USDA Loan Repayment Plans

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.