USDA loans

government shutdown I’ve been glued to CNN in recent days, watching incredulously as those buffoons in Washington grind our government to a halt. I though for sure that a midnight deal would have been struck, but I woke up this morning with the dreaded news that the government has indeed shutdown. I’ve been trying to get a handle all morning on how this is going to affect the Massachusetts and national real estate market, and here’s what I have so far. (Updated 10/1/13 at 4:30pm below).

Tax Transcripts/SSN Verification Delays

Virtually all federally back mortgage lenders request copies of borrower’s tax transcripts through the IRS and social security numbers through the SSA. According to my friend Rick Moore, loan officer at Lendmark Loans in Framingham, and media reports, the shutdown will apparently either stop or hinder the federal agencies’ ability to issue those verifications, resulting in mortgage approval delays across the board. I know that lenders were furiously ordering tax transcripts and SSN verifications last week, in preparation for the shutdown. If your loan is in the middle of underwriting, speak to your loan officer now. You may be facing a delay in getting a clear loan commitment and a resulting delay in your closing date.

Federal Housing Administration (FHA)
The shutdown’s impact on FHA loans appears to be not as bad as originally thought. HUD’s Contingency Plan states that FHA will endorse new loans in the Single Family Mortgage Loan Program, but it will not make new commitments in the Multi-family Program during the shutdown. FHA will maintain operational activities including paying claims and collecting premiums. Management & Marketing (M&M) Contractors managing the REO portfolio can continue to operate. You can expect some delays with FHA processing.

VA Loan Guaranty Program
Lenders will continue to process and guaranty mortgages through the Loan Guaranty program in the event of a government shutdown. However, borrowers should expect some delays during the shutdown.

Flood Insurance
The Federal Emergency Management Agency (FEMA) confirmed that the National Flood Insurance Program (NFIP) will not be impacted by a government shutdown, since NFIP is funded by premiums and not tax dollars. Changes to the flood insurance program scheduled to take effect on Oct. 1 will be implemented as scheduled.

USDA Loans
For USDA loan programs, essential personnel working during a shutdown do not include field office staff who typically issue conditional commitments, loan note guarantees, and modification approvals. Thus, lenders will not receive approvals during the shutdown. If the lender has already received a conditional commitment from the Rural Development office, then the lender may proceed to close those loans during the shutdown. A conditional commitment, which is good for 90 days, is given to a lender once a USDA Underwriter approves the loan. If a commitment was already issued, the funds were already set aside and the lender may close the loan at its leisure. If Rural Development has not issued a conditional commitment, the lender must wait until funding legislation is enacted before closing a loan.

It is important to note that the traditional definition of “rural” for qualifying communities for assistance will be continued in effect during the shutdown.  We expect that language to continue the current definition will be included in whatever funding measure is eventually enacted.

Government Sponsored Enterprises
Fannie Mae and Freddie Mac will continue operating normally, as will their regulator, the Federal Housing Finance Agency, since they are not reliant on appropriated funds.

Treasury
The Making Home Affordable program, including HAMP and HAFA, will not be affected as the program is funded through the Emergency Economic Stabilization Act which is mandatory spending not discretionary.

Updated (Oct. 1 at 4:30pm). Memo from national mortgage lender:

“There has been no progress today toward a resolution to the government shutdown. Fortunately, the initial impact of the shutdown on mortgage originations has been small. The biggest concerns are obtaining transcripts from the IRS and social security verifications from the SSA. Certain Government produced economic reports will not be available. The Construction spending report due out this morning was not issued. The Non-Farm Payrolls report due on Friday may be affected. The impact on the mortgage market of this lack of data is difficult to anticipate.

At this time, Fannie, Freddie, and Ginnie say they will continue to operate as normal. VA says that they, too, will have no disruptions in services. FHA, however, expects delays due to reduced staffing. Origination companies, correspondent banks, and warehouse lenders may react differently as they access the risks associated with an extended shutdown.”

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The USDA Loan: Not Just for Farmers Anymore

by Rich Vetstein on January 29, 2010

I’m pleased to welcome back guest blogger, David M. Gaffin, a licensed Loan Officer with Greenpark Mortgage Corp. of Needham MA. You can visit him at Greenpark Mortgage or through his LinkedIn profile.

