liability. The lender must make certain the borrower still owns each property listed by comparing the Schedule E with the real estate owned section of the application.
   2. Current leases. If a property was acquired since the last income tax filing and/or is not shown on the Schedule E, a current, signed lease or other rental agreement must be provided. The gross rental amount must be reduced for vacancies and maintenance by the percentage developed by the HUD area office before subtracting principal, interest, taxes, insurance, etc.
   12. Trust Income. Income from trusts may be used if guaranteed, constant payment will continue for the first three years of the mortgage. Documentation requirements include a copy of the Trust Agreement or other trustee’s statement confirming the amount, frequency of distribution, and duration of payments. Funds from the trust account with adequate documentation may also be used for the required cash investment.

       Both the tribes and individual tribal members may have income derived from sources such as timber sales on trust lands, lease payments from trust lands, or fishing income derived from usual and accustomed fishing grounds. Such income is not reported through normal tax reporting methods. Lenders can obtain verification through the local BIA offices or through tribal documentation and records.

   13. Nontaxable Income. If a particular source of income is not subject to federal taxes (e.g., certain types of disability payments, military allowances, income derived from the reservation land), the amount of continuing tax savings attributable to the nontaxable income source may be added to the borrower’s gross income. The percentage of income that may be added may not exceed the appropriate tax rate for that income amount, and no additional allowances for dependents are acceptable. The lender must document and support the adjustments made (i.e., the amount the income is "grossed up") for any nontaxable income source.
   14. Projected Income. Except for those situations described below, projected or hypothetical income is not acceptable for qualifying purposes. Exceptions are permitted for such income as cost-of-living adjustments, performance raises, or bonuses, which are verified by the employer and scheduled to begin within 60 days of loan closing.

       For those borrowers about to start a new job, if the borrower has a guaranteed, irrevocable contract for the new employment that will begin within 60 days of loan closing, the income is acceptable for qualifying purposes. The lender must also verify that the borrower will have sufficient income or cash reserves to support the mortgage payments and any other obligations during the interim between loan closing and the start of employment. (This may be appropriate for situations such as a teacher whose contract begins with the new school year or a physician beginning residency after the loan is scheduled to close.) However, if the loan will close more than 60 days before the employment begins, the loan is not eligible for guarantee until the lender provides a pay stub or other acceptable evidence that the borrower has actually begun the new job.

   15. Tribal Distributions. In certain areas, tribal members receive per capita payments. If these payments can reasonably be expected to continue for the first three years of the mortgage, they may be counted as income. A 2-year history of receipt is required and the lesser of the current per capita payment or 2-year average will be used for income purposes. For new sources of tribal distribution that do not have a past history, the tribe must certify that payments will continue for at least three years.
   16. Military Income. In addition to base pay, military personnel may be entitled to additional forms of pay. Income from variable housing allowances, clothing allowances, flight or hazard pay, rations, and proficiency pay may be counted provided its continuance is verified.
   17. Other. Several other types of income that are typically excluded from income for other federal programs may be included for the purposes of the Section 184 Guarantee. These items include:
   • The per capita shares received from judgment funds awarded by the Indian Claims Commission or the Court of Claims (25 U.S.C. 1407–1408) or from funds held in trust for an Indian tribe by the Secretary of Interior (25 U.S.C. 117).
   • Payments received under the Alaska Native Claims Settlement Act (43 U.S.C. 1626(a)).
   • Income derived from the disposition of funds of the Grand River Band of Ottawa Indians.
   • Payments received under the Maine Indian Claims Settlement Act of 1980.
   18. Employment By Family-Owned Businesses. Borrowers employed by businesses owned by family members must provide normal verification of employment and pay stubs, as well as evidence that the borrower is not an owner of the business. This may include copies of the borrower’s signed personal tax returns or a signed copy of the corporate tax return showing ownership percentages or a signed certified statement by the corporation or business accountant.
   19. Self-Employed Borrowers. A borrower with ownership interest in a business of 25 percent or more is considered self-employed for mortgage loan underwriting purposes.
   1. Analyzing Income. The lender must establish the borrower’s earnings trend over the previous two years, but may average the income over three years if all three years’ tax returns are provided. In addition, the income shown on the year-to-date profit-and-loss statement may be included in determining average income if it is consistent with the previous years’ earnings.

      Lenders must carefully analyze the individual business’ financial strength, the source of its income, and the general economic outlook for similar businesses in that area to determine if the business can be expected to continue to generate sufficient income to meet the borrower’s needs. Annual earnings that are stable or increasing are acceptable. Conversely, a borrower whose business shows significant decline in income over the period analyzed may not qualify even if the current debt to income ratio meets the Section 184 guideline.

