It may be a favorable time to review market demand for underutilized rural area financing options such as the USDA program.
According to John Walsh, president of Total Mortgage Services, Milford, Conn., rural lending is becoming “more and more prevalent” as underwriting is getting tighter and people are looking for other options.
One benefit that may not be valid in the long term is that while homebuyers are required to pay upfront a guarantee fee of up to 3.5%, there is no monthly private mortgage insurance required on this loan.
Walsh says many in the industry expect to see a mortgage insurance requirement installed as early as October of this year—hence, it is the best time to leverage rural lending options.
The product is attractive to borrowers and lenders alike because “the USDA does a little more than the FHA,” he says, because it allows for financing at up to 103.5% or even higher of the loan amount.
The firm's wholesale channel recently started to offer the USDA Guaranteed Rural Housing program designed to provide access to affordable housing options to low- and moderate-income residents to purchase properties located in designated rural areas in the almost 30 states TMS is licensed to do business. Robin Bartner, the TMS wholesale expert who helped launch the program, told this publication the updated USDA program requirements may charge borrowers an annual premium of 0.03% but lower the upfront guarantee drop from 3.5% to 2% so originators and wholesalers are still waiting for that suggestion to become final.
It compares favorably to the 1.1% annual premium required by the FHA, she said. “It still is significantly less that an FHA, plus the FHA requires a 3.5% downpayment, while the USDA requires no downpayment and at the present time no monthly mortgage insurance.” The 100% financing as well, she noted, makes this loan more affordable even when comparing the 3.5% with the 1% for the FHA, and upfront MI program it still is less than a monthly payment for the borrower.
“There's only one other program that I'm aware that still allows you to finance 100% or the purchase price and that is VA loans. The options for 100% financing are very limited.”
Under the USDA program guarantee, home loans made by private sector lenders are managed by that lender should the individual borrower default on the loan.
The TMS Guaranteed Rural Housing program allows for little or no downpayment or out-of-pocket costs and requires an average cash-to-close amount of $158.75, which means in some areas homebuyers may pay nothing, or $0 cash-to-close, while in some other states it may go up to a couple of thousands of dollars.
To make $0 closing costs possible the company said it finances closing costs to value and allows for up to 6% in seller contributions in addition to gift funds from relatives or friends who are members of the household.
It does not require downpayments and applies 100% LTV of appraisal value.
For example, if the property is appraised at $150,000 and the purchase price is settled at $145,000, closing and prepaid costs would settle at $5,000.
The maximum loan limit on a conforming loan is at $417,000.
All lender and broker fees, escrows, first-year insurance and third-party fees can be financed.
Also the one-time 3.5% upfront guarantee required at closing may be financed into the loan amount, which cannot exceed the $417,000 maximum limit.
These insiders see potential in this market segment.
While it is true that only a specific group of borrowers that fall within the low-income brackets designed for each state may qualify and also the property has to be located in certain designated areas, she said, “a lot more people would qualify for this loan” if they knew about it.
