Why USDA Rural Loans Are Slowly Getting More Popular
As the only no money down loan program available in the United States that is not restricted to just current or former military service personal it is hard to understand why the USDA Rural Development Loan Programs haven't become the lead loan program throughout rural America. To understand the relatively slow rate of adoption of the USDA Rural Development Loan Program one must first understand the motivations and requirements of the parties to the transaction.
Each party to the transaction has their own primary objectives; which are as follows:
- Homebuyer: The number one deterrent to homeownership is the down payment. So it should come as no surprise that a no money down loan program such as the USDA Rural Loan Program offers a huge benefit to a homebuyer looking to purchase a house for as little money down as possible
- Home Seller: The Seller wants to complete the transaction as quickly as possible and get as much for their house as possible
- Listing Agent and Buyers Agent: The Realtors involved want to make their Clients happy and get the transaction finalized by the contractual settlement date
Let's talk financing first. For homebuyers, being able to purchase a house with no money down financing over the last 10 years for the most part hasn't been a problem. Up until 2007, no money down financing programs existed using 80/20's, 100% Alt A and subprime loans, and Fannie Mae's Flex 100 just to name a few. When the lending industry started imploding in 2007 obtaining no down payment financing became a little harder with the Loan Officers and Realtors embracing FHA and Down Payment Assistance (DPA) Programs, like Nehemiah, to cover the mandatory FHA down payment requirements. In late 2008 FHA took the position that these types of programs were nothing more than Sellers inflating the home price in order to fund the down payment and stopped allowing DPA's to be a source of the borrowers down payment.
Now let's look at the housing market. During a strong housing market the Seller can be selective on which potential homebuyer can most quickly close on the transaction. In a weak housing market, such as today's market, the Seller is just happy that a homebuyer is making an offer on the house and is flexible on the timing on when the transaction closes.
Realtors are the bridge between the needs of the Buyer and Seller. When the housing market was strong Buyers Agents wanted their Clients to use any type of financing other than government based financing such as FHA or USDA. The reason was a perception that a FHA loan was tougher and more time consuming to close than conventional or subprime financing. And since sellers, frequently based on their Realtors advice, were able to pick the buyer that could close their loan the quickest, which in turn created a preference for non-government based financing. So right or wrong the market gravitated away from FHA, USDA, and VA loans.
Once the housing market shifted in 2007 and 2008 buyers were able to start picking the loan program that best worked for them or was promoted to them by the Loan Officer. This often was FHA, which Loan Officers preferred over USDA, coupled with a seller funded DPA. So even in rural markets where USDA loans would have better served the buyer USDA was not being promoted by Loan Officers because:
- The Loan Officer and the Realtors had become more familiar and comfortable with FHA financing as oppose to USDA financing
- FHA loans are easier to close than USDA since FHA underwriting is completed in-house while USDA mandates that their Underwriters sign off on every USDA loan after the lender approves the file. This typically adds two to three weeks to the processing of a loan
- There are no income or geographic restrictions on FHA while there are on USDA
Starting in late 2008 seller funded DPA's were abolished by FHA. This left a huge void in the market for no money down programs. All of sudden despite the above mentioned perceived deficiencies in USDA, the Rural Loan program was now the only loan program left that didn't require a down payment and was open to everyone (as opposed to the VA loan program, which as previously mentioned is only available to current and former military service personnel).
So USDA was now the only no down payment loan program for many homebuyers. Coupled with a slowing housing market, that shifted the negotiating power to the buyer, and found sellers – just happy to have an offer on their house – being extremely patient with buyers who need a few more weeks to close their USDA loan versus other types of financing.
Despite this positive trend there are still many Loan Officer and Realtors who aren't educated on the USDA loan program. This education gap creates lost opportunities to bring much needed potential homebuyers into the market and limits current buyers from using a loan program that often provides greater purchasing power than FHA. With time this education gap will hopefully close and more sellers and buyers will realize that USDA is a positive factor in promoting homeownership in our rural communities.
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