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.