The U.S. Department of Agriculture helps people grow more than crops. Through its home loans programs, the USDA assists low- and moderate-income homebuyers to grow wealth by transitioning from renters to homeowners. Homebuyers in North Carolina have tapped USDA resources for loans when buying property in rural areas. The agency offers 100 percent financing on home loans, sometimes subsidizing the interest rate to as low as 1 percent for low-income borrowers.
Connie Vital, acting housing director for the USDA office in Raleigh, said the subsidy enables borrowers to show repayment ability, making it possible for buyers on a tight budget to qualify for a loan.
“As long as borrowers’ income reflects that they need assistance, the government will subsidize that payment,” Vital said. “That’s how we can make affordable housing loans to people who make less than what a conventional bank would accept for a loan.”
The USDA has been offering two types of loans — Direct and Guaranteed — for as long as anyone can remember. Both allow 100 percent financing, and neither requires mortgage insurance. Vital recalls that the programs had been in place for years before she joined the USDA some 30 years ago. Originally, the loans came through the Federal Farmers Home Administration (FmHA), but in 1996 spun off into the Rural Development division.
Loans made through the Direct program come from the USDA and have a cap on total household income. Borrowers need to go to one of the seven USDA area offices in North Carolina or nine sub-area branches to apply. Borrowers must provide the same documentation as for a bank loan — proof of income, assets and debts and a Social Security number. Borrowers must meet the debt-to-loan and debt-to-income ratios that assess whether taking on the mortgage would put the total amount of money a borrower owes for all his or her debts beyond what his or her income could cover, factoring in other living expenses.
If the mortgage payment puts the borrower slightly above these limits, the USDA can subsidize the interest rate temporarily to lower the monthly payment, making the borrower eligible for a loan. The borrower’s financial situation is checked every year, and once his or her financial stability improves, the USDA no longer subsidizes the loan.
The Direct loan money comes from a fund set as part of the annual federal budget. Once all of the money has been loaned out, the USDA can’t make any more loans until the federal government approves a new budget that has money earmarked for the Direct loan program in that fiscal year, which runs Oct. 1 through Sept. 30 each year.
“Normally, we run out of funds for the Direct loan program before the fiscal year is out,” Vital said. “The amount budgeted changes from year to year, and that determines what we can and can’t do.”
Borrowers who make too much money to qualify for a Direct loan can go to an approved conventional lender to apply for a Guaranteed loan. The bank lends its own money for Guaranteed loans, but the USDA covers the loan in the event the borrower defaults. The USDA can supply a list of lenders it has approved. A bank not on the approved list cannot arrange a USDA Guaranteed loan. The USDA does not subsidize interest rates on the Guaranteed loans.
Christina Mason, a broker at Home Towne Realty in Clayton, has been referring clients to the USDA options throughout her 20-year career as a Realtor.
“The loans are very popular, as long as the client qualifies,” Mason said. “It’s a wonderful program. USDA loans and VA loans are just about the only 100 percent financing options left.”
All loans have fees, and the fee for a USDA loan sometimes can be lower than the fee for a Veterans Administration loan. Mason recommends that her clients who are military veterans ask their lender to see which option results in a better deal.
Obtaining a loan without a down payment aids people on a tight budget. Conventional loans traditionally require a down payment of at least 3.5 percent of the purchase price. Because the USDA allows homebuyers to borrow up to 100 percent of the purchase price of the home, providing the property is priced no higher than market value, borrowers do not have to have saved up thousands of dollars before they begin house-hunting.
“Lots of renters don’t buy a house because they don’t have the down payment,” Mason said. “With USDA loans, as long as borrowers are creditworthy and don’t exceed the income limits, they could become homeowners.”
Even for her clients who have enough for a down payment, Mason recommends financing 100 percent of the home purchase, if they qualify for a USDA loan.
“Putting 3.5 percent down on a house doesn’t lower your monthly mortgage payment that much,” she said. “People who opt to keep that money in savings have it as a cushion against home maintenance and repairs.”
USDA loans usually take longer to process than conventional loans, mainly because the loans go through more than one underwriter (perhaps a reason USDA loans have a lower default rate than the general pool of borrowers). Whereas a conventional loan might take 30 days for approval, a USDA loan would take 45 days, not so long that it would quash a sale.
The USDA makes loans only to rural properties, Vital said. In some counties, every property in the county qualifies for USDA financing. Not all properties near large cities are eligible. A USDA website, http://eligibility.sc.egov.usda.gov, allows potential buyers to enter addresses to check whether a property qualifies. The USDA loans cover multifamily buildings and single-family homes.
Prospective borrowers can check their income eligibility at www.rurdev.usda.gov/HSF_SFH.html.
Mason has had many clients, including single mothers, who would not have been able to buy a home had it not been for the USDA loan programs.
“There’s a sense of permanence and stability in owning your own home,” she said. “People feel a really big sense of accomplishment from becoming a homeowner and setting that example for their children.”
Nancy E. Oates is a business and real estate writer in Chapel Hill. Reach her at email@example.com.