   2. Minimum Length of Self-Employment. Income from self-employment is considered stable and effective if the borrower has been self-employed for at least two years. Due to the high incidence of failure during the first few years of a new business, the following requirements must be met by individuals employed less than two years:
   • Less than one year . The income from borrowers who have been self-employed less than one year may not be considered as income.
   • Between one and two years . The income from borrowers who have been self-employed between one and two years may be counted if the individual has at least two years’ previous successful employment or a combination of one year of employment and one year of formal education or training in that or a related occupation.
   3. Documentation Requirements. The following are required for self-employed borrowers:
   • Signed and dated individual tax returns, plus all applicable schedules, for the most recent two years. Verifiable financial statements are required if tax returns are not available.
   • Signed copies of federal business income tax returns for the past two years, with all applicable schedules, if the business is a corporation, an "S" corporation, or a partnership.
   • A year-to-date profit-and-loss statement and balance sheet (along with evidence of quarterly tax payments).
   • A business credit report for corporations and "S" corporations.
   • Nontraditional documentation of income is acceptable (e.g., fishing records). If non-taxable income, borrower must be able to show income receipts and expenses for a minimum two year period.

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5.7

TYPES OF LIABILITIES

Lenders must evaluate the liabilities (on-going debt) of any potential homebuyer under the Section 184 Program. This section outlines the basic requirements of such a review.

1. Recurring Obligations. The borrower’s liabilities include all installment loans, revolving charge accounts, real estate loans, alimony, child support, and all other continuing obligations. In computing the debt-to-income ratios, the lender must include the monthly housing expense and all other additional recurring charges, including payments on installment and revolving accounts extending 10 months or more, alimony, child support or separate maintenance payments. Debts of less than 10 months’ duration need not be counted unless the amount of the debt seriously affects the borrower’s ability to make the mortgage payment during the months immediately after loan closing.

   Revolving Accounts . If the account shown on the credit report has an outstanding balance, monthly payments for qualifying purposes must be calculated at the greater of 5 percent of the balance or $10 (unless the account shows a specific minimum monthly payment.

   Alimony . Because of the tax consequences of alimony payments, the lender may choose to treat the monthly alimony obligation as a reduction from the borrower’s gross income rather than as a monthly obligation.

2. Contingent Liabilities. Contingent liabilities must be considered when assessing the borrower’s ability to repay the loan. A contingent liability exists when an individual would be held responsible for payment of a debt should another party jointly or severally obligated default on that payment. Unless the borrower can provide conclusive evidence that there is no possibility the debt holder will pursue debt collection against the borrower should the other party default, the following rules apply:
1. Co-signed obligations. If the borrower is a co-signer on a car loan, student loan, or any other obligation, contingent liability applies unless:
• The borrower furnishes evidence showing the co-signer (i.e. the borrower) has not made payments on the loan over the past 12 months. A statement from both parties and cancelled checks showing the source of loan payments are acceptable evidence.
• There was a divorce and the borrower’s ex-spouse was given the responsibility for payment of the obligation as part of a legal separation or divorce settlement. A copy of the separation agreement or the divorce decree is acceptable evidence.
2. Borrower/Co-Borrower on a Mortgage. Obligations on an outstanding HUD-insured, VA-guaranteed, or conventional mortgage secured by a property which has been sold or traded within the last five years without a release of liability, are considered a contingent liability unless:
• There was a divorce and the borrower’s ex-spouse was awarded both the property and responsibility for payment of the mortgage as a part of the legal separation or divorce settlement. A copy of the separation agreement or divorce decree is acceptable evidence.
• The borrower was transferred by his or her employer and is covered by a home sale guarantee plan. A copy of the relocation agreement is acceptable evidence.
• An appraisal or closing statement from the sale of the property supports a value that results in a 75 percent loan to value ratio (i.e. the outstanding balance on the mortgage loan cannot exceed 75 percent of the appraised value or sales price).
• The property sold had a HUD-insured mortgage and was sold to an owner occupant. Proof of this sale must be obtained.
3. Projected Obligations. If a debt payment, such as a student loan, is scheduled to begin within 12 months of the mortgage loan closing, the lender must include the anticipated monthly obligation in the underwriting analysis. Similarly, balloon notes that come due within one year of loan closing must be considered.
4. Obligations Not Considered Debt. Obligations that are not considered debt include federal, state and local taxes; FICA or other retirement contributions such as 401(k)s (including repayment of debt secured by these funds); child care costs; commuting costs; union dues; open accounts with zero balances; automatic deductions to savings accounts; and other voluntary deductions.

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5.8

DETERMINING ABILITY TO PAY

Once the lender has reviewed the homebuyer’s income and liabilities, the lender can determine the borrower’s ability to pay. This section describes the criteria for this calculation under the Section 184 Program.

1. Debt to Income Ratio. A debt-to-income ratio is used to determine whether the borrower can reasonably be expected to meet the expenses involved in homeownership and provide for the family. While meeting other household obligations, a debt-to-income ratio of no more than 41 percent is generally required to qualify the borrowers. A debt-to-income ratio exceeding 41 percent may be acceptable if significant compensating factors are presented.

