HB-1-3550

CHAPTER 5: PROPERTY REQUIREMENTS

5.1 INTRODUCTION
Ensuring that the quality and the value of the property meet certain minimum thresholds is
as important as ensuring that the applicant is willing and able to repay a loan. The Agency
imposes quality and value requirements to protect the borrower’s interest and, in the event of
liquidation, the Agency’s interest.
A. Overview of Property Requirements
1. Ensuring Quality
Four sections of this chapter deal with quality assurance. Section 1 describes the
requirements for approving a site -- its location, its size and amenities, and the adequacy of
available utility systems. Section 2 describes requirements for the dwelling itself, which
must be modest, but also decent, safe, and sanitary. The standards that apply differ somewhat
depending upon whether the dwelling will be newly constructed or is an existing home.
Section 3 describes the Agency’s requirements for the protection of environmental resources
and the due diligence required with regard to hazardous substances. Section 6 provides
guidance for monitoring construction activities to ensure that any construction or repair work
is appropriately conducted and completed.
2. Ensuring Adequate Value
Before the Agency makes a loan, the Loan Originator must ensure that the applicant
will have an appropriate form of ownership and that the Agency’s interest in the property is
adequately secured by the value of the real estate and the Agency’s lien position.
Section 4 specifies Agency security requirements and Section 5 provides guidance on
conducting appraisals of the property’s value.
B. Key Processing Steps Related to Property Requirements
When applicants locate properties, they must provide the Loan Originator with the basic
information needed to initiate the Agency’s review of the property. Applicants who do not
currently own the property must submit an option or sales contract. Applicants who already own
the property must submit evidence of ownership, a legal description, and a property survey showing
all structures on the site. Within 3 business days of the applicant identifying the property, the Loan
Originator must send the applicant the items listed in Paragraph 3.8 A.
The Loan Originator will use the USDA Address Verification website
(https://eligibility.sc.egov.usda.gov/eligibility/addressVerification) to verify the property address. If
the resulting code is 1 or 2, the Loan Originator should enter the address as indicated into UniFi. If
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Paragraph 5.1 Introduction

the resulting code is not 1 or 2, the Loan Originator must verify the address with the appropriate
local entities (such as the local post office or the local tax/property recording office), document
how a reliable address for the property was established in the running record, enter that address
into UniFi, re-verify the address using the address website prior to closing and update the address
in UniFi if appropriate.

1. Appraisal
In general, appraisals are ordered under the nationwide contract with Appraisal
Management Companies (AMCs). Field Staff request an appraisal through the Procurement
Management Office’s (PMO) Procurement Requests SharePoint site using the current SFH
Appraisal Request form (which can be found in the Direct Training Hub in SharePoint along
with other appraisal training materials) and uploads all applicable supporting documents.
The AMC Administration Team (consisting of PMO and National Office staff) then orders
the appraisal through the applicable AMC portal.
Under the nationwide contract, the AMCs are generally required to follow Attachment
5- A (though contract terms may differ). The AMC Administration Team monitors the
AMCs’ contract performance, reconciles invoices, handles payments, and handles all
communications with the AMCs. Field Staff are not to communicate with the AMCs or
their subcontracted appraisers; Field Staff must direct their general appraisal
communications to rd.appraisals@usda.gov or to the Regional Appraisal Services
SharePoint site for requesting a technical review. If the communication is time sensitive (e.g.
request for a correction or revision), use “Urgent” in the subject line.

2. Review of Property and Site for Compliance with Agency Standards

Before loan approval, the Loan Originator must confirm that the property meets, or will
meet with any planned constructions or repairs, all applicable Agency requirements. This is
accomplished through a review of opinions or determinations made by qualified third parties
(such as appraisers, local building officials, architectural and engineering professionals, and
trades professionals).

3. Identification and Correction of Deficiencies

If at any point during the review process, deficiencies are identified that jeopardize the
Agency’s ability to approve a loan, the Loan Originator must notify the applicant and give
the applicant at least 15 days to resolve the deficiency. For example, if an inspection
reveals a structural deficiency that can be corrected, the applicant could negotiate with the
seller to reduce the sales price so that funds to correct the deficiency could be included in
the loan, or to correct the deficiency before the property is transferred.

If a deficiency cannot be satisfactorily corrected, the Loan Originator notifies the

applicant and provides a new Form RD 1944-59, Certificate of Eligibility, which is
signed by the Loan Approval Official.

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Paragraph 5.1 Introduction

4. Documenting the Acceptability of Seller Completed Repairs

As part of the contract negotiations, a seller often agrees to complete repairs

identified by the buyer at the time of signing the sales contract or later identified by the
buyer’s inspectors (refer to Paragraph 5.7 A.) and agreed to through an addendum to the
contract. The Field Office should ensure that the repair conditions in the contract or
addendum provide the specifics necessary for the seller to properly address the repair.
Ideally, the contract or addendum will detail the existing problem, how the repair will be
completed, who will perform the work (a licensed contractor should perform work that
demands technical expertise), and how the repairs will be verified. If the repair
conditions are vague or ambiguous, the Field Office should encourage the buyer to seek
an addendum that better defines the repair conditions.

Before loan closing can occur, receipts for the repair work and any associated
permit/contract documents must be obtained from the seller and reviewed by the Field
Office. Documentation on all agreed to repairs must be provided. In addition, the buyer
must be instructed to inspect the completed work and provide the Field Office with a
written statement of acceptance or a written statement outlining deficiencies in the seller
completed repairs. If deficiencies are noted, the buyer and seller must work to address the
deficiencies before loan closing can occur.

Special care should be given if completion of repair work cannot take place until after
the loan closing to ensure there are adequate funds. Closing agents should be instructed
to release the funds to the contractor only after receiving written instructions from the
Loan Approval Official. The Loan Approval Official may authorize the release of funds
once the work, as indicated in the contract, is completed. The case file should be
documented with invoices and the borrower’s acceptance that the work has been
completed to their satisfaction.

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HB-1-3550
SECTION 1: SITE REQUIREMENTS [7 CFR 3550.56]
5.2 OVERVIEW
Once the applicant has found a property, the Agency needs to ensure that it fits program
guidelines regarding sites. The site must be developed according to the development standards
imposed by State or local government. These standards are often contained in zoning ordinances,
building codes, subdivision regulations, and/or construction standards. In addition, the site must be
located in a rural area; be modest; meet minimum standards regarding water and wastewater
systems; and meet the Agency’s street and access requirements of being on an all-weather road that
is maintained by a public body or homeowner’s association. This section addresses these site
requirements.
5.3 RURAL AREADESIGNATION
A. Rural Area Definition
Rural areas are defined as:
• Open country or any town, village, city, or place, including the immediate adjacent
densely settled area, which is not part of or associated with an urban area and
which:
o Has a population not in excess of 2,500 inhabitants; or
o Has a population in excess of 2,500 but not in excess of 10,000 if it is rural in
character; or

o Has a population in excess of 10,000 but not in excess of 20,000, and-

 Is not contained within a Metropolitan Statistical Area (MSA); and

 Has a serious lack of mortgage credit for lower and moderate-income families as
determined by the Secretary of Agriculture and the Secretary of Housing and
Urban Development.
• Any area classified as ‘‘rural’’ or a ‘‘rural area’’ prior to October 1, 1990, and
determined not to be ‘‘rural’’ or a ‘‘rural area’’ as a result of data received from or after
the 1990, 2000, 2010, or 2020 decennial census, and any area deemed to be a ‘‘rural
area’’ at any time during the period beginning January 1, 2000, and ending December
31, 2020, shall continue to be so classified until the receipt of data from the decennial
census in the year 2030, if such area has a population in excess of 10,000 but not in
excess of 35,000, is rural in character, and has a serious lack of mortgage credit for
lower and moderate- income families.

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Paragraph 5.3 Rural Area Designation

1. Assessing “Open Country”

A site that is in “open country not part of or associated with an urban area” is one that is
separated by open space from any adjacent densely populated urban area. Open space
includes undeveloped land, agricultural land, or sparsely settled areas. Open space does not
include physical barriers (such as rivers or canals), public parks, commercial and industrial
developments, small areas reserved for recreational purposes, and open space set aside for
future development.

In order to determine if a property is in open country, the Loan Originator should review
recent maps, aerial photographs, and/or conduct a site visit. In particular, the Loan Originator
should look for significant new development in parts of rural areas that adjoin non-rural
areas, and investigate the likelihood that local authorities may re- designate the area’s
corporate limits.

2. Assessing “Population”

In order to find the population figures for a locality, the Loan Originator should use
the decennial U.S. Census of Population, or population updates published by the U.S.
Bureau of the Census. In calculating population figures for a locality, any incarcerated
prison population must be excluded from the total area population.

3. Assessing “Serious Lack of Mortgage Credit”

This determination is made jointly by the Secretary of Agriculture and the

Secretary of Housing and Urban Development (HUD).

4. Assessing “Rural in Character”

A rural in character (RIC) analysis must be completed for areas meeting “Special
Considerations” as outlined in Paragraph 5.3 B. 1. and 2.

However, an area is automatically considered to be RIC when the population density is

less than or equal to 1,000 persons per square mile. When the population density is greater
than 1,000 persons per square mile, a RIC analysis must be completed. When conducting a
RIC analysis, the State Director should also account for other factors affecting population
density that include, but are not limited to the following:

• Economic Vitality: The local economy may be adversely affected by industry

or market conditions such as high unemployment, recent loss of a large
employer, or similar factors. If so, the area may be currently or imminently
subject to out-migration that affects the RIC analysis.

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Paragraph 5.3 Rural Area Designation

• Colleges and Universities: In contrast to prison populations, college populations

cannot be excluded from the total area population. However, the college
population may be considered when determining the population density as part
of the RIC determination. However, only the portion of the college population
living on campus may be excluded from population density calculations.

B. Special Considerations

1. Exception for Rural Areas Designated Prior to October 1990

If an area was classified as rural prior to October 1, 1990, even if it is within an MSA, it
may be still considered rural as long as it: (1) has a population between 10,000 and 35,000,
(2) is rural in character, and (3) has a serious lack of mortgage credit. This designation can
remain effective through receipt of census data for the year 2030. Or;

2. Exception for Rural Areas Designated Between January 1, 2000 and

December 31, 2020.

If an area was classified as rural or deemed eligible any time between January 1, 2000
and December 31, 2020, even if it is within an MSA, it may be still considered rural as long
as it: (1) has a population between 10,000 and 35,000, (2) is rural in character and
(3) has a serious lack of mortgage credit. This designation can remain effective through
receipt of census data for the year 2030.

3. Contiguous Areas

Two or more towns, villages, cities, or places that are contiguous may be considered
separately for a rural designation if they are not otherwise associated with each other, and
their densely settled areas are not contiguous.

When determining the population count for an area, the Loan Originator also should
consider developed areas in contiguous counties or states. In cases involving contiguous
counties, the appropriate population figure to be used for the area in question should be
determined after consultation with the State Director. In an area involving contiguous states,
the applicable population figure should be determined through an agreement between the
two State Directors. The Loan Approval Official should contact both State Directors to help
make this determination.

C. Reviewing Rural Area Designations

An area’s rural designation may be changed as a result of a periodic review or after

the decennial census of population. Both types of review are discussed below. In all
cases, the local office should maintain a perpetual master file to document all rural area
decisions and include documentation of all public notification actions taken.
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Paragraph 5.3 Rural Area Designation

1. Periodic Reviews

Each Field Office must review all areas under its jurisdiction every 5 years to identify
areas that no longer qualify as rural. In areas experiencing rapid growth and in eligible
communities within MSAs, the review should take place every 3 years. Field Office files
must contain documentation that local planning boards, where available, were contacted at
the time of each review to verify that areas considered open spaces are not scheduled for
development in the next 5 years.
Field Staff must prepare a rural area review report that includes a recommendation on
those areas that should be re-designated. An acceptable form for this report is a map
showing an outline of the area recommended to be re-designated, and a cover letter
explaining the reasons for the recommendation. The review report must be signed by the
Loan Approval Official, and submitted to the State Director on or before February 28 of the
review year.
2. Census Reviews
In addition to periodic reviews, the State Director is responsible for implementing re-
designations based on the decennial U.S. Census of Population and any biannual updates.
Immediately after receiving the population information from the Census Bureau, the
State Director must make appropriate changes in designation for areas with populations
under 10,000.
3. Public Notice
90-Day Public Notice: State or Field Office must publish a 90-day notice
informing the public that analysis is being conducted to determine the area’s eligibility
designation. The 90-day public notice must specify the area that is being studied and invite
comments from the public. The notice should be publicized and targeted to partners,
groups, and organizations that are engaged in community and/or housing activities.
The notice may be published via the State Office ListServ notice or GovDelivery
email service (if available), RD State Office Home page, or in a newspaper of general
circulation within the area to be studied. When publishing via newspaper, the notice must
be in easily readable type in the non-legal section of the newspaper(s) and must be
bilingual if the affected area is largely non-English speaking or bilingual. The notice
should appear for at least three consecutive days if published in a daily newspaper, or in
two consecutive publications if published in a weekly newspaper.
30-Day Public Inspection Period: Prior to making the final rural area decision,
the State Director must provide the public an opportunity to review any comments that
were received in response to the 90-day public notice. The notice must describe the
proposed revisions to the boundary lines, and provide a link to the map eligibility site that
will reflect the proposed revisions.
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Paragraph 5.3 Rural Area Designation

30-Day Final Notice: If the State Director determines that the rural area
designation will change from rural to non-rural, a one-time 30-day notice must be
published. The notice must describe the revised boundary lines, the effective date of the re-
designation, and provide a link to the map eligibility site that will reflect the change. The
notice must be disseminated using the methods described above.

4. Final Determination

The State Director will make a final determination on designations based on the
review report and public comments and notify the Field Office of the final decision.

5. Designation of Eligible and Ineligible Area Boundary Lines

By September 30th of each review year, or after the census review is complete, the State
Director will develop, clear and distribute a State Supplement that updates, establishes, lists,
and maps all ineligible areas in accordance with RD Instruction 2006-B. The State
Supplement will include county maps showing all ineligible areas in each county.

Designation of eligible and ineligible areas will be updated to the public website:
http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do.

Once the State has completed the review, a visual presentation of those areas designated
as ineligible will be documented through the RD GIS Portal.

Boundary lines must meet the following criteria:

• If the boundary line is a road, the boundary between eligible area and ineligible area
will be represented as the middle of the road. With this type of boundary line, one side
of a road may be eligible, while the remaining side is ineligible.

• Artificial buffer zones, such as an imaginary line 100 feet from a road will not be
used.

• Boundary lines that are defined as city or town limits must be defined and labeled as of
a specific date. Example – Ineligible area is the Claremore, Oklahoma limits as of
January 1, 2009. Changes to the city limits such as annexation subsequent to the defined
date will require review, public notification, preparation of a revised State Supplement,
and update to the public eligibility website prior to implementation of the revised city
limit boundary.

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Paragraph 5.3 Rural Area Designation

In this example, the re-designated area becomes ineligible when the process for the
change is complete. The update of the State Supplement and the website should be
implemented at the same time to the extent feasible.

Submitting Ineligible Area changes:

Requests for re-designation of ineligible area on the public website will be forwarded by
the State Director together with the required State Supplement, in accordance with the
instructions in Attachment 5-D. Please see Attachment 5-E, Eligibility System Modification
Request Process, for detailed instructions and Attachment 5-F, Eligibility System
Modification Workflow, is provided for visual purposes.

