Rural Development Loans
The Rural Housing Service (RHS) was created in 1994 as a result of the Agriculture Reorganization Act to meet the needs of small towns and rural community. It is a Department within the US Department of Agriculture. Rural Development loans also know as RD and come in two programs. These loans are made in rural areas and towns with a population of less than 10,000. There are two loan programs available. The first is a direct loan made by RD to the consumer it is called Section 502 Single Family Housing Direct Loan Program. The second is the Section 502 Rural Housing Guaranteed Loan Program.
502 Direct Loan:
This is a fixed rate loan with a 30 year amortization. It has no down payment requirements. It is made to very low income consumers having 50% or below of the area median income (click for median family income limits http://www.huduser.org/datasets/il/fmr99/index.html). This loan is limited in the amount the Department has to give out each year. Its funding generally runs out before the government’s year end. The buyer not only has to have 50% or less of the median income, but they must also be able to afford the payment with taxes and insurance. The ratios are the same as FHA at 29% of the Housing Ratio to income ration and 41% debt to income ratio.
502 Guaranteed Loan:
The guaranteed loan program is available to those with 115 percent or less of the median housing income for the area. This is a 30 year fixed rate loan with NO DOWN PAYMENT requirement. Because it is a government loan the rates are low. The unique item on these loans is that it basis the loan amount based upon the appraised value. If the home appraises above the sales price, the closing cost can be added to the loan up to 100% of the appraisal. This has allowed borrowers to get in for as little as $1.00 in limited cases. This loan is only available to residence in rural or small town (under 10,000) borrowers, but is an excellent source for those borrowers. The USDA is very strict on the property condition and the insulation of the home and has high standards, which make this program impractical for older homes.
Types of Loans Available:
There is only one program for both the 502 guaranteed and 502 direct loan programs and that is a fixed rate fully amortizing 30 year mortgage.
Advantages:
- No Down Payment requirement.
- Closing Cost can be added into the loan (if the property appraises high enough to include it at up to 100% of the appraised value).
- Loan government guarantee fee and not monthly guarantee fee.
- Low interest rates.
Disadvantages:
- Property must be in very good condition and have a high insulation R-factor.
- You can not make over 50% or 115% of the median county income to qualify.
- Hard to qualify since you have to make low income.
- On the Direct loan program there may be insufficient funds available from the government when you get your loan.
- Only available in towns less than 10,000 people or rural areas.
- Must be able to verify income limits.
When to get this Loan:
- If you live in a rural area this is a great loan for a newer house.
- If you make household income that qualify for this loan, and can still qualify, it is the loan to get.
Documentation required:
There are a couple of extra forms required to make sure potential borrowers fall into income limits. All loans are full doc loans.
MCA offers a product to protect you against potential mortgage fraud and over-charging. It is called the Consumer Protection Plan. A Mortgage Professional will review your initial mortgage disclosure documentation and when the loan is ready to close the MCA professional will also review your closing settlement documents to make sure you received the correct program, rate and fees as initially disclosed.
