Section 502 Program Loans: Filling a Niche in Residential Real Estate

Jay Atterstrom, CCAR REALTOR®/Lender Committee

The confusion relative to Single Family Housing Loan Guaranty Loan Program from USDA continues. Earlier this year, funds for the program were depleted and no new funds for the program had been appropriated, leaving the program in limbo.

By this time, we were hoping to have good (at least definitive) news about the program. Although funds have been appropriated by Congress and approved by the Senate, the bill sits on the President's desk for ratification. While a few lenders have agreed to receive applications and issue commitments for these loans, others have withdrawn their programs altogether. Check with your lenders for their current status.

It's been a great mortgage program that fills an important niche in residential real estate markets--especially subsequent to the demise of alternative mortgage products. Generally speaking, Section 502 Program Loans (USDA or Rural Development Loans, as they are sometimes commonly termed) are primarily used to help low-income homebuyers in rural areas. There is no down payment required, making USDA one of the few resources for "zero-down" mortgages. Credit criteria are usually softer and the borrower's credit profile must be reasonably healthy, but lenders may impose additional minimum credit standards and other underwriting criteria overlays. Applicants may earn up to 115 percent of the median income for the area, although income caps in most areas are lower.

Here are more specifics on the income limits, property eligibility, and loan limits of this program:
Loan amount limits: The Section 502 Program sets specific loan amount limits by region. However, from a practically perspective, in most instances the loan limit is more a function of underwriting criteria relative to income (more specifically debt ratio) and assets.

Income limits: Income limits vary by area. Generally speaking, they are a function of the median income for the area. Applicants may earn up to 115 percent of the median income for the area, although income caps in most areas are lower.

Property types: Housing must be modest in size, design and cost. The home must meet the voluntary national building model code adopted by the state or area and HCFP thermal and site standards. Pools render a property ineligible. Detached living areas are not factored into the calculation of the value. Barns and out-buildings can be included in the value if typical for the area.

Although manufactured and modular housing has been negatively impacted by other changes in conventional and underwriting guidelines and appetite in the secondary markets, Section 502 program does allow for this property type. Restrictions regarding manufactured homes are essentially the same as FHA property eligibility requirements with regard to safety and thermal standards, and must be permanently installed. Most lender underwriter overlays severely limit the eligibility for manufactured homes.

Eligible areas: Even Collin County, one of the most affluent counties in the country, does contain eligible areas, as does most of North Texas. Eligibility is limited to areas with a population of less than 20,000 inhabitants, based on the most recent census surveys. The eligible areas will change once the most recent census data is compiled and recognized. When these changes will occur is still not clear, but it's safe to assume that the current eligible areas will remain such through the end of the year.

Cost: The insurance premium cost for this program is 3.35 percent of the base loan amount for purchases, and .50 percent for refinance transactions, and (can/cannot?) be rolled into the loan amount.

Local offices and other information are available on the USDA Rural Development Web site, which is very user friendly.