   The monthly debt payment includes:

   1. Principal and interest payments on the mortgage
   2. Hazard insurance premiums
   3. Real estate taxes
   4. Leasehold taxes or payments
   5. Homeowner or condominium association dues (as applicable)
   6. Payments for any second mortgages
   7. Payments on all recurring obligations and other liabilities
   8. Aggregate negative rental income from investment properties
   9. Monthly mortgage payments on any second home
2. Compensating Factors. The following compensating factors may be used to justify approval of mortgage loans with ratios exceeding the guidelines. Lenders must explain any compensating factor used for loan approval.
1. The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expenses for the new mortgage. If the borrower over the past 12-24 months has met his or her housing obligations as well as other debts (of the same amount), there should be little reason to doubt the borrower’s ability to continue to do so despite having ratios in excess of those prescribed.
2. The borrower makes a large down payment (from their own funds) toward the purchase of the property (at least 10 percent).
3. Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.
4. There is only a small increase (10 percent or less) in the borrower’s housing expense (PITI).
5. The borrower has substantial non-taxable income (if no adjustment made previously in the ratio computations).
6. The borrower has substantial cash reserves after closing (at least three months PITI).
7. High residual income is available for the payment of living expenses after estimated monthly housing expenses and other monthly housing obligations have been met. The formula for residual income is:

Total Income x 80 percent minus PITI and Recurring Debts = Residual Income

Do not use utility or maintenance costs in this formula. Exhibit 5-1 provides an example of this calculation.

Exhibit 5-1: Calculating Residual Income

Total monthly income	$2,500
Eighty percent of income	$2,000
Less housing costs (PITI)	($800)
Less recurring debts	($200)
Total residual income	$1,000

8. Other reasonable and documented compensating factors will be considered.

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5.9

BORROWER’S INVESTMENT IN THE PROPERTY

The cash investment in the property must equal the difference between the amount of the guaranteed mortgage and the total cost to acquire the property, including such items as prepaid expenses. Verification of the source and adequacy of the borrower’s funds to close is required prior to the issuance of a firm commitment. Acceptable sources of down payment include:

1. Earnest money deposit.
2. Savings and checking accounts.
3. Gift funds.
4. Secured funds.
5. Sales proceeds.
6. Trade equity.
7. Sale of personal property.
8. Savings bonds and other similar certificates.
9. Cash on hand.
10. IRAs and Keogh accounts.
11. Stocks and bonds.
12. Private savings clubs.
13. Sweat equity.
14. Commission from sale

1. Amount. The borrower’s cash investment in the property must equal the difference between the amount of the loan, excluding the one percent guarantee fee, and the total cost to acquire the property, including prepaid expenses and other settlement costs paid by the borrower. Exhibit 5-2 provides an example of determining the borrower’s cash investment when the borrower pays the normal borrower’s closing costs and prepaids:

Exhibit 5-2: Determining Borrower’s Investment

Appraised Value: $120,000 Sales Price or Construction Cost: $110,000 Allowable Closing Costs: $ 4,000 Prepaid Expenses: $ 2,700 FHA Mortgage Limit: $ 95,000
A. Section 184 mortgage limit:		$95,000 x 150% = $142,500
B. Loan-to-value cap based on appraised value:		$120,000 x 97.75% = $117,300
C. Loan-to-value cap based on acquisition cost:
	Sales Price or Construction cost plus closing:	$110,000 + $4,000 = $114,000
	Acquisition cost:	$114,000
	Loan-to-value ratio based on acquisition cost:	$114,000 x 97.75% = $111,435
Maximum mortgage amount (lowest of A, B, or C): (without the loan guarantee fee)		$111,435
Borrower’s Investment:
	Sales or Construction Price:	$110,000
	Allowable Closing Costs:	$ 4,000
	Prepaid expenses:	$ 2,700
Total Cost to Acquire Property:		$116,700
Less Maximum Mortgage Amount:		$111,435
Equals Borrower’s Investment: (without the loan guarantee fee)		$5,265

2. Settlement Items. The following items are not typically covered by the mortgage and are paid at settlement with borrower’s cash:
1. Pre-Paid Items collected at closing to cover accrued and unaccrued hazard premiums, taxes and interim interest, and similar fees and charges.
• The lender must use a minimum of 15 days of interim interest in its estimate of prepaid items. A 365-day year is used when calculating interim (per diem) interest.
• Prepaid expenses must be paid in cash (unless the lender funds the prepaid items by charging a premium interest rate).

To reduce the burden on some borrowers whose loans were scheduled to close at the end of the month but did not due to unforeseen circumstances, lenders and borrowers may agree to credit the per diem interest to the borrower and have the mortgage payments begin the first of the succeeding month. However, this procedure is only permitted on those loans that close within the first seven calendar days of the month.

2. Discount Points that are not eligible for inclusion in the mortgage.
3. Non-Realty or personal property items that the borrower agrees to pay for separately. This also includes any amount subtracted from the sales price in determining the maximum mortgage.
4. Non-Financed Closing Costs such as commitment fees for guaranteeing the rate or points, and fees such as any buyer-broker fees or any such allowable fee not previously included in calculating the minimum cash investment.
5. Repairs and Improvements to be paid by the borrower that are not eligible for inclusion in determining the maximum mortgage amount.

From the total amount needed above to close the loan i.e. the borrower’s required cash investment, subtract any amounts already paid by the borrower (including the earnest money deposit) and any allowable fees paid outside of closing such as the appraisal and credit report fees.