Dave is here to talk about USDA loans which are, surprisingly, available in such *rural* areas of Massachusetts such as Hopkinton, Sudbury, Ashland, South Shore, Cape Cod and many other communities.

Due to the mortgage meltdown that has plagued our county for the past couple of years, lending guidelines have tightened significantly and obtaining a home loan has been more akin to giving birth. In fact, it seems that many lenders want your first born in order to complete the transaction. Low down payment and no down payment loans vanished from the landscape, unless you really knew who to speak with. FHA became the buzzword and savior to those with less than a 10% down payment in a declining real estate market.

Now that FHA is more mainstream (requiring only a 3.5% down payment and having very generous credit and debt tolerances), many think this is the only alternative to the traditional Fannie/Freddie loan.

However, there are some little known loan programs available from the United States Department of Agriculture (USDA) that could benefit borrowers in many parts of Massachusetts and beyond. Known as the Guaranteed Rural Development Housing Section 502 Loans, these programs are designed for low to moderate income individuals or households purchasing a property in a “rural” community. The definition of rural is surprising, as you will see from the list of eligible communities in Massachusetts.

Massachusetts communities eligible for the rural loan include: Ashland, Hopkinton, Sherborn, Sudbury, Maynard, Littleton, Harvard and most of central and western Mass. Most of the South Shore and virtually all of Cape Cod are considered “rural” for this program as well. To see an interactive map of eligible Massachusetts communities follow this link.

There are some exceptional features to these programs, as well as some needed conservative features. Program Features include:

  • No Down-payment
  • No Monthly Mortgage Insurance
  • Unlimited Seller Contributions
  • The ability to repair certain aspects of the property and build in those costs into the total loan.

To be eligible to purchase a home with a Rural Housing loan, borrowers must meet income eligibility requirements.  Here is the link for Massachusetts.  For example, in the Boston-Cambridge-Quincy MSA (which includes most of Middlesex, Norfolk and Suffolk Counties) for Moderate Income a 1-4 person household’s income cannot exceed $95,100. For a 5+ household income cannot exceed $125,550.

Like FHA, the USDA programs requires an upfront fee of 2% that will guarantee the loan for the lender. FHA will allow the borrower to finance the upfront mortgage insurance premium (MIP) (currently 1.75% of the base loan, but scheduled to rise to 2.25% in April). In addition FHA will be reducing the allowable seller contributions from 6% to 3%. USDA will allow the upfront fee to be financed only if the appraised value of the home is greater than the purchase price.

Let’s look at the differences between FHA and USDA loans side by side:

USDA v. FHA FHA USDA
Appraised Value $200,000 $200,000
Purchase Price $175,000 $175,000
Down Payment 3.5% FHA $6,125 $0
Upfront Fee 2.25% FHA 2% USDA $3,800 $3,500
Monthly Mortgage Insurance $77 $0
Allowable Seller Contributions $6,000 $25,000
*Assumes $200 monthly taxes and $50 monthly homeowners insurance.  Interest rate of 5.50%, $400 monthly consumer debt

As you can see, with the upcoming FHA changes, the USDA loan requires less out of pocket, a lower guaranty fee and greater flexibility in managing the closing costs associated with the transaction.

The USDA loan is more conservative in qualifying than FHA, but that is probably a good thing. FHA, with its looser guidelines, is in trouble and may need the dreaded taxpayer bailout. FHA’s overall percentage of loan activity has increased from roughly 3% of closed loans to about 40%. With no minimum credit score and debt to income limits of 55%, the fact that folks are defaulting on these loans and FHA has tightened its requirements is not surprising.

David Gaffin, Greenpark Mortgage

USDA qualifies borrowers with more traditional debt ratios of 29% for housing and 41% for overall indebtedness. This is good for the borrower, who will not bite off more than they can chew, and for the taxpayer as the default rate on these loans is less than FHA. However, you will need to earn a higher income to qualify for the same house with USDA than FHA.

So, what do you do if you want more information about these loans?  Start by visiting the USDA program page.

You may also contact me with any questions you may have at dgaffin@greeparkmortgage.com.

Greenpark Mortgage Corp. is licensed to originate USDA loans in Massachusetts, Maine, New Hampshire, Vermont, Connecticut, Rhode Island and Florida.

Wow, what a great post Dave. I never knew about this program and its availability in some of the most toniest “rural” towns in Massachusetts.

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