As part of its Rural Development Loan program, the U.S. Department of Agriculture, or USDA, offers loan guarantees for rural, single-family mortgages. The Single Family Housing Guaranteed Loan Program, or SFHGLP, helps low-income to moderate-income households acquire sanitary, safe, decent, modest and adequate primary residences in eligible rural locations. The SFHGLP charges both an upfront mortgage funding fee and an annual fee in return for guaranteeing mortgages from banks and other commercial lenders. The fee is charged to the lender, and the lender in turn passes the fee along to the borrower.
Loan Eligibility Criteria
The SFHGLP guarantees 90 percent of the amount lent by approved lenders for no-down-payment mortgages to eligible rural homebuyers. The loan can be used to buy, build, rebuild, improve or relocate a property within an eligible rural area. To apply for the program, you must:
- Meet income eligibility requirements for your state and county
- Occupy the home as your primary residence
- Be a U.S. citizen, qualified alien or noncitizen national
- Be legally able to assume the mortgage
- Not be disqualified from participating in federal programs
- Show willingness to pay your debts on time
- Buy a property that satisfies all SFHGLP requirements, including location
Calculating the USDA Funding Fee
The maximum USDA funding fee allowed under the SFHGLP is 3.5 percent. As of fiscal year 2019, the upfront funding fee for the SFHGLP is 1 percent. The fee is calculated based upon the mortgage amount, including any site preparation, closing costs, repair and rehabilitation, installation of equipment for the physically disabled, upfront utility hookups, property taxes, essential furnishings and appliances, energy-efficiency features and the installation of broadband equipment. In addition, the loan can be used to refinance an eligible loan.
For example, suppose you wish to purchase an eligible home selling for $130,000 that has closing costs of $1,000. You choose to not place a down payment on the home. The total loan amount is $131,000, which means the upfront funding fee is .01 x $131,000, or $1,310. You can pay the funding fee at closing or roll it into your mortgage. If you pay the fee at closing, the lender might require proof that the funds you use are truly yours and that they are seasoned, which means that you’ve had them in an account for at least six months.
Calculating the Annual Fee
The maximum annual USDA guarantee fee for the SFHGLP is 0.5 percent. As of 2019, the annual fee charged by the SFHGLP is 0.35 percent of the average annual scheduled unpaid principal balance, or UPB. The lender pays the fee annually to the USDA and passes along the fee on a monthly basis to the borrower, who pays it out of his escrow account. The fee is recalculated every 12 months for the life of the mortgage or until the loan guarantee expires or is cancelled. You start paying the annual fee one year after the loan closing.
The calculation proceeds in three steps:
- Compute the average annual scheduled UPB. You can do this by consulting the amortization schedule for the mortgage. This schedule shows the interest and principal paid each month of the loan and the remaining loan principal. You add up the remaining loan principals for each of the 12 months and then divide by 12 to get the average UPB for the year. For example, assume you take a $100,000, 30-year loan at a 6 percent interest rate. Using the amortization schedule for the first year of this loan, the average annual UPB works out to be $99,443.24.
- Compute the annual fee based upon the average annual UPB. This is the fee the lender pays to the USDA and passes along to you in monthly installments. In this example, the annual fee for the first year of the mortgage is 0.0035 x $99,443.24, or $348.05.
- Compute the monthly escrow fee. This is the monthly installment for the annual fee. It is passed along to you from the lender, and you pay it monthly from your escrow account. In this example, the monthly fee for the first year is $348.05 / 12, or $29.00 rounded.
Borrower Income Eligibility
To qualify for the USDA loan guarantee, your household income cannot exceed certain limits set by the USDA. These limits depend on several criteria, including:
- State and county
- Number of people in household
- Number of household residents who are disabled, full-time students or under 18 years old
- Applicant’s age
- Annual expenses for child care, medical care and disability support
- Monthly income, including base, overtime, bonus, commission, self-employment, dividend/interest and net rental income
Based on your circumstances, the USDA determines whether you are eligible for the SFHGLP. You must also show you have the ability to repay your mortgage, have a reasonable credit history and meet other requirements. Generally, your adjusted household income cannot exceed 115 percent of your area’s median income.
Eligible Rural Areas
Only homes situated in eligible rural areas can be considered for the SFHGLP. The USDA maintains a database of eligible locations that you can check. You might be surprised by which areas are considered rural, because many lie adjacent to suburbs and qualify by virtue of their low population rates. The eligible areas are updated every 10 years after the latest census is complete. You can quickly determine whether the property is located in an eligible area by entering the address on the USDA online map.
Direct Home Loans from the USDA
If your household income is at or below the applicable low-income limit in your area, you can avoid the upfront and annual mortgage fees by obtaining a Section 502 Single Family Direct Home Loan from the USDA. These USDA loans provide safe, decent and sanitary housing to low-income and very low-income applicants living in rural areas, which generally includes areas with a population below 35,000 people. If you qualify for this program, you receive assistance directly from the USDA that reduces your monthly mortgage payments. Criteria used to qualify potential loan recipients include:
- Lack of safe, sanitary and decent housing
- Inability to obtain a loan on reasonable terms
- Pledging to use the property as a primary residence
- Meeting citizenship requirements
- Not barred from federal program participation
- Seeking a property that is no larger than 2,000 square feet, has a market value below the loan limit, is not used to produce income and does not have an in-ground swimming pool
The interest rate for the direct loan can be as low as 1 percent with payback periods of up to 38 years. No down payment is required unless your assets exceed certain limits.
Other Federal Programs
The U.S. government offers no less than 17 programs to help individuals buy a single-family home, including several additional ones offered by the USDA. Perhaps the best known of these programs is the basic Federal Housing Administration Insured Home Mortgage. The program provides insured mortgages for individuals who meet the requirements for eligibility, cash investment, mortgage payments and credit score. The FHA has additional loan guarantee programs to support property improvement and the purchase of manufactured homes. Other federal mortgage programs are available to a number of groups, including veterans, Native Americans and homeowners/renters living in a declared disaster area who need financial assistance.
Items you will need
- Calculate the upfront funding fee for a refinance by multiplying the loan value by .015.
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