Funding for USDA loans is still continuing although several changes have been proposed for the president’s new budget that would take effect October 1, 2011.
Currently the guarantee fee for USDA is 3.5% of the loan size. This 3.5% can be built into your loan at origination. There is no mortgage insurance premium required.
The president has proposed reducing the 3.5% guarantee fee to 2% of the loan size and instituting a .5% annual mortgage insurance premium. This annual premium would be divided to monthly payments.
For example on a $200,000 loan the 3.5% fee or $7000 would be built in upfront in your loan. Under the proposed changes you would pay 2% or $4000 and you would pay approximately $83 a month in monthly mortgage insurance premium until you had enough equity to remove this. If you held this loan for 10 years you would pay about $10,000 in mortgage insurance premiums. This would be $7000 or approximately double what the current rate of 3.5% brings in.
The goal of the changes is to make this program self-sufficient. However these are just proposed rules and if constituents let the president know that they preferred not to spend an extra $7000 over 10 years then perhaps these could be changed prior to the implementation in October.
Below is an explanation of the program and how it can be helpful to many borrowers today.
Due to the mortgage meltdown that has plagued our county for the past couple of years, lending guidelines have tightened significantly and obtaining a home loan has been more akin to giving birth. In fact is seems that many lender’s want your first born in order to complete the transaction. Low downpayment, no downpayment loans vanished from the landscape, unless you really knew who to speak with. FHA became the buzzword and savior to those with less than a 10% down payment in a declining real esate market.
Now that FHA is more mainstream (requiring only a 3.5% down payment and having very generous credit and debt tolerances), many think this is the only alternative to the traditional Fannie/Freddie loan.
However, there are some little known loan programs available from the United States Department of Agriculture (USDA) that could benefit borrower’s in many parts of Massachusetts and beyond. Known as the Guaranteed Rural Development Housing Section 502 Loans, these programs are designed for low to moderate income individuals or households purchasing a property in a “rural” community. The definition of rural is somewhat vague, as you will see from the list of eligible communities in Massachusetts. There are some exceptional features to these programs, as well as some needed conservative features.
To be eligible to purchase a home with a Rural Housing loan, borrowers must meet income eligibility requirements. Here is the link for Massachusetts. For example, in the Boston- Cambridge-Quincy MSA (which includes most of Middlesex, Norfolk and Suffolk Counties) for Moderate Income a 1-4 person household’s income cannot exceed $95,100. For a 5+ household income cannot exceed $125,550.
To see an interactive map of eligible Massachusetts communities follow this link. Some of the area towns eligible for the rural loan include: Ashland, Hopkinton, Sherborn, Sudbury, Maynard, Littleton, Harvard and most of central and western Mass. Most of the South Shore and virtually all of Cape Cod are considered “rural” for this program as well.
Program Features include:
- No Down-payment
- No Monthly Mortgage Insurance
- Unlimited Seller Contributions
- The ability to repair certain aspects of the property and build in those costs into the total loan.
Like FHA, the USDA programs requires an UPFRONT FEE of 3.5% that will guarantee the loan for the lender. FHA will allow the borrower to finance the Upfront MIP, currently 1.00% of the base loan. In addition FHA has reduced the allowable seller contributions from 6% to 3%. USDA will allow the fee to be financed only if the appraised value of the home is greater than the purchase price.
Let’s look at the differences between FHA and USDA loans side by side:
| USDA v. FHA |
FHA |
USDA |
| Appraised Value |
$200,000 |
$200,000 |
| Purchase Price |
$175,000 |
$175,000 |
| Down Payment 3.5% FHA |
$6,125 |
$0 |
| Upfront Fee 1.00% FHA 3.50% USDA |
$2,000 |
$7,000 |
| Monthly Mortgage Insurance |
$131.25 |
$0 |
| Allowable Seller Contributions |
$6,000 |
$10,500 |
| |
|
|
| *Assumes $200 monthly taxes and $50 monthly homeowners insurance. Interest rate of 4.750%, $400 monthly consumer debt |
As you can see, vs. FHA changes, the USDA loan requires less out of pocket, No monthly mortgage insurance and greater flexibility in managing the closing costs associated with the transaction.
The USDA loan IS more conservative in qualifying than FHA, but that is probably a good thing. FHA, with its looser guidelines is in trouble and may need the dreaded TAXPAYER BAILOUT. FHA overall % of loan activity has increased from roughly 3% of closed loans to about 40%. With no minimum credit score and DTI limits of 55%, it is no wonder that folks are defaulting on these loans and that FHA needs to raise its Monthly Mortgage Insurance to remain solvent.
USDA qualifies borrowers with more traditional debt ratios of 29% for housing and 41% for overall indebtedness. This is good for the borrower, who will not bite off more than they can chew, and for the taxpayer as the default rate on these loans is less than FHA. However, you will need to earn a higher income to qualify for the same house with USDA than FHA.
So what do you do if you want more information about these loans? Start by visiting the USDA program page @ http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=pageLoad&requestInfo=GuaranteedProgramInfo&NavKey=loan@21 .
