The USDA 502 Direct Loan: Making It Work for Your Affiliate

The USDA 502 Direct Loan: Making It Work for Your Affiliate

The USDA 502 Direct Loan: Making It Work for Your Affiliate Panelist Lori Anderson, executive director, Habitat for Humanity of Douglas County (MN) Panelist Letitia Horace, director of operations, Habitat for Humanity Colorado Panelist and Moderator Laurie Foor, organizational development consultant, HFHI 2

Why the USDA 502 Direct Loan? US Subsidy and Sustainability Policy that went into effect in early CY 2010 provided that The US Area Office may authorize affiliates to participate in selected mortgage financing programs in partnership with third party lenders Two options are currently identified: USDA 502 Direct Loan and 504 Repair Program Zero Equivalent Mortgage 3

Why the USDA 502 Direct Loan? Both HFH & USDA 502 Direct have the same goals Help low income families purchase homes in [rural] areas Families must be without adequate housing and unable to obtain credit elsewhere Provide housing that is modest in size, design and cost Simple, decent, affordable housing that doesn t cost burden the family 4

USDA 502 Direct Loan Basics Must be in designated rural area Some affiliate service areas may include USDA rural areas http://eligibility.sc.egov.usda.gov/eligibility/welcomeaction.do?pageactio n=sfp&navkey=property@11 Loan not more than Maximum Area Loan Limit 5

USDA 502 Direct Loan Basics Purpose to provide home-ownership opportunities in rural areas to families with low (80% AMI) or very low (50% AMI) income Family must be unable to obtain credit elsewhere for the total amount needed to purchase the property, yet have reasonable credit history. Family must be able to afford the mortgage payments, including principle, interest, taxes and insurance (PITI) 24% adjusted annual income 6

USDA 502 Direct Loan Basics Cost of Financing HFH Affiliate cannot charge interest on any mortgage financing it provides directly to Habitat homeowners 502 Loan provided by USDA. Interest is based on affordability. Note rate is fixed but payment based on affordability Professional Quality Loan Servicing USDA Service Center HFH in house or out sourced 7

USDA 502 Direct Loan Basics Length of Mortgage HFHI- The maximum length of a mortgage is now permitted for up to 40 years if necessary to achieve the income and affordability thresholds typically 25 to 30 years 502 Loans are for 33 years (38 years for those with incomes below 60% of AMI who cannot afford 33 year term) 8

USDA 502 Direct Loan Basics Benefits to affiliates May allow affiliate to serve an area that otherwise was not accessible Affiliate may not consider itself to be rural but may have rural areas in service area Increase cash flow sustainability Increase capacity Serve more families 9

USDA 502 Direct Loan Basics Homeowner Benefits May get home sooner May be able to live in an area the affiliate would otherwise be unable to serve 10

Making it work for your affiliate Important things to address Research with USDA office Does your service area include qualified rural area? Contact your local USDA field office for specifics Discuss with your board Review implications Discuss implementation date 11

Making it work for your affiliate Adopt appropriate board policies the board needs to decide who gets what type of loan, and how they will incorporate the USDA loan into their service area model House pricing remains the same 12

Making it work for your affiliate Inform/Train Staff use of financing options Volunteers Donors Homeowners 13

Making it work for your affiliate Update marketing materials All marketing, family selection materials must be updated to incorporate a third party loan to all donors and applicants Staff must be trained to speak about financing options Equal Opportunity Lender posters are REQUIRED to be visible in the office 14

For additional information Staff person at HFHI for questions: Laurie Foor Organizational Development Consultant LFoor@habitat.org USDA Website http://www.rurdev.usda.gov/supportdocuments/hb-1-3550.pdf This is the loan origination handbook, for your reference. Please do not proceed without contacting your local USDA field office. 15

Presentation by: Lori Anderson Executive Director, Habitat for Humanity of Douglas County (MN)

How it Started Attended a workshop at HFHI 2011 Conference Participated in a meeting with HFH-MN and USDA North West District Rural Development Key - building a good relationship with local USDA - Area Specialist - Rural Development 17

Why Consider the 502 Direct Loan? The program can provide an affiliate the means to offer alternative financing options for a partner family Funds available for home construction or rehabilitation allowing an affiliate to serve additional families It s affordable for the family HFHI: 30% of the household s gross income 502: payment based on 29% of adjusted annual income (with adjustments for child care, elderly care, etc.) 18

Benefits to Affiliates Include May allow affiliate to serve an area that otherwise was not accessible Affiliate may not consider itself to be rural but may have rural areas in service area Increase cash flow sustainability Increase capacity Serve more families 19

Benefits to Homeowners Provides for payment assistance, workout agreements, moratorium of payments (for up to 2 years) in event homeowner encounters difficulty Home may be available sooner with funding May have lower monthly payments 20

Steps at the Affiliate Taskforce was formed to study 502 Program Board Resolution Policy adopting use of 502 Program Educate family selection committee Update all marketing materials, providing low cost funding options to families, and no profit mortgage Train staff, families, volunteers and donors of change 21

Working with USDA Be prepared Present your affiliate / plans for the community Tour of your homes / house plans and lots Construction processes / procedures What areas can you and the USDA work together 22

Things to Ask Application processes and procedures Time-lines, max loan amounts, available funding Loan packaging Training Closing requirements sworn construction statement, contractor s warranty Referrals between agencies 23

Implementation of 502 Program Families approved by BOD Policy families apply for 502 Mentor or Family Representative attends USDA meeting with the family Financing use 502 if approved, use Habitat if not approved Sweat equity requirements are the same Homebuyer education for first-time homeowners is required Family is assigned a mentor Maintain relationship with family after closing 24

Communication with Family Three meetings are held to explain USDA 502 Program to partner family and mentor In the beginning after family is approved for USDA financing Midway through the process Several weeks prior to closing 25

USDA 502 Program Steps Family prequalified for USDA Lot location and house plan approved by USDA Signed purchase agreement by family and Habitat Family is certified and placed on USDA funding list Habitat provides a contractor s warranty Closing affiliate is paid, escrow account for established lawn etc., USDA and homeowner sign off to receive escrow funds 26

Our Experience Three families purchased new homes built by Habitat and financed by USDA 502 Direct Loan Program Three additional families approved by Habitat & USDA, families chose to purchase a home on the market Currently have 1 family approved and 2 in process, USDA funding is uncertain 27

Messaging Change mortgage language from no interest to no profit in all marketing material Family selection explains program and affiliate policy during application process Need on-going messaging program for volunteers and donors 28

Moving Forward Adopt appropriate board policies Family selection Review House Pricing Model sell price to the USDA should be consistent with other mortgages to Habitat home owners. No need to reduce price to cover interest. If applicable, a second mortgage could be used. 29

Contact Information Lori Anderson, Executive Director Habitat for Humanity of Douglas County, MN lori@hfhdouglascounty.org