100 percent mortgage financing: USDA rural home loans (Updated)
Did you know that the U.S. Department of Agriculture (USDA) is in the housing business? Rural housing programs allow people with very low to moderate incomes buy houses with no down payment and, in some cases, subsidized interest rates. It's important to note that not all "rural" areas are way out in the boonies.
Funding hiccup for USDA loan guarantee program
One of its most popular programs is an insurance program that guarantees 30-year fixed-rate mortgages offered to moderate-income buyers by private mortgage lenders.
USDA-guaranteed loans are popular because no down payment is required and there are no monthly mortgage insurance premiums. With USDA loans, underwriting guidelines are similar to those of the Federal Housing Administration (FHA) -- that is, the guidelines are more flexible than those for conventional mortgages.
Unfortunately for prospective homeowners, in April 2010, the USDA shut down its zero-down Guaranteed Loan program when it ran out of funds.
USDA loan guarantee program now self-funding
Congress has since acted to put USDA home loan funding on more sustainable footing. On July 29, 2010, Congress passed H.R. 4899, which made the USDA Rural Development agency's guarantee program independent of annual legislative funding.
Instead, the program will be self-funded, with higher fees assessed on borrowers: 3.5 percent of the loan balance for a home purchase. This funding model is similar to the way the FHA mortgage insurance operates -- the mortgage insurance premiums collected from borrowers keep FHA's program afloat, with no taxpayer money involved.
The USDA's 3.5 percent funding fee, while substantial, can be financed into the home loan. H.R. 4899 also included $679 million to enable the USDA to waive the funding fee for low-income borrowers.
Availability through mortgage lenders still limited
With the tap turned back on, how do you get one of these USDA Rural Development home loan guarantees? Not so fast. You may find that there's still limited availability of these mortgages.
Mortgage News Daily reported that, although the additional funding has been approved, guaranteed loans are still being accepted "subject to the availability of funds and Congressional authority to charge a 3.5 percent guarantee fee for purchase loans and a 2.25 percent guarantee fee for refinance loans."
This uncertainty puts a bit of a damper on mortgage lenders' quick readoption of the Guaranteed Loan program. It means that any mortgage lender funding a USDA home loan for the time being is on the hook to buy back loans that default. In the current economic climate, that's a huge risk that few mortgage lenders are willing to take.
If one mortgage lender won't let you take out a home loan with USDA backing, why not just go to another lender? It's not that easy.
First, there's scarcity of expertise. USDA Rural Development housing loans are not made by just anyone at any mortgage lending company. These loans require special knowledge and training, and only a small percentage of loan officers have it. In addition, many mortgage lenders choose not to deal with rural housing loans because they don't do much business in rural areas or don't want to assume the risk of underwriting these mortgages.
If you're shopping for a mortgage lender that funds USDA rural housing mortgages, you may need to speak to a number of companies before you find one that offers the program.
No interruption of direct loan program for low-income borrowers
There is another USDA Rural Development agency program that places no risk on private mortage lenders: a direct loan program targeted for low-income borrowers in which the loans are actually offered by the USDA at subsidized mortgage rates. While the Guaranteed Loan program was derailed until funding was re-established, the Direct Loan program continued because it still had money available.
Some have theorized that the USDA has been holding up new funding for the Guaranteed Loan program to encourage more borrowers to use the Direct Loan program instead, because any money allocated to direct lending disappears at the end of the fiscal year (for the federal government, it's September 30) unless it is used by then. Many whose income would qualify them for the Direct Loan program choose the Guarantee Loan program instead because of the additional bureaucracy and paperwork associated with the Direct Loan program.
Do zero-down mortgages encourage foreclosure?
Some say zero-down loans were part of what got the foreclosure ball rolling, but the zero-down Rural Development programs have lower default rates than 3-percent-down FHA loans. For fiscal year 2009, the USDA program's delinquency and foreclosure rates were 12 percent for low-income participants and 1.7 percent for moderate-income participants. That compares with FHA's 14.5 percent and 3 percent, respectively.
For many, the return of the USDA home loan program means the ability to buy homes in areas that need an influx of homeowners to grow and improve.
Before you shop for a USDA home loan
If 100 percent financing or a subsidized interest rate appeals to you, learn a little more about the various programs offered by the USDA, as well as the borrower and property requirements.
It's important to note, for instance, that the USDA's 100 percent financing is determined by the property appraisal, not the sales price of the home.
Rural areas defined generously
What is rural? You'd be surprised. The USDA defines "rural" generously -- you don't have to buy a home in the farm belt to qualify. In fact, the vast majority of the land area in the U.S. falls within this definition of rural. The rural designation includes many small- to medium-sized towns as well as suburban areas outside larger cities. The USDA offers a lookup tool for property eligibility.
To qualify for the program, the home must be modest in size, design and cost. Modest housing is determined by what is typical for homes in the area; its market value cannot exceed the applicable area loan limit, and it can't have any prohibited features such as a swimming pool.
Houses constructed, purchased or rehabilitated must meet the national model building code adopted by the state and thermal and site standards set by the USDA's Housing and Community Facilities Programs (HCFP). Manufactured housing or mobile homes must be permanently installed and must meet the Department of Housing and Urban Development's Manufactured Home Construction and Safety Standards as well as HCFP's thermal and site standards.
The Guaranteed Loan program is funded through USDA-approved mortgage lenders and brokers. Like the FHA program, the USDA doesn't directly fund these loans itself but instead guarantees them, making them a safer investment for the lenders. These loans come with no subsidies -- you find the best deal you can from a mortgage lender and pay the going rate.
The Guaranteed Loan program guidelines allow applicants earn up to 115 percent of the median income for the area after certain adjustments. A good loan officer who specializes in USDA and other government mortgages should be able to help you determine if you qualify.
- Guarantees home loans through private lenders for the purchase of modest housing in designated rural areas.
- Income qualification is up to 115 percent of area median income for the same size household.
- No down payment is required.
- Loans are fixed-rate mortgages with 30 year terms.
- Funds can be used for repairs and to cover the funding fee.
- There is no monthly mortgage insurance payment.
To be eligible for a USDA Direct Loan, your income can't be more than 80 percent of the median income for the area. These loans can be used to build, repair, renovate or relocate a home, or to purchase and prepare a building site, including providing water and sewage facilities.
The Direct Loan program is funded directly through the USDA Rural Development agency, and payments may be subsidized -- the goal is to keep payments between 22 percent and 26 percent of the applicant's gross monthly income.
The interest rate is set by HCFP based on the government's cost of money. Loan terms are 33 years, except for borrowers who earn less than 60 percent of the area median income, who can have terms of up to 38 years to make the loan more affordable.
- Lends funds directly to low- and very low-income families to purchase modest homes in rural areas.
- "Low-income" is defined as income between 50 and 80 percent of the area median income, and "very low-income" is below 50 percent of the area median income.
- Loan terms can be 33 or 38 years.
- Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare home sites.
The Mutual Self-Help Housing program makes homes affordable by allowing would-be homeowners to work on homes themselves. With this "sweat equity," each buyer pays less for his or her home. Qualified applicants are required to complete 65 percent of the work to build the home.
For very low-income families who own homes needing repair, the Home Repair Loan and Grant Program offers loans and grants for necessary renovations and maintenance. The Home Repair Program also provides funds to make a home accessible to someone with disabilities -- for example, to build a ramp for someone using a wheelchair. Other qualified repairs include fixing a leaking roof, adding central heating or replacing an outhouse with a bathroom.
Homeowners 62 years and older are eligible for home improvement grants. Other low-income families and individuals can get loans with 1 percent interest rates directly from HCFP.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.