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.

When you work with a professional they listen to your needs and hopes; they talk to you in a way that you can understand even if it is something you know little about. In short the same qualities that many of us look for in friends are the very same qualities we look for in professionals. Do you have that level of comfort and understanding with the professionals in your life? In the following article, Danny Thornton explores the importance of a good working relationship with your real estate industry professionals.

Via Danny Thornton:

When I have talked to people over the last 6 to 8 months, it seems one of their biggest concerns is whether or not their loan officers are giving them the best loan for them. Too many times have I witness loan officers getting on a kick of selling just FHA loans and frankly ignoring USDA, VA, or even conventional loans. The problem with this is that they might not be getting you, the consumer, the best loan for your circumstances.
Let me give you an example of what I mean. A few months back I had a customer call me distraught. The lender that they had contacted previously had qualified them on a conventional loan and the customer had to bring almost $20,000 to the table. The down payment was 10%. After asking a few questions, I found out that the customer was a veteran. Upon realizing this, I immediately thought of the VA loan. In this case, he could get in the home at 100% financing, pay his closing cost, and still have money in the bank for a rainy day. With the conventional loan, he would have been tapped out in the bank.
After digging a little deeper, I realized that this mishap was not the fault of the loan officer though. When I went to their website, I found out that they were not licensed to sell VA or FHA loans. This is something that is very important to know going in when dealing with a mortgage company. Also, another thing to take into consideration is the fact that just because a lender is licensed FHA or VA, it does not mean that they also carry all the products that either of them has available.

The following post by Danny Thornton explains some of the changes that have occurred in the mortgage industry. These changes are actually positive for both borrowers and lenders. Many people think that the tightening of lending guidelines serves only to hinder qualified buyers from obtaining a home loan. As you will see in this article nothing could be farther from the truth. These tightened guidelines mean that when a potential home buyer actually purchases a home, they are able to afford it and unless something catastrophic occurs, they will have the ability to remain in it for years.

Via Danny Thornton (Home America Mortgage, INC.):

One of the first things that I always hear when it comes to mortgages today is that it is not as easy to get one today as it was 3 years ago. Well, frankly, that is true. Today the lenders are being a little smarter with who they give their money to.

With that said, the issue of getting qualified for a mortgage is not what has gotten harder. What has gotten tough is lending money to people that either can not prove their income or prove that they can manage their finances. Let’s take a look at both issues for a minute.

A few years ago, you could basically call up a lender, state that you make XYZ for an income, and get a mortgage. In my book, this is not responsible lending. Responsible lending tells you that a potential customers needs to be able to pay back the money and to do so, we need to determine if that potential customer actually makes XYZ. This was a program that was being offered to people with credit scores in the 500s and probably never should have been.

That leads me into the second issue which was people that could not manage their credit. This might be one of the biggest issues and it still is an issue today. When buying a home, the lender needs to make sure that the borrower can actually pay back the mortgage. If they are currently showing late payments or collections, this should throw a red flag up to the lender. In this case, the lender then needs to determine if the borrower can pay back the amount in a timely manner to them.

Both of these issues that I have wrote about are issues that affect the lender in the long run. The biggest effect is brought on from the investor. First off, a lot of investors will not back “stated income” loans due to the facts mentioned about. The same goes for “credit risk” loans as well. Investors buy these pools of loans because they want to make money. The higher the risk, the higher the return, but the bigger chance of losing as well.

These are some things to consider when you go to borrow money from a lender in the future. It is not that we do not want to lend money at this time. It is the fact that we have to be picky with whom we lend to now.