USDA Rural Development Loan – Features and Benefits
The Rural Development Loan is available to borrowers in need of housing, even when they have owned a home in the past. The loan is also available to borrowers who currently have a home that is not in the local commuting area or is not structurally sound or functionally adequate.
No credit, limited credit, and less-than-perfect credit are acceptable with the RD Loan. The manual underwriting process benefits applicants who have not yet established credit or who suffer from lagging credit scores despite a sustained recovery from past difficulties. Underwriting considers the personal circumstances of each applicant and allows for common-sense decisions on a case-by-case basis. This gives an advantage to applicants who do not qualify for loan programs involving modern automated computer underwriting systems driven heavily by credit scores.
The RD Loan offers financing up to 102% of the appraised value (not sales price) of the property. Therefore, a down payment is not required.
The RD Loan (based on value) can be set above the purchase price to finance loan closing costs, pre-paid expenses, and incidental expenses. With no down payment and financed settlement costs, borrowers can acquire homes with little or no money out of pocket.
Unlike other government and conventional loan programs, there are no monthly mortgage insurance premiums on the Rural Development Loan. This lowers the monthly housing payment significantly.
The RD Loan does not have loan limits. The amount borrowed depends on the borrower’s repayment ability. This offers an advantage in communities where FHA and VA loan limits are low.
The RD Loan may be used as take-out financing for a loan to buy land and construct a new home. The value of a finished home is usually higher than the cost to build, so the loan amount (based on value, not acquisition costs) usually covers the entire cost of the project.
There is no need for payment reserves after closing on the RD Loan. This opens opportunities to borrowers who have not yet accumulated savings.
Because the RD Loan has low or no cash-to-close requirements, there is usually no need for statements, receipts, letters, and other types of documentation to verify savings or gifts.
The RD Loan program allows the lender to underwrite the loan using the start rate of a temporary 2-1 buydown rather than the note rate. The 2-1 buydown is a fixed-rate loan with a graduated payment. It is not an adjustable rate mortgage (ARM). In today’s market, the start rate would be 4.25% for the first year, 5.25% for the second year, and 6.25% for the remaining 28 years. This can make the difference for borrowers who cannot qualify for a home at the current note rate.
In January 2008, the RD Loan eliminated thermal standards. Prior to 2008, a house was required to have a certain level of insulation plus double pane or storm windows and doors. Thankfully, USDA has adopted the HUD minimum property standards. Now, we simply need a standard appraisal on FNMA Form 1004 or FHLMC Form 70.
The new Guaranteed Underwriting System (GUS) was introduced into the RD Loan in January 2008 giving lenders an automated underwriting system similar to Desktop Underwriter (DU) and Loan Prospector (LP) used by government and conventional agencies to provide loan approval with streamline documentation for borrowers with good credit scores and other compensating factors. As a result, we are now able to approve more borrowers with higher income-to-debt ratios. In addition, we continue to offer manual underwriting for applicants with no credit, limited credit, and less-than-perfect credit.
Despite the 102% financing, no monthly mortgage insurance, and other unique features, the RD Loan does not have a recapture fee or tax when the borrower sells the property. The recapture fee is a requirement of the Rural Development Direct Loan Program, a different program offered by USDA to very low-income borrowers. However, it is not a requirement of the Rural Development Guaranteed Loan Program offered to moderate-income borrowers.
FHA and other programs have “Flipping Rule” that prevents a buyer from purchasing a property from a seller on title for less than 90 days. However, the Rural Development Loan does not impose this rule.
The RD Loan allows for post-closing repairs required by the appraiser to meet minimum HUD property standards. This means borrowers can get a loan to purchase the property in its current condition plus additional funds to make repairs after closing. This benefits the borrower similar to the FHA 203(k) rehabilitation loan but with a simpler process.
There is no limit to concessions or gifts with the RD Loan, whereas FHA and other programs have a limit of 6% of the sales price. This is particularly helpful when a seller is willing to pay for repairs but does not have the cash to pay for them prior to selling the home at closing. In those cases, the seller can fund a repair escrow at closing without a 6% restriction.
The Rural Development loan offers unique opportunities to many homebuyers. However, it is not the best program for all situations.
The USDA program does not fit every homebuying scenario. In some cases it makes more sense to persue VA, FHA, and Conventional loan programs.