3. Verification. The source and adequacy of all funds used for the borrower’s investment in the property must be verified. Paragraph 5.23c(16) of this guidebook discuss verification of the borrower’s funds to close the loan.
4. Funds to Close. Acceptable sources of the borrower’s funds to close include:
1. Earnest Money Deposit. If the amount of the earnest money deposit exceeds two percent of the sales price or appears excessive based on the borrower’s history of accumulating savings, the lender must verify the deposit amount and the source of funds.

   Satisfactory documentation includes a copy of the borrower’s cancelled check. HUD will also accept a certification from the deposit holder acknowledging receipt of funds and separate evidence of the source of funds. Evidence of source of funds includes a verification of deposit or bank statement showing that the average balance at the time the deposit was made was sufficient to have included the earnest money deposit. Cash-on-hand is discussed below [see paragraph 5.9d(10)].

2. Savings and Checking Accounts. A verification of deposit (VOD) obtained directly from the depository may be used to verify these accounts, along with the most recent bank statement or the originals or certified copies of the last two or three month bank statements. See paragraph 5.23c(16). If there is a large increase in an account, or the account was opened recently, an explanation and evidence of source of funds must be obtained by the lender.

3. Gift Funds.

   • An outright gift of the cash investment or of equity in the property is acceptable if the donor is: a relative of the borrower, the borrower’s employer or labor union, a charitable organization, a governmental agency or public entity (such as the IHA/TDHE or tribe) that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined interest in the borrower.
   • No repayment of the gift may be expected or implied. A "gift letter" stating this is required. The gift letter must be signed by the donor and the borrower and must show the donor’s name, address, telephone number and relationship to the borrower. The lender must document the transfer of funds from the donor’s account to the borrower’s account. This may include obtaining a copy of the donor’s withdrawal slip or cancelled check, along with the borrower’s deposit slip or bank statement showing the deposit. If the funds are not deposited to the borrower’s account prior to closing, the lender must obtain verification that the closing agent received certified funds from the donor for the amount of the gift.
   • A gift from any other source is considered an inducement to purchase and requires a reduction in the sales price. Except for eligible donors as described above, the donor of the gift or equity credit may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. Gifts or credits from these sources must be treated as sales concessions, must be subtracted from the sales price, and may not be considered as assets to close. This includes foreclosed properties sold by a government agency.
4. Secured Funds.
• Borrowers may borrow against any collateral authorized under federal, state, or tribal law that is sufficient to meet the amount of borrower investment required. Examples of various types of collateral are discussed below.
• Funds can be borrowed for the required investment as long as satisfactory evidence is provided that these funds are fully secured by existing marketable assets, which are not the subject property. These assets may include:
• A first or second mortgage on real estate (other than the property being purchased).
• Personal property such as automobiles or boats.
• Cash (but not funds required to close the subject transaction), notes, an interest in securities, royalties, or annuities.
• Any other property that is transferable and whose value can be determined.

Individuals with an interest in the subject transaction such as the seller, builder, contractor, real estate agent or broker, lender, etc. may not provide borrowed funds.

• An IHA/TDHE or Tribe may lend a Tribal member the monies for the cash investment. This loan may be a second mortgage against the subject property with a monthly mortgage payment. When a monthly payment is required, the combined financing (i.e., the Section 184 loan and the Tribal/TDHE/IHA/ loan) may not exceed 100 percent of the lesser of:
• Appraised value; or
• Contract price plus normal closing costs, prepaids and discount points.

Cash back to the borrower is not acceptable (beyond refund of borrower’s own funds paid as earnest money deposit). The second mortgage must have equal monthly payments and may not contain any balloon provisions. This loan will be added to the borrower’s monthly debt. The Program ONAP will consider requests for waiver of this policy when other factors are present (i.e., very low ratios, borrower is making some of the cash investment, amount of the second mortgage is minimal).

• Unless the borrower provides satisfactory evidence that the borrowed funds do not require repayment (e.g., some thrift and retirement plans or various loans secured by deposited funds or a soft second mortgage from the tribe or IHA/TDHE), the monthly debt resulting from the loan must be included in the borrower’s qualifying ratios.

Unacceptable borrowed funds include signature loans, cash advances on credit cards, and similar unsecured financing.

However, family members [defined as a child (son, stepson, daughter, stepdaughter), parent, or grandparent, of the borrower or the borrower’s spouse] may lend on a secured or unsecured basis 100 percent of the buyer’s required investment including down payment, closing costs, prepaids and discount points.

The combined amount of financing (i.e. , the Section 184 loan and the family member loan) may not exceed 100 percent of the lesser of the property’s value or sales price, plus normal closing costs, prepaid expenses and discount points. Cash back to the borrower (beyond refund of the borrower’s own funds paid as an earnest money deposit) at closing is not acceptable.

If periodic payments of the family member’s secondary loan are required, the combined payments of the Section 184 loan and the family member’s financing may not exceed the borrower’s ability to pay. The secondary financing payment (if any) must be included in the borrower’s total debt-to-income ratio.

