Patrick Welberg is a senior vice president at Academy Mortgage Corporation, one of the top independent purchase
lenders in the U.S. Under the leadership of Welberg and
other leaders nationwide, Academy achieved record-high
production volume in 2017 and was named a Scotsman Guide
top 10 lender in volume gain, retail volume and most ranked
originators. Welberg has enjoyed a successful
24-year career in the mortgage industry, serving as branch,
district and regional manager. Reach him at
Rural Areas Need New Homes
and This Loan Can Help
USDA pilot program benefits borrowers, originators,
builders and real estate agents
By Patrick Welberg
With for-sale housing scarce — especially in some rural and semi-rural areas — many buyers want to build their dream homes now rather than wait for
months or years for something to come on the market.
Fortunately, a relatively new pilot program by the U.S.
Department of Agriculture (USDA) meets the challenge.
The single-close construction-to-permanent zero-down loan program offers advantages for rural communities. The program lowers risks for both lenders
and borrowers by providing a 90 percent loan-note
guarantee that becomes effective as soon as the
mortgage is closed. That makes these loans immediately saleable in the secondary market, where they
are securitized with the backing of Ginnie Mae. That
process should create more liquidity for new construction loans, particularly in these underserved rural areas.
For originators, the loan helps spur business growth
and strengthen relationships by offering savings and
convenience for borrowers, improved profit margins
and streamlined processes for builders and, in turn,
more homes for sale for real estate agents. Originators
should take advantage of this program by partnering with a knowledgeable local lender who offers the
product. While the loan-program terminology, closing
details, eligible properties and other details vary
from lender to lender, the program’s overall goal and
benefits are similar throughout the country.
Closing with one loan
The USDA’s Single Family Housing Guarantee Loan
Program is for low- to moderate-income buyers, and
qualifying for it is typically fairly straightforward.
Self-employed buyers need only, in some cases, document one year of income instead of two years. The program itself has no maximum loan amount. Instead, the
maximum that can be lent is driven by the loan cap set
for the specific area where a home is being purchased
and the buyer’s ability to repay the loan.
The buyer can purchase the land (if necessary) and
complete the home construction with just one loan
and one closing. Monthly payments are deducted
from a reserve account and applied to principal and
interest during construction, but the buyer makes no
mortgage payments until construction is completed.
With just one closing, the buyer typically saves a great
deal of time and thousands of dollars compared to a
Once the loan is approved and closed, the buyer
doesn’t need to seek loan re-approval when construction is completed. The interest rate is locked prior to
closing (before construction starts), so the interest
rate risk over the course of the construction process
is reduced, particularly in a rising rate environment.
Without any long-term rate-lock fees, again, the
homebuyer saves money.
Big bang for the buck
With the significant savings from a single closing and
avoiding extended rate-lock fees, buyers can purchase
furnishings or more house, if they choose. In addition,
as populations and property values in urban and suburban areas continue to increase in the coming years,
property values in adjacent semi-rural and rural areas
also are likely to increase, resulting in the potential for
building more equity.
For builders, once the loan has been approved and
closed, the construction funds are fully disbursed
into the construction escrow account, where they are
managed and allocated. The builder doesn’t have to
tap a line of credit because the construction financing
is under the buyer’s name rather than the builder’s
name. That’s a benefit particularly attractive to small-to intermediate-size builders, which often lack access
to large amounts of credit. The loan process effectively
shifts the cost of the interim construction interest, the
cost of inspections and the cost of builder’s risk insurance from the builder to the buyer, which improves
the builder’s profit margin and frees up the builder’s
capital to move forward with other projects.
This USDA loan provides the builder with a streamlined approval process. An initial draw of funds for the
builder can be made at closing, with a customized
draw schedule based on the number of months the
builder should take to complete the project. Lenders
may want to save time and remove uncertainty by
pre-approving builders, who will then be ready when
a construction-to-permanent loan opportunity arises.
For real estate agents, the all-important benefit of
the single-close, construction-to-permanent loan is the
opening of what is, in a sense, a whole new market in
the country’s underserved rural and semi-rural areas.
With this product, agents may see an increase in available housing inventory while also propelling the long-term growth of their business.
The agent’s commission is paid at closing, so there’s
no waiting until construction is completed. The agent’s
commission is paid on both the land and the home, if
the agent is representing the builder. With this product, agent commissions are considered part of the
allowable “soft costs” of construction.
Developing referral sources
Bankers, real estate agents, builders and subcontractors — including custom, semi-custom and tract
homebuilders — are great sources for referrals. Originators should join a local homebuilders association
and attend consistently, just the same as they do with
real estate agent functions.
Many subcontractors will give prospective home-
buyers bids for their specific trade work — plumbing,
electrical, etc. Local agents usually sell the home lots,
but many of them aren’t aware that they can make a
commission on the lot and the construction contract
by introducing the buyer to the builder. Architects,
planners, and draftsmen also can be referral sources
because buyers consult with them early in the plan-
Research can pay huge dividends in building a
USDA construction-to-permanent loan book of business. This may be an excellent assignment for a loan
assistant. Local public-records offices and building
departments can be a good resource to learn about
lot transfers and building-permit activities. A closed
lot sale usually means a new construction loan is
needed or will be needed in the near future. Building
permits can be a good source to track and include
grading permits, road permits, and septic and well
permits. Public-record searches are usually free. Meet
the planners who staff the building departments.
Eligible property types for USDA’s pilot program
for the single-close, construction-to-permanent loan
vary with location and lender but typically include
single-family homes, including eligible condominiums,
and manufactured homes. Improvements and costs
that are allowed under the USDA program — subject
to qualification, loan-to-value and appraisal requirements — include acquiring a lot, reasonable
construction-related administrative costs, contingency
reserves, inspection fees, builder’s risk insurance,
landscaping expenses and more.
n n n
Builders, real estate agents and mortgage originators have an excellent opportunity to use USDA’s new
single-close construction-to-permanent loan to grow
their business by serving the low-inventory housing
market in underserved rural and semi-rural areas.
Best of all, buyers in these areas can use this affordable, convenient program to build their dream
home now. n