6. Making Loans in Areas Changed to Non-Rural

If an area’s designation changes from rural to non-rural, the Loan Approval Official
may approve loans in that area only under the circumstances listed below.

• If an application is received before an area’s designation changed and the applicant

selects a property in the newly designated non-rural area, a loan may be made for that
property if it meets all other eligibility requirements.

• New conditional commitments may be issued in non-rural areas if a purchaser is

found whose loan application was complete before the area’s designation
changed.

• Existing conditional commitments will be honored.

• Real Estate Owned (REO) property sales and transfers with assumption may be
processed in areas that have changed to non-rural.

• Section 504 Loan and Grant assistance may be provided on a property that already
has an Agency loan.

• Subsequent loans may be made on a property that already has an Agency loan to: (1)
make necessary repairs; (2) pay equity in connection with an assumption of the Agency
loan; or (3) to pay equity to a departing co-borrower or (4) refinance a direct or
guaranteed borrower's loan with a new direct or guaranteed loan if it meets all other
eligibility requirements.

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5.4 MODEST SITES

A qualified property must be predominately residential in use, character, and design (as
opposed to commercial, industrial, or agricultural). Modest sites are defined by their size,
value, income production use, and the presence of prohibited outbuildings outlined in
Paragraph 5.6. The Loan Originator must verify that the requirements listed below are met.

• Size. There is no specific limitation to the size/acreage of the site, provided it is

not large enough to be subdivided under local subdivision regulations.

• Value. The value of the site should not exceed 30 percent of the as-improved market
value of the property. The 30 percent limitation may be exceeded if the site cannot be
subdivided into two or more sites and the value of the site is typical for the area, as
evidenced by the appraisal and the practices of other lenders.
• Income-Producing Land. The site must not have income-producing land that will be
used principally for income producing purposes. Vacant land or properties used
primarily for agricultural, farming or commercial enterprise are ineligible.
• Zoning. The property must comply with applicable zoning and restrictions. If
an existing property does not comply with all current zoning ordinances, but it is
accepted by the local zoning authority, the appraiser must report the property as
legal non-conforming. The appraisal must reflect any adverse effect of the legal
non-conforming use on the value and marketability of the property.
5.5 ADEQUATE SITE ACCESS, WATER, AND WASTEWATER SYSTEMS
The site must be accessible from an all-weather road maintained by either a public body or
a homeowner’s association. When the road is privately maintained by an association, there must
be a legally enforceable arrangement for the ongoing maintenance needs of the roads.
The site must also have water and wastewater disposal systems, whether individual, central,
or privately-owned and operated, that meet the applicable water and wastewater disposal system
requirements of RD Instruction 1924-C. There must be assurance of continuous service at
reasonable rates for central water and wastewater disposal systems. A system owned or operated by
a private party must have a legally irrevocable agreement which allows interested third parties to
enforce the obligation.
Private companies usually inspect individual wells and septic system and provide written
results of the inspection. In addition, the responsible local or State regulatory agency must
verify, in writing, that the privately-owned water and wastewater disposal systems, that serve
multiple households, comply with the Safe Drinking Water Act (42 U.S.C. 300h) and the Clean
Water Act (33 U.S.C. 1341), respectively. Inspections are not required on public water and
wastewater disposal systems.

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SECTION 2: DWELLING REQUIREMENTS [7 CFR 3550.63(a)]
5.6 MODEST HOUSING

To be considered “modest”, the property must be one that is considered modest

for the area, must not have a market value in excess of the applicable area loan limit, meet the
standard square footage consideration, and must not have certain prohibited features.

A. Establishing Area Loan Limits Within a State

The standard area loan limit is 80% of the local HUD 203(b) limit in effect unless
otherwise approved by the Deputy Administrator, Single Family Housing. The Agency website
will be updated shortly after the annual updates to HUD’s 203(b) limits are published.

Loan Limit Requests to Exceed the Standard

1. Exceptions for Counties States are not authorized to alter their limits throughout the
year without prior approval from the Deputy Administrator, Single Family Housing.
State Directors who have counties they believe merit loan limits exceeding the standard,
may submit a request to the National Office by completing Form RD 2006-3,
“Instruction and Form Justification.” The request should be accompanied by a narrative
and supporting data. The analysis should include local values for both existing homes in
program-acceptable condition and the total costs to acquire or construct new dwellings.

2. Exceptions for Individuals An exception to an established area loan limit may be

granted to accommodate the specific needs of an applicant, for example, to serve an
exceptionally large household or to provide reasonable accommodation for a household
member with a disability. Requests for exceptions may be approved by the State
Director if the cost of the property will exceed the limit by $5,000 or less. To request an
exception, the Loan Originator must fully document the need for the exception.

• For accommodations for household members with disabilities, the Loan Originator
must provide the cost of accommodations that demonstrates that these costs cannot
be accommodated within the area’s modest housing limit; and

• If exceptions are granted, the Loan Originator will follow UniFi procedures for
overriding the maximum loan limits.

B. Notification
States should encourage stakeholders; such as certified loan packagers, intermediaries, real
estate agents, brokers, building contractors, lenders, partners, etc. to sign up for GovDelivery to
ensure they are informed of updates to the area loan limits as they occur.

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Paragraph 5.6 Modest Housing
C. Square Footage Consideration Standards

1. Maximum
Agency financed properties should generally not exceed 2,000 square feet living
area, above grade as a general guideline, but not a firm limitation. The square
footage consideration may be waived by the Loan Approval Official’s next-level
supervisor when the Field Office determines:

• The subject property is modest;

• The property is typical for the area and/or the applicant has special
needs due to an exceptionally large household or a household
member with a disability; and

• The property’s anticipated utilities and maintenance costs are reasonable

for the area and will not place a strain on the applicant’s budget.

The maximum standard square footage consideration is based on gross living area that is
above grade. An attached garage and a basement (including a basement that is partially
above grade or is a walk- out) should not be included in the square footage calculation.
This approximate calculation must be made at the time the Agency receives a purchase
agreement or construction contract. Concerns regarding the size of the house must be
immediately communicated in writing to the applicant.

2. Minimum

Agency financed dwellings are generally not less than 400 square feet to ensure they are
designed and constructed for permanent occupancy and contain permanent areas for
cooking, eating, sleeping and sanitary needs. Water and wastewater systems must be
permanently connected. This square footage consideration may be waived by the Loan
Approval Official’s next-level supervisor when the Field Office determines a smaller
dwelling or “tiny home” otherwise meets the same property standards as other Agency
financed dwellings.

D. Prohibited Features

1. Swimming Pools

Properties that include in-ground pools will not be financed. It is not acceptable to
remove a pool after closing to meet this requirement.
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Paragraph 5.6 Modest Housing

2. Farm Service Buildings and Income-Producing Structures

The property must not include buildings principally used for income-
producing purposes.
•Farm service buildings such as barns, silos, commercial greenhouses, or
livestock facilities used primarily for the production of agricultural,
farming or commercial enterprises are ineligible. However, barns,
silos, livestock facilities or greenhouses no longer in use for a
commercial operation, which will be used for storage, do not render
the property ineligible.
•Outbuildings such as storage sheds and non-commercial workshops are
permitted if they are not used primarily for an income producing
agricultural, farming or commercial enterprise.
•A minimal income-producing activity, such as maintaining a garden that
generates a small amount of additional income does not violate this
requirement. Home-based operations such as childcare, product sales,
or craft production that do not require specific commercial real estate
features are not restricted.

5.7 DECENT, SAFE AND SANITARY DWELLINGS

To help ensure that dwellings are decent, safe, and sanitary (DSS) the Agency has
established minimum standards for existing and new dwellings.

A. Existing Dwellings
Existing dwellings must be structurally sound and functionally adequate, and be in good
repair or be placed in good repair with loan funds.

For an initial Section 502 direct loan to purchase or refinance a non-Agency loan on an
existing dwelling, the applicant must engage the services of a State-licensed inspector to perform a
whole house inspection and provide a statement that the dwelling appears to meet the Agency’s DSS
standards with respect to: (1) termites and other pests (this may be separate from the whole house
inspection); (2) plumbing, water and sewage; (3) heating and cooling; (4) electrical systems; and (5)
structural soundness. The inspection report must be a comprehensive document that meets the
minimum standards of the professional home inspector associations. When a State does not license
inspectors, a qualified, independent, third party inspector may perform the inspection and provide
the necessary certifications.

The Loan Originator should inform the applicant that if their loan application request
falls through for whatever reason, they will remain responsible for paying their inspectors
(unless the seller agreed to cover the inspection fees).

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Paragraph 5.7 Decent, Safe and Sanitary Dwellings
Once a report(s) covering all five items noted above is received by the Agency, the Loan
Originator must identify any noted deficiencies that may make the home not decent, safe, and
sanitary. If these deficiencies are not already addressed in the option or sales contract, the Loan
Originator must inform the applicant that they must be addressed either through the seller
assuming responsibility for the repair prior to closing or the repairs being required post-closing.

Special Considerations:
Low risk of termite infestation: A State Director may issue a state supplement waiving the
termite inspection requirement provided the state’s probability of termite infestation is slight to none
and state law does not require one. The supplement, which must receive prior approval through the
National Office, can remove the need for a termite inspection provided a dwelling shows no signs of
active infestation.

Section 502 loan balance less than $7,500 and the repayment schedule does not
exceed 10 years: If the Section 502 loan balance is less than $7,500 and the repayment schedule
does not exceed 10 years, a whole house inspection is not needed and the dwelling may lack some
equipment or features after repairs such as a complete bath, kitchen cabinets, closets, or
completed finished interior in some rooms. These dwellings must otherwise meet the housing
needs of the applicant and provide decent, safe, and sanitary living conditions when the
improvements financed with the loan are completed.
Initial Section 502 loans for necessary repairs-only: An initial Section 502 loan can
be made to an existing homeowner for necessary repairs provided any existing loan against the
property is an affordable non-RHS loan. While a whole house inspection is not needed, the
dwelling must otherwise meet the housing needs of the applicant and provide decent, safe, and
sanitary living conditions when the improvements financed with the loan are completed.
B. New Dwellings
All construction must meet the standards contained in RD Instruction 1924-A. New
dwellings include homes to be built, currently under construction, or those that are less than 12
months old and never occupied. When applicants enter into a contract to purchase a new
dwelling, the Loan Approval Official must consider how the construction quality will be
documented. The process for ensuring that the Agency’s construction standards are met is
described in Section 6 of this chapter and in Paragraph 6.7.
C. Survey Requirements
A survey is not required for any financed property unless the title insurance commitment
specifically excludes coverage for the property and improvements in the loan policy. The
currently adopted 2006 American Land Title Association (ALTA) lender’s policy provides
explicit “survey” (or boundary and encroachment) coverage without issuance of a special
endorsement. A survey is usually required by the title insurance company to remove the
exclusions from coverage related to boundaries, encroachments, easements and other

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Paragraph 5.7 Decent, Safe and Sanitary Dwellings

matters when issuing an owner’s title policy. Although an owner’s policy is not required by the
Agency, the borrower may choose to have this coverage and use loan funds to pay for it provided
the loan does not exceed the appraised value.

When a new survey is needed, it must contain boundary lines, any improvements,
encroachments on the subject or adjacent property, above-ground easements, set-backs imposed
by either restrictive covenant or zoning, and any additional requirements needed to obtain title
insurance. For new construction, the boundary corners must also be clearly marked. An existing
survey may be used if it meets the requirements of the title insurance.

D. Flood-Related Requirements
Flood insurance is required for all dwellings located within the 100-year flood plain, unless FEMA has
granted an exception, and flood insurance is available as part of the community’s flood plain
management regulations.

For all new construction, substantial improvements, and existing dwellings the lowest
floor (including basement) must be elevated to or above the 100-year flood level.

In addition, for newly constructed and substantially rehabilitated dwellings, the

construction materials and methods used must be for the purpose of making the structure resistant
to flood damage, and minimizing any damage that may occur. RD Instruction 426.2 contains
further guidance on the National Flood Insurance Program and flood-related requirements.

All dwellings within the 100-year floodplain must be served by public utilities that are
located and constructed to minimize or eliminate flood damage, or have an on-site water supply
and waste disposal system located and constructed to avoid contamination of the water supply by
the septic system due to flooding.

For all new construction, substantial improvements, and existing dwellings in a floodplain,
the Agency must perform the eight step decision making process for alternative consideration in
order to determine if a reasonable alternative to committing federal funding to a property in a
floodplain exists. This process is outlined in detail in RD Instruction 1970-F, section 1970.256.

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SECTION 3: ENVIRONMENTAL REQUIREMENTS
[7 CFR 3550.5]

5.8 PROTECTION OF ENVIRONMENTAL RESOURCES

The Agency considers environmental Environmental Library

quality equally with economic, social, and other At a minimum, each Field Office should
factors in its program development and decision- maintain the following information in order to
making processes. The environmental review facilitate completion of environmental reviews.
process is intended to help Agency officials make The State Environmental Coordinator can provide
decisions that are based on an understanding of the assistance in obtaining or understanding this
environmental consequences of a proposed action, information.
and to take those actions that protect, restore, and • The Environmental Resource Directory;
enhance the environment. • Federal Emergency Management Agency
(FEMA) floodplain maps;
This paragraph contains a general
discussion of basic environmental requirements. • Natural Resources Conservation Service (NRCS)
Detailed environmental policies and procedures Soil Surveys and Important Farmland Soils; and
can be found in 7 CFR Part 1970 and the • U.S. Fish and Wildlife Service (USFWS)
corresponding staff instructions in RD Coastal Barrier Resource System maps (as
Instruction 1970 series, which contains compliance applicable).
requirements for the National Environmental Policy Act
(NEPA), as well as numerous other laws, Executive Orders,
and Departmental Regulations on a variety of other
environmental issues.

In accordance with 7 CFR 1970.11, the environmental review must be concluded before
the obligation of funds, therefore in no case will loan or grant funds be obligated without the
completion of the environmental review. In addition, in accordance with 7 CFR 1970.5 (a) (5),
mitigation measures described in the environmental review and decision documents must be
included as conditions in Agency financial commitment documents, such as a conditional
commitment letter or funding commitment.

While funds may be obligated subject to an appraisal, if the appraiser determines that there
are environmental hazards on site, further environmental due diligence investigations may be
required to determine the nature and extent of the contamination, and to determine the estimated
cost of remediation. This information should be used by the Agency to make a decision related to
property eligibility.

