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Rural Lending Covers A Lot Of Ground

Time to look at a different kind of farming system for originators.

Lew Sichelman headshot
Lew Sichelman
Rural Lending Covers A Lot Of Ground

When the late night talk-TV hosts start joking about Fannie Mae and Freddie Mac — as they did after the housing meltdown in 2008 and beyond after the two secondary market enterprises would have gone belly up had they not been bailed out by Congress — you know they have reached the public consciousness.

But there are two other federal housing programs hardly anyone in the general public knows about. One is from Farmer Mac, a government-sponsored outfit similar to Fannie and Freddie. The other is from the Department of Agriculture. Not only do most people not know about these alternative lending options, most mortgage professionals don’t talk them up. But they should.

Heartland Lending

Both are aimed at “rural” home buyers (and refinancers). And that’s key. Places like New York City have made a comeback, for sure. According to reports from Big Apple brokerages, Manhattan real estate enjoyed a banner year in 2021. The fourth quarter alone was one of the most potent on record, with $8 billion in sales on an 89% increase in closings. But the data suggests people are still moving out, not in.

For example, nearly 90% of agents polled by the National Association of Realtors said their buyers are heading to the suburbs, small towns and rural communities. And while the gap that favored lower density locations over higher density markets has shrunk somewhat of late, the National Association of Home Builders reports, the exurbs of large metropolitan areas still are recording the highest growth rates for its members.

Combine that with the latest from United Van Lines, which tracks its customers’ state-to-state migration habits, and you can see why you might want to give the USDA and Farmer Mac a look-see, if you haven’t already. Vermont had the highest percentage of in-bound locations, followed by South Dakota, South Carolina, West Virginia and Florida. On the flip side, spots like Illinois, New York and Connecticut registered the most outbound movers.

Rural Neighbors

Now you may have noticed I put quote marks around the word rural a few paragraphs above. That’s because rural may be much closer to where you normally ply your trade than you realize. Consider Prosper, Texas, a 40-minute drive from Dallas, or Shady Side, Md., less than 20 miles from Annapolis, the state capital. How about Bainbridge Island, a ferry-ride across the sound from Seattle, or Weaverville, N.C., less than 10 miles from bustling Asheville.

Only one of Ohio’s 88 counties — Cuyahoga, which encompasses Cleveland — is not rural by USDA’s standards. At least part of the rest are considered rural. At least parts of every Texas county are rural, too, including Dallas and Houston. And ditto for every county in California, even Los Angeles and San Francisco.

There are many spots like these throughout the country. According to the Housing Assistance Council, a non-profit devoted to improving housing conditions for the rural poor, 97% of America’s landmass is rural. And its occupied by one-fifth of our population — plus 48% more if you count suburban and exurban locations.

Planting Helpful Seeds

That’s exactly why you might want to consider loans from USDA’s Rural Housing Service (RHS). That’s what Toni Church and Marquil Jones-Walker did when they moved from downtown Wichita, Kan., to Mulvane, a community of some 6,500 people about 20 miles south of the city. “We liked going downtown,” Church told me. “We’re still not too far away, but being away from people is better.”

Same for Johanna Diaz, a single mother who took a loan from USDA’s Rural Housing Service to build her own place in Imperial, Calif. Actually, she used RHS twice, once for a grant to hire staff and pay administrative costs to help build the house and second to actually finance it.

“I’ve always lived in apartments, and this is my dream house for my kids,” says Diaz, who broke into tears when she was handed the keys. “We have a playground in the back. I can paint it whatever colors I want, and even plant a garden.”

RHS offers a variety of loans, grants and loan guarantees to buy, build or improve both single and multi-family properties. It also offers the same for housing for farm laborers, child care centers, fire and police stations, hospitals, libraries and schools.

The Section 502 Direct Loan Program is aimed at low and moderate-income home buyers who cannot qualify for financing elsewhere. To qualify, borrowers must have adjusted incomes that are no greater than the low-income limit for their particular areas. But don’t let that fool you. While folks in Cook County, Ill., where Chicago rests, don’t qualify, some in DeKalb, the next county over, do, and RHS will give a qualified borrower up to $303,600 if he wants to buy one.

Similarly, Suffolk County, Mass. (think Boston) is out of bounds, but not parts of nearby Worcester, where the limit is $291,600. Denver is off limits, too, but in parts of Boulder County, the max loan amount is $523,400. No county in Maryland is ineligible, including parts of Baltimore County, where the ceiling is $430,500. In other parts of the Free State, the lid is a whopping $657,900.

Size Matters

There are other parameters as well. Houses generally must be under 2,000 square feet, for example. But successful very low-income applicants can have up to 38 years to pay. Others have 33 years. Also, no one needs a down payment. And as of January 1, the rate was a paltry 2.5%.

Another RHS program, the Guaranteed Loan Program, provides a 90% loan note guarantee to approved lenders to reduce the risk of extending 100% financing to rural folk who want to build, rehab, improve or even relocate a dwelling. Guaranteed loans can be for new or existing residential properties as long as they are used as a permanent residence occupied by the borrower. Even closing costs and reasonable and customary expenses that have to do with the purchase can be included in the loan amount.

Big Players Play, Too

Here, it is worth a reminder that both Fannie Mae and Freddie Mac also are players in the rural sector. Under the Housing and Economic Recovery Act of 2008, the law born of the Great Recession, the two government-sponsored enterprises have a “duty to serve” rural markets but also manufactured housing, a substantial part of which is rural. Indeed, “trailers,” as many people still call them, are a staple of country life.

Earlier this year, Fannie and Freddie were told to rethink their next three-year, 2022-2024, duty to serve programs by their overseer, the Federal Housing Finance Agency, which said their plans were insufficient. The agency wouldn’t say why. But in the interim, their rejected platform will stand.

Meanwhile, Farmer Mac, the “other” GSE, is ready to serve. Fannie and Freddie’s smaller sibling, Farmer Mac stands for the Federal Agricultural Mortgage Corp. It started life in 1988 when it was created by Congress to build a secondary market for ag real estate and rural housing mortgages, just like F&F do in the conventional sector. (Unlike F&F, which, in case you are too young to remember, were originally known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., Farmer Mac never formally changed its name to the shorter, snappier handle used most everywhere by everyone.)

Farming System

Be that as it may, one of its programs targets buyers who want to move to the country and do a bit of farming, either full-time or on the side. Gentlemen farmers who pass muster are eligible for financing of up to $12 million — or even $30 million on “high-value” properties of less than 1,000 acres.

There are no minimum or maximum acreage requirements. But if the property is less than 5 acres — not a lot of land in most outer-suburban markets — it must yield a minimum of documented $5,000 annually in gross sales. If it is larger than 5 acres, though, there is no sales minimum.

Borrowers must be either U.S. citizens or permanently admitted for U.S. residency. And eligible properties must be owner-occupied, single-family, detached houses or second homes with enough ground to support agricultural production. There are no geographic restrictions, meaning that if you can find a by-passed 5-acre lot in a close suburb, go for it.

But the property can’t just be a house somewhere on a larger lot or a place off in the woods. It has to produce. Marijuana, anyone? Hemp?

This article was originally published in the NMP Magazine March 2022 issue.
Lew Sichelman headshot
Lew Sichelman,
National Mortgage Professional Contributing Writer

Lew Sichelman has been covering the housing and mortgage sectors for 52 years. His syndicated column appears in major newspapers throughout the country. He also has been the real estate editor at two major Washington, D.C., dailies and spent 30 years on the staff of National Mortgage News, formerly National Thrift News.

Published on
Mar 22, 2022
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