USDA loans available for Mid-Shore purchases

EASTON - Government-guaranteed loans through the Department of Agriculture provide the best option for starter and start-over home purchases in the Mid-Shore area, according to local experts.

Loans through USDA, which stands for U.S. Department of Agriculture, require no down payment and offer low interest rates for those that meet income level criteria.

"The USDA program is one of the best out there right now," said Richie Wheatley, senior vice president and partner at Bay Capital Mortgage Corp. in Easton.

Rob Gallagher, mortgage loan originator from Compass Point Mortgage Corp. in Chester, agreed. "I recommend USDA loans to anyone who meets the income requirement," said Gallagher, who has been working with USDA loans for over 15 years.

While details differ slightly because Bay Capital is a correspondent lender and Compass Point is a mortgage brokerage, both said the program is the best option for those who qualify.

"It's the most affordable way of purchasing a new home," Gallagher said. Some 50 percent of Gallagher's and 40 percent of Wheatley's current business comes from government loans, mostly USDA.

The program is good for first time home buyers and for those who have owned in the past and are now starting over due to financial challenges and divorce.

"Right now, I'm working with a single mother and another gentleman who was recently divorced. They've both owned homes in the past and are starting over," Gallagher said, noting that those who currently own property will not qualify for a USDA loan.

One of the biggest misconceptions about USDA loans, both experts said, is that there is an agricultural criteria associated - not true. Applicants do not need to purchase farms or acreage to qualify for a USDA loan. The loans are for rural designations, not necessarily agricultural. The good news for residents of the five-county Mid-Shore area, all property automatically qualifies for the rural designation and is eligible for the USDA program.

USDA is available in Talbot, Queen Anne's, Kent, Dorchester and Caroline counties to applicants with a maximum combined income of $96,150, for one to four people living in the household. The maximum income goes up depending on the number of household members and the incomes vary in other counties, but all five Mid-Shore counties require the same income levels for this program.

Credit scores reportedly vary depending on the investor. Wheatley said he can provide USDA loans to applicants with a minimum credit score of 620 and a maximum debt to income ratio of 41 percent, with some flexibility depending on the borrower's individual circumstances. As a broker, Gallagher said he is able to shop for criteria that meets his client's circumstances and has obtained a USDA loan for applicants with credit scores as low as 593. USDA does not actually have credit score criteria attached to the loan, but rather the investor establishes the criteria, Gallagher said.

Whether a loan is originated through a broker, correspondent or the actual investor, the money ultimately comes from investors such as Wells Fargo, BofA and Franklin American. Even with government guaranteed programs such as USDA, the funding comes from those same investors but is guaranteed by the program.

Conventional loans are guaranteed historically by publicly traded organizations such as Fannie and Freddie Mac and have stricter guidelines for lower income borrowers. Although Fannie and Freddie were placed into conservatorship by the U.S. Treasury in 2008, during the subprime mortgage crisis, and now also are guaranteed by the government, they have maintained traditional conventional guidelines with even more stringent criteria since the mortgage crisis.

The difference between a USDA guaranteed loan and one insured by the Federal Housing Administration, FHA, experts said, is that the FHA loan requires a down payment and higher monthly mortgage insurance.

With USDA, the applicant pays nothing down, up-front mortgage insurance of 2 percent, which may be financed into the loan, and monthly mortgage insurance of 0.4 percent which is added to the principle payment.

FHA loans require 3.5 percent down, up-front mortgage insurance of 1.75 percent and monthly mortgage insurance of 1.35 percent.

The seller often pays for closing costs with USDA loans, enabling buyers to purchase with very little cash on-hand, said Wheatley, who believes the program is important in moving the housing market forward.

"In getting the market moving again, we need to start with these first-time buyers," he said. "They purchase a home and it allows the seller to move into another property. It's a domino effect."

The ultimate in government guaranteed loans is available through the Veterans Association, Wheatley said. VA loans require no down payment or monthly mortgage insurance for those who qualify. But for those who don't qualify, USDA is likely the best option. 

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