I read a post this morning that I was unable to find again. I’m pretty new to AR so I’m probably just not searching correctly. Anyway, here it is:

Lenders are set to fund the USDA/RD loans again but the loan requires a 3.5% guarantee fee. This means that if their value does not go up it will take 5 yrs. on a 100k home before they can sell their home and break even. Basically, in five years if they sell their home they will be able to pay the 6% commission and have no proceeds. Just something to keep in mind. I prefer the FHA loan with only a 1% fee and 3.5% down so that they start off with equity.

I wasn’t sure about a couple of things so I asked my favorite mortgage broker who is extremely knowledgeable and had been in the biz over 30 years what he thought of it. Here is his response:

My guess is this was posted by someone who doesn’t do USDA loans or chooses FHA’s because they make way more money on those.

Buyers using USDA loans today do so because there is no down payment, which they usually don’t have anyway. FHA requires 3.5% down. FHA Up Front MIP is 1% , so the difference is 2.5%. The entire 3.5% USDA Guarantee fee is added to the loan, regardless of appraisal. So, no, the buyer does not pay it up front. The one thing not mentioned here is that the FHA loan also requires a MONTHLY Mortgage Insurance Premium where the USDA does not. So here’s the math:

 $100,000 sale price FHA with a loan amount of $96,500 PLUS the 1% FHA FEE for a total of $97,465. Buyer puts $3500 down. The Monthly MIP on this loan will be $73.10. So the monthly payment will be higher than the USDA with NO DOWN PAYMENT.

 But here’s the more important part. He mentions 5 years. After 5 years, the FHA borrower will have paid $4,386 in monthly mortgage insurance premium. The USDA borrower will have paid $0000. So the FHA borrower will have paid $5,351 in MIP/Guarantee costs, while the USDA borrower will have paid $3,500. So which one has the lower net equity? Don’t have to be a brain surgeon to figure this one out.

 In addition, it is very important to understand that the USDA loan allows the borrower to add closing costs to the loan if the appraisal exceeds the sale price. You already know this works; we have done it on every USDA loan we have closed for you and Patti. In fact we have done it on all USDA loans we have done in the past 10 years, except 1, which appraised for the sale price, not above it.

Bob Gillespie

Executive Vice President

Benchmark Home Loans

 BTW, if you respond to the blog, he’ll come back saying that the USDA borrower is paying more interest because of the higher loan. That’s true, but he also has all his money in his pocket. So at todays low rates, that’s a wash. I also must point out the he mentions ”Lenders are set to fund USDA/RD loans again”; we have never stopped funding them. Our source closes and funds these regardless of Congress’s game playing. No one else does that. Pass this email around to your associates. I think they wil find it interesting as well.

 Obviously, Bob doesn’t mince words (I actually cut a few sentences out) and I mean no offense to the poster. But I felt that it was important to pass this along. Take it for what you wish.