Little-Known USDA Mortgage Program Getting a Second Look

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Yesterday’s Wall Street Journal included an article (Home Buyers Turn to USDA for Mortgages) about an obscure home-loan program offered through the U.S. Department of Agriculture. The program was created as a way to boost homeownership in rural areas, but is now being used by buyers in some areas outside of major cities that still qualify for the loan terms.

The article shares this story from a recent buyer:

When Erick Moore first read about the USDA’s Rural Development Guaranteed Loan program, he says he imagined it would be “restricted to some little farmhouse.” Instead, the 33-year-old computer programmer moved last month into a four-bedroom, three-bath home in Fuquay-Varina, N.C., 17 miles outside Raleigh. The house sits on nearly one acre and features a brick facade, 10-foot ceilings and hardwood floors.

“I couldn’t believe it until we closed,” says Mr. Moore, who paid only $1,200 out of pocket to move into the $228,000 home. The seller contributed $5,000 in closing costs, and Mr. Moore rolled the 2% fee charged by the USDA into the loan. Mr. Moore, who owned a home in St. Louis before he relocated to the Raleigh area last year, says a 60% drop in his stock portfolio made it difficult to come up with a down payment. He directed his Realtor to show him only homes that were eligible for the USDA program.

There are many areas within our area that would likely qualify for this program. To qualify, borrowers must meet specific income limits based on the number of people in the household the median income of the county where the borrower is buying the home. For most of the Memphis area, the income limit for a household of four individuals would be $70,750. Detailed income limits by state are here.

Despite the low- or no-down payment requirements of these loans, the USDA program has a default rate slightly better than that of loans guaranteed through the Federal Housing Administration. But unlike FHA the USDA loan programs rely on a fixed allocation of funds from Congress, and no additional loans can be made once that money is committed.

In today’s tighter credit market, the USDA program might be a viable and attractive alternative for some buyers.

Posted by Scott Sherrin at 3:46 pm

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