Special Mortgage Loan Programs - Part 2: The Rural Development Guaranteed Housing Loan

Part 2: The Rural Development Guaranteed Housing Loan

Rural Development, formerly known as the Farmers Home Administration (FmHA), administers a mortgage loan guaranty program – also called the Section 502 Program -- designed to provide rural home financing for first-time homeowners or those who don't own structurally sound or adequate housing. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare home sites, including providing water and sewage facilities. Prospective borrowers can apply with participating lenders, who process and close the loans. The Rural Development organization, an office of the U.S. Department of Agriculture (USDA), underwrites the loan packages.

'Rural' is defined by the organization as being outside a Standard Metropolitan Statistical Area (SMSA). The property that the borrower wishes to buy must be on a publicly-maintained road, though it can be located in a development with private roads. And, as with the mortgage revenue bond authority loan (see Part 1 of this article series), it must be a single-family owner-occupied home from which no income can be derived. The loan amount can be up to 100% of the lesser of the property's cost or its appraised value. The seller is allowed to pay all closing costs, making it a true 'no money down' transaction for the buyer. Additionally, if the property appraises for more than the purchase price, the borrower can finance in the closing costs and the guaranty fee (which is 2% of the loan). The guaranty fee can be financed as long as the property appraises for at least the amount of the purchase price plus the fee. Anything above that amount can be used to finance closing costs. The maximum loan term under the 502 program is 30 years.

The program sets limits on the maximum adjusted gross income that a qualified borrower is allowed to have, as well as maximum loan amounts based on the area's current FHA loan limits. Allowable income adjustments include amounts for minor children, child-care expenses, and elderly family members. For the most part, these limitations are not placed so low as to preclude a large segment of moderate-income borrowers from qualifying for the program. Perhaps the most stringent limit of the program, however, is the requirement that the borrower be unable to obtain the financing necessary to buy a home without Rural Development's assistance. In other words, the borrower must be rejected by or be unable to qualify for any other available loan program, such as conventional, FHA, or VA loans. But although unable to qualify for other funding sources, borrowers must still have a good credit record that shows a history of meeting their financial obligations. In short, there can be very few late payments and no judgments or bad accounts reported over the previous twelve- to twenty-four month period.

Rural Development also offers a subsidized payment program for borrowers who don't have sufficient income to qualify for the standard plan. A portion, or all of the loan, may be subsidized. A formula is used to determine the parameters that the borrower fits into. Nevertheless, this loan also requires that the applicant have good credit.

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