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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2014

Getting to the Bottom of USDA Mortgages

With the requisite know how, U.S. Department of Agriculture loans can be a crucial part of your business

Getting to the Bottom of USDA Mortgages

Amidst the chatter of tightening credit restrictions and rising interest rates, many homebuyers have been led to think that their loan options are increasingly limited. Make no mistake, however: Niche loan programs still exist, and it’s up to well-informed mortgage professionals to keep their clients aware of any and all programs that may be available to them.

One often-overlooked loan program belongs to the U.S. Department of Agriculture (USDA). With no downpayment requirement, the USDA’s Section 502 guaranteed Rural Development housing loan has similar credit restrictions and debt-to-income ratios as Federal Housing Administration loans. This USDA program can become a valuable part of your portfolio — provided that you understand its nuances. Let’s dig a little deeper into this important niche.

With no private mortgage insurance requirement and no downpayment requirement, USDA Section 502 guaranteed Rural Development loans can prove to be the perfect program for rural communities — and an excellent source of new business for originators, as well. Why, then, are these loans so frequently overlooked?

Simply because many mortgage professionals haven’t bothered to learn much about them. For originators working in or around rural communities, it’s a must to learn all there is to know about this USDA program and its eligible properties.

Misconceptions

There are a number of misconceptions that many mortgage originators have about the USDA’s 502 guaranteed loan program, all of which warrant addressing. For one thing, this program is not for farm purchases. These USDA loans are strictly for housing purchases or refinances of current USDA loans in communities that generally have fewer than 20,000 residents and are located within eligible geographic areas.

A second misconception is that it’s a program designed just for low-income borrowers. Although this program was established to help low- and moderate-income buyers obtain decent and safe housing in rural areas, the USDA’s 502 program is much more than a low-income loan program. Borrowers can qualify under the USDA’s income requirements even if their household income exceeds the area’s median income, for instance.

More specifically, a borrower’s income can reach 115 percent of the designated area’s median income and still qualify. That noted, there’s one additional detail that originators should be aware of: The number of people residing in a household will affect the loan’s income limits. Mortgage professionals can be sure that their underwriters will look at the income of any co-applicants and adults planning on staying in the home.

Mortgage professionals also may have heard that USDA programs are hard to qualify for and carry too many restrictions and requirements on purchase properties. In truth, the USDA’s 502 program is no harder to qualify for than many other loan programs and often allows for more flexibility. When it comes to turn times, mortgage professionals can close a file from start to finish generally within 30 days. To do this, however, they need a stellar support system and a thorough knowledge of the program. The processing team must gather all the required information and work closely with under-writers to ensure that the loan process moves along smoothly.

Once a USDA loan file is cleared by an underwriter, it must be submitted to the USDA for a conditional commitment. This approval process can take a couple of days. The file then goes back to the underwriter to clear it, a process that can take five days. Originators must factor in this added wait time when calculating timelines. Otherwise, a closing could be delayed and your borrowers may be unhappy. High-quality USDA originators know this, however, and take all the necessary steps to keep their customers in the loop. Regardless, a strong support platform is essential for success in the USDA loan arena.

Knowing the market

In addition to familiarizing themselves with USDA processes and turn times, mortgage professionals who are interested in closing more USDA Section 502 guaranteed loans also should be familiar with the areas in which they’re permitted to close them. This past January, the USDA updated its list of eligible areas. Although most rural business will not be affected, many originators closer to major metropolitan areas likely will see eligible markets shrink.

This change has been coming for a long time, however, as the USDA postponed the update several times, so it may be the case that your bank or brokerage is already up-to-speed with the changes. In any case, eligibility information is available online at the USDA Rural Development website. Visit sctsm.in/USDAeligibility for more information.

As the 502 program is only open to properties in specific locations, USDA loan originators must know their markets thoroughly. Additionally, originators should know that homes themselves also must meet certain eligibility requirements. For example, per the USDA, the house must be “modest in size, design and cost,” and the home must meet the voluntary national model building code adopted by the given state. Staying on top of all these specifics is why it’s vital for mortgage professionals to perform their due research.

•  •  •

Like other loan types, USDA origination is a relationship-based business. USDA mortgage originators must know the people and the communities that they serve, and business is often based on word of mouth or referrals. From a loan’s application phase to its final closing, an originator must strive for great service. You also must maintain high standards for repeat customers and Realtor partners. If a borrower has been promised a closing within 30 days, you’ve got to do everything in your power to make that happen.

The sky is the limit with USDA loans. There is ample opportunity this year to expand your volume in this market, as many USDA-focused banks and brokerages are hiring additional loan officers and support staff. By educating more people in the rural community about the benefits of the USDA program, more dreams of home-ownership can come true. 


 


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