Question - I’m looking at a listing that says it qualifies for a Rural Development Loan; what’s that all about?
Answer - First let me say that yes, this is the same USDA that you see stamped on food packages. The United Stated Department of Agriculture (USDA) was given the charter back in the 1950’s to try to develop programs that would encourage people to want to move to and own homes in the rural areas of our country. One of the more successful programs is the Rural Development Loan Guarantee program. I’ll discuss the one in Michigan, but this is a national program that is available in all states.
The Rural Development Guaranteed Program provides a guarantee on approved private lenders' loans. The Guaranteed Program offers moderate income applicants the opportunity to purchase new or existing home with zero down payment, no monthly PMI payment and 102% financing based on appraised value vs. purchase price. So it is a lot like the VA loan program and shares some features with programs from FHA or Fannie and Freddie Mac; however, in this case it does not involve just foreclosed homes. Any single family dwelling in a designated rural area may qualify, if it and the buyers meet the criteria of the USDA program.
You can read all of the eligibility requirements, loan use restrictions, property requirements and terms and fees for the Michigan program by clicking here.
A thumbnail summary would be that you have to need the loan guarantee in order to buy, have a modest but dependable income, be legally able to take out a loan and must be buying in a designated rural area. To find out if the area in Michigan that you’d like to buy in is designated as a rural area, click here. For other states, see the USDA web site for your state. The terms and fees for this typwe of loan are that is be a 30-year fixed loan, with a 2% up-front fee and a .4% annual fee for the life of the loan. There is no PMI required and there are no limits on seller contributions towards closing costs, other than what your lender may impose.
There are both national lenders and Michigan-based lenders who offer this program and it’s up to you to hook up with one that does these types of loans. For more information about this program in Michigan, click here to get the program brochure.
If you are not in Michigan, click here to go to the USDA national site where you can choose your own state and look to see if the areas that you have in mind fall under the program. Click on the Single Family Housing choice in the left hand column and then accept their disclaimer terms to get to a US map that will allow you to choose your state.
This is a great program for first time buyers who have reasonable credit scores and steady employment, but who need help getting over the down payment hump or with closing costs. I think you’ll also be surprised that you don’t have to go way out in the boonies to get into areas that are designated as being rural for the purposes of this program. Good luck!
One note of caution is that this type of loan can take a little longer to put together than a conventional loan, so allow yourself about 15 extra days to get the closing on your offer. In addition to the normal underwriting process, which itself has become much more strict and time consuming, a USDA loan must be shipped off to the USDA for final approval, once your mortgage company has otherwise approve it. A second cautionary note is that the USDA program is funded by Congress year-by-year and it sometimes runs out of funding before the year ends, so get your application in earlier in the year, if at all possible.
