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USDA Home Loans – Part 1

Although most people don’t realize it, the Federal Housing Authority (FHA) and the Veterans Administration (VA) are not the only government agencies, which guarantee homeowner mortgages.  The US Department of Agriculture (USDA) also provides USDA Home Loans and related services.

The USDA House Loan Program is for Everyone

Almost Everyone Has a Chance!

While I knew that they existed, it wasn’t until a friend of mine bought a home in the City of Geneva, Ohio (which, interestingly enough, meets the USDA’s definition of a rural area… who’d ‘a guessed?),  I thought that the US Department of Agriculture (USDA) program was a trivial, essentially non-player, in the US Government-related mortgage activities, so, I didn’t include it in this website.

Wow, was I wrong!  And, I’m now scrambling to correct that oversight.

In fact, not only do they guarantee homeowner loans like the VA and the FHA. Unlike those other two agencies, USDA actually issues mortgage loans to lower income individuals in rural areas. My assumption here is that they are providing a very valuable service to individuals whose income is so low that commercial lending institutions won’t touch them… A very good thing in my opinion.

As long as you have income sufficient to make the payments on your loan and your credit history meets their criteria (which I have the impression is less strict than it might be), you may be eligible for a USDA-related property loan.

And, here’s the best part… you can get both “Section 502 Direct Rural Housing Loans” and “Section 502 Guaranteed Rural Housing Loans” with a ZERO (nada, rien, zip) down payment… See below.

 

The Rural Development Responsibilities of the US Department Of Agriculture

 

These loans are a part of the rural development responsibilities of the USDA.  Actually, there are quite a few programs that the US Department of Agriculture has been given the responsibility of overseeing.

Its programs encompass everything from business loans and grants through community and economic development programs.

The latest legal authority for the rural development responsibilities of the USDA comes from the American Recovery and Reinvestment Act of 2009 (Recovery Act), which was signed into law by President Obama on February 17, 2009.  Under that law, funding is provided according to the following table:

Rural Development Recovery Funding Obligations

Business and Industry Guaranteed Loan Program (B&I):
$1,601,007,139
Broadband Initiatives Loan and Grant Program (BIP):
$3,529,090,888
Rural Business Enterprise Grant Program (RBEG):
$19,398,942
Community Facilities Loan and Grant Program (CF):
$1,389,529,796
Single Family Housing Direct Loan Program (SFHD):
$1,395,291,645
Single Family Housing Guaranteed Loan Program (SFHG):
$10,056,306,317
Water and Waste Disposal Loan and Grant Program (WWD):
$3,271,300,435
USDA Recovery Funding Obligations

 

Today’s article is the first in a series of posts where I will be dealing with USDA related mortgages.  So let’s get started.

The first thing that you need to understand is…

What Is Rural?

 

The key to the USDA rural development process is understanding exactly what the USDA is responsible for… The United States Department of Agriculture is responsible for the development of rural areas, facilities and services.  The first thing that you need to understand about its responsibilities is the definition of the word “rural.”

The 2002 Farm Bill (P.L. 107-171, Sec. 6020) defines under “§1991 – Definitions” the terms “rural” and “rural area” as any area other than (i) a city or town that has a population of greater than 50,000 inhabitants; and (ii) the urbanized areas contiguous and adjacent to such a city or town.

There are other legal definitions of the word “rural” which seem to involve the Census Bureau and/or other government agencies that I’m not going to get into here.  But, based upon my investigation of the question, it’s somewhat unclear exactly what constitutes “rural” as far as the USDA is concerned.  However, my bet’s on the 2002 Farm Bill.

Fortunately, the USDA has come to the rescue. Their website provides a step-by-step process, which will help you determine whether the property that you want a mortgage loan for is actually rural.  If the USDA is going to be involved with your mortgage, the property must be in an area categorized as “rural.”

Step 1 – It All Hinges on Where the Property Is Located

The first step in determining eligibility for a USDA-related mortgage is to find out if the property to be mortgaged is in a rural area.  As I implied above, this isn’t necessarily an easy thing to do.

Fortunately, while it’s somewhat difficult to determine whether an area you are interested in is eligible for a USDA-related mortgage loan, the USDA website can help you with that.

Its website has an interactive map, which, if used properly, will show you whether a given area is, in fact, rural or urban.  You can zoom in on the map which makes it easier to do that if your property is located very close to an urban area.  Plus, there is a list of additional areas which are categorized as rural that you can get to from the interactive map.  And just in case you don’t like interactive maps (which I personally don’t), there is also a list by state and county which will indicate whether a given locality is rural.

Step 2 – You Must Figure Out What Type of Housing You Want

 

In order to apply for a USDA related mortgage loan, you must know exactly what type of housing you are buying or want to buy.  In this article I’ll be talking about single-family housing loans as well as multifamily housing loans.  Also, provision is made for the repair and rehabilitation of structures which you already occupy but I won’t be getting into that today.

