Positive Real Estate Professionals

Established by President Abraham Lincoln on May 15, 1862, the United States Department of Agriculture (USDA), a non-cabinet level department until 1889, sought to improve the variety of seeds, plants, and animals available to the mostly agrarian society of that time. This may seem like an unlikely place for prospective homeowners to turn when looking for a home loan. The truth is that the USDA Rural Development Program has been helping to provide the means to obtain low cost housing, provide community facilities like schools, health clinics, and fire stations, extend modern services such as water, sewer, electricity, and telecommunications beginning with the passage of the Hatch Act in 1887 and the Smith-Lever Act in 1914. Due in large part to these two acts coupled with the widespread needs of rural Americans that arose during the Great Depression, the USDA took on the responsibility of assuring that food production continued, began offering loans to small landowners, and helped meet the educational needs of rural youths. Add to these early acts the numerous other acts which directly affected the USDA such as the Food Stamp Program piloted between 1961 and 1964, Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) in 1972, and the Safe Drinking Water Act in 1974 and the scope of the USDA can be viewed in its modern form. The main purpose of this article is to illuminate the two types of home loans that are available from the USDA.

Mission: "To increase economic opportunity and improve the quality of life for all rural Americans."

The USDA offers two very different types of home loans in conjunction with state, local, and tribal governments, private and nonprofit organizations, and member-owned cooperatives as part of its Rural Development program. These loans are known as the Direct Loan Program and the Loan Guarantee Program. I want to first look at the things these two programs have in common.

• The home to be purchased must be located in an eligible rural area as defined by USDA. Click HERE to see if a specific property address is eligible.
• Both loans are intended for low income households to obtain home ownership in rural areas.
• Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.
• Under the Section 502 program, housing must be modest in size, design, and cost.
  

As similar as these programs are, there are some distinct and important differences.

Direct Loan Program

Eligibility: Applicants for direct loans from Housing & Community Facilities Program (HCFP) must have very low or low incomes.   Very low income is defined as below 50 percent of the Area Median Income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI.  Click here to review area income limits for this program.  Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance, which are typically within 22 to 26 percent of an applicant’s income.  However, payment subsidy is available to applicants to enhance repayment ability.  Applicants must be unable to obtain credit elsewhere, yet have reasonable credit histories.

Terms: Loans are for up to 33 years (38 for those with incomes below 60 percent of AMI and who cannot afford 33-year terms). The term is 30 years for manufactured homes. The promissory note interest rate is set by HCFP based on the Government’s cost of money.  However, that interest rate is modified by payment assistance subsidy.

Approval: Rural Development officials should make a decision within 30 days of the Rural Development office’s receipt of the application.

Loan Guarantee Program

Eligibility: Applicants for loans may have an income of up to 115% of the median income for the area. Area income limits for this program are here.   Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance.  In addition, applicants must have reasonable credit histories.

Terms: Loans are for 30 years.  The promissory note interest rate is set by the lender. There is no required down payment. The lender must also determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.

Approval: Rural Development officials have the authority to approve most Section 502 loan guarantee requests.

Most loan guarantees issued by the Housing & Community Facilities Programs are from 80-100% of the amount of the loan. The reasons investors might choose to work with the HCFP are many. Since loan guarantees issued by HCFP are backed by the full faith and credit of the U.S. Treasury, many lenders consider HCFP programs to be a relatively risk-free way to expand portfolios. These loans are great for helping low income households in rural areas attain ownership of modest homes while avoiding one of the most common roadblocks, the down payment.

Click to see a complete list of Rural Development State Offices including contact information.