Vail Daily column: Changes to USDA loan program could benefit locals
There is one loan program that in many ways is the most advantageous program available to first time home buyers in Eagle County, but in many ways is the hardest to qualify for. It is the U.S. Department of Agriculture home loan program for rural areas. Yes, Eagle County is a rural area, in spite of the fact the population has increased 700 percent in the last 35 years.
The USDA program allows qualifying homeowner to purchase a home with no money down, yes, as in zip, zero and nada. If you write the deal correctly, then all you need to bring to closing is your ID and your pen (and hopefully a smile!). You will have to pay for an appraisal up front, but generally you can get reimbursed for that.
Adjusted Gross Income Maximum
But there are a few reasons this program does not work for everyone. First, you can only make a maximum adjusted gross income of $93,450 for a family of four, if there are five or more members the limit is $123,350.00. And the USDA will count junior’s summer job income and Granny’s pension if they are living with you (sorry, Granny might have to find her own place if she tips the numbers, but you are stuck with junior until he at least turns 18 and can rent his own apartment).
In addition, your total housing expense cannot exceed 29 percent of your income, even though your other combined monthly debts and housing expense can go to 41 percent of your income. If you are debt free and your housing expense runs 29.01 percent of your income, then you’re out of luck, although you likely could qualify for a traditional mortgage with as little as 3.5 to 5 percent down.
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The other point to consider is that these loans have funding fees and monthly guarantee fees that are very steep, at least until they change next month. In the past USDA loans had a 2.75 percent up-front funding fee meaning a $300,000 loan would cost $8,250. The borrower has a couple of options on how to pay this fee. It can be added to the loan amount, meaning over time you pay an extra $8,250 plus interest on the additional money, or the buyer can ask the seller for a credit to offset it, which means in reality you are still paying for it because most likely the seller would have been happy taking a lower price and not paying your fee.
The third option, and usually the most economical is to use what is called a lender credit, and you get this by agreeing to a slightly higher mortgage rate. So your monthly payments are higher, but at least for the first several years you will probably come out ahead over the other two options.
More than one Catch-22
Another issue with a USDA loan is the monthly guarantee fee for USDA sticking its neck out and assuming you will make all the payments on a house you don’t have a dime of your own money initially invested in. To cover the losses overall on the loan portfolio, USDA charges each borrower a fee of one half percent per year of the loan balance. This means on a $300,000 loan you will pay $1,500 per year (or $125 per month) extra on your payment each month.
The other Catch-22 to these loans is if you ever want to refinance your USDA loan to get a lower rate, and the only way you can qualify given your loan to value is a new USDA loan the same income limitations and fees applied. So if your family is prospering and your income has increased, then you might not be able to refinance because you make too much money.
Upcoming Significant Changes
But take heart, because change is on the way, at least for the next year. Starting in September, USDA is doing three significant things. First they are changing the upfront fee from 2.75 percent to a more palatable 1 percent. This means on a $300,000 loan the fee would be $3,000 vs. $8,250.
The second change is the monthly fee is going to drop from 0.5 percent to 0.35 percent, meaning a borrower who owed $300,000 would save $37.50 per month.
The third change is that current borrowers with USDA loans will be able to refinance with no income, no asset verification, no appraisal or credit check, other than they must have been making their payments on time on their current USDA loan. This is a very attractive option for many current borrowers with USDA loans to take advantage of.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.