2017 Kentucky Rural Development Mortgage Guide

  • 30 year fixed rate only for Purchases and Existing USDA loans Refinances.
  • Zero down Mortgage loan with a loan limit of $424,000
  • Upfront funding fee is 1.0% and annual mi fee is .35% (very low compared to FHA)
  • Typically cannot own other real estate. There are exceptions to this. 
  • You do not have to be a first-time home buyer in Kentucky
  • Can refinance existing USDA loan as long as lowering rate by 1% and can do without an appraisal. There are overlays to this by lenders.
  • Closing costs and prepaids can be paid by seller but must be put into contract
  • Closing costs may be financed into the loan up to the appraised value.
  • You will need two credit trade lines reporting at least for 12 months on your credit file. They don't have to be open and active. Just reporting on your credit report.
  • All Guaranteed Mortgage Loans are ran through GUS. GUS stands for the Guaranteed Underwriting System. USDA and their underwriters use this system to pre-approve you. They review credit score/history, income, debt to income ratio and assets to determine your loan eligibility. If your credit score is below 640 or your debt to income ratio is over 45%, it will get a refer and you will find most lenders will not approve the loan. 
  • Some lenders will do a credit score down to 600, but they will want a lot of documentation to overturn the refer and compensating factors for the lower credit score. They typically will need to verify rent for last 12 months, with no lates, cash payments are not acceptable, and debt to income ratios are set at 29% and 41% respectively. Reserves are typically helpful too on lower credit scores, so keep in that in mind, if you have money in a savings account, for a rainy day fund, this will help sometimes get the loan approved.
  • see link below in yellow here for Credit Qualifying guidelines as far as credit scores, trade lines, bankruptcy, foreclosures, short sales and disputed accounts on the credit reportt.--------------->>>>>>>>

This attachment illustrates the approach to reviewing credit history when a loan is
manually underwritten by an approved lender.

Credit score over 680: 

Perform a basic level of underwriting to confirm the
applicant has an acceptable credit reputation. Perform additional analysis if the
applicant’s credit history has indicators of unacceptable credit as noted in Paragraph 10.7
of this Chapter.

Credit score 679 to 640:

Perform a comprehensive level of underwriting.
Underwrite all aspects of the applicant’s credit history to establish the applicant has an
acceptable credit reputation. Credit scores in this range indicate the applicant’s
reputation is uncertain and will require a thorough analysis by the underwriter of the
credit to draw a logical conclusion about the applicant’s commitment to making
payments on the new mortgage obligation. The applicant’s credit history should
demonstrate his or her past willingness and ability to meet credit obligations.

Credit score less than 640:

Perform a cautious level of underwriting. Perform a
detailed review of all aspects of the applicant’s credit history to establish the applicant’s
willingness to repay and ability to manage obligations as agreed. Unless there are
extenuating circumstances documented in accordance with this Chapter, a credit score in
this range is generally viewed as a strong indication that the applicant does not have an
acceptable credit reputation.

Little or no credit history:

The lack of credit history on the credit report may be
mitigated if the applicant can document a willingness to pay recurring debts through
other acceptable means such as third party verification or cancelled checks. Due to
impartiality issues, third party verifications from relatives of household members are not
permissible. Lenders can develop a Non-Traditional Credit Report for applicants who
do not have a credit score in accordance with Paragraph 10.6 of this Chapter.
An applicant with an outstanding judgment obtained by the United States in a
Federal court, other than the United States Tax Court, is not eligible for a guarantee
unless otherwise stated in this Chapter.

Foreclosure and Bankruptcy Guidelines

 Foreclosure within 3 years:
 Including pre-foreclosure activity, such as a pre-foreclosure sale or short sale
in the previous 3 years (refer to Attachment 10-B for additional guidance);
 Bankruptcy within 3 years:
 Chapter 7 bankruptcy discharged in the previous 3 years;
 An elapsed period of less than 3 years, but not less than 12 months, may
be acceptable if the applicant meets the criteria of Section 10.8 of this
 Chapter 13 bankruptcy that has yet to complete repayment (repayment plan in
progress) or has completed payment in the most recent 12 months.
 Plans that are completed for 12 months or greater do not require a credit
exception in accordance with Section 10.8;
 Late mortgage payments if any mortgage trade line during the most recent 12
months shows 1 or more late payments of greater than 30 days

Collections Accounts
In an effort to minimize future risk of open collections left unpaid, the lender will
consider the following during the capacity analysis of the loan request, regardless of the
method utilized to underwrite:
1) Determine if the total outstanding balance of all collections accounts of all
applicants is equal to or greater than $2,000. Unless excluded by state law,
collection accounts of a non-purchasing spouse in a community property state are
included in the cumulative balance of all collections.
2) Remove all medical collections and all types of charge off accounts from the total
balance. Medical collections and charge off accounts must be clearly identifiable
on the credit report.
3) If the remaining outstanding balance of collection accounts are equal to or greater
than $2,000, any of the following actions will apply:
a. Payment in full of all collection accounts at or prior to closing.
b. Payment arrangements are made with each creditor for each collection
account remaining outstanding. A letter from the creditor or evidence on
the credit report is required to validate the payment arrangements. The
agreed upon monthly payment for each outstanding collection account
will be included in the borrower’s debt-to-income ratio.
c. In the absence of a payment arrangement, the lender will utilize in the
debt-to-income ratio a calculated monthly payment. For each collection

utilize 5% of the outstanding balance to represent the monthly payment.

