'Win-Win' for Rural Housing
USDA loan guarantee program--a resource for low-to-moderate income borrowers
by Lon Tonneson
Community banker Jim Nixon likes nothing better than to help a young family buy its first home. It’s a thrill to see how happy the family members are to own their own piece of turf and no longer be renting. Typically, they take pride in their new status as homeowners and begin to put down roots in the community, helping it grow and become more stable. And they often become loyal customers with the bank that helped them get their first home loan.
“Everybody wins,” says Nixon, vice-president of the Metz Banking Co. in Nevada, Mo.
But because Nixon works at an independent community bank that serves a rural area, helping first-time, low-to-moderate income homebuyers hasn’t always been something he says he could do very often. Like most other smaller banks, Metz Banking, which has $40 million in assets, often required a 20 percent down payment on such home loans and offered only a 20-year variable rate mortgage.
“Often, we had to tell them thanks for thinking of us and refer them to a competitor or a mortgage broker,” says Nixon, who notes that when such prospects did find a lender, they often ended up paying higher rates on loans.
Luckily that’s changing. Thanks to the U.S. Department of Agriculture Rural Development’s Guaranteed Single Family Housing Loan program. The program provides up to a 100 percent loan guarantee, enabling Metz Banking, among others, to offer no down payment, fixed rate, 30-year loans to qualified borrowers.
The loans are assumable without release of liability. And closing and repair costs can be rolled in the loan when the appraised value of the property is higher than the contract price. The loans can be easily sold in the secondary mortgage market. “It is a great program,” says Nixon, who has made USDA guaranteed loans in four states.
To be eligible for the USDA guarantee, home buyers must:
- Have an acceptable credit history;
- Have adequate and dependable family income not exceeding 115 percent of the county median income;
- Have repayment capacity (based on payments as a percentage of gross family income). The maximum ratios include 29 percent for principal, interest, taxes and insurance and 41 percent of total obligations;
- Be U.S. citizens, or non-citizens admitted to the United States for permanent residence or on indefinite parole; and
- Have the ability to personally occupy the home on a permanent basis.
The property must be located in a community with a population of 20,000 or less and meet the Department of Housing and Urban Development’s minimum property standards. Congress appropriated approximately $2.8 billion for the program last fiscal year and is expected to allocate about the same amount of money in fiscal year 2004, says Howard Boatman, director of the program in Minnesota, one of the leading users of the guarantee in the United States.
According to Nixon, one of the program’s big pluses is that it is administered locally. Each state has several local offices serving several counties. “You don’t have to call Chicago, Denver or Washington, D.C., to get answers to your questions,” Nixon says. “Sometimes you can talk to a real person in your hometown, or just a few counties away.”
A bank does not have to worry about hiring someone who is an expert in loan processing or underwriting to use the program either. A bank can form alliances with underwriters who will process and consolidate the loans with others for sale to the secondary mortgage market.
That’s the strategy Farmers and Merchants State Bank of New York Mills, Minn., follows. “We don’t do enough first-time homebuyer loans to be able to process them,” says Ellen Olson, the bank’s compliance officer.
Instead, the bank works with Midwest Minnesota Community Development Corp., a nonprofit organization in Detroit Lakes, Minn. “It reduces our risk and allows us to be a full service bank for our customers,” Olson says.
The secondary mortgage market has embraced USDA’s guaranteed loan program. Many companies have relaxed time and distance limits for comparable sales that can be used in appraisals. They also have improved outreach support for rural banks with Internet tools.
These changes at Fannie Mae, Freddie Mac, major banks and other institutions make housing loans a better fit for rural lenders, says Mike Hindman, president and CEO of ICBA Mortgage, ICBA’s secondary mortgage market access provider. ICBA Mortgage has lobbied for many of the USDA loan program’s changes.
For Nixon, the benefits of using the USDA program in southwest Missouri are clear. “First-time homebuyers are a steady business for us now. It is helping our customers, our bank and our community,” he says.
Lon Tonneson is a free-lance writer and editor specializing in agricultural issues.