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A. Types of Environmental Reviews

NEPA requires that Agency actions be classified into 3 basic categories of actions: those that are
categorically excluded from NEPA review; those for which more information is needed to determine
if the project will significantly impact the environment, and therefore preparation of an
Environmental Assessment (EA) will be required; and those that have been determined to
significantly impact the environment, and therefore require preparation of an Environmental Impact
Statement (EIS). The Agency has been allowed to establish 2 categories of Categorical Exclusions:
those that involve no or minimal alterations in the physical environment and typically occur on
previously disturbed land, and therefore require no or limited environmental documentation to be
submitted by the applicant (RD Instruction 1970-B, section 1970.53), and those that will cause more
alteration of the environment and therefore require the submission of an Environmental Report (a
brief report on the current environment of the project area and the expected environmental impacts
of the proposed project) (RD Instruction 1970-B, section 1970.54). This classification of actions
provides the Agency with a starting point for beginning its environmental review process. Most
single family housing activities do not adversely affect environmental resources and have no
cumulative effect, and therefore will qualify as a Categorical Exclusion without an Environmental
Report; those which affect resources or have a cumulative effect may require an Environmental
Review or an Environmental Assessment. For a complete list of housing actions and their
classifications, refer to RD Instruction 1970-B, sections 1970.53 and 1970.54.
1. Categorical Exclusions
In accordance with RD Instruction 1970-A, a Categorical Exclusion is an action that
does not individually or cumulatively have a significant impact on the quality of the human
environment.
The following are routine financial actions related to single family housing
transactions that are classified as Categorical Exclusions without an Environmental Report:

• Financial assistance for the purchase, transfer, lease, or other acquisition of real
property when no or minimal change in use is reasonably foreseeable.
• Financial assistance for the purchase, transfer, or lease of personal property or
fixtures where no or minimal change in operations is reasonably foreseeable.
• Sale or lease of Agency-owned real property, if the sale or lease will have no or
minimal construction or change in current operations in the foreseeable future.
• The provision of additional financial assistance for cost overruns where the
purpose, operation, location and design of the proposal as originally approved has
not been substantially changed.
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• Minor construction proposals such as:

o Minor amendments or revisions to previously approved projects provided
such activities do not alter the purpose, operation, geographic scope, or
design of the project as originally approved;
o Repair, upgrade, or replacement of equipment in existing structures for such
purposes as improving habitability, energy efficiency (including heat rate
efficiency), replacement or conversion to enable use of renewable fuels,
pollution prevention, or pollution control;
o Any internal modification or minimal external modification, restoration,
renovation, maintenance, and replacement in-kind to an existing facility or
structure;
o Construction of or substantial improvement to a single-family dwelling, or a
Rural Housing Site Loan project serving up to four families and affecting less
than 10 acres of land;
o Siting, construction, and operation of new or additional water supply wells for
residential, farm, or livestock use;
o Replacement of existing water and sewer lines within the existing right-of-way and
as long as the size of pipe is either no larger than the inner diameter of the existing
pipe or is an increased diameter as required by Federal or state requirements. If a
larger pipe size is required, applicants must provide a copy of written administrative
requirements mandating a minimum pipe diameter from the regulatory agency with
jurisdiction; and
o New utility service connections to individual users or construction of utility lines or
associated components where the applicant has no control over the placement of the
utility facilities.
For each proposed action, RD Instruction 1970-B, Exhibit D, “Environmental Checklist for
Categorical Exclusions,” is prepared by the Agency to ensure that the specific proposal under
consideration qualifies as a Categorical Exclusion, and that there are no extraordinary
circumstances (RD Instruction1970-B, section 1970.52) or cumulative impacts related to the
proposal, that the proposal is not connected to other actions with potentially significant impacts (see
40 CFR 1508.25(a)(1)), and that it is not considered a cumulative action (see 40 CFR
1508.25(a)(2)).
In general, extraordinary circumstances (RD Instruction 1970-B, section 1970.52) are
unique situations presented by specific proposals, such as characteristics of the geographic area
affected by the proposal, scientific controversy about the environmental effects of the proposal,
uncertain effects or effects involving unique or unknown risks, and unresolved conflicts
concerning alternate uses of available resources within the meaning of section 102(2) (E) of
NEPA. Exhibit 5-2 provides a listing of the most common extraordinary circumstances.
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Exhibit 5-2
Extraordinary Circumstances
• Any violation of applicable Federal, state, or local statutory, regulatory, or permit requirements for
environment, safety, and health.
• Any proposal that is likely to cause uncontrolled or unpermitted releases of hazardous substances, pollutants,
contaminants, or petroleum and natural gas products.
• An adverse effect on the following environmental resources:
o Historic properties;
o Federally listed threatened or endangered species, critical habitat, Federally proposed or candidate species;
o Wetlands;
o Floodplains;
o Areas having formal Federal or state designations such as wilderness areas, parks, or wildlife refuges;
wild and scenic rivers; or marine sanctuaries;
o Special sources of water (such as sole source aquifers, wellhead protection areas, and other water sources
that are vital in a region);
o Coastal barrier resources or, unless exempt, coastal zone management areas; and
o Coral reefs.
• The existence of controversy based on effects to the human environment brought to the Agency’s attention
by a Federal, tribal, state, or local government agency.

RD Instruction 1970-B contains detailed information on the proper implementation of

requirements affecting Categorical Exclusions.
It is important to note that development on tribal land or dependent Indian communities may
require additional coordination with the tribe to determine if the proposal has an adverse impact on
environmental or cultural resources. In accordance with RD Instruction 1970-H, Exhibit B, “When
an applicant’s proposal is located on tribal lands, defined in 36 CFR § 800.16(x) as all lands within
the exterior boundary of any Indian reservation and all dependent Indian communities, and that tribe
has designated a Tribal Historic Preservation Officer (THPO) in accordance with Section 101(d)(2)
of [National Historic Preservation Act (NHPA)], the SHPO participates only under the conditions
specified in 36 CFR § 800.2(c)(1)(ii). If the Indian tribe has not designated a THPO, then the SHPO
participates in Section 106 review pursuant to 36 CFR § 800.2(c)(2)(i)(B).” Exhibit D of RD
Instruction 1970-H provides guidance on working with Indian tribes in the NHPA Section 106
review.
2. Environmental Reports and Environmental Assessments
If it appears that extraordinary circumstances and/or cumulative impacts may be involved, an
Environmental Report (ER) or an Environmental Assessment (EA) may be required in
accordance with RD Instruction 1970-B, section 1970.54 and RD Instruction 1970-C. Through
these review processes, the Agency will acquire the necessary documentation to: (1) demonstrate
compliance with requirements for protection of environmental resources, including the
development of practical alternatives to either avoid or lessen any adverse environmental
impacts; and (2) demonstrate why the potential impact on resources is not considered to be
significant and, therefore, an EIS is not required.
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B. Flood Hazard Determination

FEMA’s Standard Flood Hazard Determination Form (SFHDF) determines if the home is
located in a Special Flood Hazard Area (SFHA) and states the availability of flood insurance
based on if the community participates in the National Flood Insurance Program (NFIP). Flood
insurance is required when any form of federal financial assistance is intended in whole or in part
for acquisition, construction, reconstruction, or substantial improvement of any building located
in a SFHA. The flood insurance can be through NFIP or under NFIP’s “write your own” program
where the policy is through private insurance that meets the requirements of 42 USC 4012a
(b)(1)(A). Flood insurance must be obtained and maintained throughout the life of the loan when
any portion of the home is located in a SFHA, including attached garages, decks and carports, etc.
Flood insurance is not required for any additional structure that is located on the property but is
detached from the home (such as detached shed, garage, or other ancillary structure). Flood
insurance is also not required if the financial assistance is less than the substantial improvement
threshold discussed in HB-1-3550, Chapter 7.
The information on the SFHDF will assist in the preparation of the environmental review
documentation, which must examine whether there is a reasonable alternative to a proposed
purchase or construction in a floodplain. The Loan Originator will be responsible for acquiring
the SFHDF from CoreLogic Flood Services at: https://www.floodcert.com/. CoreLogic provides
“Life of Loan Determination” in which the Agency will be notified should the site’s floodplain
designation change. The SFHDF must be acquired prior to the completion of the environmental
review.
If the dwelling is located within a SFHA, the lowest floor (including basements) must be
elevated above the base flood elevation (BFE). Proof that this requirement has been met is usually
in the form of a FEMA Elevation Certificate, however other forms of documentation may be
accepted (see RD Instruction 1970-F).
Additionally, for applications to purchase, construct, or substantially rehabilitate a dwelling
in a floodplain, utilities should be flood-proofed or located above the BFE. If the dwelling does not
use public utilities, the domestic well must be a minimum of 50 feet from the septic drain field (or
more, depending on local or state codes). For minor repairs, these requirements are not applicable
if the dwelling existed prior to the publication of the first FEMA flood map for that location. In
accordance with RD Instruction 1970-F, section 1970.256 (b) and 1970.261(b), if the property is
within a floodplain, the Agency approval official is responsible for notifying the applicant about
the hazards associated with occupancy of locations within a floodplain at the earliest possible point
in the Agency’s decision-making process. A template notice can be found in RD Instruction 1970-
F, Exhibit B, Attachment 2.
C. Responsibility for Environmental Reviews
The Loan Originator is responsible for ensuring that the appropriate level of environmental review has
been completed prior to the commitment of federal funds. This includes the assembly and analysis of
relevant material, the development and analysis of practical alternatives and mitigation measures (as
appropriate), and the development of recommendations regarding environmental impacts and
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Paragraph 5.8 Protection of Environmental Resource

environmental compliance. Applicants may be requested to provide information needed for the
analysis.
If the appraiser marks “No” to the question, “Are there any adverse site conditions or
external factors (easements, encroachments, environmental conditions, land uses, etc.)?” under
the site portion of the Uniform Residential Appraisal Report, the Field Office is not required to
conduct a site inspection in order to complete the environment review. If the appraiser answers in
the affirmative, a qualified Rural Development official must conduct a site inspection as part of
the environmental review process.
The Loan Approval Official will use the environmental review documents and, as
appropriate, the recommendations of the State Environmental Coordinator (SEC), to make the
Agency’s final decision regarding an environmental impact determination and compliance with
environmental requirements, as well as flood insurance requirements. For Categorical Exclusions
without an ER, this decision is evidenced by the completion of RD Instruction 1970- B, Exhibit
D, which will be signed by the form’s preparer and the Loan Approval Official (if these are the
same person, both applicable signatory lines should be signed). For Categorical Exclusions with
an ER, the SEC must review the environmental documentation and sign the Exhibit D in addition
to the preparer and Loan Approval Official. The Agency’s decision for EAs is documented by
the signing of the Finding of No Significant Impact (FONSI) by the Loan Approval Official;
after reviewing the EA, the SEC will assist with the FONSI’s preparation.

SECs are available to provide technical assistance and guidance. They also are available
to assist in problem resolution on environmental issues. Environmental questions or problems
should be referred promptly to the SEC. Furthermore, SECs will review and sign off on all
Categorical Exclusions with an ER and EAs.
D. Noise Abatement
If a site is located near a major source of noise, the appraiser should consider this in their
appraisal report. The information should be made available to the applicant, who may not be
aware of the problem. The applicant, once informed, may wish to look for a different site or to
consider some method of noise reduction. The Loan Approval Official should consult with the
State Architect and the SEC on any proposals for noise reduction.
5.9 MANAGEMENT OF HAZARDOUS SUBSTANCES
The Agency must consider the management of hazardous substances, including
hazardous wastes and petroleum products, from two perspectives: liability under hazardous
substance and hazardous waste laws, and the economic risks posed by the presence of
hazardous substances. Both of these issues are addressed through due diligence. Due diligence
is the process of inquiring into the environmental condition of real estate, in the context of a,
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real estate transaction, to determine the presence of contamination from hazardous substances including
hazardous wastes and petroleum products, and to determine what impact such contamination may have on the
market value of the property.

Appraisers are required to notify the Agency if they observe contamination from hazardous
substances, or if information from research or interviews with individuals knowledgeable about the
property indicates that the property might contain hazardous substances.

If an appraiser notices that a property may contain hazardous substances, or if the Agency
has any other reason to suspect that a property is contaminated, the Loan Approval Official must
initiate a due diligence review by completing Attachment 5-B, Single Family Housing Site
Checklist. If the completed Attachment 5-B raises any concerns, it must be sent to the SEC for
further evaluation and guidance. The SEC will contact a National Office Program Support Staff
Environmental Protection Specialist to determine what further steps will need to be taken.

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SECTION 4: SECURITY REQUIREMENTS
5.10 ACCEPTABLE MORTGAGE
Generally, there should be no non-Agency liens on the property at the time of or
immediately after closing, unless they are part of a formal leveraging strategy, or the Agency
loan is for essential repairs and a senior lien secures an affordable non-Agency loan. However,
the Loan Originator may accept prior or junior liens as long as: (1) the lien will not interfere with
the purpose or repayment of the Agency loan; (2) the total value of all liens on the property is
less than or equal to the property’s market value; and (3) the prior lien does not contain
provisions that may jeopardize the Agency’s security position or the applicant’s ability to repay
the loan.
5.11 OWNERSHIP REQUIREMENTS [7 CFR 3550.58]

If the applicant defaults on the loan, the Agency must be able to foreclose on the property
to settle the debt. Therefore, after the loan is closed, the applicant must have an ownership
interest in the property that is acceptable to the Agency.

A. Responsibilities

In preparation for closing, the closing agent selected by the applicant must review the
ownership interest the applicant will have to ensure that it meets the requirements established by
the Agency in RD Instruction 1927-B. The closing agent must also ensure that the form of
ownership conforms with the requirements of relevant State laws. After closing, the Loan
Originator should compare the deed of trust or mortgage with the title opinion to assess lien
priority, to verify recordation of the date and time, and to ensure that the loan closing instructions
have been followed.

B. Acceptable Forms of Ownership

Several forms of ownership are acceptable to the Agency, but in all cases the
applicant’s ownership interest must be carefully documented.

1. Fee-Simple Ownership

The most common form of ownership Land Purchase Contracts

is fee-simple ownership, under which the
borrower holds a fully marketable title to When the ownership interest is by virtue of a land
purchase contract, the ownership interest must be
the property. This title is evidenced by a converted to a deed/mortgage interest prior to closing
deed that vests full interest in the property the loan.
to the borrower.
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2. Secure Leasehold Interest

Although fee-simple ownership is preferable, the borrower may have a secure leasehold
interest in the property. Leasehold interests are acceptable only when all of the following
conditions apply.

• The applicant must be unable to obtain fee-simple title to the property, and the rent
charged for the lease must not exceed the rate being paid for comparable leases.

• The lessor must own the fee-simple title (this provision does not apply to a lessor who
is an American Indian possessing a leasehold interest on tribal allotted or trust land).

• Neither the leasehold nor the fee-simple title may be subject to a prior lien unless the
Agency authorizes acceptance of the prior lien before loan approval. The amount of
the Agency’s loan, plus any prior liens, must not exceed the market value of the
property including the value of the leasehold.

• The lease must be in writing, and must contain all of the following provisions:

◊ The lessor’s consent to allow the Agency’s mortgage;

◊ The right of the Agency to foreclose and sell the property without restrictions that
adversely affect the market value of the property;

◊ The right of the Agency to bid at a foreclosure sale or to accept voluntary

conveyance of the property in lieu of foreclosure;

◊ The right of the Agency to occupy, sublet, or sell the property should the
leasehold be acquired through foreclosure, voluntary conveyance, or
abandonment;

◊ The right of the applicant to transfer the leasehold and Agency mortgage to an
eligible transferee who will assume the Agency’s debt, if the borrower defaults or is
unable to continue with the lease;

◊ Advance written notice of at least 90 days to the Agency of the lessor’s intention to
cancel or terminate the lease;
◊ Provisions are negotiated with the lessor before the leasehold interest is approved
regarding the Agency’s obligation to satisfy unpaid rent or other charges accrued
before or during the time the Agency has possession of or title to the leasehold.
During negotiations, the Loan Originator should consider the length of time it will
take to foreclose, how much the Agency would be responsible for, and when the
Agency would have to pay;
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Paragraph 5.11 Ownership Requirements [7 CFR 3550.58]

◊ Provisions to ensure fair compensation to the borrower for any part of the
property taken by condemnation; and

◊ The unexpired term of the lease must be at least 150 percent of the term of the
mortgage, unless the loan is guaranteed by a public authority, Indian Tribe, or
Indian Housing Authority. For guaranteed loans, the unexpired term of the lease
must be at least 2 years longer than the mortgage term. In no case may the
unexpired term of the lease be less than 25 years.

