RealEstateEconomyWatch.com

The Federal government’s best deal for home buyers is no longer a best kept secret.  Founded in 1949 to spur home sales and development in rural areas, the US Department of Agriculture’s direct and guaranteed rural housing loans today are just about the only place in America you can get a mortgage with no money down at competitive rates.

As more and more suburban and exurban buyers figured out how to qualify and an infusion of stimulus funds made more direct and guaranteed loans available, the program doubled its volume last year, making 27,871 loans for the year.  Stimulus money paid for 84,021 loans.

However, no one told the USDA’s 800 field offices.  Many were slammed with applications for loans, which have credit, income and geographic requirements that make underwriting more complicated than for a typical mortgage in the private sector. To qualify for the program, a buyer needs decent credit , to earn less than 115 percent of the area median income as calculated by USDA and to live in a rural area or a town with fewer than 10,000 or-under certain conditions-towns and cities with between 10,000 and 25,000 residents.

The result was that approval times soared in some offices just as the clock ticked down on the first-time homebuyer credit, setting off a scramble for financing.  As the deadline to qualify for the credit drew nearer, waiting times in the busiest USDA offices grew longer.  Where a busy field office typically saw 100 applications per week, it received 10,000 during the crush.

To make things worse, many offices froze their lending authority as the pool of available funding dried up with the end of the Federal fiscal year on September 30-a normal occurrence in recent years as demand for the loans has exceeded appropriated funding, but an additional headache for first-time buyers in a hurry who could not understand why their applications. Though funding was certain with the new fiscal year October 1, offices could not lock rates, issue new approvals or close loans commitments until funds were replenished.

Despite the quadrupled work load, staffing was not increased, with the result that the lending pipeline slowed to a crawl, particularly during the busy months of the first-time buyers’ tax credit. 

“Well it took here in Washington State almost two months to go through the USDA.  We just got news yesterday it was approved! Now we are waiting for a closing date… they said maybe tomorrow, but we’ll see,” wrote a borrower in rural Washington, where turnaround time stretched for 45 days during the fall.

 ”Buyers of our house are using a USDA loan. Within the typical 45 days we heard that they qualified for the loan, as well as the house appraisal qualified. As of Dec 10th we are on the 73rd day of closing! The loan is still being processed by the government. We had to re-sign documents because they expired after 60 days. They even suggested we might want to re-sign again with the closing date of Dec 24th- just in case it goes that long. That would be 87 days! (And you know they won’t be working on that day, and the funds can’t disperse on the 25th anyway. What an idiotic suggestion.) We moved out in anticipation of the house closing after 45 days. Now we are paying rent and a mortgage. Our Realtor is also disgusted and just advised another client to reject an offer with a USDA loan,” blogged a seller.

 ”I was told at least 2 weeks. Going on 4 weeks now. Need in my new house asap because I sold the house I’m currently in to pay off loans that I had to be able to purchase this house. They want me out in a few weeks!!,” wrote another.

 ”In Florida we went from 2084 loans to over 7000 last year. The increased volume has increased the time it takes to get approvals from the USDA so depending on your area you may need to add from 3 days to two weeks to the process,” a Realtor advised her customers.

In Cloquet, Minnesota, USDA reviews were running 20 business days out in reviewing the loans and they could not meet original schedules. ” Twenty business days is what is in a normal month, so it may take up to two months to close a USDA loan, since normal processing time on a loan is about 30 days,” blogged a local Realtor.

With no stimulus money in the pipeline for 2010 and buyers rushing to take advantage of the expanded, extended tax credit, odds are good USDA will use up a lion’s share of its available funding for loans during the first quarter.  Unless Congress comes up with emergency funding, applications might hit deep freeze again.  However, when that happened a year ago, farm state Congressmen stepped in to keep the program going even though most of the loan money these days goes to clever buyers who live in the suburbs, not farm families.