The secondary financing may not provide for a balloon payment within five years from the date of execution of the financing agreement. If the family member providing the secondary financing borrows those funds, the source may not be any entity with an interest in the sale of the property.

5. Tribe/TDHE Down Payment/Buydown Assistance.Tribe/TDHE down payment or buydown assistance is acceptable (reference Gift Funds and Secured Funds above); however, there are some limitations on who can receive the assistance depending on the source of funds. The lender will want to ensure that the borrower is income eligible for the assistance to expedite the loan approval process and avoid submitting loan packages, which cannot be approved. The tribe/TDHE will generally provide assistance under one of the following categories:
• Tribe/TDHE’s Own Funds. The tribe/TDHE may provide assistance from their own tribal funds to whomever they choose. In this case, the tribe/TDHE (donor) should provide a certification that the source of assistance is from their own funds and not provided from NAHASDA, HOME funds or any HUD source of funds.
• Tribe/TDHE NAHASDA Funds.Assistance is generally limited to families with income at or below 80 percent of median income.
• Up to 10 percent of the tribe/TDHE’s grant funds can be used for families whose income falls within 80 to 100 percent of median income. If the borrower falls within this category, the tribe/TDHE should provide a certification that they have not exceeded the 10 percent limit.
• If the tribe/TDHE wishes to assist a borrower whose income exceeds 100 percent of the median income, the tribe/TDHE must obtain approval from HUD (reference NAHASDA Bulletin 98-15). A letter documenting this approval must be included in the file. This approval is required under Title II of NAHASDA.
• Indian Home Funds. Recipients of these funds may not exceed the applicable income limits of the program. The tribe/TDHE should provide documentation verifying that the borrower’s income does not exceed these limits.
• The tribe/TDHE can choose to structure the down payment assistance in whatever form they choose; i.e., gift with no repayment, soft second mortgage with a forgivable period of time, promissory note with repayment requirements, etc. The lender must obtain from the tribe the documentation regarding the applicable type of assistance.
• For secured financing with a monthly payment requirement, please reference paragraph 5.9d(4) for additional information.
6. Sales Proceeds. The net proceeds from an arms-length sale of a currently owned property may be used for the cash investment on a new house. A certified true copy of the fully executed HUD-1 Settlement Statement must be provided as satisfactory evidence of the cash sales proceeds accruing to the borrower. If the property has not sold as of the time of underwriting, the borrower approval must be conditioned upon verifying the actual proceeds received by the borrower. The lender must document both the actual sale and the sufficiency of the net proceeds required for settlement.
7. Trade Equity. The borrower may agree to trade his or her property to the seller as part of the cash investment. The amount of the borrower’s equity contribution is determined by subtracting all liens against the property being traded plus any real estate commission due from the lesser of that property’s appraised value or sales/trade price. Evidence of ownership is also required.

   The appraisal must be a residential appraisal (conventional, HUD, or VA) and not more than six months old on the date of the trade. Additionally, if the property being traded has a HUD-FHA insured mortgage, HUD-FHA assumption processing requirements and restrictions apply.

8. Sale of Personal Property. If the borrower intends to sell personal property items (such as cars, recreational vehicles, stamp, coin, or baseball card collections) to obtain funds required for closing, in addition to conclusive evidence the items have been sold, the borrower must provide a satisfactory estimate of their worth. The estimated worth of the items being sold may be in the form of published value estimates, such as those issued by automobile dealers, philatelic or numismatic associations or a separate written appraisal by a qualified appraiser. Only the lesser of this estimate of value or the actual sales price less any obligation(s) secured by the personal property, is considered as assets to close. The assets received must be deposited and verified. See paragraph 5.23c(16).
9. Savings Bonds and Other Similar Certificates. Government-issued bonds are counted at original purchase price unless eligibility for redemption and redemption value are determined. Actual receipt of funds at redemption must be verified.
10. Cash on Hand. Cash on hand is an acceptable form of borrower cash for the Section 184 Program. At the time of application, the lender will verify the funds that must then be deposited with the lender or another financial institution. The asset verification process requires that the borrower explain how such funds were accumulated and the amount of time taken to do so. The lender must determine the reasonableness of the accumulation based on the borrower’s income stream, the time period of savings, spending habits, and history of using financial institutions.
11. Individual Retirement Accounts (IRAs) and Keogh Accounts. Only the net amount of IRAs and Keogh accounts, after subtracting federal income tax and withdrawal penalties, may be considered as assets to close. Evidence of redemption is required.
12. Stocks and bonds. When the borrower claims assets through the sale of stocks and bonds, the value of these securities must be verified from the stockbroker or by photocopies of the stock certificates along with a dated newspaper stock price list. Actual receipt of funds must be verified.
13. Private Savings Clubs. If a borrower claims that the cash to close the mortgage is from savings held with a private savings club, the borrower must be able to adequately document the accumulation of those assets with the club. There must exist account ledgers, receipts from the club, verification from the club treasurer as well as identification of the club that would permit the lender to re-verify information provided. The lender must be able to make a determination that it was reasonable for the borrower to have saved the dollars claimed and that there is no evidence these funds were borrowed with the expectation of repayment.
14. Sweat Equity. Labor performed or materials furnished by the borrower on the property being purchased may be considered as the equivalent of a cash investment to the extent of the estimated cost of the work or materials. (Sweat equity may be "gifted" subject to both the gift requirements and additional requirements shown below.) Additionally:
• On existing construction, only the repairs or improvements listed on the appraisal or work plans or specifications are eligible for sweat equity. Any work completed or materials provided before the appraisal is made are not eligible. On proposed construction, the sales contract must indicate the work to be performed by the homebuyer during the construction.
• The borrower’s labor may be considered as the equivalent of cash if the borrower can demonstrate his or her ability to complete the work in a satisfactory manner. The lender must document the contributory value of the labor through either the appraiser’s estimate or a cost estimating method.
• Delayed work (on-site escrow), clean-up, debris removal and other general maintenance cannot be included as sweat equity.
• There can be no cash back to the borrower in these transactions.
• Sweat equity on a property other than the property being purchased is not acceptable. Compensation for work performed on other properties must be monetary and be properly documented and verified if the funds will be used to close the subject transaction.
• If materials are furnished by the borrower evidence of the source of funds used to purchase and the market value of the materials must be provided.
• Sweat equity cannot be used as a source of down payment funds on a single close loan. However, funds remaining after completion of the work can be used to pay down the mortgage.
15. Commission from Sale. If the borrower is entitled to a real estate commission from the sale of the property being purchased, that amount may be used as part of the cash investment. No adjustment to the maximum mortgage is required.
16. Rent Credit. That portion of the rental payment that exceeds the appraiser’s estimate of fair market rent may be considered accumulation of the borrower’s cash investment. The rent with option to purchase or other rent credit agreement and the appraiser’s estimate of market rent must be included in the loan package.

