USDA Loans

Types of USDA Loan Repayment Plans

OVERVIEW

The rules governing Section 502 loan origination differ slightly, depending upon the type of loan being made. The types of loans available under Section 502 include:

• Initial loans;
• Assumed loans;
• Subsequent loans; and
• Non-program loans.

This section describes the four types of loans and how they differ.

INITIAL LOANS

Initial loans are made when neither the applicant nor the seller has an existing Agency loan. Generally, they are made for the maximum loan term for which the applicant qualifies, and at the Rural Housing (RH) 502 low or moderate interest rate. If no prior Agency loans are involved in the transaction and the loan is to be made on program terms, this is the type of loan used.

ASSUMED LOANS

Section 502 loans may be assumed. The terms and conditions of the assumption depend upon the eligibility of the new purchaser.

A.  New Rates and Terms Assumption

Most assumptions of Section 502 loans are new rates and terms assumptions — that is, the purchaser assumes responsibility for all or a portion of the remaining debt, including principal and recapture receivable amounts. In order to conserve the Agency’s budgetary resources, the transaction does not involve paying off the old loan and issuing a new initial loan.  Instead, the purchaser assumes the outstanding debt, which is re-amortized at new rates and terms. If the new purchaser and the property are eligible for the Section 502 program, the loan can be assumed on program terms. In addition, eligible new purchasers may receive subsequent loans to make up the difference between the amount of debt assumed and the purchase price, or may be able to obtain a leveraged loan. If the property does not meet Agency standards or will not be brought to Agency standards with the use of loan funds, or the new purchaser is not eligible, the loan can be assumed on non-program terms. Purchasers who assume the loan under non-program terms are not eligible for a loan to cover amounts above the amount assumed.

B.  Same Rates and Terms Assumption

In certain limited cases — generally those involving transfers of title between family members — a same rates and terms assumption, is permitted. Under this type of assumption, the existing note terms, including the interest rate and the remaining repayment period, do not change.

The new owner need not be income-eligible for a Section 502 loan. However, payment subsidy can be continued for new owners only if they are eligible for subsidy, and only at the level for which the new household qualifies.

Same rates and terms assumptions are permitted for the following types of transfers:

• A transfer from the borrower to a spouse or children not resulting from the death of the borrower;
• A transfer to a relative, joint tenant, or tenant by the entirety resulting from the death of the borrower;
• A transfer to a spouse or ex-spouse resulting from a divorce decree, legal separation agreement, or property settlement agreement;
• A transfer to a person, other than a deceased borrower’s spouse, who wishes to assume the loan for the benefit of persons who were dependent on the borrower at the time of death, if the dwelling will be occupied by one or more persons who were dependent on the borrower at the time of death, and there is a reasonable prospect of repayment; or

• A transfer into an inter vivos trust in which the borrower does not transfer rights of occupancy in the property.

SUBSEQUENT LOANS

Subsequent loans can be issued as part of the original purchase of a property in combination with an assumption, or during the term of an Agency loan to help an existing borrower pay for repairs or improvements to the property.

NONPROGRAM LOANS

Non-program loans are loans made on non-program terms to borrowers who are non-  program-eligible, and/or for properties that do not meet Agency standards and will not be brought to Agency standards with the use of loan funds. The interest rate offered is somewhat higher than for program-eligible borrowers, but is competitive in the marketplace. Borrowers with non-program loans are not eligible for program benefits, such as payment subsidy, or for servicing actions, such as moratoriums. They also are exempt from occupancy restrictions and the requirement to refinance with private credit.

• A transfer into an inter vivos trust in which the borrower does not transfer rights of occupancy in the property.

SUBSEQUENT LOANS

Subsequent loans can be issued as part of the original purchase of a property in combination with an assumption, or during the term of an Agency loan to help an existing borrower pay for repairs or improvements to the property.

