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Payment Assistance 2 Introduced for Section 502 Direct Loans, Effective April 1
USDA Rural Development has established a new way to calculate the payment assistance (subsidy) for homebuyers receiving mortgages through the Section 502 direct loan program. A December 27, 2007 Federal Register notice announces the change, which will take effect on April 1, 2008.
Applicants who receive a Certificate of Eligibility from RD – indicating the agency’s underwriting process has determined they qualify for and can afford a Section 502 mortgage – on or after April 1, 2008 will receive payment assistance calculated under the new formula, dubbed Payment Assistance 2 or PA2. Applicants who have already obtained certificates showing they are eligible for loans using the current formula, Payment Assistance 1, cannot switch to PA2, nor can borrowers whose loans have already closed using either the older Interest Credit subsidy or PA1. Applicants who were found ineligible under PA1, but believe they could be eligible under PA2, may reapply.
The final PA2 formula is similar, but not identical, to a proposal published February 17, 2006. RD’s December 27, 2007 notice describes the final formula as follows.
Payment Assistance equals Note Rate payment for principal, interest, taxes, and insurance (PITI) minus borrower’s PITI contribution.
Regardless of the use of leveraged loans, the borrower’s PITI contribution is the higher of:
- 24 percent of borrower’s adjusted annual income for the total PITI; or
- principal and interest (P&I) calculated at 1 percent on the Rural Development loan plus Taxes and Insurance (T&I).
In response to concerns expressed by some who commented on the 2006 proposal, the final PA2 regulation recognizes payments made on leveraged loans that are targeted to affordable housing – that is, leveraged loans with interest rates no more than 3 percent and amortization of at least 30 years.
Making a significant shift away from one element of PA1, PA2 eliminates area median income from the calculation. Thus a borrower’s payments will be based only on the borrower’s income and housing costs, without regard to the income of the area where the borrower lives.
HAC’s analysis of the 2006 proposal indicated that very low-income and extremely low-income borrowers (those with incomes under 50 percent and 30 percent, respectively, of area median) would be more likely than those with low incomes (under 80 percent of median) to make higher payments under PA2 than under PA1. HAC’s calculations were based on 25 percent of borrower adjusted income, the proportion proposed in 2006, rather than the 24 percent used in the final PA2. HAC’s recommendations for ways to make homeownership feasible for the lowest possible income levels remain valid:
- RD should use its current authority to make loans for 38-year terms rather than 33-year terms when the longer period will reduce payments to affordable levels.
- Self-help housing should be encouraged, so homebuyers can use their own sweat equity to lower their purchase costs.
- Grant subsidies for homebuyers, such as Community Development Block Grant assistance, should be encouraged for very low-income Section 502 borrowers.
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For more information about the Section 502 direct loan program, click here.
To find the USDA Rural Development office closest to you, click here.
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Posted: December 28, 2007
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