    If the sales agreement reveals that the renter has been living in the property (or one owned by the seller) rent-free, or that an agreement was made allowing the renter to occupy at a rental amount considerably below fair market in anticipation of eventual purchase of the property, this must be treated as an inducement to purchase with an appropriate reduction to the sales price when calculating the borrower’s acquisition cost. Exceptions may be granted in situations such as where a builder fails to deliver the property at an agreed-to time and then permits the borrower to occupy that or another unit for less than market rent temporarily until construction is complete. Program ONAP will give special consideration on IHA/TDHE or tribal assumptions of rental property.

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5.10

IHA/TDHE OR TRIBAL LOANS

1. Overview. Lenders who are processing IHA/TDHE-borrower or Tribal-borrower applications must follow the procedures outlined below. The requirements for an IHA/TDHE apply also to a Tribally Designated Housing Entity (TDHE) and any reference to an IHA/TDHE also applies to a TDHE.

   The Department anticipates that there will be two types of IHA/TDHE or tribal applications:

   1. IHAs/TDHEs or Tribes that plan to develop and sell homes but who have not yet identified individual households.
   2. IHAs/TDHEs or Tribes that will retain ownership and management of the units.

   The following sections describe each of these approaches, explain the pre-qualification information required, and highlight the process for any subsequent purchase of the units.

2. IHA Loans Originated Prior to 10/1/97. Under the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA), most Indian Housing Authorities will no longer exist, under their present operation , after 10/1/1997. Therefore, the lender must obtain from the Tribe with authority over the Indian area where the home is located, evidence of the following:
1. A resolution passed by the Tribe which appoints their current Indian Housing Authority (the loan applicant) as their Tribally-Designated Housing Entity; or
2. A resolution passed by the Tribe whereby the Tribe agrees to assume full responsibility for the mortgage loan obligation after October 1, 1997. In this case, the lender must obtain qualifying income documentation, which shows that the Tribe has the financial capacity to make the loan payments.

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5.11

IHA/TDHE OR TRIBAL APPLICATIONS FOR SUBSEQUENT SALE

1. Overview. Under this option, the IHA/TDHE or Tribe applies for financing to construct or purchase and rehabilitate property (1-4 units) with the expressed purpose of selling the unit to a household to be identified at a later date.

As noted elsewhere in this guidance, each property under the Section 184 Program must have a separate application, loan, and loan guarantee commitment. Therefore, IHAs/TDHEs or Tribes that plan to construct or purchase and rehabilitate multiple properties must request separate loans and loan guarantees for each property.

2. Loan Processing. Because no specific purchaser has been identified at the time of the application the lender will request the case number with the lHA/TDHE or Tribe listed as the borrower.
3. Sale Procedures. It is anticipated that IHAs/TDHEs or Tribes may undertake one of three processes to convey the unit to an individual homebuyer:
1. Identification of Buyer Before Firm Commitment Processing. The first method is to identify the homebuyer after a case number has been assigned with the IHA/TDHE or tribe as the mortgagor, but before going to firm commitment and loan closing. At the time that the IHA/TDHE or Tribe identifies the household, all of the household’s income and credit information listed in Paragraphs 5.4, 5.5, 5.6 and 5.7 must be submitted to the lender and to HUD for review and approval. If this homebuyer is approved and if the property and mortgage requirements listed in Chapters 4 and 5 of this guidance are satisfied, the case number commitment is transferred to the homebuyer and HUD will issue a firm commitment. The lender may then close the guaranteed loan with the individual homebuyer as the borrower of record.
2. Assumption. The second method is for the loan to close with the IHA/TDHE or Tribe as the borrower. The IHA/TDHE or Tribe could then identify the subsequent purchaser. If qualified, the homebuyer assumes the mortgage at exactly the same terms and conditions as the loan guaranteed to the IHA/TDHE or Tribe. The IHA/TDHE or Tribe will then be released from liability on the loan.