You may also contact me at dgaffin@greenparkmortgage.com.
This post was oringinally published on The Massachusetts Real Estate Law Blog.
You may also contact me with any questions you may have at dgaffin@greeparkmortgage.com. Greenpark Mortgage Corp. is licensed to originate USDA loans in Massachusetts, Maine, New Hampshire, Vermont, Connecticut, Rhode Island and Florida.
The USDA Loan: 100% Financing Proposed Changes
Funding for USDA loans is still continuing although several changes have been proposed for the president’s new budget that would take effect October 1, 2011.
Currently the guarantee fee for USDA is 3.5% of the loan size. This 3.5% can be built into your loan at origination. There is no mortgage insurance premium required.
The president has proposed reducing the 3.5% guarantee fee to 2% of the loan size and instituting a .5% annual mortgage insurance premium. This annual premium would be divided to monthly payments.
For example on a $200,000 loan the 3.5% fee or $7000 would be built in upfront in your loan. Under the proposed changes you would pay 2% or $4000 and you would pay approximately $83 a month in monthly mortgage insurance premium until you had enough equity to remove this. If you held this loan for 10 years you would pay about $10,000 in mortgage insurance premiums. This would be $7000 or approximately double what the current rate of 3.5% brings in.
The goal of the changes is to make this program self-sufficient. However these are just proposed rules and if constituents let the president know that they preferred not to spend an extra $7000 over 10 years then perhaps these could be changed prior to the implementation in October.
Below is an explanation of the program and how it can be helpful to many borrowers today.
Due to the mortgage meltdown that has plagued our county for the past couple of years, lending guidelines have tightened significantly and obtaining a home loan has been more akin to giving birth. In fact is seems that many lender’s want your first born in order to complete the transaction. Low downpayment, no downpayment loans vanished from the landscape, unless you really knew who to speak with. FHA became the buzzword and savior to those with less than a 10% down payment in a declining real esate market.
Now that FHA is more mainstream (requiring only a 3.5% down payment and having very generous credit and debt tolerances), many think this is the only alternative to the traditional Fannie/Freddie loan.
However, there are some little known loan programs available from the United States Department of Agriculture (USDA) that could benefit borrower’s in many parts of Massachusetts and beyond. Known as the Guaranteed Rural Development Housing Section 502 Loans, these programs are designed for low to moderate income individuals or households purchasing a property in a “rural” community. The definition of rural is somewhat vague, as you will see from the list of eligible communities in Massachusetts. There are some exceptional features to these programs, as well as some needed conservative features.
To be eligible to purchase a home with a Rural Housing loan, borrowers must meet income eligibility requirements. Here is the link for Massachusetts. For example, in the Boston- Cambridge-Quincy MSA (which includes most of Middlesex, Norfolk and Suffolk Counties) for Moderate Income a 1-4 person household’s income cannot exceed $95,100. For a 5+ household income cannot exceed $125,550.
To see an interactive map of eligible Massachusetts communities follow this link. Some of the area towns eligible for the rural loan include: Ashland, Hopkinton, Sherborn, Sudbury, Maynard, Littleton, Harvard and most of central and western Mass. Most of the South Shore and virtually all of Cape Cod are considered “rural” for this program as well.
Program Features include:
Like FHA, the USDA programs requires an UPFRONT FEE of 3.5% that will guarantee the loan for the lender. FHA will allow the borrower to finance the Upfront MIP, currently 1.00% of the base loan. In addition FHA has reduced the allowable seller contributions from 6% to 3%. USDA will allow the fee to be financed only if the appraised value of the home is greater than the purchase price.
Let’s look at the differences between FHA and USDA loans side by side:
As you can see, vs. FHA changes, the USDA loan requires less out of pocket, No monthly mortgage insurance and greater flexibility in managing the closing costs associated with the transaction.
The USDA loan IS more conservative in qualifying than FHA, but that is probably a good thing. FHA, with its looser guidelines is in trouble and may need the dreaded TAXPAYER BAILOUT. FHA overall % of loan activity has increased from roughly 3% of closed loans to about 40%. With no minimum credit score and DTI limits of 55%, it is no wonder that folks are defaulting on these loans and that FHA needs to raise its Monthly Mortgage Insurance to remain solvent.
USDA qualifies borrowers with more traditional debt ratios of 29% for housing and 41% for overall indebtedness. This is good for the borrower, who will not bite off more than they can chew, and for the taxpayer as the default rate on these loans is less than FHA. However, you will need to earn a higher income to qualify for the same house with USDA than FHA.
So what do you do if you want more information about these loans? Start by visiting the USDA program page @ http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=pageLoad&requestInfo=GuaranteedProgramInfo&NavKey=loan@21 .
You may also contact me at dgaffin@greenparkmortgage.com.
This post was oringinally published on The Massachusetts Real Estate Law Blog.
You may also contact me with any questions you may have at dgaffin@greeparkmortgage.com. Greenpark Mortgage Corp. is licensed to originate USDA loans in Massachusetts, Maine, New Hampshire, Vermont, Connecticut, Rhode Island and Florida.