All About the USDA Guaranteed Rural Housing Program (And If It’s Right for You!)

USDA stands for the United States Department of Agriculture, the agency best known for working with farmers and food standards.  The USDA also promotes decent and affordable homeownership in rural areas. The USDA offers two types of home lending. The first is USDA Direct, where a lower-income borrower deals directly with the Department of Agriculture. The second is the Guaranteed Rural Housing program, where the US government offers a strong default guarantee to borrowers of moderate means to purchase a home in a rural community. This article focuses on the Guaranteed Rural Housing program.

The Guaranteed Rural Housing program offers a zero-down down payment and a long-term 30-year fixed-rate mortgage on a quality, single-family home in a rural area to a moderate-income qualified borrower.

• Guaranteed means that in exchange for an upfront fee of one percent of the loan amount (added to the loan) and a small monthly fee collected with the monthly payment, the Federal government will issue the lender a default guarantee in the event of a foreclosure.
• Zero down means no down payment is needed and, as mentioned above, the guarantee fee can be added into the loan amount. However, the borrower must be able to cover the closing costs and prepaid items in connection with the loan (1^st year’s insurance, establish escrows for future taxes and insurance). These costs could run several thousand dollars. Gifts from family members or grants might help offset some of these costs.
• A Rural Development loan has a 30-year fixed rate and tends to be a competitive rate because of the government guarantee.
• A quality single-family home means the property must be in good condition, pass an appraisal done by a Housing and Urban Development (HUD) certified appraiser and not have any safety and soundness issues. The property cannot be income-producing (no farms).
• A rural area is an area or community in a non-metropolitan area. Currently, in Northern Illinois, all areas of Ogle, Stephenson, and Lee Counties are considered rural along with western Winnebago, northern Boone, and western DeKalb counties. Please feel free to contact us to see if a particular property is in an eligible area.
• Moderate income is determined by the county where the property is located and the family size. The income limits vary from the low $100,000s to the $130,000s. To see if your income level qualifies, feel free to contact us for more information.
• A qualified borrower is someone with a reasonable credit score and a reasonable debt-to-income ratio that makes home ownership affordable and sustainable for years to come.

The Guaranteed Rural Housing program is a great program for buyers, but in our current markets, the buyer must declare what type of financing option they are seeking. In an ultra-competitive market, sellers are looking for the top dollar with the easiest financing (or no financing) option available. The Guaranteed Rural Housing program, an FHA loan, or a VA loan can all be perceived by sellers as being a more difficult process with borrowers, even if the borrowers are pre-approved.

So, if you are considering a Guaranteed Rural Development loan, I highly recommend that you discuss some other possible lending options with one of our lenders. Also, have a discussion with your realtor on whether the seller will consider a Guaranteed Rural Development contract. In today’s world, you will need to put your best foot forward and although the rural development loan may be in your best interest, a conventional loan with 3% – 5% down payment may be more likely to get your offer accepted. We would be happy to help you determine what mortgage program could best fit your needs. Contact us today!

Patrick J. O’Gorman
Senior Vice President
NMLS No. 468516

Opinions expressed are solely my own and do not express the views or opinions of Stillman Bank.