The already low-cost RD loan just got more affordable in October of 2016 when the USDA lowered upfront and monthly fees. This loan was previously popular because of its 100% financing, meaning there is no required down payment. The next cheapest loan, other than the VA which is veterans-exclusive, is the FHA with 3.5% down.
Prior to October, RD’s upfront fee was 2.75%; now it is 1.00%. The former monthly fee was .50%; now it is .35%. This makes for a significant difference in monthly mortgage payments, especially in comparison to FHA’s fees which are almost a point higher and which can’t be financed into the loan. The USDA typically reviews financials each year, so the fee may drop again in 2017. As for now, the recent changes will be in effect until September 2017.
The upfront guarantee fee greatly impacts the loan amount. At 2.75%, a loan with a $100,000 purchase price would increase by $2,750. Now, at 1%, the loan will only increase by $1,000. Since this fee is rolled into the mortgage and paid out through the loan term, the monthly payments are lower.
The former .50% annual guarantee fee has been reduced to .35% which affects the monthly mortgage payment as well. When before, it would cost approximately $40 per month on a $100,000 mortgage, it now costs around $30. These reductions save buyers an estimated $20 a month per $100,000 financed.
It may not seem like a generous decrease at first sight, but when a borrower is on the brink of exceeding their debt-to-income limit, the additional monthly savings in fees alone can save the loan.
Because there are no purchase price limits with the 100% RD loan, buyers can essentially borrow more money than with conventional, FHA, or even VA programs. The buyer just has to prove that they can budget the monthly house payments with their current debt obligations. There are income restrictions with the 100% RD loan, however, and they are based on the number of people in a household and the region in which they live. If a borrower’s income exceeds the maximum limit, they will not be eligible for an RD loan.
RD loans have income restrictions because USDA wants families who need the most help to have access to the program first. By providing a 100% loan and other housing assistance, they aim to build up rural communities and give hard-working families a leg-up. More affordable housing generates more revenue for surrounding areas and promotes prosperity in our communities. The recent pricing changes for the RD loan will have an impact on the entire economy.