As noted throughout this guidance, all purchasers assuming guaranteed loans must meet the individual income and credit criteria listed earlier in this section. When the lHA/TDHE or Tribe has identified a homebuyer, this household’s qualification information (listed in Paragraphs 5.4 through 5.7) must be submitted to the lender and to HUD for review and approval before the assumption from the IHA/TDHE or Tribe to the buyer may be closed. The guaranteed loan will not be transferred from the lHA/TDHE or Tribe to the buyer without this approval.

3. Sale. Under the third method, the lHA/TDHE or Tribe again identifies the homebuyer after loan closing. However, instead of offering the original loan terms, the lHA/TDHE or Tribe elects to reduce or increase the cost of the unit. For example, the IHA/TDHE or Tribe may elect to offer the household a grant to reduce the sales price or to buy down the interest rate. If these actions will cause the terms and conditions of the existing loan to change, the original guaranteed loan to the IHA/TDHE or Tribe may not be assumed by the subsequent homebuyer. Instead, this transaction is considered to be a new loan.

   A new Section 184 loan requires applying for a new firm commitment and a new loan guarantee certificate. The IHA/TDHE or Tribe or homebuyer must submit to the lender all of the information listed in Paragraphs 5.4 through 5.7 plus any relevant information from Chapters 5 and 6 of this guidance. HUD and the lender will review this information. If the new loan is acceptable and if loan guarantee funds are currently available, HUD will issue a firm commitment. Upon receipt of the firm commitment, the loan may be closed.

4. Firm Commitment Submission. As noted in 5-11c(1), the lender submits a firm commitment package for the individual homebuyer when the family has been identified by the IHA/TDHE or tribe, prior to submission for firm commitment. If the loan will close in the name of the IHA/TDHE or tribe and later assumed or the property sold, as noted above, the lender submits the following information for the IHA/TDHE or tribe’s application:
1. Firm commitment checklist. IHAs/TDHEs, Tribes and lenders are not required to use this format and may use an alternate form. See Appendix 3 for a sample.
2. Mortgage Credit Analysis Worksheet.
3. Maximum Mortgage Worksheet (single close only)
4. Good Faith Estimate
5. Executed Uniform Residential Loan Application (including Addendum A)
6. The Land Status and Jurisdiction form or other similar evidence that the property is within an Indian area or located on trust land.
7. CAIVRS
8. Appraisal including supporting documentation as provided by the appraiser
9. IHA/TDHE or Tribal-audited financial statements. This must include the current financial statement for the IHA/TDHE or the Tribe (the latest statement required by the HUD programs) and previous year’s annual statement.
10. Demonstration of IHA/TDHE and Tribal skills and experience to successfully undertake similar development activities.
11. Assets Analysis (proving sufficient debt coverage). The IHA/TDHE or Tribe must have sufficient assets in order to reasonably assure the project debt service will be met, notwithstanding an intention to sell or rent the completed unit(s). The lender will determine the needed level of debt coverage.
12. Demonstration of Sufficient Market. For large-scale projects, demonstration of a sufficient number of households that are interested in purchasing and could qualify to buy a unit. Examples might include: IHA/TDHE waiting lists and a needs survey, or a market survey. Note the restrictions on large-scale projects in 5.13.
13. Marketing Plan: Description of how each unit will be marketed and subsequently sold to a homebuyer. This description should cover the anticipated sales price of the unit, time frames for property transfer, and any anticipated Tribal or IHA/TDHE price subsidy.
14. Evidence of Authority to Borrow. The IHA/TDHE or Tribe must provide evidence from its legal counsel (or other knowledgeable source) that it has the legal authority and capacity to become the borrower and that the IHA/TDHE or Tribe is not in bankruptcy. Typical information submitted herein includes IHA/TDHE or Tribal board resolutions to borrower, lists of signatory authorities and applicable by-laws.
15. Evidence of Ability to Obtain Deficiency Judgments. The IHA/TDHE or Tribe must also provide evidence that there is no legal prohibition that would prevent the lender from obtaining a deficiency judgment (if permitted by state law for other types of borrowers) on HUD’s behalf in the event of foreclosure.
16. Verification of Deposit/Funds to Close and Source of Funds. Bank statements/VODs are required as with individual borrowers. IHA/TDHE or Tribe must document source of funds and ability to use funds for the cash investment in the properties.
17. Credit report
18. Flood Certificate
19. Environmental Assessment. See Paragraph 4.11.
20. Any explanatory statements