• The language, specified in Attachment 5-C, must be inserted in the mortgage.

3. Life Estate Interest

The applicant may hold a life estate interest with the rights of present possession,
control, and beneficial use of the property. All persons with any remainder interests in the
property must be signatories to the mortgage, except as described in Paragraph 5.11 B. 4.

4. Undivided Interest

To be eligible for a loan if an applicant only has an undivided interest in the land, co-
owners must also be unable to provide or obtain the financing for the improvements, either
individually or jointly with the applicant. Generally, all legally competent co-owners must
sign the mortgage. However, when one or more of the co-owners cannot be located, are not
legally competent (and there is no legal representative who can sign the mortgage), or if the
ownership interests are divided among so many co-owners that it is not practical to
mortgage all of their interests, their interests may be excluded from the security
requirements, as long as their interests do not exceed 50 percent of the property’s value.

The loan amount shall be limited based on the percentage of the market value that is
proportional to the percentage of the property interest owned by all persons signing the
mortgage. The determination of market value should take into account any adverse effects
that might result from selling mortgaged interests separately from nonmortgaged interests.

Only the State Director may approve the exclusion of co-owners’ interests. The Loan
Originator or the Loan Approval Official should prepare a recommendation for the State
Director’s review. The memo should include a full statement of ownership and the reasons
for the proposed exclusion.

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5. Possessory Rights

Possessory rights on an American Indian reservation or State-owned land, and the

interest of an American Indian in land held in trust or deeds containing restrictions
against alienation are acceptable forms of interest as long as the trust or restricted land
will remain in trust or restricted status.

Tribal allotted or trust land must remain in trust or restricted status. In these cases,
the mortgage, deed of trust, leasehold interest or other security interest must be
approved by the Secretary of the Interior. Each State should issue a supplement to give
guidance about making loans under these circumstances.

5.12 EXCEPTIONS TO THE AGENCY’S SECURITY REQUIREMENTS

Exceptions may be made under the circumstances described below.

A. Unsecured (Note Only) Section 502 Loans

A loan of less than $7,500 that is scheduled for repayment within 10 years from the date
of the loan may be secured by a promissory note alone as long as the applicant:

• Has a credit history that indicates an ability and willingness to pay the debt when due;
and,

• Has principal, interest, taxes, and insurance (PITI) and total debt (TD) ratios that
indicate that the applicant will have sufficient income to meet all obligations.

In order to verify the above conditions, the Loan Originator should review the applicant’s
credit history as described in Section 3 of Chapter 4. The applicant cannot receive payment
subsidy on an unsecured loan.

B. Best Mortgage Obtainable

Except for unsecured loans described in Paragraph 5.12 A., loans must be secured by a
mortgage. In addition, title clearance and the use of legal services as required by RD Instruction
1927-B are necessary, unless the total RHS indebtedness is less than $7,500 or the loan is a
subsequent loan made for minimal essential repairs necessary to protect the Government’s
interest.

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SECTION 5: APPRAISALS [7 CFR 3550.62]
5.13 OVERVIEW

High-quality appraisals are key to ensuring that the Agency obtains adequate security for its
loans. This section provides guidance about the types of appraisals that may be needed, when
appraisals are required, how they are ordered, and how they must be reviewed.

5.14 REQUIREMENTS FOR APPRAISALS

Appraisals must meet the following requirements:

• Qualified Appraiser: In nearly all cases, Direct Single Family Housing appraisal
assignments will be completed by a State–certified or licensed appraiser using nationwide
contracts with Appraisal Management Companies (AMCs). Contract appraisers must be
certified or licensed (or hold a “Temporary Practice Permit” issued by the respective
State for a specific period of time and for a specific property), in the State in which the
subject property is located. When using a contract appraiser, the Agency will contract
with qualified appraisers that are active on the Appraisal Subcommittee website
(www.asc.gov). However, when a contract appraiser is not available at an acceptable cost
or is unable to complete an appraisal timely, a qualified Agency appraiser may conduct
the appraisal. For credit transactions that are $100,000 or greater, Agency appraiser must
possess the same qualifications as those required for contract appraisers, except that an
Agency appraiser is only required to be certified in one State or Territory to perform real
property appraisal duties as a Federal employee in all States and territories.

• Standards: All appraisals must be consistent with the current edition of the Uniform
Standards of Professional Appraisal Practice (USPAP) available at
www.appraisalfoundation.org and comply with Agency appraisal requirements, as
described in this chapter and in 7 CFR 3550.62(a).

• Timelines: In general, appraisals are ordered under the nationwide contracts with
Appraisal Management Companies (AMCs) and are generally completed within 15
business days. In-house appraisals are to be completed within 7 calendar days of
receiving the appraisal order.

• Nondiscrimination: The appraiser may not use factors that are discriminatory on the
basis of race, color, religion, sex, disability, familial status, or national origin in
conducting the appraisal and valuing the property.

• Use of a Third Party Appraisal: The Agency may only use an appraisal for which it did
not contract for when the appraisal was obtained from a leveraged lender involved in the
transaction and that lender is financing at least 20 percent of the transaction with loan funds
or 15 percent if entirely a grant, forgivable loan or deferred loan except when the lender is
also a party to the transaction such as seller, builder, developer, or contractor.
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The Agency reviewer should be especially diligent in reviewing these appraisals to ensure
they meet USPAP and Agency appraisal requirements and the expected intended use is
the same as the intended use reported in the appraisal. The Agency is not required to use
any appraisal that it did not contract for directly.
5.15 TYPES OF VALUES
Depending on the type and purpose of the appraisal needed, an appraiser will be asked to
provide an estimated value of the property based on one of the following:

• As Is. For existing dwellings that require no repairs/alterations or require

repairs/alterations that typically add no value (e.g. general maintenance to the home’s
infrastructure and machinery); newly constructed dwellings; and to support a loan
servicing action or to determine a disposition plan for a REO property.

• Cost Approach Only. See Paragraph 5.16 for a description.

• Subject to Completion of Plans & Specs. For newly constructed dwellings to be built.

• Subject to Repairs/Alterations. For existing dwellings that require repairs/alterations

that typically add value (e.g. window replacement, siding replacement, and bathroom
remodel).

5.16 APPRAISAL METHODOLOGY

Real estate appraisers make judgments about a property’s value based on many factors,
including location, market conditions, construction quality, and amenities. Single Family
Housing Appraisals require one, two, or three approaches to value, as described below,
depending on the specific assignment.

• Sales comparison approach. Under this method, the appraiser uses the recent sales data of
properties that are comparable in location and characteristics to the security property in
order to estimate a market value for the property.

• Cost approach. Under this method, the appraiser derives an estimate of value using
replacement cost estimates for the improvements, less depreciation and an estimate of the
site value. If applicable, the appraiser will identify the source of cost estimates, such as
Marshall and Swift, used in the cost approach.

The methodology used to estimate depreciation and an analysis may be stated in the report.
This method is required for a dwelling to be constructed, or a dwelling that is less than one
year old. The remaining economic life must be stated for all properties.
• Income Approach. Under this method the appraiser derives a value indication for an
income-producing property by converting its anticipated benefits (cash flows and
reversion) into property value. This conversion can be accomplished in two ways, direct
capitalization or yield capitalization. This method may only be used for Agency non-
program REO properties.

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Paragraph 5.16 Appraisal Methodology

The appraisal must be completed using Fannie Mae Form 1004/Freddie Mac Form 70,
“Uniform Residential Appraisal Report,” for all one-unit, single family dwellings; Fannie Mae
Form 1004C/Freddie Mac Form 70B, “Manufactured Home Appraisal Report,” for all
manufactured homes; or Fannie Mae Form 1073/Freddie Mac Form 465, “Individual
Condominium Unit Appraisal Report” for all individual condominium units.

5.17 ORDERING APPRAISALS

A. When Appraisals Are Needed

An appraisal is always required if the RHS loan is $7,500 or more and the Agency’s debt
plus prior liens against the property will exceed $15,000. (Another lender’s appraisal is acceptable
when the loan is part of a leveraging strategy under certain circumstances as described in Chapter
10.) If the total indebtedness against the property is less than or equal to $15,000, an appraisal is
not required if the Loan Originator is confident that the property has sufficient value to serve as
adequate security. Total indebtedness includes any prior liens on the property. The Loan Originator
should include a statement of the property’s value in the case file whenever an appraisal is not
completed.

For subsequent loans, no appraisal is required if the loan is less than $7,500 and is for
minimal essential repairs needed to ensure that the dwelling is decent, safe, and sanitary. An
appraisal is not required when a subsequent loan is made to protect the Government’s interest,
regardless of the amount. The Loan Originator must include a statement of the estimated
property value in the case file. If the subsequent loan is for $7,500 or more, no appraisal is
needed unless the property will be taken as security and at least 1 of the following conditions
exists:
• The latest appraisal report of the real estate is over 2 years old;
• The physical characteristics of the property have changed significantly;
• The economic characteristics of the market have changed significantly;
• The Loan Originator is uncertain of the adequacy of the security; or
• The subsequent loan is in connection with a transfer of an existing loan.

B. Program Responsibilities
In accordance with RD Instruction 2024-A, contract services shall not involve decision
making or other inherently governmental functions. Accordingly, prior to ordering an appraisal on
the subject property, the Field Office will ensure that the property is located in an eligible area
(which should be accomplished by entering the property’s address in the Agency’s property
eligibility website); and review the sales contract and related materials (such as the property’s
Multiple Listing Service sheet, tax bills, etc.) to confirm that the dwelling and/or site appear to
comply with the Agency’s regulations and guidance.
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Paragraph 5.17 Ordering Appraisals

If appropriate, the Field Office will also prepare a list of detailed repairs with estimated costs,
or provide copies of bids from the applicant’s contractor needed to ensure the property meets the
Agency’s regulations and guidance. This list of repairs, which is based upon the inspection reports
prepared by State-licensed inspectors or qualified, third party inspectors hired by the applicant (refer
to Paragraph 5.7 A.), will be provided to the appraiser for the purpose of obtaining a subject to
repairs/alterations value provided those repairs/alterations typically add value and are not routine
maintenance items (e.g. check smoke detectors, pest or septic inspection, add GFCI protection to
exterior, kitchen, or bathroom electrical outlets, etc.).

C. Required Information

When the Loan Originator or Staff Appraiser requests an appraisal through the PMO’s
Procurement Requests SharePoint site using the current SFH Appraisal Request form (which can
be found in the Direct Training Hub in SharePoint along with other appraisal training materials),
the following information will be uploaded (as applicable): Cost Breakdown, Legal
Description/Deed, Plan & Specs (New Construction), Plat of Property, Prior Appraisal (1004D
only), Property Inspection Report, Proposed Repairs – Est. Cost $, Purchase Agreement &
Amendments, and Survey (if available).

The applicant has until the expiration of their Certificate of Eligibility, as described in
Paragraph 4.25, to present this information to the Loan Originator. Originals of this information
should be kept in the case file, with copies provided to the appraiser.

D. Appraisal Disputes

In situations where the market value of the security is inadequate to support the loan
request, the Loan Originator will send Handbook Letter 17 (3550), Adverse Decision Involving an
Appraisal. Handbook Letter 17 informs the applicant of their right to request a meeting with the
Local Office to review the appraisal report and present new, objective information or evidence for
the Agency’s consideration. The Loan Approval Official will then request a technical review by an
RD staff appraiser, and must attach the additional data provided by the applicant. New information
or evidence may include, but is not limited to, incorrect number of bedrooms, bathrooms, garage
bays, finished percentage of basement, repaired or renovated conditions not captured in the report,
etc. However, consideration of additional (or alternate) comparable sales are not part of the
Agency’s technical appraisal review process.

If the RD staff appraiser’s technical review concurs with the original appraisal, or if after
revisions are coordinated and the market value still does not support the loan amount, then
the Loan Originator will send the applicant Handbook Letter 18 (3550), Unfavorable
Decision after Technical Review of an Appraisal, with appeal rights (Attachment 1-B). The
appeal will consider the Agency’s underwriting decision regarding inadequate security
(market value) to support the loan request. Once an appraisal has been accepted by the
Agency the market value reported within the appraisal is not appealable.

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5.18 APPRAISER RESPONSIBILITIES

The appraiser must provide the required estimates of value on the appropriate form. The
appraiser may also be asked to provide a list of repairs deemed essential for the property to be made
decent, safe, and sanitary.
If an appraiser observes potential contamination from hazardous substances, hazardous
wastes, or petroleum products on the property, or obtains other information about such
contamination, that information should be provided to the Agency together with an indication of
its potential impact on the value of the property. The Loan Originator must initiate the due
diligence process by completing Attachment 5-B. The completed Attachment 5-B must be sent
promptly to the SEC for further evaluation and guidance.

5.19 REVIEWINGAPPRAISALS
Appraisals will be reviewed through a combination of administrative reviews and technical
reviews. Administrative reviews can be completed by Agency staff trained to do so while technical
reviews must be completed by certified Agency appraisers. A technical review for loan origination
is an inherently governmental function and must be completed by an Agency appraiser. If an
appraisal is found to be unacceptable by any review, other than a post review, the original AMC
can make corrections or a new appraisal can be requested. The appraisal report must be acceptable
before the loan-making process can continue.

A. Administrative Review
Administrative reviews are performed by the Loan Approval Official using Form RD
1922- 15, Administrative Appraisal Review for Single Family Housing, and should be completed
as soon as possible (but not later than 7 days from receipt of the appraisal). Reviews are performed
on all contract appraisals and the contract appraiser’s invoice cannot be paid until the appraisal
review is complete. This review determines if there are inconsistencies in the appraisal report that
warrant a secondary review of the property and the sales contract prior to loan approval, or if a
technical review should be conducted by the staff appraiser prior to paying the appraiser’s invoice.
Indicators that a technical review may be required consist of the following: (1) Photos and
maps are not consistent with the information provided in the appraisal; (2) Large variances in
actual and effective age are not supported; (3) Comparables are located outside of the subject’s
market area or they are superior/inferior to the subject warranting excessive adjustments that are
not supported; (4) Sales and Financing concessions are not reported or comparables are not
properly adjusted when they are reported; (5) History of the subject property was omitted or not
analyzed; and (6) Inconsistent information in the appraisal.

