State set-asides generally are established to fund Rural Development loans with leveraged financing. This means that applications with other lender participation will not have to compete with non-leveraged applications for funding. Participating loans with Rural Development will assist the lender

• in broadening their loan activity by making loans to individuals and families that are served by the Section 502 loan program
• in meeting their Community Reinvestment Act (CRA) requirements

• Allow a lender to make a loan in the amount they are comfortable with

Participation loans with other lenders will allow Rural Development to stretch limited funds and provide the opportunity for low-income applicants to become homeowners in rural communities.

Rural Development may take a junior lien as security for a Rural Housing Loan provided the total indebtedness does not exceed the appraised value. To participate in joint financing, the other lender's terms must be a fixed rate, 30-year mortgage or a 15 year fixed rate loan amortized for a 30 year period. Either the other lender's loan amount or Rural Development's loan amount should be at least 20 percent of the combined transaction (smaller amounts may be considered).

Subsidized financing in any amount may leverage a Rural Development loan. Some type of subsidized financing are grants without long-term restrictions, forgivable loans, deferred payment loans, or amortizing low interest loans. Non-amortizing participation loans will be subordinate to the Rural Development loan.

Generally, must be PITI-33%, Total Debt-41%, for very low income the PITI-29%.

Rural Development can accept the lender's appraisal if it is in compliance with USPAP standards and the Rural Development appraisal fee can be waived. The maximum Rural Development loan may exceed the appraised value by the cost of the appraisal, but will not exceed the mortgage limit established by HUD's Section 203(b) loan limit.

Most lender charges and fees are authorized in connection with participation loans, provided they are the same as those charged other applicants for similar types of transactions.

The interest rate for the lender's portion of the loan will not exceed the rate in effect for similar uninsured loans. The effective interest rate for the Rural Development loan will be subject to the amount of subsidy based on adjusted family income.

Payment Assistance is only available on the Rural Development portion of the loan and is based on the applicant's adjusted income. The reduced Rural Development payments will be added to the lender's payments to determine the PITI Ratio.

If needed, the Home Ownership Specialist may assist the lender in developing the loan package. Subject to written consent by the applicant, the lender or Rural Development will share required documentation. At a minimum, the application package will include:

Application Form (URLA), Residential Mortgage Credit Report, Verification of Employment, Benefits, Deposits, and Gifts, Documentation of deductions-child care expenses, medical expenses (as needed), Purchase Agreement, FEMA Form 81-93, Flood Hazard Determination

Home Inspection Report, or equivalent and Appraisal.

The applicant will be asked to sign a Privacy Act Statement allowing Rural Development to release information such as URLA, Verification of Employment and Credit Report.

Rural Development will retain final underwriting and loan approval responsibility for the Rural Development loan.

Rural Development forms and other USDA forms can be found at the USDA eCommerce web site. (http://www.sc.egov.usda.gov/Main.asp) Use of this web site may require the user to download and install a "plug in" in order to take full advantage of the services available.

To avoid duplication of closing costs, Rural Development and the participating lender should use the same closing agent. Closing costs may be included in the Rural Development loan, provided repayment ability and market value are not exceeded. A lender's Title Insurance policy is required for Rural Development loans.

Leveraged loans may be processed on both existing and new construction, including the financing of new manufactured dwellings from approved Rural Development Contract/Dealers and placed on a permanent foundation. Existing houses must be structurally sound, functionally adequate, in good repair or placed in good repair, with loan funds. Construction loan funds will be monitored in a joint Rural Development and borrower supervised bank account with disbursements made at specified inspections.

This program is open to communities with a population of 20,000 or less unless the community is within a MSA area (please inquire with the local office for any ineligible areas).

Recapture will be due on the payment assistance granted by Rural Development. The "First Lien" priority of the leveraged amount, will take precedence over subsidy recaptured by Rural Development.

An escrow account for real estate taxes and hazard insurance will be established for loans financed by Rural Development. If the leveraged lender wishes to maintain the escrow account, they may do so.

Leveraged Rural Development loans are eligible for the same servicing actions as any other Section 502 Direct loan. The leveraged lender and Rural Development will coordinate servicing strategies. Generally, each lender will service their own loan.

If a lender wishes to utilize the secondary market, Fannie Mae, or either Housing Finance Agency in New Hampshire or Vermont will purchase the loan under certain conditions if the lending institution is a participating or approved lender with those organizations.