Guest post by Kevin Pearia
For the USDA Rural Home Loan program, the last few years have been tumultuous. About two years ago, USDA loans got a hand up in a stimulus plan and some stricter appraisal terms. But last year the program flirted with insolvency. Now it seems things are back on track, and USDA loans continue to abet families in need of more adequate housing.
Guaranteed by the government, USDA loans boast several financial advantages. When the program took shape about 25 years ago, low-income families in rural areas seldom found lenders. Therefore, it was difficult to buy new homes that better suited growing families. Consequently, USDA loans’ perks aim to limit the financial burden of buying a home.
Qualified homebuyers can obtain a USDA loan at no money down. This gives homebuyers immense savings from the start, as does getting sellers to cover some of the closing costs. Even without paying anything down, USDA loan borrowers can fully finance their home no matter how high the purchase price. Monthly payments shrink as a result of lower, fixed interest rates and no private mortgage insurance.
To be eligible, families’ housing must be inadequate based on the family’s size. The USDA does not allow loans to purchase oversized homes, and will determine a reasonably-sized home per the family’s size. Borrowers must be able to afford the mortgage payments each month. However, no financial reserves are required to qualify for a USDA loan. Credit can be less than perfect, too. USDA-certified lenders look for scores upwards of 620. Of course higher credit means the borrower can have a higher debt-to-income (DTI) ratio as long as it’s below 41 percent monthly. Prospective homebuyers must apply for a USDA loan at the Rural Development office in their area.
Changes in 2009 to USDA loans did a few things. First, the USDA imposed new appraisal requirements that were updated by Fannie Mae and Freddie Mac. The new appraisal standards require the borrower to identify changes in a subdivision or small township. Prices of homes in rural areas may vary greatly, making it seem as though prices are declining.
But the good news for USDA loans in 2009 came in the form of stimulus money. The government put $2 billion behind loan guarantees of 60 to 90 percent. Lenders got to reduce interest rates.
When the Rural Home Loan program started, it was designed for low-income families in rural areas. Now even middle-income families have access to the program. Still, lenders usually issue USDA loans to families in towns or cities with fewer than 25,000 people.