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The Rural Housing program allows approved private lenders to offer home buyers a 0% down home loan. In order to offset their losses, USDA charges an upfront guarantee fee as well as monthly mortgage insurance. The Rural Housing guarantee fee has been 2% for the last several years, but beginning October 2015 it is increasing to 2.75%. This money is used to maintain the program. It covers many things such as defaults on existing mortgages.
Since USDA guarantees the loan, if a borrower defaults they will pay the lender 90% of the loan. The mortgage insurance is essentially an insurance policy for the lender, thus allowing them to lend up to 100% with minimal risk. As program costs rise, it’s a safe assumption that fees associated with the Rural Housing loan will rise as well. Defaults are the major cost, however, there are other contributing factors such as technology and administrative costs.
If the program exceeds the yearly budget, USDA must ask Congress to make up the difference with allocation of funds. While this is an option, it’s not ideal because everyone wants the program to stand on its own. While the Rural Housing Guarantee Fee is not always popular with potential buyers, it is a necessity to keep the program going. The upfront fee has a minimal impact on a borrower’s monthly payment.
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Some products and services may not be available in all states. Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice.