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Paragraph 5.19 Reviewing Appraisals

If the appraisal is acceptable, Field Staff must promptly forward (within 7 days) the email
received from the appraiser or AMC to rd.appraisals@usda.gov with “Appraisal Reviewed &
Accepted” in the subject line. If the appraisal is not acceptable, Field Staff must forward the
appraisal and Form RD 1922-15 to the Agency’s Regional Appraisal Services for a technical
review. The request for the technical review must be through the Regional Appraisal Services
SharePoint site.
B. Technical Review
A technical review can be either a field review or a desk review and is performed to
determine whether the appraisal is credible within the intended use, was clearly reasoned,
followed accepted appraisal techniques and RD requirements and had adequate support for the
conclusion of value. Technical reviews are an inherently governmental function and must be
performed by Agency certified appraisers. Technical reviews completed by Agency appraisers
should be consistent with current USPAP requirements which can be found at
www.appraisalfoundation.org.
Field reviews involve on-site visits to the subject property and the comparables while desk
reviews are performed in the office. Technical reviews must be completed for the first appraisal
conducted by any contract appraiser and for each appraiser that does multiple appraisals in a 12-
month period. Additionally, each contract appraiser must be reviewed at least once in a three-year
period. At the discretion of the Regional Appraisal Staff, additional technical reviews may be
ordered if concerns were encountered on the first technical review. In addition to the initial review,
technical desk or field reviews will be done in a random, spot- check method established by the
State Director for contract appraisals but should be completed on a minimum of 5 percent of the
contract appraisals received.
A technical review also may be requested by the Loan Approval Official when concerns are
detected by the administrative review. The concerns will be documented on Form RD 1922-15.
The Regional Appraisal Staff must determine if the concerns merit a technical review before the
vendor’s invoice can be paid or the loan closed.
5.20 PAYING FOR APPRAISALS
The Agency will charge a standard fee for each loan application that requires an appraisal.
This fee is updated periodically, along with TRID related implementation instructions, through
an Unnumbered Letter (UL) posted to the Agency’s Directives website. The UL will generally be
posted 30 days prior to the effective date of the fee change. Within 3 business days of receiving a
completed application, the Loan Originator will provide the applicant with CFPB’s standard
Loan Estimate, which includes the amount of the appraisal fee listed in the current UL.
The Agency may waive the fee for appraisals done for subsequent loans needed to make
minimal, essential repairs necessary to protect the Government’s interest, or for leveraged loans
if a participating lender is obtaining an appraisal that is acceptable to the Agency.
If there is a conditional commitment, the appraisal fee should be paid to the contractor at
closing as reimbursement for the cost of the appraisal that was included in the conditional
commitment fee.
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5.21 APPRAISALS IN REMOTE RURAL AREAS, ON TRIBAL LANDS, OR WHERE

THERE IS A LACK OF CONVENTIONAL MARKET ACTIVITY

In remote rural areas, on Tribal lands, or areas with a lack of conventional lending market
activity it may be difficult to obtain adequate comparable sales to appraise a property. In these
areas, the sales comparison approach is not required. Instead, Form 1007, Marshall and Swift
Square Foot Appraisal Form must be used. These appraisals may be conducted by Agency staff
appraisers or by contract appraisers.

Remote rural areas are identified by the State Director and are defined as areas with these
types of characteristics:

• Scattered population;

• Low density of residences;

• Lack of basic shopping facilities;

• Lack of community and public services and facilities; and

• Lack of comparable sales data.

The results of the cost analysis completed using Form 1007 should be documented on the
Uniform Residential Appraisal Report and efforts to obtain comparable market data must be
documented in lieu of the sales comparison approach. External depreciation based on the
remoteness of the site must not be considered; however, factors that impact the site such as
immediate proximity to a feedlot, factory, or other similar considerations should be included.
When a market is established in these areas, the Agency will again require complete appraisals.

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SECTION 6: MANAGING CONSTRUCTION
This section generally refers to when the Agency is advancing funds through draws for new
construction or substantial rehabilitation to a dwelling and when the funds are secured by a deed of
trust or mortgage. Typically this work will involve a general contractor who is responsible for
supervising and directly paying their subcontractors. Work described in this section is more
complex and would commonly take more than 30 days to complete.
When applicants enter into contracts with builders who own the site and are self-funding
the construction process, the Loan Originator will enter the dwelling type in LoanServ as
“Purchase New” rather than “Build”. The Loan Approval Official should communicate with the
applicant and builder on how acceptable construction quality will be documented in accordance
with Paragraph 6.7 B. and the standards in RD Instruction 1924-A.
5.22 DESIGN
A. Disseminating the Standards
The applicant needs to know the standards the dwelling must meet before the design process
begins. The Loan Originator should advise the applicant of the Agency’s rehabilitation or
construction standards.
The applicant and/or designer should also be provided with Form RD 1924-2, Description of
Materials, prior to loan approval. This form may be used by the designer as a basis for preparing
specifications. When other suitable specifications are available which will adequately describe the
materials, equipment, and fixtures to be used on the job, this form need not be used.
B. Review and Approve the Drawings and Specifications
Once the drawings and specifications are finished, the Loan Originator should review them
to ensure that they have been certified as meeting the Agency’s minimum standards contained in RD
Instruction 1924-A. The plans, specifications, calculations, and any modifications should be
certified by the design professional on Form RD 1924-25, Plan Certification, to ensure that the
appropriate codes and standards are met. If all applicable requirements are met, the Loan Originator
may accept the documents. If they do not meet the applicable requirements, the Loan Originator
should inform the applicant and designer, in writing, of the deficiencies or discrepancies. Once
these issues are resolved, the Loan Originator should review the drawings and specifications again.
5.23 PREPARING FORCONSTRUCTION
A. Selecting the Contractor
The applicant should select the contractor who will build or rehabilitate the dwelling. The
contractor must have a valid State contractor’s license if required in the State, and such license must
be documented by the Loan Originator. The Loan Originator must also verify the validity of the
license with the appropriate State entity and document the applicant’s file. For new construction,

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Paragraph 5.23 Preparing for Construction

the applicant will usually have a contractor in mind. For rehabilitation, the applicant will provide an
adequate number of bid(s) from a qualified contractor(s).

The local office must review the bid(s) obtained to ensure costs are reasonable for the area
serviced, the number of bid(s) are sufficient, and clearly identify the work and materials to be
furnished. Bids should be solicited based on the developed set of specifications. Detailed
specifications must include a complete breakdown on materials and labor and describe the
quantity, quality, grades, styles, model numbers, etc.

The development budget may include an amount for contingencies not to exceed five
percent of the construction cost for unusual and unforeseen circumstances beyond the contractor’s
or borrower’s control (e.g. a major disaster in the region that causes an increase in materials and
subcontracted labor costs). The contractor and borrower must submit a signed change order to the
Loan Approval Official for concurrence to use the contingency funds. Contingency funds may
also be used for other eligible loan purposes when approved by the Loan Approval Official. If
not used, contingency funds will be deobligated or applied as a principal curtailment before or
after the construction loan is converted to a permanent loan.

With the exception of approved manufactured dealer-contractors, the Agency should not
maintain a list of approved contractors and an in-depth investigation of a contractor by the Agency
is not required unless the surety requirements are triggered and an exception by the State Director is
being considered. The need for an in-depth investigation should be rare; refer to RD Instruction
1924-A for further guidance. While a list of approved contractors should not be maintained, the
Agency should give the applicant general advice on selecting a contractor (e.g. the benefits of
“shopping around”, ask for and check references, check the contractor’s record with the Better
Business Bureau, etc.).
B. Pre-Construction Conference
Once the contractor has been selected and the funds have been obligated, the Agency, the
applicant, the designer (if applicable), and the contractor should hold a pre-construction conference.
The purpose of the conference is to ensure that each party understands their respective roles and
responsibilities. The parties should review the drawings and specifications to make sure everyone
understands the scope of work, construction/thermal standards, environmental mitigation
requirements, materials, inspection, change orders, and payment procedures. In addition, the
contractor must be advised that should human remains, historic or cultural resources be uncovered
during excavation or site development, all work must be stopped until an additional environmental
analysis is completed.
For new construction or rehabilitation, the Loan Originator should provide Exhibits F and
G of RD Instruction 1924-A to the contractor at or before the preconstruction conference. These
exhibits give details on the completion assurance (surety) that the contractor can elect to obtain.
The Loan Originator also should provide the “Equal Employment Is The Law” poster, which
explains the requirements of applicable fair labor standard laws to the contractor to post at the
work site.
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Paragraph 5.23 Preparing for Construction

The Loan Originator should prepare an agenda before the meeting and take minutes during
the meeting. All parties should review and sign these minutes to indicate their approval. The Loan
Originator may use Form RD 1924-16, Record of Pre-Construction Conference, or Attachment
12-F as a basis for preparing the agenda and recording the minutes.
To prepare for loan closing, the contractor and applicant should undertake any pre-
construction activities necessary to ensure that construction can begin shortly after closing. This
might include getting building permits and lining up material suppliers.

C. Construction Contract
For new construction, a written construction contract is always required. Written contracts
are strongly recommended for all rehabilitation-related construction, and are required if there is
construction work involved that would affect the dwelling’s structural integrity (otherwise, a
rehabilitation plan with cost estimates and bid specifications may be used). The applicant and
contractor must sign the construction contract no later than at the pre-construction conference.

The Agency is not a party to this contract; however, the Agency provides many forms
that should be used, including:

• Form RD 1924-6, Construction Contract;

• Form RD 400-1, Equal Opportunity Agreement;

• Form RD 400-3, Notice to Contractors and Applicants; and

• Form RD 400-6, Compliance Statement.

D. Department of Labor Notification

For contracts greater than $10,000, the Loan Originator must prepare a letter within 10 days
after the contract is signed to notify the U.S. Department of Labor (DOL) of the execution. The letter
notifies the U.S. Department of Labor of the contract period and amount, and the contractor’s name,
address, and employer identification number. Exhibit C of RD Instruction 1901-E provides a format
for the Loan Originator to use. To obtain the most current DOL address, visit the DOL website
https://www.dol.gov/ofccp/contacts/regkeyp.htm

5.24 CONSTRUCTION PERIOD

Once the construction contract is in place, construction can begin. All construction work
should be inspected periodically in accordance with RD Instruction 1924-A to ensure that the work
is done properly. When Agency staff perform an inspection, Form RD 1924-12 Inspection Report
should be retained in the borrower’s case file. The borrower should attend all inspections and be
available to sign checks if payment is approved for the completed work.

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Paragraph 5.24 Construction Period

Borrower’s Responsibility
A. Qualified Inspector for Inspection
The borrower is responsible for making
The borrower will be responsible for inspections to protect his or her interest. The
making inspections necessary to protect their Agency’s inspections are not intended to assure
interest. Agency inspections are to protect the the borrower that the house is built according to
the approved plans and specifications.
Agency’s interest and to ensure the
completion of construction or rehabilitation without implication of duty or obligation to the
borrower. The final inspection can be conducted by the Loan Approval Official/Originator, or by a
qualified third party. Inspections fees from third parties, like building permits, are eligible loan
purposes. The inspector must be qualified to perform a construction inspection. A qualified third
party includes, a local building official, an inspector certified by a nationally recognized home
inspection entity, or a State-licensed inspector who inspects property according to the International
Code Council (ICC). The ICC publishes the International Building Codes used by most of the
jurisdictions within the United States. An appraiser may perform a completion valuation inspection
but this report is not sufficient for the Agency’s purpose without other supporting documentation
such as a certificate of occupancy, or a final inspection from a local building official or other
qualified third party.

A qualified third party inspector should be able to execute each of the following, as
applicable:

• Inspecting for conformity with development plans and building codes, with written
reports, at footing, framing, and final project phases.

• Preparation of additional inspection reports to include an analysis of the project’s

progress and quality of workmanship. Reports may include notes from
teleconferences, inspection reports, video and/or photos.

• Issue specific and critical activity reports, video or photos of apparent errors or
problems with workmanship.

• Document and evaluate any expressed opinion, fact, and observation by the owner,
third party inspector, or building/code official.

• Document discussions with the owner, inspector(s) and contractor.

B. Periodic Inspections

If inspections are conducted by a third party, the inspector should submit periodic
inspection reports to the Agency. The number and timing of inspections varies by the type and
extent of work performed. When concerns are raised by the inspector, contractor, borrower, or
Agency staff, clear communication between the parties is critical to successful completion of the
work.

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Paragraph 5.24 Construction Period

• New construction. Inspections may be conducted as necessary, but a minimum of 3

generally are required: (1) footings while under construction; (2) after the dwelling
is framed-in; and (3) a final inspection once all work is complete.

• Substantial rehabilitation. A new addition, remodeling, moving walls, changing the

foundation, or structural integrity of the home are examples of substantial
rehabilitation. It is more complex than simple repairs and oftentimes affects multiple
major components of the dwelling. This type of work generally requires permits and
inspections by the local building department. All rehabilitation work must be
inspected, but the Agency does not prescribe specific guidelines for inspecting
rehabilitation work that does not involve new construction. A qualified third party
inspector may be used and should inspect at intervals that are appropriate for the
complexity of the work. The Loan Originator may also rely on current media (photos,
video) and third party inspection reports, which are quickly and easily transmitted, to
render an effective remote assessment for compliance determinations.

• Final Inspection: The following documents should be submitted prior to final

payment and the Loan Originator should address the acceptability of the
documentation and the completed repairs in the running record:

◊ The forms listed in Paragraph 5.27.

◊ Borrower’s written acceptance of the completed work.
◊ Photos of the completed work as provided by the borrower and/or contractor.
◊ A copy of a third party inspection (if applicable).

• Environmental requirements. If environmental mitigation measures are required,

the Agency’s inspector should follow up on the implementation of such measures and
document compliance on Form RD 1924-12. Noncompliance with environmental
mitigation measures must be reported promptly to the Loan Originator and the SEC.

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Paragraph 5.24 Construction Period

C. Partial Payments
Example - Partial Payments
Partial payments for work completed A contractor submits a payment request for $25,000
can be issued after each inspection. The for work completed. The loan official prepares a
contractor and Loan Originator establish a payment for $15,000 (60 percent of the request), and
withholds $10,000 (40 percent).
draw schedule before loan closing. This
schedule identifies when partial payments
may be made, based on the amount of work completed. The amount of the payment is typically
based on the value of the work, according to Exhibit A of RD Instruction 1924-A, or the
Marshall and Swift guidelines. To ensure that all work will be satisfactorily completed, 40
percent (or a lesser percent if required by state law) of each payment request is typically
withheld until all of the work items established in the draw schedule are complete and final
payment is made, as described in Paragraph 5.27. The amount withheld can be reduced to 10
percent if the contractor obtains a Surety Bond, Performance Bond, or Payment Bond, but this
is extremely rare.

D. Changes During Construction

If changes to the approved drawings and specifications are required during construction,
the applicant and contractor must sign Form RD 1924-7, Contract Change Order. All
modifications must be certified on Form RD 1924-25, Plan Certification, if the modification is
regulated by the applicable development standard. Before signing it, the Loan Approval Official
must review and sign the change order to ensure that the change fits within the approved loan
amount and the funds are being used for an eligible loan purpose.
If the change order does not fit within the approved loan amount, several courses of action
are possible:
• If the change is necessary and the borrower has repayment ability, the Agency may
make a subsequent loan for the amount required to pay for the change;

• The scope of work may be scaled back to accommodate the change;

• The Agency may increase the loan amount if it can be supported by the appraisal, the
cost of the property remains below the applicable area loan limit, and the borrower
has repayment ability; or

• The borrower may be required to provide additional cash.

The environmental review for the project must be amended if there are changes to plan
and specifications during construction (with or without the provision of additional financial
assistance), which will alter the purpose, operation, location, or design of the project as originally
approved.
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5.25 CONSTRUCTION CLOSEOUT

Once construction or rehabilitation work is satisfactorily completed, the Agency will

make final payment to the contractor. Before that can occur, the Loan Originator must ensure
that the work has been done properly and that no one will make any claims against the property
(such as dissatisfied subcontractors). The Agency provides several forms to help the Loan
Originator close out the construction process, as listed below.

• Certificate of Contractor’s Release. Form RD 1924-9, Certificate of Contractor’s

Release must be signed by the contractor; it certifies that the work has been
completed according to the drawings and specifications and the Agency’s standards.

• Release by Claimants. The contractor must have each subcontractor used

during construction sign Form RD 1924-10, Release by Claimants. It certifies
that the contractor has paid each subcontractor and that there are no outstanding
claims against the property for work performed.

