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Rural Housing Agency Launches New Construction Loan Program

"We are encouraging new construction in rural areas," said Joaquin Tremols, the director of single-family loans for the Rural Housing Service.

The Rural Housing Service has quietly launched a new construction loan program designed to increase the availability of new homes in rural areas.

The program was launched in March, but many industry representatives weren't aware of it until last week when it was discussed at a recent conference hosted by Ginnie Mae.

Under the program, construction-to-permanent financing for low- and moderate-income families can be securitized and sold to Ginnie investors. The RHS loan guarantee goes into effect right after the first closing.

"We don't wait until construction is completed or until the certificate for occupancy is issued. We don't wait for that," said Joaquin Tremols, the single-family director for the RHS, at the conference.

The maximum loan-to-value ratio is 100% and a down payment is not required.

"We are encouraging new construction in rural areas," Tremols said.

He said the program could help revitalize housing stock, which in many rural areas is very old. Additionally, new construction will stimulate business activity and development in rural areas. RHS is part of the U.S. Department of Agriculture's Rural Development division.

The single-close program has several features that should be attractive to lenders and builders, according to officials with the National Association of Home Builders.

First, the RHS construction loan is made to the homebuyer, not the builder. As a result, the builder doesn't have to secure financing or a line of credit for the construction phase.

"That is a definite plus in terms of picking up business," said Curtis Milton, the director of single-family finance for NAHB, in an interview. "Essentially, by making the construction loan to the homebuyer, RHS is assisting builders who may not be able to get construction financing on their own."

Secondly, 90% of the continental U.S is deemed rural enough to qualify for RHS single-family loans and some areas are close to suburban communities.

"We have gotten some interest from our members," said Chellie Hamecs, NAHB vice president for housing finance. "They want to be more involved in the RHS program."

In terms of RHS income limits, once a borrower qualifies for the program, they are not required to submit additional pay stubs or other information that might disqualify them when the loan converts from the construction loan to a permanent mortgage.

The RHS construction loan program provides for an interest reserve account which can cover the borrower's loan payments during the construction phase. It makes it "more affordable for rural households," Tremols said.

The single-close loan program also provides for a 10% contingency reserve to cover the costs of upgrades or change orders during the construction phase. Untapped contingency reserves must be rolled in the loan amount at the final closing.

To participate in the RHS program, lenders are required to have two or more years of experience in single-family construction lending. Builders are required to have at least two years of construction experience along with a state or local contractor's license and at least $500,000 in general commercial liability insurance.

RHS initially planned to limit the number of construction loans a lender could make at 25 loans per year. But the final program launched March 9 does not have a set limit.

The agency "reserves the right to limit the number or amount of loans guaranteed based on market conditions and other factors," such as loan performance, according to RHS regulations.

To get the program rolling, the RHS needs banks and other mortgage lenders to originate the loans.

So far, the new program hasn't stirred a lot of interest from lenders. When asked about the new RHS home construction program, spokespersons for two major banking groups said they haven't received much feedback about it from their members.

Flagstar Bank, based in Troy, Mich., has taken a look at the new RHS program.

"We did look at it, but to date we have focused on other construction-related product projects that have taken priority," a Flagstar spokesperson said.

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