Meet USDA, the Home Lender

Sunday, December 2, 2007

Q Maryland: What can you tell me about the Department of Agriculture's rural housing program? I know to qualify you must have good credit with an income below the average for your area.

A Most people don't think of the USDA as a home lender, said Dane S. Henshall, a spokeswoman for the agency. However, more than 2.5 million families have obtained more than $97 billion in loans and loan guarantees from USDA Rural Development.

In fiscal year 2007, Rural Development handled $4.8 billion in direct and guaranteed loans for about 46,500 rural home buyers. In Maryland, 290 loans and guarantees totaling $43.5 million were approved. Virginians obtained 1,215 loans and guarantees totaling nearly $135 million. (The loans are not available in the District.) A similar budget has been proposed for fiscal year 2008.

There are two programs, with different eligibility rules. The guaranteed loans are made through approved lenders. These fixed-rate, 30-year loans require no down payment and bear market interest rates, Henshall said, now about 6 to 7 percent. The government charges a 2 percent, one-time fee for the guarantee, which can be included in the amount borrowed. There is no requirement for private mortgage insurance. To be eligible, a household cannot have income greater than 115 percent of the local median.

Under a second program, the agency lends the money directly. The term is 33 years, and the interest rate is about 6 percent. No down payment is required, and a subsidy is provided, based on income, which can lower the effective interest rate on these loans to as low as 1 percent.

But this isn't free money, Henshall said. "When the home is later sold, all or a portion of the subsidy provided is 'recaptured' from profits on the sale. As these are generally starter loans, refinancing is required if income increases, and the government subsidy is no longer needed."

The direct program requires little upfront cash, and payments are subsidized to an affordable level (22 to 26 percent of income for the loan plus taxes and insurance). Servicing options include a moratorium if a major financial problem occurs and various options to make up missed payments. Families cannot have income greater than 80 percent of the area median for direct loans.

Under both programs, the home must be in a rural area, which generally means a place with a population of 10,000 or less, though some areas with a population of up to 20,000 are eligible. Even in the Washington metropolitan area, which wouldn't fit many people's concept of rural, there are eligible areas, including within Montgomery and Prince George's counties. With few exceptions, the loans are used for home purchase (including construction) and repair.

For lower-income buyers in rural areas, the Rural Development loans are considered among the best, Henshall said. They're also popular: Funding for these loans is fully used each year, and there may be waiting lists.

Rural Development loans are often "leveraged" with other bank loans or government programs, she said.

Satisfactory credit, Henshall said, means a borrower has "a credit history that indicates a reasonable ability and willingness to meet debt obligations.

"There is no minimum credit score, though a high score will automatically fulfill the credit requirement."

Complete requirements are listed under Regulations on the Web site at

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