There are three primary government-backed mortgage programs and all three have some sort of upfront fee or guarantee fee. The three programs are the VA loan, FHA, and USDA. VA loans are reserved for veterans and other service personnel and require no down payment. The FHA loan can be used by anyone but does ask for a down payment of at least 3.5%. The USDA loan, like the VA loan, doesn’t require a down payment but there are two general qualifications.
One, the household income of those living in the subject property cannot exceed 115% of the median income for the area and the property must be located in a preapproved area. The USDA identifies these areas after a review of data taken from the national census taken every 10 years. For example, the USDA loan can’t be used to finance a property for a first time buyer in Tampa because this city isn’t considered rural or semi-rural. Yet certain suburbs just outside of Tampa are still USDA eligible. Your loan officer can help determine if a particular area you’re interested in is USDA-eligible.
If the income limitations are met and the property is located in an approved region, the USDA loan can be an ideal option for those seeking to buy a home in a rural or semi-rural area and come to the closing table with as little cash as possible. The USDA loan still provides 100% financing for approved home buyers.
The USDA loan guarantee to the lender is financed by a form of mortgage insurance. There are two types of mortgage insurance and the USDA program refers to these insurance policies as the Guarantee Fee. There is a single upfront fee based upon the sales price of the home at 1.00%. Say the home is listed at $150,000. That would mean the Guarantee Fee is $1,500. This fee is then rolled into the loan amount for a final loan amount of $151,500. The second fee is an annual one and lasts throughout the life of the loan and adjusted each year based upon the outstanding loan balance.
This annual premium is 0.35% and when applied to a loan amount of $151,500, or $530. The annual premium is paid in monthly installments so in this example, the additional monthly payment is $44 based upon the initial loan amount of $151,500. As the loan balance decreases, so too will the annual premium which will result in a reduction of the monthly payment as well.
When a lender approves a USDA loan and uses proper protocol the guarantee will apply. Say a lender approves the USDA loan request of $151,500. A few years pass and the borrowers can no longer afford the home. The lender provides various options to help the homeowners keep their home yet they no longer have sufficient income to make the monthly payments. The lender then is then forced to foreclose on the defaulted loan. At this stage, the lender makes a claim with the USDA.
The USDA will then review the claim and make sure the loan was approved properly and the lender followed proper statute during the foreclosure process the lender is then compensated for the loss. There is a loan guarantee associated with a USDA loan- it’s a guarantee to the mortgage company.
Borrowers that have questions about applying for a USDA 502 mortgage can reach us by calling ph: 904-810-2293