Construction documents (see Chapter 7 for more information):

21. Plans and specifications with a detailed cost estimate/breakdown of costs
22. Site map with legal description of the proposed property(ies). This map should clearly indicate that the property is either on trust/restricted land or is within an Indian area.
23. Construction schedule.
24. Construction contract.
25. Builders Certification, HUD 92541

Fee Simple Land:

26. Preliminary Title Report

Tribal Trust Land:

27. Title Status Report with the recorded leasehold instrument(s)
28. Leasehold Instrument(s) with all signatures as required

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5.12

IHA/TDHE OR TRIBAL ONGOING PROPERTY OWNERSHIP

1. Overview. Under this option, the IHA/TDHE or Tribe acts as the long-term owner and manager of the property. The IHA/TDHE or Tribe has no intention of seeking a subsequent homebuyer but will instead maintain ownership of the unit.
2. Submission Information. Under this option, the lender requests the case number in the name of the IHA/TDHE or Tribe and the lender submits the following information for the lHA/TDHE or Tribe’s application (see Appendix 3 for a sample checklist):
1. Firm commitment checklist.
2. Mortgage Credit Analysis Worksheet
3. Maximum Mortgage Worksheet (single close only)
4. Good Faith Estimate
5. Executed Uniform Residential Loan Application (including Addendum A)
6. The Land Status and Jurisdiction form or other similar evidence that the property is within an Indian area or located on trust land.
7. CAIVRS
8. Appraisal including supporting documentation as provided by the appraiser
9. IHA/TDHE or Tribal-audited financial statements. This must include the current financial statement for the IHA/TDHE or the Tribe (the latest statement required by the HUD programs) and previous year’s annual statement.
10. Demonstration of IHA/TDHE and Tribal skills and experience to successfully undertake similar development activities.
11. Assets Analysis (proving sufficient debt coverage). The IHA/TDHE or Tribe must have sufficient assets in order to reasonably assure the project debt service will be met, notwithstanding an intention to sell or rent the completed unit(s). The lender will determine the needed level of debt subsidy.
12. Demonstration of Sufficient Market. For large-scale projects, demonstration of a sufficient number of households that are interested in renting. This might include an IHA/TDHE waiting lists, a needs survey, or a market survey. Note the restrictions on large-scale projects in 5.13.
13. Marketing Plan: A description of the IHA/TDHE’s or Tribe’s plans for renting the properties. This description should cover the anticipated rental payment of the unit, and any anticipated Tribal or IHA/TDHE rental subsidy.
14. Demonstration of IHA/TDHE or Tribal skills and experience in successfully managing similar types of properties, including: rental collection; property maintenance; and tenant selection.
15. Project proforma demonstrating cash flow.
16. A description of the IHA/TDHE’s or Tribe’s plans for renting and maintaining the units.
17. Evidence of Authority to Borrow. The IHA/TDHE or Tribe must provide evidence from its legal counsel (or other knowledgeable source) that it has the legal authority and capacity to become the borrower and that the IHA/TDHE or Tribe is not in bankruptcy. Typical information submitted herein includes IHA/TDHE or Tribal board resolutions to borrower, lists of signatory authorities and applicable by-laws.
18. Evidence of Ability to Obtain Deficiency Judgments. The IHA/TDHE or Tribe must also provide evidence that there is no legal prohibition that would prevent the lender from obtaining a deficiency judgment (if permitted by state law for other types of borrowers) on HUD’s behalf in the event of foreclosure.
19. Verification of Deposit/Funds to Close and Source of Funds. Bank statements/VODs are required as with individual borrowers. IHA/TDHE or Tribe must document source of funds and ability to use funds for the cash investment in the properties.
20. Credit report
21. Flood Certificate
22. Environmental Assessment. See Paragraph 4.11.
23. Any explanatory statements

Construction documents (see Chapter 7 for more information):

24. Plans and specifications with a detailed cost estimate/breakdown of costs
25. Site map with legal description of the proposed property(ies). This map should clearly indicate that the property is either on trust/restricted land or is within an Indian area.
26. Construction schedule.
27. Construction contract.
28. Builders Certification, HUD 92541

Fee Simple Land:

29. Preliminary Title Report

Tribal Trust Land:

30. Title Status Report with the recorded leasehold instrument(s)
31. Leasehold Instrument(s) with all signatures as

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5.13

IHA/TDHE OR TRIBAL MULTIPLE UNIT PROJECTS

Due to the limited resources in the Loan Guarantee Fund, IHA/TDHEs or Tribes, which are developing multiple home/unit projects, may not obtain more than 20 Section 184 case numbers at one time. Plans for projects exceeding 20 homes must be built in phases. As loans are guaranteed, the IHA/TDHE or Tribe may request additional loans if it can provide documentation that the properties in the first phase have rental leases in place, or the loan has been assumed or sold to a qualified Indian family. Upon receipt of this evidence, the lender may request additional case numbers. IHA/TDHEs and Tribes may have no more than 20 loans in process at one time. The Program ONAP may waive this limitation.

SECTION II: LOAN PROCESSING