Article includes Raleigh UDSA Rural Area Designation Map (see below)
Not to be left out of the cost race between FHA and Conventional loans, USDA changes are coming. We blogged about this earlier this year when the initial announcement was made - but the changes are right around the corner now - so let's explore.
A USDA Mortgage provides a low-cost insured home mortgage loan that suits a variety of options. A USDA mortgage is likely the best home loan option if you want to purchase a home with no down payment. It is important to remember that USDA loans are available for borrowers that meet income guidelines and are located in eligible areas. Even with the new monthly fee, USDA remains a viable 100% financing strategy.
Understanding the New Changes
If you recall, under the new rule effective October 1, 2011, the up-front guarantee fee (aka mortgage insurance premium) for purchase transactions will decrease from 3.5 percent to 2 percent for purchase loans transactions. Remember it was just last summer that the 2% to 3.5% increase occurred. The up-front guaranteed fee for refinance loans transactions will remain at 1 percent.
What’s new this time is an annual fee of 0.3 percent of the unpaid principal balance. For example: on a $100,000 loan the monthly payment will be $24.87. This fee will be calculated annually and the monthly fee will decrease over time but will be paid for the life of the loan.
The USDA reminds us that the annual fee and upfront guarantee fee are subject to change annually to maintain a subsidy neutral program. USDA's annual fee NEVER terminates. It will remain a part of the monthly payment until the USDA mortgage is paid off. The annual fee will be reduced each year as it is calculated annually from the principal balance.
Here's a comparison:
Currently, if someone was using a USDA zero down loan to purchase a home in Holly Springs for $300,000, their loan amount would be $310,500 (sales price plus 3.5% for the upfront guarantee fee). Based on a rate of 4.375% (apr 4.786), their payment (excluding taxes and home owners insurance) would be $1550.28.
Effective October 1, 2011 and assuming the mortgage rate to be the same, the loan amount would be $306,000 (sales price plus 2% for the upfront guarantee fee) creating a principal and interest payment of $1,527.81 PLUS an estimated monthly premium of $75.82 = $1,603.63.
An increase of $53.35 per month!
Why would someone even consider having a USDA mortgage after October 1, 2011?
Well for one, it's one of the few "zero down" mortgage programs available for homes that are located in a designated rural area (examples: Youngsville, Holly Springs, Clayton). If the appraisal comes in higher than the sales price, borrowers may be able to finance closing cost... there are some perks to this unique program and it may be worth your consideration if you're income meets the guidelines and you're buying a home in a rural community.
Rural areas include open country and places with population of 10,000 or less and—under certain conditions—towns and cities. There is an automated North Carolina rural area eligibility calculator for USDA home loans at: http://eligibility.sc.egov.usda.gov.
Questions about USDA or other types of mortgage programs for homes located in the Triangle Area? Contact me, I'm happy to help!
Future updates to both the up-front and annual fee will be published in Exhibit K, of RD Instruction 440.1, available in any Rural Development office or on the Rural Development website as follows: http://www.rurdev.usda.gov/regs/regs_toc.html.