On a weekly basis I talk to people in the community that would consider buying a home but assume that- due to recent press coverage of several bank collapses- no banks are lending money. That is true for some types of loans, but if you’re looking to buy a primary home (and you’re credit worthy) there’s several types of mortgages available. In fact I’ve helped more than one client purchase a home in the past six months that had less than $1500 out of pocket to complete the purchase. Sound to good to be true? Really, it’s not!
Clatsop County is considered a ‘rural’ area by the U.S. Department of Agriculture, and because of that USDA Guaranteed Housing Loans are available to home buyers here. I’m not a mortgage broker, and I didn’t stay at a Holiday Inn last night, but here’s the basic overview of the program:
- Finance 100% of the purchase price, as long as the property appraises for that amount.
- Flexible credit, income and debt ratio limits (most are set by the lender, more on that in a minute).
- 30 year fixed interest rates, currently around 5% and sometimes less.
- No PMI (mortgage insurance) [edit: this changed effective 10/1/2011]
- The Buyer pays a 3.5% guarantee fee, which is rolled into the total loan amount. [edit: this changed effective 10/1/2011]
- The usual underwriting process applies (full documentation required).
When Buying a home using the USDA loan program, the overall process is similar to conventional financing. After you’ve got an accepted offer you start by completing the formal loan application. Once that is complete, and you’ve given the mortgage broker all required documentation (pay stubs, ect.) an appraisal is ordered. Once the appraisal is received by the mortgage broker and the loan file is complete, the entire package goes to the lender for the first of two underwriting processes. The funds for these loans come from a regular bank like Chase or Flagstar, but in order to get nearly the entire purchase amount financed someone has to guarantee the loan. That’s where the USDA comes in. The up-front guarantee fee that is paid by the borrower goes to the USDA and covers those USDA loans that go bad. There’s a reason I mention this: Once the loan package is approved by the lender, the entire package goes through a similar process at the USDA office (either Portland or Corvallis in this area).
Now the underwriting process and standards used by the USDA are similar to the lender, so usually once the lender has approved a file the USDA does as well. The main difference is the amount of time required to get the file through the approval process. The file is usually approved by the lender within 48-72 hours (sometimes with minor conditions) but the Rural Development approval could take over a week. The “turn time” to get loans through Rural Development varies depending on the current volume- I’ve seen files come back in 24 hours, and I’ve also seen files take over 2 weeks*. The norm seems to be about 5 business days, and once the file is approved it goes back to the lender and loan documents are sent to escrow. The entire process from the time the loan package is submitted to the lender until the loans docs are ready to be signed takes 2-3 weeks. The RD loan process does take a little more time to complete than a FHA or VA loan can but the program is so good that it’s usually worth it.
When going the USDA route typical out of pocket expense to the Buyer is the earnest money deposit and home inspection, normally about $1500 total. If you are buying a property with a septic system, or require additional inspections it could be more.
A few things to be aware of about the RD loan program: It’s still a loan made by a bank, so you’ll need decent credit and income to support repayment. Also, manufactured homes cannot be financed with this program. Oh, and if the house is so far dilapidated that mice won’t even live there you probably should find an alternative funding source. Other than that it’s a great program. I’ve heard statistics that anywhere from 40-60% of the home sales in Clatsop County this year have been funded by these loans.
Several other financing options available today include FHA, VA and conventional home loans. I’ve personally done transactions with all of the above in the past few months, and lenders are competing for mortgage business. I’ve also been told recently that some lenders are starting to make Jumbo loans again (loan amounts over $417,000) and loans for second homes. Expect to pay a slightly higher interest rate and have a larger cash down payment to qualify for these programs.
The most prudent thing to do when considering a home purchase is consulting with a mortgage broker or direct lender to see what you can afford. If you need the names of some reputable local lenders contact me and I’ll get you a list.
*This doesn’t include the files that got delayed when the guarantee funds ran out this spring. I personally had one transaction that took over a month to get through the second underwriting, due to a lack of funding available.
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