The USDA Rural Development 502 Guarantee program here in Florida is primarily used to help low-moderate income individuals or households purchase homes in Florida's rural defined locations. The wonderful part of this Government backed mortgage program is there is no required down payment…$0. The lender must determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.
No Down payment, no “skin in the game” should result in higher default rate right? Wrong! Many people are surprised to learn that the USDA home loan default rate is considerably less when compared to traditional Fannie Mae/Freddie Mac loans that requires large down payments. Why is this? We have outlined a few reasons below.
1. Like all Government home loans, USDA rural housing loans are full documentation. All of the borrower’s income, assets, etc must be fully documented and proven. There is no “stated income” “no documentation” or non verified anything when it comes to Government home loans. Everything must be fully checked and verified.
2. USDA loans require secondary approval - once the loan is fully underwritten by the approving USDA lender, the loan must go through a final check at the local USDA Rural Development office. This “second look” if you will provides an added safety net to insure homebuyer’s loan meets the USDA requirements.
3. Counseling - USDA has aggressive counseling programs for homeowners that have missed mortgage payment. Many times they can assist homeowners before the instance becomes a real problem thus preventing foreclosure.
Something else to consider is loan amounts – USDA does not have official loan amounts like FHA or other mortgage programs. However, USDA does have income caps in place. As stated above this loan is geared towards low-moderate income households and expanding Florida’s rural communities. The income caps in place do limit the loan amounts to a degree. Like all loans there is a maximum allowable qualifying debt to income ratio. Example – if the income limit for a family of 1-4 in Marion County FL is $74,050 dollars – the loan amount they would qualify for would likely be limited around $400,000 – this is best case assuming the family has $0 debt, which is rare.
In most cases the average USDA loan amount in Florida is around $125,000. These lower loan amounts spread out the risk better for the Department of Rural Development.
So are high default rate related to down payment size, etc? To a degree maybe, but we personally feel the big factor is sound USDA underwriting, USDA credit standards and full documentation. It wasn’t long ago when a new home buyer only needed a pulse and ID to get some exotic home loans. Those days are long gone and as a result the default rate overall should drop even more.
Serving all of Florida 7 days a week (Clermont FL, Leesburg FL, Fruitland Park FL, Lady Lake FL, Ocala FL, Silver Springs FL) USDA Mortgage Source is Florida leader in Rural Housing Loans. Call us at (904) 302-6060 or visit our main web site at www.UsdaMortgageSource.com or more details.