Our New Home

Our New Home

It’s also interesting that the USDA provides both loans (which you need to pay back) and grants (which, generally, you may not need to pay back).  I’ll be discussing the grants that are available to buyers of and individuals interested in the rehabilitation and repair of properties covered by the programs of the United States Department of Agriculture.  Depending on the type of USDA program you are interested in to determine if there is a grant which may be exactly what you’re looking for.

Today I’m going to focus on single-family housing loans.

Single-Family Housing Loans

 

Property Eligibility

The USDA provides two separate sources of property eligibility to interested applicants.  The first source is an interactive map.  Here’s the link to the map:

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

You can move around on the map by depressing your left mouse button to “grab” the map and then pulling the map in the direction you want it to move so that your property area will be shown.  And, you can zoom in and out by using your mouse wheel (if you have one) or by double clicking to zoom in and using the minus sign near the top left of the map to zoom out.  It’s not very intuitive and it took me a while to figure out how do it.

The thing that I really liked about the map is the search feature.  When I entered my home’s address in the search box near the top of the map, not only did the map to zoom in and show me right where I live, but it also had a pop-up window, which told me whether my property was eligible for USDA related financing…  Kind of slick, actually!

If you decide to use the zoom feature, and as zoom in on into a given area, you will notice that ineligible areas are highlighted in a light beige color.  Areas outside of the light beige highlighted urban areas are white and are in fact eligible for USDA backed or direct single-family housing loans.

In the event the property that you wish to purchase or renovate appears to be in any ineligible area, click the following link to obtain a list by state of eligible localities within ineligible urban areas:

http://eligibility.sc.egov.usda.gov/eligibility/additionalAreas.html

You can also get a list of eligible/ineligible areas on a state-by-state basis by going to the following link:

http://eligibility.sc.egov.usda.gov/eligibility/textDiscriptionAction.do?pageAction=state

Personally I don’t like the map.  I found it to be not very intuitive and quite hard to figure out how to use.  However, the last two links and the search feature worked better for me.

After you figure out whether the property you want a home loan for is eligible, you will need to determine whether your income qualifies for USDA related financing.

Step 3 – Determine Whether or Not You Have Enough Income to Qualify for USDA Related Financing

 

The USDA related mortgage loans are really kind of nice because, rather than having an arbitrary minimum income level to determine whether you qualify for their involvement in your housing situation, you only have to demonstrate that you have enough income to make your payments on time.

However, note that you will need to have an acceptable credit rating.  As I understand it, most governmental agencies are somewhat lenient and will take into account special situations… Especially if you had a rough period and your situation has changed.

Note that if you habitually fail to pay your bills, no matter how you spin it, the USDA is not going to help you get a mortgage.

Income Eligibility.

Income eligibility is difficult to determine when using the USDA Rural Development web site, in my opinion.  However, due to their nature of US government regulations, the way they have it set up is probably better than any of the alternatives.  You can go to the income eligibility determination portion of the website by clicking the following link:

http://eligibility.sc.egov.usda.gov/eligibility/incomeEligibilityAction.do?pageAction=state&NavKey=income@11

You will begin on the screen where you indicate where your property is located.  This is a determining factor in providing you with your income eligibility information.  The process begins when a screen which will permit you to select the state where the property is located from a drop-down list.  This is followed by another screen which is also a drop-down list for the county/locality of the property you are interested in.

Then, the website will collect household member information on the third screen.  After providing the information you will collect the next button and you will be taken to a screen where you will have an opportunity to enter your financial income information.  This time, rather than clicking the next button, button that you will need to click says, “Finish”.

The screen that is then displayed will provide you with your eligibility information based upon what you entered in the previous screens.  Here is a sample screen that I copied from the USDA website:

 

You will need to study the screen a little bit, but it’s fairly straightforward.  It indicates whether you’re eligible for a guaranteed rural housing loan and or a direct rural housing loan program. I arbitrarily chose a county in Alaska and used what I think is a reasonable Social Security type income level.

The screen, surprisingly, after the somewhat confusing previous process, does make sense and is, I think, fairly well-designed.  Study the screen until it makes sense or contact USDA Rural Development office in your area for assistance.

Types of Single-Family Dwelling Loans.

There are basically two types of single-family dwelling loans available under USDA programs.  The first, is a guarantee of the loan and is a somewhat standard mortgage, such as one would expect to obtain for an FHA or veteran loan.  It is called a Section 502 Guaranteed Rural Housing Loan.  The other type is made directly from the USDA.  It is called a Section 502 Direct Rural Housing Loan Program.

The Section 502 Direct Rural Housing Loan Program is a loan that is granted from and administered directly by the USDA.  The income requirement maximum of the Direct Loan Program is substantially less than those allowed for the Guaranteed Rural Housing Loan.

You can see an example of the income levels permitted for both types of loans in the above displayed screen.

If you are eligible for a direct housing loan or a guaranteed housing loan, here is a link to the second part of this article which is a summary of how each type works:

USDA Home Loans – Part 2