NONPROGRAM LOANS

Non-program loans are loans made on non-program terms to borrowers who are non-  program-eligible, and/or for properties that do not meet Agency standards and will not be brought to Agency standards with the use of loan funds. The interest rate offered is somewhat higher than for program-eligible borrowers, but is competitive in the marketplace. Borrowers with non-program loans are not eligible for program benefits, such as payment subsidy, or for servicing actions, such as moratoriums. They also are exempt from occupancy restrictions and the requirement to refinance with private credit.

USDA Loan Programs

Loan Guarantee Program (Section 502)

Under the Guaranteed Loan program, the Housing and Community Facilities Programs guarantees loans made by private sector lenders. (A loan guarantee through HCFP means that, should the individual borrower default on the loan, HCFP will pay the private financier for the loan).  The individual works with the private lender and makes his or her payments to that lender.

Under the terms of the program, an individual or family may borrow up to 100% of the appraised value of the home, which eliminates the need for a down payment.  Since a common barrier to owning a home for many low-income people is the lack of funds to make a down payment, the availability of the loan guarantees from HCFP makes the reality of owning a home available to a much larger percentage of Americans.

Credit Score Requirements for a USDA Loan

The credit guidelines for this home mortgage are simple, straight forward and very flexible.  Don’t get the idea that this is a bad credit mortgage because it is not.  It is flexible and you will see how everything about this mortgage plays together.

Credit Score:

If the credit score is 620 or above the credit is considered acceptable.  If the score is 620 or above the documentation is streamlined as follows:

• No rental history is required
• No credit waiver is required if there are derogatory trade lines like bankruptcy, foreclosures, or late payments for whatever. The only exception is Federal debts.
• If the score is below 620 a full manual credit assessment must be done  by the underwriter.

Indicators of unacceptable credit history for this mortgage loan are:

• More than one 30 day slow pay in the last 12 months
• Foreclosure less than 3 years old
• Tax lien or delinquent Government debt with no arrangement for re-payment.
• Judgment outstanding with in the last 12 months
• More than two slow rental payments in the last 12 months
• Account converted to a collection within the last 12 months
• Chapter 7 discharged for less than 3 years
• Chapter 13 discharged for less than 1 year

It is important to note that the underwriter can issue a credit waiver for any of these issues with proper documentation that proves that the bad credit was beyond the control of the applicant, were temporary, and causal factors have been removed.  Underwriters must also consider layered risks in addition to low credit scores.

Credit scores below 580 should not be considered if there is any derogatory credit and there must be extraordinary compensating factors.

In addition to all this the lender must obtain a clear CAIVRS number for each applicant.  They must get 12 months documented rental history, however this is only required if the credit score is less than 620.

Non-traditional credit is acceptable if traditional credit is not available.  There is a 3 reference minimum and no other risk layers are allowed.

How to find out if a Property is USDA loan eligible?

Go Through Online scenario at The link below:

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

USDA Required Income & Asset

Go Through Online scenario at their website using the link below:



http://eligibility.sc.egov.usda.gov/eligibility/incomeEligibilityAction.do?pageAction=state&NavKey=income@11

What Is USDA Funding Fee

The USDA funding fee is required by law. The fee, currently 2% on no down payment loans for a first-time use, is intended to enable the borrower who obtains a USDA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers.

Example:

Purchase Price:  $100,000

Funding Fee:  2% or $2,000

Finance Loan Amount:  $102,000

USDA Required Down Payment

In 2009 the USDA enacted changes that made millions of borrowers eligible for rural mortgage programs. Many home buyers dream of purchasing a home but don’t necessarily have the cash on hand to make the hefty 20% down payment required by a conventional home loan.

USDA loans stand alone as the only zero money down program available to borrowers that have not served in the military. Eligible borrowers will be hard pressed to find a loan program that offers more favorable terms.

USDA Seller Concessions

One of the more attractive features of the USDA loan is the 6% seller-paid concessions.

When negotiating the purchase of any home, one of the most effective tools to reducing the closing costs of the home is using the USDA Loan combined with seller concession.

The average home has a total cost of anywhere from 3% to 5% in 3rd party closing costs. These costs are addressed in the closing cost video.

By using HUD’s USDA guidelines, the average borrower can save thousands of dollars in buyer-paid costs by having a seller pay these typical closing fees.

