Tightened lending standards are leaving builders and real estate agents scrambling for new ways to move cash-strapped buyers into homes. One increasingly popular option: an obscure home-loan program offered by the U.S. Department of Agriculture.
Created in 1991 as a way to boost homeownership in rural areas, the program is being tapped by home buyers in overbuilt exurbs who are attracted to the no-money-down terms.
Volume for these USDA- backed loans has nearly doubled. The department insured $7 billion in loans during the 2008 fiscal year, which ended Sept. 30, up from $3.6 billion the previous year. In October and November, the agency has already insured some $1.7 billion in loans.
That’s relatively small when compared with the volume of business handled by the Federal Housing Administration — which guaranteed $102 billion in new loans during fiscal 2008. But interest in the USDA’s development lending program is growing rapidly in response to the nation’s credit crunch and as most private lenders have stopped offering loans with no money down.
To be eligible for a USDA-backed loan, a borrower can’t have income that exceeds 115 percent of the median county income, and the loans are restricted to areas with lower population density — generally towns of no more than 25,000 residents. So while homebuyers in big cities aren’t eligible for the loans, residents of many of America’s fastest-growing towns and exurbs do qualify.
Home builders, many of which have overbuilt properties in these areas, are eagerly promoting the program to sell excess inventory.
Some question the USDA’s practice of allowing no-money down purchases. “If you have to get a 102 percent loan, you probably shouldn’t be buying a house,” says U.S. Sen. Christopher Bond, R-Mo., who adds that he supports the intent of the programs because it has traditionally been “very difficult” for rural borrowers to buy homes.