• Builder’s warranty. A warranty is a guarantee of the quality of work or materials.

The Agency must have a copy of 1 of the 2 acceptable forms of builder’s warranties
as listed below (the applicant keeps the original).
◊ Form RD 1924-19, Builder’s Warranty is a 1-year warranty provided to the
borrower by the contractor after the construction work has been accepted by the
borrower and the Agency. A builder’s warranty is issued for new construction (or
rehabilitation involving construction) that has had appropriate periodic inspections
conducted by the Agency (or third party). The warranty guarantees that the builder
will repair or replace any defects in materials or construction that occur within 1
year from the date of acceptance. The Servicing and Asset Management Office
(Servicing Office) will be responsible for notifying the borrower of the expiration
of the builder’s warranty within eleven months of acceptance of the final
inspection

◊ An insured 10-year warranty, as described in Exhibit L of RD Instruction 1924-A,

is an insurance policy issued by a third party. It is purchased by the builder and insures
the borrower against builder defaults and/or major structural defects. This policy is
typically used when the borrower is purchasing an existing, newly constructed dwelling
and the Agency does not have acceptable documentation of construction quality.

• Other documentation. The Agency should maintain the following documentation,

if applicable:

◊ Certificate of Occupancy (in some localities, a certificate of occupancy from

the local authority is required before a new or renovated structure may be
occupied);
◊ Copies of building permits;

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Paragraph 5.25 Construction Closeout

◊ Form RD 1924-25, Plan Certification;

◊ Certifications regarding the adequacy of all systems, as described in Paragraph

5.7 A.; and

◊ Additional certifications and warranties, including insulation, carpet, major

equipment and appliances.

◊ Thirty days after the final inspection and issuance of the Builder’s Warranty, the
Loan Originator will send Guide Letter 1924-1 of RD Instruction 1924-F
informing the borrower that financial assistance may be available to them under
the Compensation for Construction Defects Program.
5.26 SPECIAL SITUATIONS
A. Funds Remaining After Completion
When all planned construction or rehabilitation work has been completed, remaining loan
funds may be used for any additional authorized loan purposes agreed upon by the applicant and
the Agency. The Loan Originator must document the purposes for which the funds disbursed to
the borrower will be used. The Loan Originator should adjust the development plan accordingly.
Once the work is complete, the Loan Originator should maintain documentation of the work
performed, such as invoices and receipts for materials, equipment or supplies. If no agreement
can be reached, the Agency should apply the funds to the borrower’s outstanding principal
balance.
B. Construction Work that Cannot be Completed
If construction or rehabilitation work cannot be completed because the contractor is unable
or unwilling to do so, and the applicant is unable to obtain another contractor (even with the
Agency’s assistance), funds should be applied to reduce the borrower’s principal balance.
C. Deceased Borrowers
If a borrower dies before funds are disbursed for completed construction or rehabilitation
work, the Loan Originator may authorize payment for work completed when there is written
evidence (such as a letter) that the work was accepted as complete and satisfactory by the borrower
or an authorized representative, and an authorized Agency representative has inspected the work and
found it satisfactory. The authorized representative can endorse the check on behalf of the deceased
borrower. If there is no authorized representative or the contractor files a mechanics lien, advice
from the Office of the General Counsel (OGC) should be sought to ensure the Agency’s interests are
protected.
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Paragraph 5.26 Special Situations

D. Compensation for Construction Defects

RD Instruction 1924-F defines a newly constructed dwelling. The Government may pay
for major defects in dwelling construction that are not repaired adequately by the builder (such
defects are usually the result of poor workmanship and the contractor refuses to repair the defect
or the repairs are inadequate) only in dwellings that meet the eligibility requirements. To be
eligible, the borrower must submit a claim to the Field Office within 18 months after the date the
borrower signs the final inspection report. Guidance on how to notify borrowers of this policy, as
well as instructions on how to implement the policy, can be found in RD Instruction 1924-F. This
option should only be used as a last resort after all other actions to correct the defects have failed.

5-42
 HB-1-3550
Attachment 5-A
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ATTACHMENT 5-A

STATEMENT OF WORK (SOW) FOR APPRAISAL SERVICES AND

APPRAISAL INSTRUCTIONS SINGLE FAMILY HOUSING
RESIDENTIAL PROPERTY

BACKGROUND: USDA Rural Development (RD) provides direct loans to eligible applicants
for single family housing (SFH) residential property. To support this program, RD requires
qualified appraisers to provide appraisal services, in accordance with 7 Code of Federal
Regulations (CFR) Part 3550, at https://www.rd.usda.gov/files/3550appendix01.pdf.

OBJECTIVE: High quality appraisals to determine market value of SFH residential properties
are key to ensuring the Agency obtains adequate security for its loans.

1. REQUIREMENTS FORAPPRAISALS:

A. The appraiser(s) signing the appraisal must be currently licensed in the state where the
subject property is located as a Certified General, Certified Residential, or Licensed
Appraiser. The appraiser shall be identified as active on the Appraisal Subcommittee
website (www.asc.gov) at time of award and maintain professional errors and omissions
insurance coverage in accordance with local and state government requirements. The
appraiser shall have the specialized knowledge and experience necessary to be competent
to appraise single-family housing.

A trainee may sign the report. If a trainee signs the report, the trainee’s registration shall be
provided to RD and the qualified appraiser shall sign as Supervisory Appraiser and
personally inspect the subject property.

If an appraisal assignment is awarded to a contractor not holding an appraisal license, the

awarded contractor may subcontract the appraisal assignment (or any part of it) to a
qualified appraiser as outlined above with prior written consent of the RD Contracting
Officer (CO). In the event of subcontracting the assignment, the contractor must also
adhere to any licensure requirements imposed by any entity having jurisdiction in the state
where the property is located.

If required by RD, the appraiser(s) signing the report shall defend the appraisal in court or
in the RD appeals process. Cost associated with the defense of the appraisal, when
necessary, will be negotiated under a separate purchase order/contract.

Except where noted herein, the contractor or appraiser shall provide all facilities, materials, supplies,
tools, equipment, personnel, and travel to accomplish the performance of the requirements of this
agreement.

(01-23-03) SPECIAL PN
Revised (04-15-21) PN 549
HB-1-3550
Attachment 5-A
Page 2 of 12

B. The appraisal must comply with the current edition of the Uniform Standards of
Professional Practice (USPAP) and agency requirements as described in Handbook-1-
3550 https://www.rd.usda.gov/files/hb-1-3550.pdf , Handbook-2-3550, Chapter 2,
https://www.rd.usda.gov/files/3550-2chapter02.pdf , together with 7 CFR 3550 as
applicable to all additional appraisal requirements
https://www.rd.usda.gov/files/3550appendix01.pdf, and Rural Development Instruction
1922-A, https://www.rd.usda.gov/files/1922a.pdf.

C. All appraisals for RD will provide market value based on the following market value
definition used by federally insured financial institutions; Title XI of the Financial
Institutions Reform and Recovery Enforcement Act of 1989; Definition of Market Value
(12 U.S.C. 1818,1819):

Definition of Market Value:

Market value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is not affected by
undue stimulus. Implicit in this definition is the consummation of a sale as of a specified
date and the passing of title from seller to buyer under conditions whereby:

(1) Buyer and seller are typically motivated;

(2) Both parties are well informed or well advised, and acting in what they consider their
own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold unaffected by
special or creative financing or sales concessions granted by anyone associated with
the sale.

D. The appraisal must be completed using the most recent version one of the following forms:
Fannie Mae Form 1004/Freddie Mac Form 70, "Uniform Residential Appraisal Report," for
all one-unit, single family dwellings; Fannie Mae Form 1004C/Freddie Mac Form 70B,
“Manufactured Home Appraisal Report,” for all manufactured homes; Fannie Mae Form
1073/Freddie Mac Form 465, “Individual Condominium Unit Appraisal Report” for all
individual condominium units; Fannie Mae Form 2055/Freddie Mac Form 2055, "Exterior-
Only Inspection Residential Appraisal Report," for all one-unit, single family dwellings for
all properties when there is no visual inspection of the interior required or requested by RD;
or Fannie Mae Form 1004D/Freddie Mac Form 442, “Appraisal Update and/or Completion
Report”.
 HB-1-3550
Attachment 5-A
Page 3 of 12

2. TYPES OFVALUES:

Depending on the purpose of the appraisal, an appraiser will either determine the estimated
market value of the property in its current condition (the “as-is” value) or; determine the
estimated market value of the property, based on completion of construction in accordance
with plans and specifications, or completion of rehabilitation based on a list of repairs to be
considered (the “as-improved” value). https://www.rd.usda.gov/files/3550-1chapter05.pdf
(Handbook-1-3550, Chapter 5 (5.15))

A. As-Improved value (Value Subject to Completion) - Loans for planned new construction
or rehabilitation require an estimate of the “as-improved” value considering all
construction / repairs / rehabilitation are complete.

B. As-Is value – Loans for existing dwellings (including a new construction dwelling that
has been completed at the time of appraisal) involving no repairs require an as-is value.
As-is value appraisals may also be needed to support loan servicing actions or to
determine a disposition plan for real estate owned (REO) properties.

C. Liquidation Value – Liquidation appraisals may be needed to support loan foreclosure

actions or to determine a disposition plan for real estate owned (REO) properties.

Liquidation Value, is defined as:

The most probable price that a specified interest in property which a property should
bring under the following conditions:

1. Consummation of a sale within a short time period;

2. The property is subjected to market conditions prevailing as of the date of
valuation ;
3. Both buyer and seller are acting prudently and knowledgably;
4. The seller is under extreme compulsion to sell;
5. The buyer is typically motivated;
6. Both parties are acting in what they consider to be their best interests;
7. A normal marketing effort is not possible due to the brief exposure time;
8. Payment will be made in cash in US dollars (or the local currency) or in terms of
financing arrangements comparable thereto;
9. The price represents the normal consideration for the property sold unaffected by
special or creative financing or sales concessions granted by anyone associated
with the sale.

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th Ed., (Chicago:
Appraisal Institute, 2015):

(01-23-03) SPECIAL PN
Revised (06-21-18) SPECIAL PN
HB-1-3550
Attachment 5-A
Page 4 of 12

3. SPECIALINSTRUCTIONS:

A. Loan Servicing Appraisal - In the event the appraiser is requested to complete an

appraisal for a servicing action such as foreclosure, short sale, deed-in-lieu, etc., an
appraisal reflecting the market value of the property in its “as-is” condition is necessary
for RD use.

Additionally, the appraiser shall provide under the same cover within the addenda, a
liquidation value estimate for the subject property, as defined in Item 2, considering a
prescribed marketing period of 30 days.

Typically, when a property in foreclosure is occupied, the appraiser will not be required to
gain access for a visual inspection of the interior of the subject property. In this case, the
appraiser must complete the appraisal report on the Fannie Mae Form 2055/Freddie Mac
Form 2055, “Exterior-Only Inspection Residential Appraisal Report” unless specifically
instructed otherwise by RD. The report must include an extraordinary assumption that
there was no visual inspection to the interior and details of the sources being used for the
interior components and the assumed condition of the interior.
https://www.rd.usda.gov/files/3550-1chapter13.pdf (Handbook-1-3550, Chapter 13
(13.17) (C) (3).

B. Subsidy Recapture Appraisal – The appraiser must complete an as-is market value
appraisal.

The appraiser must provide the estimated contributory value of all capital improvements
added to the subject property from original date of purchase as specified / indicated by the
owner. In the event the appraiser cannot determine from local records what capital
improvements may have been added, the appraiser may contact the Authorized Government
Representative (AGR) to determine if original loan records detail historic property
conditions. Each capital improvement must be noted individually. The appraiser must
provide the estimated contributory amount of market value, if any, for each capital
improvement item. Items considered to be general maintenance are not considered to be
capital improvements. Values shall be supported by market evidence or other valuation
methods deemed appropriate by the appraiser. https://www.rd.usda.gov/files/3550-
2chapter02.pdf (Handbook-2-3550, Chapter2 (2.23) (8)
 HB-1-3550
Attachment 5-A
Page 5 of 12

4. APPRAISALMETHODOLOGY

RD requires appraisers to use the following appraisal methods to arrive at a final estimate of
value.

A. Sales Comparison Approach: Under this method, the appraiser uses the recent sales prices
of properties that are comparable in location and characteristics to the subject property in
order to estimate a market value for the property. The appraiser must use at a minimum
three (3) comparable closed sales of single family residential properties that sold in the
previous 12 month period unless the appraiser provides documentation that such
comparable transactions are not available in the area. Comparable sales should be located
as close as possible to the subject dwelling, from within the competitive market area, and
should be the most comparable available for purposes of valuation.

B. Cost Approach: This method is specified in Handbook 1-3550, Chapter 5, found at this
web address, http://www.rd.usda.gov/files/3550-1chapter05.pdf. For all proposed
construction or all homes having an age of one year or less, RD requires that the
appraiser develop, report and reconcile the cost approach to value. On homes over one
year of age, the appraiser should determine whether the cost approach is relevant or
necessary to determine a valid opinion of market value. This determination must be
developed and reported in accordance with the USPAP.

Under this method, the appraiser derives an estimate of value using replacement cost
estimates for the improvements, less depreciation of all forms, and then adding an
estimate of the site value.
The appraiser will identify the source of cost estimates, such as Marshall and Swift
Residential Cost service, local builder’s cost data or other national
publication for residential costs, used in the cost approach. The methodology used to
estimate depreciation must be stated in the report.

Properties in remote rural areas, on tribal lands (American Native and Alaskan Native), areas
with a lack of market activity, or those representing a leasehold interest, where it may be
difficult to obtain adequate comparable sales to be used for comparative purposes in order to
appraise a property. In these areas, the sales comparison approach is not required. Instead,
Marshall & Swift Form 1007, Square Foot Appraisal Form, must be used.

Remote rural areas are identified by RD and are defined as areas lacking sufficient
market activity and having the following characteristics:
• Scattered population;
• Low density of residences

(01-23-03) SPECIAL PN
Revised (02-15-19) PN 521
HB-1-3550
Attachment 5-A
Page 6 of 12

C. Income Approach: Under this method, the appraiser derives a value indication for an
income-producing property by converting its anticipated benefits (cash flows and
reversion) into property value. This conversion can be accomplished in two ways. One
year’s income expectancy can be capitalized at a market-derived capitalization rate or at a
capitalization rate that reflects a specified income pattern, return on investment, and change
in the value of the investment. Alternatively, the annual cash flows for the holding period
and the reversion can be discounted at a specified yield rate.
The Income Approach method of valuation may only be used for Agency Non-
Program Properties such as Real Estate Owned (REO) or Non-Program Loan
Assumptions.

USPAP Standards Rule 2-2 (a) (viii) require the appraisal report to summarize the
information analyzed, the appraisal methods and techniques employed, and reasoning
that supports the analyses, opinions, and conclusions; and also, exclusion of the sales
comparison approach, cost approach, or income approach must be explained.
5. APPRAISALREQUIREMENTS:

A. The appraiser signing the appraisal report must understand and agree that RD is the client,
and all reports must be addressed to USDA – Rural Development. The intended user of the
report will be RD and any other intended user specified by the agency. Any questions
relating to agency requirements of the appraisal assignment should be directed to the AGR
and will not be directed to the property owner, real estate agent, builder/contractor, or any
other party to the transaction. Communication relating to the assignment, directed

B. to the AGR, can come from the appraiser signing the appraisal report or the contractor
selected for the assignment and in all instances RD staff will be granted permission to
directly communicate with the appraiser signing the report.