Be sure when negotiating your purchase contract that you ask for closing costs concessions. Most lenders, including USDA HUD insured loans, will allow unlimited seller concessions. With conventional loans, lenders can place limits on a home buyer’s ability to ask for seller-paid closing costs. These limits can reduce the amount to 3%, or can even completely strip your ability to get any seller concessions at all!

If you don’t have the funds to cover these costs, you’ll most certainly want to have these fees paid by the seller when possible. In a buyer’s market, you always want to ask. The worst case scenario is your contract is turned down completely. However, in the typical real estate transaction, a seller will simply counter your offer with what they are agreeable to. Your real estate agent can help you with these types of negotiations.

Seller paid concessions can pay the actual costs to close on your home purchase up to the percentage agreed to. These third party paid fees can cover your prepaid items, which include home owner insurance and property taxes through the end of the tax year, along with title insurance fees and your lender fees.

Seller Concessions Example

For example, if you’re purchasing a home for $100,000, your typical costs to close would break down similar to this:

0% down payment – $0.00

Funding Fee – $2,000
4% closing costs – $4,000

Total cost to close – $6,000

By negotiating a closing cost concession into your contract, you can reduce the amount of funds you need to close to $0.00.

What Is A USDA Loan

This program is administered by USDA Rural Development, which serves the public through
more than 800 field offices nationwide. Sometimes good credit and a steady income are not enough to qualify for a home loan at a commercial lending institution, such as a bank, savings and loan or mortgage company.

More rural families and individuals may be eligible to become homeowners with the help of a
USDA guaranteed home loan. When the federal government agrees to guarantee a loan, lending institutions can help buyers while incurring less risk. Through USDA’s Guaranteed Rural Housing Loan Program, low- and moderate-income people can qualify for mortgages even without a down payment.

To be eligible, applicants must:

-  Have an adequate and dependable income;

-  Be a U.S. citizen, qualified alien, or be legally admitted to the United States for permanent residence;

-  Have an adjusted annual household income that does not exceed the moderate income limit established for the area. A family’s income includes the total gross income of the applicant, co-applicant and any other adults in the household. Applicants may be eligible to make certain adjustments to gross income— such as annual child care expenses and $480 for each minor child—in order to qualify.

-  USDA Rural Development field offices can provide information on the moderate income limits for the areas that fall within their jurisdiction, and can provide further guidance on calculating household income. To find out what the income limits are for the USDA Loan please review the Income & Assets Required video

-  Have a credit history that indicates a reasonable willingness to meet obligations as they become due

-  Have repayment ability based on the following ratios: Principle, Interest, Taxes, and Insurance (PITI) divided by gross monthly income must be equal to or less than 29 percent.

-  Total debt divided by gross monthly income must be equal to, or less than, 41 percent.

Homes That Qualify:

-  Guaranteed loans can be made on either new or existing homes

-  Existing homes must be structurally sound, functionally adequate, and in good repair

-  There are no restrictions on the size or design of the home financed

-  The home must not be used for income-producing purposes

-  Homes must be located in rural areas. Rural areas include open country and places with a population of 10,000 or less and—under certain conditions—towns and cities with between 10,000 and 25,000 residents.

-  USDA Rural Development field offices can determine eligible areas.

Highlights of the USDA Guaranteed Rural Housing Loan Program

-  Loans may be for up to 100 percent (102 percent if the guarantee fee is included in the loan) of appraised value or for the acquisition cost, whichever is less.

-  No down payment is required

-  Mortgages are 30-year fixed rate at market interest rates

-  Loans may include funds for closing costs, the guarantee fee, legal fees, title services, cost of establishing an escrow account and other prepaid items, if the appraised value is higher than sales price

-  Sellers may contribute to the buyer’s closing costs

-  Home buyers make application with participating lenders

-  Buyers must personally occupy the dwelling following the purchase

-  For purchase loans, a one-time guarantee fee equal to 2.0 percent of the loan amount is charged to the lender

-  After the one-time fee is paid, there is no recurring monthly expense charged for guaranteeing the loan

Other USDA Loan Information: