Rural Development adds monthly fee effective October 2011

The biggest advantage of Rural Development home loans is of course the No Down Payment. A second great feature of Rural Development loans has been that they had no monthly mortgage insurance, an upfront funding fee was included with the loan, but no monthly charge.

Effective October 1, 2011, the benefit of no monthly fee will change.

Rural Development is adding an annual fee  charged to lenders of .3%. For a $130,000 Rural Development purchase loan, about the median for Chattanooga home purchases, the annual fee would be about $450. The actual fee will be based on a projected average.

Lenders will be billed annually for the fee. This is a new announcement, so no one has plans in place to collect from the fee from borrowers. I am certain though that the fee will be billed monthly with the regular payment escrows.

In effect this will become an equivalent to mortgage insurance. In the example above the charge would add approximately $37.50 to the monthly payment, for the first year.

The change is effective in October 1, 2011

The upfront guaranteed funding fee will drop to 2%. It is currently 3.5%

The annual fee will be paid at closing for the first year, and billed annually in subsequent years. The upfront fee will probably still be added to the loan amount. It looks like the initial annual fee though will be collected as a closing cost. I did not see any suggestion in the memo that it would be added to the loan amount.

The fee is actually not called mortgage insurance, but a fee. The fee is calculated annually based on the Average Loan Amount for the coming year. But the fee does not drop off at a certain loan to value amount. Mortgage insurance typically drops at 80% or so. This fee is lower with each year but it carries through to the full term.

The change is effective October 1, 2011.

The stated purpose of this change is "to make the Single Family Housing Guaranteed Loan Program (SFHGLP) subsidy neutral, thus eliminating the need for taxpayer support of the program." This seems to be consistent with the housing goals as put forth in the Administration's white paper on the future of housing, published on February 13.

It is consistent also with the recently announced increase in FHA mortgage insurance costs. 

New regulations allow for Rural Development to charge as high as 3.5% upfront and .5% annually, but the program will start with the 2% upfront and .3% annually.

If you have any questions about this or Rural Development home loans for the Chattanooga area, feel free to contact me via my website, www.RichardSmithHomeLoans.com, or call my cell phone, 423-280-0345.