Some Light in the USDA Tunnel?

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With its funding all but dried up, the USDA’s increasingly popular Rural Development loan program may be on the brink of resuscitation.

Two House members recently introduced bills that would make the program self-funding. One of the proposed measures, from Pennsylvania Democrat Paul Kanjorski, would require lenders to pay an origination fee of up to 3.5 percent on the loan value. It would also allow the U.S. Agriculture Secretary to levy a 0.5 percent fee annually on an outstanding loan balance.

What it would not do is force borrowers to incur new costs, Kanjorski said in a press release issued by his office.

“This change will cost taxpayers nothing and ensure that families in rural areas can continue to access affordable mortgages,” he said. “As our economy recovers, we cannot allow rural America to get left behind.”

USDA loans have garnered significant interest in the last year, as borrowers in tight credit market turn to government-backed loans — especially ones that come with no down payment. It’s not unusual for the USDA loan program to run out of funding. But the shortfall usually occurs with little fanfare near the close of the fiscal year in September and is typically covered without consumers feeling any pain.

But this year is different, with the program likely to run out of money at some point this month. Wells Fargo and other lenders recently stopped taking USDA loan commitments.

These flexible loans, aimed at low- and middle-income borrowers, come with more stringent requirements than other government-backed loans.  But they come with significant financial benefits, including no PMI or down payment.

Kanjorski’s bill must first make it out of committee before a final version can go to the full House for a vote. There’s no clear timetable for that, which means borrowers considering a USDA loan should think about what options, if any, they have moving forward, including FHA and VA loans.

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