Since the mortgage crisis in 2008 and 2009, lenders have become, and continue to be, much more conservative with their lending practices. For those looking to purchase a home, it's a lot harder to get a mortgage, especially for those with low incomes or who have little money for a down payment.
However, there is hope. The Direct Loan Program from the Federal government offers payment assistance and home loan availability for those who meet certain eligibility requirements. The program is designed to help low-income families purchase a single-family home in rural or unimproved areas. A rural area is typically defined as an area with a population less than 35,000 according to the USDA (U.S. Department of Agriculture). Below we highlight the key tenants of the program as laid out on the USDA website.
What the Direct Loan Program Does
Also known as the Section 502 Direct Loan Program, this program assists low and very-low-income applicants to obtain decent, safe, and sanitary housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability. Payment assistance is a type of subsidy that reduces the mortgage payment for a short time. The amount of assistance is determined by the adjusted family income.
How Applicant Eligibility Is Determined for the Direct Home Loan Program
A number of factors are considered when determining an applicant’s eligibility for Single Family Direct Home Loans. At a minimum, applicants interested in obtaining a direct loan must have an adjusted income that is at or below the applicable low-income limit for the area where they wish to buy a house, and they must demonstrate a willingness and ability to repay debt. Applicants must:
- Be without decent, safe, and sanitary housing
- Be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to meet
- Agree to occupy the property as their primary residence
- Have the legal capacity to incur a loan obligation
- Meet citizenship or eligible noncitizen requirements
- Not be suspended or debarred from participation in federal programs
Eligibility Requirements for Properties Financed With Direct Loan Funds
Properties financed with direct loan funds must:
- Generally be 2,000 square feet or less
- Not have a market value in excess of the applicable area loan limit
- Not have in-ground swimming pools
- Not be designed for income producing activities
Repayment Requirements for the Direct Home Loan Program
Borrowers are required to repay all, or a portion of, the payment subsidy received over the life of the loan when the title to the property transfers, or the borrower is no longer living in the dwelling. Applicants must meet certain income eligibility requirements for a direct loan, and you'll need to check the USDA website to determine your state's requirement.
How Funds Can Be Used
In addition to using the loan proceeds to purchase a home in a rural area, the funds can also be used to repair, renovate, or flip an existing home.
Financial Details of Receiving No Money Down
As stated earlier, there is no down payment required, but you must have certain asset limits, meaning you can't have too much in savings or assets. Otherwise, you'll need to use a portion of those assets for the down payment if the value of your assets exceeds the limit.
The term of the mortgage is typically 33 years. The interest rate on the loan is based on current market rates, but with the payment assistance program can be adjusted to as low as 1 percent depending on the applicant's financial situation.
The Section 502 Direct Loan Program helps families who truly have no other way to make affordable homeownership a reality. If you're looking to buy a home, check out the USDA rural loan program to see if you qualify. If you're a real estate agent and want to be a hero for a buyer who qualifies, show them this program!