  • If you have access to 20% down payment you cannot use the USDA Program. Money in a retirement account does not account toward the 20% rule.
  • Properties must be located in an eligible area of Kentucky. Typically the large metro areas of Kentucky including the following: all of Jefferson County,  all of Fayette County, Owensboro, Paducah, Hopkinsville, Bowling Green, Richmond, Frankfort and Northern KY cities of Covington, Florence, Erlanger, Beechwood, Richwood are not eligible

USDA Eligible Areas In Northern Kentucky for Boone, Kenton, Campbell, Grant Counties

  • Independence
  • Burlington
  • Hebron
  • Highland Heights
  • Walton
  • Alexandria
  • Cold Springs
  • All Of Grant County, Pendleton County And Owen County

Kentucky USDA Rural Max Income Limits:

  • The total household income must be within the county limits for household size.  Typically a family household of 4 can make up to around $75,650  and a family of five or more  can make up to $99,850 for a household- Some KY counties allow for higher like Shelby County, and the Northern Kentucky Counties of Boone, Kenton, Campbell allow $82,000 (household income of four) up to $108,250 (household income of five or more)

Some More Facts about a Kentucky USDA loan:

It's a two step approval process.  The chosen USDA lender must first underwrite the file and get it approved based on the income, assets, and credit report submitted. Then, the lenders must submit to USDA for a "conditional commitment".  This conditional commitment is the final loan approval paperwork you are looking for. 

Even though the lender may have approved the file, it still must go to USDA office in Lexington for an assignment to SFH underwriter for the final approval process. They typically are checking the appraisal and income at this stage. There have been instances where the lender would approve the file but USDA would not due to appraisal issues or income and job history. 
This is very rare instances, so keep that in mind when it comes to final loan approval. 
This two-step approval process usually adds 4-6 days to the final loan approval process, so keep that in mind when you are writing up your contract because it takes a little longer to close these loans vs FHA, VA, and Fannie Mae loans. 
Well Test Treatments:  Properties with a well as the primary drinking source will require a well water test.  There are local labs to perform this test and the water must pass.

Septic Test: Sometimes they will require the septic tank to be inspected if called for in the appraisal report or home inspection. 

Older Homes: As a general rule, USDA does not like homes older than 100 years old. They will sometimes require a home inspection in addition to the mandatory appraisal on older homes.
USDA Loan After a Short Sale:  A short sale is not the end of the world.  So it is very possible to obtain a USDA loan if 3 years have passed after the short sale.  But a buyer would need re-established good rent and other credit history.

Bankruptcy and Foreclosure:  If the mortgage debt that was foreclosed, was included in a Bankruptcy – then the USDA Home Loan waiting periods after foreclosure “waiting period” of 3 years, starts from the date of the discharge of the Bankruptcy.  Because it can take 6 months or more for Banks to process the Foreclosure, and transfer title, this is a tremendous plus.

** If the mortgage debt that was foreclosed, was included in a Bankruptcy – then the USDA Home Loan waiting periods after foreclosure “waiting period” of 3 years, starts from the date of the discharge of the Bankruptcy.  Because it can take 6 months or more for Banks to process the Foreclosure, and transfer title, this is a tremendous plus.

PROPERTY: Must be in a rural area as determined by USDA Rural Development.

Condo or town homes must be FHA approved
Manufactured homes must be from dealer lot and brand new. No existing manufactured homes are allowed
Property must be in good condition. “As is” appraisal not acceptable when repairs
Homes with in-ground pools are eligible on a case-by-case and value of pool must be
subtracted as no financing available for pools.
All appraisers must be currently approved by FHA. See most current list dated
October1, 2009.

The property must be non-farm, non-income providing tract.

Appraiser to certify property meets current requirements of HUD Handbooks–
150.2 and 4905.1.

If the builder is providing a one-year warranty for new construction, the following
inspections are required: framing inspection, footing inspection and final inspection. If
the builder is providing a 10-year warranty, only the final inspection and the thermal
certification are required.

Properties having community wells or sewage systems will require a state operating
permit, evidence of compliance with the Safe Drinking Water Act and Clean Water
Act and a legal binding contract to enforce the obligation of the operator to provide
satisfactory service at reasonable rates-must be maintained in our file.


Borrower must be within income limits. Refer to: for validation.

Salary Income– VOE – 24 month-history plus most recent pay-stub or 2 paycheck stubs
covering most recent 30 days and W2 for previous 2 years and processor
certification of employment within 10 business days of closing. Any gap of
employment beyond one (1) month must be explained by borrower.

Self-employed and Commissioned borrowers or employed by a relative– 2-year tax
returns required to reflect income is stable and will continue.

