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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2016

Home Loans on the Range

USDA mortgages offer originators countless new borrowers and referral partners

Home Loans on the Range

One of the biggest stumbling blocks for many would-be homebuyers is the downpayment. Despite having strong credit and an income that allows for regular payments, it can be difficult to save up enough money to qualify for many loan programs. This also is a problem for mortgage originators, who may lose out on profits if they can’t find a suitable loan program for these otherwise worthy borrowers.

This is where it can be beneficial to think outside the box — or the barn. With many borrowers willing to live in rural areas — particularly if they have a manageable commute to a big city — originators can find loans for more borrowers than ever before, if they do a little research and learn the ins and outs of no-money-down loans offered through the U.S. Department of Agriculture (USDA).

Two big questions surface when it comes to USDA mortgages: What exactly are they, and why don’t more originators do them? These loans are sort of like self-employed borrowers who actually show a large profit on their adjusted gross income. You may have heard about them, but you don’t see them often.

The USDA’s Rural Housing Service single-family housing loans are no-money-down secured government mortgages. The most important thing to remember about these loan programs is that the subject property has to be in an eligible rural area. The USDA’s website allows users to look up eligible addresses, but roughly 97 percent of the country, geographically speaking, is USDA-eligible territory.

Many borrowers and originators are not fully familiar with these USDA loans, which also are commonly known as Section 502 loans, but they have many attractive features. Interest rates are on par with Federal Housing Administration (FHA) rates. These loans are for first-time or repeat homebuyers, no counseling is required, and there are no prepayment penalties.

Purchase loans and refinances both have a 2 percent upfront fee paid at closing. Mortgage insurance is less than half a percent annually, making it less than required for FHA or conventional loans. Also, keep in mind that the upfront fee can be financed as part of the loan transaction.

As an originator, the top selling point is simple: If you come across a borrower whose credit and income qualify, you can get them into a new home with absolutely no money down. Depending on closing costs and credits, they may even get their earnest money back at closing.

Eligibility

USDA-guaranteed home loans can only be used for owner-occupied primary residences, and the housing must be decent, safe and sanitary. Loans also are subject to an income limit, as borrowers must have an adjusted income at or below the set limits for the county in which they live. The USDA makes these limits, for each county, readily available.

If you come across a borrower whose credit and income qualify,
you can get them into a new home with absolutely no money down.

To qualify for USDA funding, the agency requires that borrowers must be unable to secure a home loan from “other resources on terms and conditions that they can reasonably be expected to meet” — although that definition allows some room for interpretation. Other eligibility requirements include, but are not limited to:

  • Proof of U.S. citizenship or permanent residency;
  • 29/41 debt-to-income ratios, although if borrowers have a credit score greater than 660, these ratios can be even higher;
  • Acceptable credit history, with no accounts that went into collection in the previous 12 months. If you can prove, however, that your borrowers had credit issues that were temporary or outside of their control, such as a medical emergency, they may still qualify.

Borrowers with a credit score of 620 or higher tend to get approved a bit easier. If a borrower has a credit score below 580, the underwriting process gets more stringent, but it is up to individual lenders to determine what credit scores they will accept.

Large metropolitan areas are generally not going to be eligible for USDA programs. Rural locations are always eligible, and as previously mentioned, the vast majority of the U.S. is geographically eligible. Oftentimes, these locations are just a short commute away from metropolitan areas.

Education

Because many real estate brokers are not going to be familiar with this program, you will likely have to do some educating of your Realtor partners. By doing this, you can be the originator who brought thousands more potential homebuyers to their attention — and imagine the referrals that can bring. Many borrowers will need a similar education, as they may believe a downpayment is required to purchase a home.

The way you can explain USDA loans to potential Realtors is simple. Many Realtors are familiar with FHA loan programs, so tell them to think of USDA loans as being similar — but requiring no money down and with lower mortgage-insurance costs. This is an even easier point to get across to potential borrowers.

Think about all of the applications you have taken where borrowers had the credit and the income to qualify, but no downpayment available. Those clients are all potential USDA borrowers. Sure, they may have to tack on an extra half-hour of drive time to get to an eligible area — but that’s better than not getting a home at all.

Because many are not going to be familiar with this program,
you will likely have to do some education of your Realtor partners.

As just one example, take the town of Elwood, Illinois. Elwood is a quaint little community, less than an hour away from in Chicago. According to Zillow, the median home value in Elwood is $174,200, or roughly 15 percent less than the median home value in Chicago. Even better, the entire city of Elwood is USDA-eligible, although towns to its immediate north, east and west are not.

If you happen to be an originator who does loans in Illinois, it would be worthwhile to call on Realtors who serve Elwood. You could tell them you are a mortgage professional who specializes in USDA mortgages, that every single home in that town is eligible for a no-money-down mortgage, and you would be happy to pre-approve all potential buyers.

Similar examples can be found in every state across America. With a little bit of research, effort and a few phone calls, you may be able to reach Realtors in attractive USDA-eligible cities and counties wherever you originate loans — and it is likely Realtors have not received similar calls from other mortgage professionals.

•  •  •

Now is the time to take the first steps toward originating USDA loans. If you are interested in broadening your business, research all of the USDA-eligible areas near you, which are easily accessible on the agency’s website. Write the locations down, and call every Realtor partner you know who services those areas.

Ask if they have heard of USDA loans, and if not, take a few minutes to educate them, emphasizing that potential buyers don’t need a downpayment. You also could set up a meeting with the managing brokers of real estate offices in a central location within a USDA-eligible area. If the brokers are not familiar with USDA loans, offer to come in and train their agents. With this effort, you can potentially line up an entire office full of Realtors who are ready to feed you deals.


 


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