Funding has been restored for the USDA's Guaranteed Rural Housing Loan Program, meaning that lenders can once again begin issuing mortgages under the popular government program.

Lenders were informed that funding for the program would resume effective today, September 8. Mortgage lending under the program had basically been shut down since May, when the program ran out of funds due to strong demand.

The program's first priority will be to address a backlog of approximately $1.6 billion in conditional loan approvals issued since May 26, when the program ran out of funds. New applicants will likely face delays in obtaining approvals and closing loans until the backlog is cleared, but the agency says it will have sufficient funds for all loans approved for the end of the year.

No down payment required

The Rural Housing Loan Program, known as Section 502, provides mortgage loans to borrowers with low- to moderate incomes who purchase homes in rural areas. For purposes of the program, "rural" does not necessarily mean surrounded by cows and corn - qualifying areas include townships with populations of up to 10,000 people, and certain towns and cities of up to 25,000 - areas most people would regard as suburbs.

The program's popularity is due in large part to the fact it is one place where average borrowers can still get a zero-down payment mortgage. In fact, the program will even allow loans in excess of the purchase price to cover closing costs, up to a maximum loan-to-value ratio of 115 percent.

Borrowers may also use the program to refinance existing loans, provided they qualify and the property meets the USDA's definition of rural, as described above.

Now a self-funded program

The program had been dependent on regular appropriations, meaning that loan availability varied with the funding. However, in July Congress enacted changes to make the program self-funding as part of the FY 2010 Supplemental Funding Bill, H.R. 4899.

The program will be funding primarily through upfront fees charged when the mortgage is issued. Effective Sept. 8, those fees increased to 3.5 percent of the loan amount, up from 2 percent previously. The legislation also authorizes USDA to add an annual fee of 0.5 percent, but it has not yet done so.

Interested borrowers should contact a USDA-authorized lender or their local USDA Field Development Office for more information. To determine if a property qualifies for the program, the USDA provides a rural area eligibility calculator at http://eligibility.sc.egov.usda.gov.

Published on September 9, 2010