C. The appraisal report must be Uniform Appraisal Dataset (UAD) compliant.

D. A property contact person will be provided by the AGR and ensure the appraiser has access
to the subject property for inspection, unless the property is occupied and the appraisal is
for foreclosure purposes. In this situation, a drive-by / exterior only appraisal shall be
conducted utilizing the extraordinary assumption the condition of the exterior of the
dwelling indicates a similar condition for the interior.
 HB-1-3550
Attachment 5-A
Page 7 of 12

Appraisal fees or turnaround times must not be discussed with the property contact, the
property owner or the borrower. The appraiser must notify the AGR immediately if any of
the following occurs:
(1) The appraiser cannot gain adequate access to the property;
(2) The appraiser does not receive essential property information in a timely manner;
(3) The appraiser has previously appraised or is in the process of appraising the property
for another client; or
(4) The appraiser has any other potential conflict of interest with respect to the
assignment.
E. If appropriate, the RD Field Office will prepare a list of repairs needed to insure the
property meets the Agency regulations and guidance. The list of repairs, which is based on
the inspection reports prepared by State-licensed inspectors or qualified third party
inspectors hired by the applicant will be provided to the appraiser for the purpose of
obtaining an “as-improved” value. The list of repairs shall be provided by the RD Office
processing the loan application. The appraiser is responsible to take into account the RD
required repairs and must include the list of repairs in the addendum of the appraisal
report.

F. The appraiser must provide an opinion of site value supported by a narrative of

comparable land sales or other methods used for estimating site value. If support is not
included in the appraisal report, a statement by the appraiser that such information is
available for review upon request and in the appraiser’s work file should be made. The
land must be valued as though vacant and ready for development.
• The appraiser must specify whether the site is or can be subdivided into more
than one site under existing local zoning ordinances.
• The appraiser shall discuss the site size and the concluded site value and
whether they are typical for the subject market.
• Any land area of the subject property that is determined by the appraiser as
either excess land or surplus land must be addressed and valued accordingly
together with documentation and support within the appraisal report for the
appraiser’s conclusions.
G. In addition, the appraisal report for a manufactured home must also meet the following
requirements:
(1) Cost Approach: Manufactured Home Appraisal Reports will require a published
cost data service such as the Marshall and Swift Residential Cost Guide or the
N.A.D.A. Manufactured Housing Appraisal Guide calculations to be included. The
appraiser must take at least one of those values into consideration in arriving at a
value conclusion.

(01-23-03) SPECIAL PN
Revised (02-15-19) PN 521
HB-1-3550
Attachment 5-A
Page 8 of 12

(2) Sales Comparison Approach: The appraisal report must contain at least two
comparable manufactured home sales of similar configuration and quality. The
appraiser may use either site-built housing or a different type of factory built housing as
the third comparable sale if the appraiser explains the reason for selecting the
comparable and support the appropriate adjustments in the appraisal report.

H. All extraordinary assumptions, hypothetical conditions, and limiting conditions must be

clearly and prominently described in a single location near the beginning of the report
and in appropriate sections of the appraisal. General assumptions and limiting conditions
that reduce the normal scope of appraisal due diligence are not allowed.

I. The appraiser must keep all information and materials furnished by Rural Development, the
owner, and/or property contact regarding the subject property confidential, as required by
USPAP and the Gramm-Leach-Bliley Act (also known as the Financial Services
Modernization Act of 1999). Any information obtained through public sources is not
considered confidential information. Disregard of this privacy requirement will be cause
for immediate debarment as a contractor for the federal government.
J. All appraisals must comply with the Fair Housing Amendments Act of 1988.
According to the Act, it is unlawful for an appraiser to use factors that are
discriminatory on the basis of race, color, religion, sex, disability, familial status, or
national origin in the sale, rental, leasing, or financing of housing.

K. Each appraisal will be submitted electronically, using the industry standard Extensible
Markup Language (XML) appraisal data formats Mortgage Industry Standard
Maintenance Organization (MISMO), with embedded PDF. Electronic submissions, in
the above formats, must be emailed to the AGR as indicated on the confirmed Single
Family Appraisal Order Form, Purchase Order, or Task Order (SF 1449).

6. OBSERVEDCONDITIONS:

The appraiser is required to make a property inspection to gather data to support the
determination of value. Readily observable conditions shall be noted.

A. The appraiser(s) signing the appraisal report must make at a minimum a personal inspection
of the subject (interior and exterior) unless the appraisal is for foreclosure purposed of an
occupied dwelling, then an exterior only inspection is required. Also, inspection of all
comparable sales (exterior) at a minimum from the street. The appraiser must indicate that
the subject’s interior and exterior and all comparable sales were personally inspected /
observed within the appraisal report. Readily observable conditions must be noted for the
following: attic space, crawl space, floors and walls for significant structural failure,
moisture damage, or evidence of past fire damage; the roof condition for remaining life; the
mechanical systems for operability; and all surfaces for defective paint.
 HB-1-3550
Attachment 5-A
Page 9 of 12

B. In the event that access to the subject interior and/or exterior cannot be obtained, the
appraiser must obtain prior authorization to continue the assignment without inspection. In
the event RD authorizes valuation without an inspection, the appraiser must comply with
USPAP Standard Rule 1-2 (F) which requires the appraiser to identify any extraordinary
assumptions necessary in the assignment. The extraordinary assumption must include
detailed disclosure of the assumed condition, the source(s) the extraordinary assumption is
based upon and must be clearly labeled as such within the appraisal.
C. The appraiser must note any suspected environmental hazards, including issues external to
the property that could adversely impact the property's value. Examples of environmental
hazards would include damaged asbestos-containing building materials, underground
storage tanks, chemical leaks, spills, staining of ground surfaces, or on-site waste disposal
such as sludge, oil, paints, or chemical residues. If the appraiser observes any suspected
environmental hazards, he/she must notify the AGR immediately and refrain from
finalizing aspects of the appraisal that could be impacted until resolution of the issue or
until instructed otherwise.

D. The appraiser must notify the AGR. In the event the appraiser observes a deficiency in
the property that does not meet minimum property requirements, of decent, safe and
sanitary as outlined in HB-1-3550, Paragraph 5.7. (http://www.rd.usda.gov/files/3550-
1chapter05.pdf).

E. For uninhabited dwellings where utilities are temporarily disconnected, the appraiser will
inspect all mechanical systems (heating, plumbing, electrical) for observable conditions,
but will not be responsible for reporting operability of these systems. Unless otherwise
notified, the appraiser may assume operability for valuation purposes and this must be
mentioned as an “extraordinary assumption” in the appraisal report.

F. Where applicable, appraisers should be familiar with the general provisions of “green
properties” in single-family housing. The appraiser shall consider what impact (if any)
such factors have on the value of the subject property. Any impact on value should be
supported by market evidence.

G. The Mutual Self-Help Program, is a housing program utilizing supervised labor

performed by borrowers as part of the construction process. Construction conducted
under the program is supervised by technical experts to assure the quality of its
completion.

Appraisal of properties constructed under the Mutual Self-Help Program should consider
construction, materials and finish will be completed in a workmanlike and professional
manner.
(01-23-03) SPECIAL PN
Revised (02-15-19) PN 521
 HB-1-3550
Attachment 5-A
Page 10 of 12

7. DOCUMENTATION:

All approaches to value and the value opinion must be in accordance with acceptable
appraisal methodology.

A. All reports must include a location map (should include proximity to applicable
road/highway), flood plain map when the property is located in a designated flood plain,
land sales map, sales comparable map, rent comparable map (if applicable), plat map, and
building sketch (indicating interior building layout, garages and all external buildings).

B. For new construction, the appraisal report must include clear original color photographs of
the subject’s front, rear, street and street easement (private access), if applicable. In all other
appraisals colored photographs showing at a minimum the front, rear, and both sides to the
exterior. Interior photographs should be included showing each room type, attic and crawl
spaces, other non-gross living area (sun rooms, patio/deck/porch/fences) and any noted
structural, safety and/or sanitary deficiencies. Additionally, photographs of improvement
components that have been upgraded shall be included to document and support the
appraiser’s determination of the subject’s effective age if different than its actual age. A
current original photograph of each comparable sale and listing used in the completion of
the appraisal is required. If the comparable sale and listing photographs are not available
the appraiser should provide, at a minimum, multiple listing service photographs, whenever
possible, along with the cited source from which the photographs were obtained.

C. The bedroom shall meet legal requirements (building code, zoning ordinance, etc.) as
mandated by the local county/state government enforcement agency and applicable agency
regulations where subject property is located, if any such legal requirements exist.

D. Verification from third party sources should be noted within the appraisal and maintained as
part of the appraisers work file.

E. The appraisal shall include photographs of all external buildings as well as interior photos
of the external buildings (if possible). The external dimensions for each of the external
buildings must be included, preferably in the building sketch or identified in the addendum
of the appraisal report.

The appraiser must estimate the remaining economic life of the subject's improvements, (the remaining
number of years that the subject's improvements will contribute value to the land) and report this
estimate in the cost approach section. An explanation is required if the remaining economic life is less
than 30 years (the explanation is used to justify reducing the term of the mortgage to less than 30 years).
 HB-1-3550
Attachment 5-A
Page 11 of 12

F. All appraisals of existing properties must include a discussion of deferred maintenance

for the subject property. Items of deferred maintenance must be listed, and cost to cure
for each item must be estimated with support provided.

G. All reports must include a written explanation and documentation to support individual line
item adjustments. Total net adjustment percentages and gross adjustment percentages when
compared with the comparable sale unadjusted sale price shall be discussed.

8. COMPLETIONCERTIFICATION:

A. If determined by Rural Development (RD), the appraiser may be requested to re-inspect

properties to determine if repairs to the home or construction of home were completed.
RD shall determine the need for an appraiser to re-inspect a property. Re-inspection
services may also be ordered on a separate contract if required. A list of additional repairs
will be provided to the appraiser. Not all “subject to” appraisals will require re- inspection
services.

B. The appraiser shall submit their findings using the Fannie Mae Form 1004D/Freddie Mac
Form 442 “Appraisal Update and/or Completion Report.” The completed report shall be
delivered to the AGR within 7 business days from the date the order was received. The
report shall include pictures of completed work.

C. Re-inspection reports are due within 7 business days after notification is received from
the AGR.

9. APPRAISAL REPORT DELIVERYDEADLINES:

The appraiser shall complete and deliver appraisals to the AGR within 10 business/working
days or specified noted delivery time after date of order, or upon receipt of the appraisal
information from AGR unless a different deadline is set by written mutual agreement at the
time of order. If corrections and/or amendments to the appraisal are requested by the AGR, the
corrections and/or amendments are to be delivered as soon as possible, but not later than 4
business days following the request unless, by written mutual agreement, other arrangements
are made. If, for any reason the timely delivery of the appraisal report is delayed for reasons
beyond the appraiser's control, the appraiser must contact the AGR and convey the reasons for
the delay.

If, for any reason the timely delivery of the appraisal report is delayed for reasons beyond the
appraiser's control, the appraiser must contact the AGR and convey the reasons for the delay.

(01-23-03) SPECIAL PN
Revised (06-21-18) SPECIAL PN
 HB-1-3550
Attachment 5-A
Page 12 of 12

10. REVIEW OF THE APPRAISALREPORT:

All appraisals prepared for RD are subject to technical review by the agency. Appraisers
must be prepared to discuss their analyses, reasoning, opinions, and conclusions.
Additionally, if requested, they must provide additional written support, clarification, and/or
corrected appraisal pages or report. If requested by the AGR or RD’s Regional Agency
Appraiser, they will provide assistance to monitor the progress and quality of the appraiser’s
performance and in all instances RD Regional Agency Appraisers will be granted permission
to directly communicate with the appraiser signing the report as part of the review process.

11. ATTACHMENTS:

The Agency will provide the appraiser all necessary support information available at the time
of appraisal engagement.

12. COMPLIANCE WITH STATEMENT OFWORK:

The appraiser must follow all provisions and instructions contained in this Statement of
Work. When, in the opinion of the appraiser, the Regional Agency Appraiser or the AGR
request effort(s) falling outside this Statement of Work, the appraiser shall promptly notify
the AGR, in writing.

The Regional Agency Appraiser or the AGR has the authority to direct the accomplishment
of any effort which goes beyond the Statement of Work, however, any changes resulting in
additional charges must be approved by the contracting officer prior to commencement of
work.

If the appraiser is unable to fully comply with this Statement of Work, the appraiser must
decline the appraisal assignment in accordance with the USPAP.

13. SPECIFIC STATEREQUIREMENTS:

None

*PLEASE NOTE: FAILURE TO FOLLOW THE STATEMENT OF WORK AND

APPRAISAL INSTRUCTIONS CAN RESULT IN DENIAL OF FUTURE
ASSIGNMENTS.*
 HB-1-3550
Attachment 5-B
Page 1 of 5
ATTACHMENT 5-B
SINGLE FAMILY HOUSING SITE CHECKLIST

Buyer/Owner Name Property Address

Name of Subdivision:
Year Built:

Property is currently ( ) occupied ( ) unoccupied. Was interior accessible? ( ) Yes ( ) No

1. SITE SUITABILITY, ACCESS, AND COMPATIBILITY WITH SURROUNDING

DEVELOPMENT

Has the site been used as a dump, sanitary landfill, or mine waste disposal area? ( ) Yes ( ) No If
no, is the site in proximity to any such uses? ( ) Yes ( ) No

Is there indication of:

Yes No Yes No
distressed vegetation ( ) ( ) oil/chemical spills ( ) ()
waste material/containers ( ) ( ) abandoned machinery, cars,
soil staining, pools of liquid ( ) ( ) refrigerators, batteries, tires, etc. ( ) ()
loose/empty drums, barrels ( ) ( ) transformers, fill/ventpipes,
foul odor ( ) ( ) pipelines, drainage structures ( ) ()
underground or above ground
storage tanks ( ) ()

Are there property easements for high-tension power lines or gas lines? ( ) Yes ( ) No

Are there other unusual conditions on site which might indicate potential for contamination from hazardous
waste, hazardous substances, or petroleum products? ( ) Yes ( ) No

Is the site adjacent or in proximity to industrial areas, refineries, dry cleaners, chemical storage areas, recycling
facilities, oil or gas wells, fueling stations, etc.? ( ) Yes ( ) No

Note: Complete a Transaction Screen Questionnaire (TSQ) for any “YES” answer in item 1 before proceeding
further. Contact the State Environmental Coordinator with any questions.