Part-time jobs–24-month history required.

Alimony, child support– must have received for 12 months and will continue for 3
years after application. Must document receipt for last 12 months consecutive
Reflecting no breaks in income.

3-year continuation for social security income, disability income, retirement income, etc.

Borrower’s adjusted annual income cannot exceed the appropriate moderate income
limit. Refer to

All household income must be included in the total eligibility income, even if not on the
loan, however, for qualifying purposes, use the income for borrowers signing
the Note.

All qualifying income must be stable and likely to continue for the next 3 years.

Significant increase /decrease must be analyzed closely to make sure income used
to qualify will continue.


 Only USDA Guaranteed loans eligible

 The value of the new mortgage loan request can be supported by the original appraisal
report obtained in connection with the existing mortgage.

 The maximum loan amount cannot exceed the principal balance of the existing loan to be
refinanced, plus the guarantee fee. The new loan amount cannot include any accrued
interest, closing costs or lender fees.

 Loan must be manually underwritten (GUS is not run).

 Up front Guarantee fee of 2% and annual fee of 0.4% apply.

 Subject property must still be the borrower’s primary residence

 Any late mortgage payments within the past 36 months on the existing USDA loan, with
emphasis on the most recent 12 month period, must be analyzed and addressed by the
lender to determine if any late payments were a disregard for financial obligations, an
inability to manage debt, or factors beyond the control of the borrower when considering
the underwriting decision.

 Maximum ratios 29/41

 30 year fixed rate loan only

 Interest rate must be lower than the existing loan to be refinanced

 If the final settlement statement shows nominal cash back to the borrower, that amount
must be applied as a principal curtailment. The borrower can receive no cash back from
the transaction.

Debt ratio waivers may be requested for loans with ratios exceeding program guidelines
of 29/41 when compensating factors are present in the file. Applicants with credit
scores of 660 and higher do not require additional compensating factors to be identified
for debt ratio waiver requests. If co-applicants have a credit score of 659 or below,
additional compensating factors should be documented to further support the ratio
waiver request. There is no minimum credit score required to be eligible for a debt ratio
waiver request. Compensating factors include, but are not limited to, the following:

 Credit score of 660 or higher for any applicant
 Cash reserves after closing
 Potential for increased earnings and career advancement\
 Similar housing expenditure
 Conservative use of credit
 Additional compensation not included in qualifying income, such as part time job
income that lacks a stable job history, potential bonus or commission income
from a job.
 Low total obligation ratio. (A low total obligation ratio does not compensate for a
high PITI ratio; however, when other strong compensating factors are present a
low total obligation ratio should be viewed as a positive mitigating factor.

Debt ratio waiver requests are submitted by the lender in writing with the complete
submission package


 Applicants must have adequate and dependable income, typically with a history
of 24 months
 Qualifying ratios are 29/41; however, higher ratios considered with strong
compensating factors, including good credit scores (660+), stable employment
history, potential for increased earnings, and ability to save.
 Income to be verified with a written VOE and one month’s current paystubs, OR
one month’s paystubs and two years of W2’s.
 2/1 buydowns qualifying ratios are calculated using note rate.
 Debts with more than 6 monthly payments remaining must be included in
qualifying ratios
 Student loan payments must be included in ratios even if loans are currently in
 Self employed borrowers require two year history with 1040’s
 Disability and Social Security benefits – 3 year continuance documented with
award letter or 2 months bank statements, grossed up 125%
 Salary increases within 60 days of the first payment due date are acceptable
 Part time employment must have a history of no less than 12 months
 Alimony and child support income must continue for 3 years and have no less
than a 12 month history
 Any income of a non-purchasing spouse must be verified to make sure income
limits are not exceeded

Please note that the USDA Refinance Pilot program has different guidelines.

Kentucky RHS USDA Mortgage Insurance  Changes Below and Important Dates to Keep in Mind that could affect your loan closing and approval!
On October 1, 2016, both the upfront guarantee fee and annual fee for purchase and refinance loans will decrease. We are reducing the upfront guarantee fee from 2.75% to 1%, and the annual fee from .5% to .35%. The Guaranteed Underwriting System (GUS) will be updated on August 31, 2016, to allow lenders to select and underwrite using either the FY16 or FY17 fee schedule.

 Most are familiar with USDA Rural Housing Loan Program  being a great no money down program available and it is not just for Kentucky first time buyers
But starting with commitments on October 1, the funding fee that is financed is going from 2.75% to only 1%!  On a $100,000 loan, a buyer saves about $1750!  In addition, the annual fee (like PMI) reduces from .5% to .35% which lowers the monthly payment by $15 a month on an $100,000 loan amount.
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Joel Lobb
Senior  Loan Officer

text or call my phone: (502) 905-3708
email me at
The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people. NMLS ID# 57916, ( Mortgage loans only offered in Kentucky.
All loans and lines are subject to credit approval, verification, and collateral evaluation and are originated by lender. Products and interest rates are subject to change without notice. Manufactured and mobile homes are not eligible as collateral.