16.11 OWNERSHIP REQUIREMENTS (07/07/17)

Owned by Kacey Olson
Last updated: Nov 17, 2018
5 min read

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook


If the applicant defaults on the loan, the lender must be able to foreclose on the property to settle the debt.  After the loan is closed, the applicant must have an ownership interest that protects the security property.  

A.                      Lender and Agency Responsibilities

After closing, the lender must compare the deed of trust or real estate mortgage with the title opinion to assess lien priority, assure the collateral is accurately covered, verify the date and time record, and ensure that the loan closing instructions have been followed.  The Agency does not set policy for survey requirements; however, it is the lender’s responsibility to adequately ensure that ownership interest that protects the security property has been obtained after the loan is closed.  If the borrower defaults on the loan, the lender must be able to foreclose on the property to settle the debt.  If the lender failed to obtain all required security, the originating lender may be subject to indemnification if a loss claim request is made to reflect the lender’s failure to meet the lien requirements. 

B.                      Acceptable Forms of Ownership

The two forms of ownership acceptable to the Agency are fee-simple and secure leasehold. 

1.        Fee-Simple Ownership

The most common form of ownership is fee-simple ownership under which the borrower holds a fully marketable title to the property.  This title is evidenced by a deed that vests full interest in the property to the borrower as mortgagor. 

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 when all of the following conditions are met.

  • 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 paid for comparable leases.  This must be documented in the appraisal.
  • The lessor must own the fee-simple title.  This provision does not apply to a lessor who is a Native American possessing a leasehold interest on restricted land.  Trust or restricted 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.
  • Leasehold estates are an accepted practice and readily marketable in the area where the subject property is located.
  • 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 lease is recorded.
  • The lease must be in writing, and contain all of the following provisions:
  • The lessor’s consent to allow the lender’s mortgage.
  • The right of the lender to foreclose and sell the property without restrictions that adversely affect the market value of the property.
  • The right of the lender to bid at a foreclosure sale or to accept voluntary conveyance of the property in lieu of foreclosure.
  • The right of the lender 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 lender mortgage to an eligible transferee who will assume the lender’s debt if the borrower defaults or is unable to continue with the lease.
  • A negotiated agreement with the lessor before the leasehold interest is approved regarding the lender’s obligation to satisfy unpaid rent or other charges accrued before or during the time the lender has possession of or title to the leasehold.  During negotiations, the lender should consider the length of time it will take to foreclose, how much the Agency would be responsible for, and when the lender would have to pay.
  • Fair compensation to the borrower for any part of the property taken by condemnation.
  • The unexpired term of the lease must be at least 150 percent of the term of the mortgage.
  • The language regarding amendments to mortgages with leasehold interests, specified in Attachment 16-B of this Chapter, must be inserted in the mortgage.

C.            Insurance Policy Requirements

1.        Hazard Insurance

Until loans are paid in full, lenders must ensure that all borrowers continuously maintain hazard insurance on property securing guaranteed loans to protect the property against fire and weather-related damage.  A hazard insurance policy must be in forced at the time the loan is closed.  All policies must state whether the building is on leasehold since some state laws have specific insurance requirements pertaining to leasehold interests.

Lenders should adopt accepted industry standards for hazard insurance as noted below:

  • Hazard insurance providers should have ratings in accordance with the most recent Government Sponsored Enterprise (GSE) requirements.
  • Hazard insurance policies should conform to the GSE coverage requirements of “the standard extended coverage endorsement,” which states that a policy cannot be accepted that in whole or part excludes wind, hurricane or

catastrophe insurance unless the coverage is provided in another policy with the same coverage limits as the hazard policy.

  • Borrower occupied properties should have replacement cost coverage in an amount equal to the insured value of the improvements or the unpaid principal balance with hazard or wind deductible(s) of up to but not exceeding five percent of the policy limits. Lender placed policies should have a deductible level of no greater than $1,000 or 1 percent of the policy limit.

2.        Flood Insurance

If a dwelling is located in a Special Flood Hazard Area (SFHA,) as identified by the FEMA, the community must be located within a National Flood Insurance Program (NFIP) participating community and the borrower must obtain flood insurance.  The lender must ensure the borrower continuously maintains flood insurance for the life of the loan and that the policy is in force at the time of loan closing.  Flood insurance must cover the lesser of the outstanding principal balance of the loan(s) or the maximum amount of coverage allowed under NFIP.  Unless a higher amount is required by state or federal law, the maximum deductible clause for a flood insurance policy should not exceed the greater of $1,000 or 1 percent of the face amount of the policy.  Existing dwellings for the SFHGLP are eligible if flood insurance is available.  Existing properties are not subject to the Agency’s requirements within RD Instruction 1940G Exhibit C.  Additional requirements, in accordance with Chapter 12 of this Handbook may be required when a property is not served by a public sewer system.  See Section 12.10B of Chapter 12 for additional information.