(01-23-03) SPECIAL PN
Revised (11-03-17) PN 505
HB-1-3550
Attachment 5-B
Page 2 of 5

Are any of the following conditions present? Check if observed and explain on page 5 of 5:

( ) mold/mildew ( ) peeling paint(interior)

( ) insect infestation ( ) peeling paint (exterior)
( ) asbestos (interior) ( ) ponding/standing water
( ) asbestos (exterior) ( ) evidence of water runoff from adjacent properties
( ) knowledge of past or current use for production of methamphetamine

Is the site compatible with surrounding area in terms of:

Yes No Yes No
Land use () () Building type () ()
Height, bulk, mass () () Building density () ()

Will the site be unduly influenced by:

Yes No Yes No
Building deterioration () () Transition of land uses () ()
Postponed maintenance () () Incompatible land uses () ()
Obsolete public facilities () () Inadequate off-street parking () ()

2. SOIL STABILITY, EROSION, AND DRAINAGE

Slopes: ( ) Not applicable ( ) Steep ( ) Moderate ( ) Slight

Is there evidence of slope erosion or unstable slope conditions on or near the site? ( ) Yes ( ) No

Is there evidence of ground subsidence, high water table, or other unusual conditions on the site?
( ) Yes ( ) No

Is there any visible evidence of soil problems (foundations cracking or settling, basement flooding, etc.) in the
neighborhood of this site? ( ) Yes ( ) No

Have soil studies or boring been made for the site or the area? ( ) Yes ( ) No ( ) Unknown

Do the soil studies or boring indicate marginal or unsatisfactory soil conditions? ( ) Yes ( ) No

Is there indication of cross-lot runoff, swales, drainage flows on the property? ( ) Yes ( ) No

Are there visual indications of filled ground? ( ) Yes ( ) No

Are there active rills and gullies on site? ( ) Yes ( ) No

If the site is not to be served by a municipal waste water disposal system, has a report of the soil conditions
suitable for on-site septic systems been submitted?( ) Yes ( ) No ( ) Not Applicable
 HB-1-3550
Attachment 5-B
Page 3 of 5

3. NUISANCES ANDHAZARDS
Will the site be affected by natural hazards:

Yes No Yes No

Faults, fracture () () Fire hazard materials () ()

Cliffs, bluffs, crevices () () Wind/sand storm concerns () ()
Slope-failure from rains () () Poisonous plants, insects, animals () ()
Unprotected bodies of water () () Hazardous terrain features () ()

Will the site be affected by built hazards and nuisances:

Yes No Yes No

Hazardous street ( ) ( ) Railroad crossing () ()

Dangerous intersection ( ) ( ) Inadequate screened
Through traffic ( ) ( ) drainage catchments ( ) ( )
Inadequate separation Hazards in vacant lots ( ) ( )
of pedestrian/vehicle traffic ( ) ( ) Chemical tank-carterminals ( ) ( )
Traffic way ( ) ( ) Other hazardous chemical storage ( ) ( )
Inadequate street lighting ( ) ( ) High-pressure gas or liquid
Quarries petroleum transmission
or other excavations ( ) ( ) lines on site ( ) ( )
Dumps/sanitary landfills or Overhead transmission lines ( ) ( )
mining ( ) ( ) Hazardous cargo
Heavy industry ( ) ( ) transportation routes ( ) ( )
Incinerators ( ) ( ) Oil or gas wells ( ) ( )
Power generating plants ( ) ( ) Industrial operations ( ) ( )
Oil refineries ( ) ( ) Cement plants ( ) ( )

Will the site be affected by nuisances:

Yes No Yes No

Gas, smoke, fumes () () Unsightly land uses () ()

Odors () () Abandoned vehicle () ()
Vibration () () Vermin infestation () ()
Vacant/boarded-up Industrial nuisances () ()
buildings () () Other () ()

(01-23-03) SPECIAL PN
Revised (11-03-17) PN 505
HB-1-3550
Attachment 5-B
Page 4 of 5

4. WATER SUPPLY, SANITARY SEWERS, AND SOLID WASTE DISPOSAL

Is the site served by an adequate and acceptable:

water supply ( ) Yes ( ) No ( ) Municipal ( ) Private;

sanitary sewers and waste disposal systems ( ) Yes ( ) No ( ) Municipal ( ) Private; and

trash collection and solid waste disposal ( ) Yes ( ) No ( ) Municipal ( ) Private.

If the water supply is non-municipal, has an acceptable “system” been approved by appropriate authorities and
agencies?
( ) Yes ( ) No

If the sanitary sewers and waste water disposal systems are non-municipal, has an acceptable “system” been
approved by appropriate authorities and agencies?
( ) Yes ( ) No

5. NOISE ABATEMENT
Is the site located near a major noise source, i.e., civil airports (within 5 miles), military airfields (15 miles),
major highways or busy roads (within 1000 feet), or railroads (within 3000 feet)? ( ) Yes ( ) No

6. AIRPORTHAZARDS
Is the project within 3,000 feet from the end of a runway at a civil airport? ( ) Yes ( ) No

Is the project within 2-1/2 miles from the end of a runway at a military airfield? ( ) Yes ( ) No

7. OTHERCONDITIONS
Are there any field conditions not specified above that would adversely affect the acceptability of the
lots/sites? ( ) Yes ( ) No

Prepared By Date
 HB-1-3550
Attachment 5-B
Page 5 of 5
ITEM NUMBER ADDITIONAL COMMENTS

(01-23-03) SPECIAL PN
Revised (11-03-17) PN 505
 HB1-3550
Attachment 5-C
Page 1 of 1

ATTACHMENT 5-C
AMENDMENTS TO MORTGAGES WITH LEASEHOLD INTEREST

The following paragraphs must be inserted in the mortgage. The first paragraph should be placed
directly before the legal description of the real estate.

“All Borrower’s right, title, and interest in and to the leasehold estate for a term of
years beginning on , 20 , created, executed and established by
certain Lease dated , 20 , by , Page of
Records of said County and State, and any renewals and extensions thereof, and all
Borrower’s right, title, and interest in and to said Lease, covering the following real
estate.”

“Borrower will pay when due all rents and any and all other charges required by said
Lease, will comply with all other requirements of said Lease, and will not surrender or
relinquish, without the Government’s written consent, any of Borrower’s right, title, or
interest in or to said leasehold estate or under said Lease while this instrument remains in
effect.”

(01-23-03) SPECIAL PN
Revised (11-03-17) PN 505
 HB1-3550
Attachment 5-D
Page 1 of 1
ATTACHMENT 5-D

TRANSMITTAL COVER SHEET FOR MAPPING SYSTEM MODIFICATION

Utilize this as a coversheet to transmit your request for ineligible area re-designations or errors identified
to the present public website mapping system. Complete all fields to avoid delays in your request.

Request: Re-designation of rural areas

Correction of Error to existing mapping system

State:

Applicable Counties:

Submitters Name -
Point of Contact:

Email Address:

Telephone #:

Form RD 2006-3, Instruction and Form Justification has been completed

and a copy of the State Supplement to the HB-1-3550

has been approved or is included with this submission.

Documentation Submittal:

Email

Send to: RA.dcwashing3.SFHGLD(SFHGLD@usda.gov)

AND

RA.dcwashing2.RDSFHDP(SFHDIRECTPROGRAM@usda.gov)

(When an email copy is not feasible, contact the SFH Direct Loan Division for instructions.)

Comments: Include additional information regarding errors to the present mapping system or re- designation
comments.

(01-23-03) SPECIAL PN
Revised (03-19-20) PN 534
 HB-1-3550
Attachment 5-E
Page 1 of 6
ATTACHMENT 5-E
ELIGIBILITY SYSTEM MODIFICATION REQUESTPROCESS

Instructions for Eligibility Map Changes

No map changes will be processed without an approved Form RD 2006-3 showing the rural
area changes as adopted by the State.

The preferred method of delivery is electronic. Refer to Attachment 5-E regarding the
level of detail and process flow that occur once modified maps and text is submitted. There are
three types of modification requests. The level of complexity (the number of modifications
requested) determines the length of time to production implementation.

Allow ample time prior to implementation of revised ineligible areas. The RD GIS Portal is the
preferred method for maps as they are digitized and facilitate changes to the mapping system.
Maps that require digitizing to enable posting to the public eligibility website will require
additional time, as will substantial changes to the existing mapping system.

Occasionally States identify actual errors to the public website mapping system (i.e. a
correction to an incorrectly coded map). This type of modification falls under Type 1 identified
in Attachment 5-F.

Attachment 5-F is provided for visual purposes.

The following information discusses the process of requesting changes to the public
eligibility website. It also discusses what the State Offices need to do in order to test and
approve requested modifications. Finally, it will provide an idea of what is involved in the
request approval process that must go through the Configuration Management & Standards
Compliance Branch in the St. Louis DCIO office. The level of detail is provided to keep States
abreast of the processes that must take place in order to modify the public eligibility website.

I. Modification Request Types, Request Instructions and Examples

There are 3 types of modification requests. Their descriptions are below, along with the procedure
to complete a request. The differences are (1) the number of modifications within a request and
(2) the length of time it will take for making the modifications and their eventual deployment to
the Production environment.

The RD GIS Portal will be used to collaborate with and convey map changes to the RD GIS
Specialist. For further guidance, please refer to the RD GIS Portal Collaboration Guide which is
published on the Single Family Housing SharePoint site under the Rural Areas folder.

(01-23-03) SPECIAL PN
Revised (06-21-18) SPECIAL PN
HB-1-3550
Attachment 5-E
Page 2 of 6

* Type 1 – Basic Modification\Correction Request:

A basic modification request is a request that requires modification to the text description and/or a
State’s eligibility map (mapping to be based at a county level). A basic modification has no more
than 2 ineligible areas within the request. This request should include a map with an outline of the
new or modified ineligible area. Type 1 requests (including changes to boundary lines or
corrections to erroneous maps) take approximately one to two weeks for modifications. When
modification is complete, the requestor will be contacted for testing. Once the maps are tested and
approved by the requester, the implementation process will begin. The timeline for modification
and implementation is typically 3 to 5 weeks.

* Type 2 - Moderate Modification\New Eligibility Area Request:

A moderate modification or new eligibility area request is a request that requires significant
modifications to more than 2 ineligible areas on a State’s eligibility map (mappings being based at
a county level), or is a newly defined ineligible area. This request should include a map with an
outline of the new or modified ineligible area. Type 2 requests take approximately two to four
weeks for modifications. When modification is complete, the requestor will be contacted for
testing. Once the maps are tested and approved by the requester, the implementation process will
begin. The timeline for modification and implementation is typically 4 to 7 weeks.

* Type 3 – Text Description Modification Request:

A text description modification request is only for text changes. Type 3 requests should contain the
exact text the Field Office requires to be placed on the site. The text description will be utilized to
prepare the boundary lines and will be compared to the map submitted. It is important that the text
version clearly defines the boundaries submitted. When modification is complete, the requestor
will be contacted for testing. Once the text version is tested and approved by the requester, the
implementation process will begin. The timeline for modification and implementation is typically 2
to 3 weeks.
 HB-1-3550
Attachment 5-E
Page 3 of 6

* How to request a modification, addition or correction:

The State Office should request changes through utilization of a transmittal similar to Attachment
5-D. The Program Director is the State point of contact and communication regarding
modifications, additions or corrections must be transmitted through the Program Director.
Requests will not be accepted from Field Offices. Electronic requests will be forwarded to the
National Office at: RA.dcwashing3.SFHGLD (SFHGLD@usda.gov) and RA.dcwashing2.RD-
SFHDP (SFHDIRECTPROGRAM@usda.gov). Accompanying each request, the State must
clearly indicate the type of request to be performed. The request should have detailed listings
of all changes required by county and\or city.

The transmittal should also clearly reference what should be changed on the public eligibility map.
Clearly referencing the changes to occur are recommended as follows: 1) If the State or Field
Offices have access to Microsoft Word (place a copy of a map of the area to be modified into a
Microsoft Word document. Utilize the drawing tools within Microsoft Word for highlighting
changes that are needed. 2) If the State or Field Offices have access to Adobe Acrobat, use the
tools to draw on an existing map. 3) Scan a hand-written modification on a printed map. The
examples provided are suggestions to a timelier more accurate implementation of boundary line
changes. If the State or Field Office cannot provide a detailed mapping, a text description only will
be accepted. Insure the text version clearly defines the ineligible boundaries. Personnel from the
Enterprise Technologies Branch in the St. Louis DCIO office will contact the requestor with any
questions.

(01-23-03) SPECIAL PN
Revised (03-19-20) PN 534
HB-1-3550
Attachment 5-E
Page 4 of 6

II. Testing Requested Changes

Once the modifications have been made, they are implemented into the Test environment. Upon
these changes being made in the Test environment, the requestors will be contacted and asked to
review the requested modifications for approval.

The State or Field Office representatives that made the initial request should then review the
requested changes in the Test environment. An email notification will be sent to the requestor
notifying them of modifications implemented into the Test environment. The Test environment
can be found at the following link:

Eligibility Test Site: https://eligibility.test.sc.egov.usda.gov/eligibility/welcomeAction.do

The user’s e-authentication identification will be utilized to access the site.

Log into the test environment and review the changes on both the map and the text description. If
there are any issues with what has been changed, or questions, refer those issues/questions to
whom the email request was received from.
 HB-1-3550
Attachment 5-E
Page 5 of 6
III. Approving Requested Changes and the Implementation Process
Once the requestor has reviewed and approved the changes necessary for their ineligible area
map, respond to the email requestor stating that the changes made fit the business needs of the
State and Field Offices. The following information lists specific detail that must accompany your
response and confirmation. The items are required by the Configuration Management process in
order to get the changes implemented to the Certification and deployed to the Production
environments. The items that need to be listed in the email response are:
• What county and State have been reviewed
• State that all changes made have been tested and are acceptable
• State that all changes made should be moved to the Certification and Production
Environments
• In the email, please refer to RFA number “A-11012” and RFC number “RFC-11108”

The above listed items are a requirement for the User Acceptance letters used in the
Configuration Management implementation process.
Once received, the Enterprise Technologies Branch (ETB) in the St. Louis DCIO office will
create a request package for the implementation of the changes to be placed into both the
Certification and Production environments.
There are many types of configuration implementation process. Updates to the public eligibility
website will utilize the CERT\HOLD\PROD request type for Configuration Management
implementation. This request type indicates changes will be implemented into the Certification
(CERT) environment first, followed by Production (PROD) in either of the next 2 regularly
scheduled Production releases. The implementation into the Certification environment can take up
to one week. Additionally, a one or two week gap between implementation to the Certification and
Production environment could occur.
Once the changes are placed into the Certification environment, the Enterprise Technologies Branch
will be responsible for reviewing/confirming the changes in the Certification environment match
those within the Test environment that was approved. These can be viewed at the following link:
http://eligibility.cert.sc.egov.usda.gov
The user’s e-authentication identification will be utilized to access the site.
After review of the Certification environment has been completed and approved, the Production
implementation will take place. The implementation will be completed during the next available,
normal Production release (typically the following Wednesday, depending on the length of time it
takes the requestor to reply to the email notification). If the Certification environment review fails,
the Enterprise Technologies Branch will acquire the correct file structure from the approved Test
environment and request the local Configuration Management team re-deploy the correctly
modified files.

(01-23-03) SPECIAL PN
Revised (06-21-18) SPECIAL PN
HB-1-3550
Attachment 5-E
Page 6 of 6

The Production environment link is as follows:

http://eligibility.sc.egov.usda.gov

*Extraordinary Circumstances/Special Request Process

In the event that there are extenuating circumstances that require the updates be placed to the
Production environment more timely than the typical flow, a special request process can be
utilized. This request must be justified based on Field Office\State Office need. To submit a special
request for an expedited implementation, the State Director must provide a justification as to the
circumstances requiring an implementation timeline that requires attention over the typical flow of
timelines outlined in Type 1, 2 and 3 above. The justification must indicate specific reasons for an
expedited implementation and must confirm the need is beyond the control of the State and is not
due to the lack of planning the change or otherwise an error on the part of the State. This
justification will accompany the transmittal and modifications request.
 HB-1-3550
Attachment 5-F
Page 1 of 1

ATTACHMENT 5-F
ELIGIBILITY SYSTEM MODIFICATION WORKFLOW

(01-23-03) SPECIAL PN
Revised (08-21-13) PN 465