The USDA has just announced changes to their loan programs. The changes will take effect on October 1st, 2011. At that point, loans which are under the Guaranteed Loan Program will have a .003% annual fee. The fee will be added to the monthly loan payment. There will still be an upfront fee, but it is be cut almost in half, from 3.5% to only 2%.
This change is the result of increase authority that was given to the USDA as part of legislation passed last year which allowed additional funding for the program. The program has been very successful and allowed buyers a very attractive option for purchasing homes in the designated areas.
The question has been asked, do the changes make the USDA option more expensive? The Federal Government has always demanded that consumers be made aware of the total cost of loans. In the real world, most buyers cringe if they are asked to focus on the total cost of a home purchase (if all the payments over 30 years are added together). I know, it is important information, but the real question about changes has to do with “how are buyers impacted today?”.
Is the zero down USDA loan still going to be a good deal?
I think so. Obviously, you are going to be better off if you have down payment money available. Every dollar you put into the purchase of a house reduces the principle that you are going to borrow. That being said, you may only have enough money to cover a bit more than closing costs on the home. The reduction in the up front fee that will occur when this change takes place is significant. Under today’s guidelines, you need almost $3,700 for every $100,00 you borrow. After October, the amount drops to just about $2,000 for every $100,000 you borrow. The new monthly fee is roughly $25 per month in the first year. It decreases based on the principle still due each year. The end result is that you may qualify for a little bit less of a loan (The $25 month per $100,000 will have to factored in, just like a condo fee or HOA fee is factored in).
As always, the amount of money you can borrow is directly related to how much the lender believes you can pay back on a monthly basis. That is why, when you sit down with a lender they begin talking about your debt to income ratio. They are only going to allow a certain percentage of your income to be designated as available to pay the loan. The small increase in the monthly payment will reduce the amount of money you can borrow.
If you are willing to accept that there are limits to what you can buy, the new guidelines offer you a clear picture of how a USDA loan might benefit you. It is a wonderful program if used properly.
If you have any questions about this or any other real estate information, feel free to contact me.