The USDA Section 184 Loan Program began as a way to help Natives living on the Reservation. Because homes located on the Reservation are located on Trust Land, it makes them ineligible for most financing programs. HUD began the Section 184 program in 1992 in order to fix this problem. Today, it is possible for Natives of specific tribes to secure financing on land within the Reservation without issue.
Qualifying for the Program
The first step to determine if you are eligible for the USDA Section 184 Loan Program is to prove your enrollment in a tribe. In order to qualify, at least one borrower on the loan must belong to a tribe. The borrower must be a member of a federally recognized tribe. As of right now, there are 566 federally recognized tribes in the United States. You can see a list of them here. Once you can prove your eligibility for the program, you must qualify for the program.
Meeting the Requirements
As with most government-sponsored loan programs, the USDA Section 184 Loan Program has simple requirements. Generally speaking, you can have a credit score in the low 600s and still qualify. In addition, many lenders allow you to use alternative credit. This means you can use alternative sources of credit to prove your credit worthiness. These trade lines include:
- Rent payments
- Insurance payments
- Utility bill payments
- Student tuition
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Any bill you pay on a monthly basis consistently may be able to serve as a traditional trade line as long. You have to be able to provide proof of the payments over a 12-month period, though.
In addition to your credit score, the lender needs to determine that you can afford the loan. They do this by calculating your debt ratio. This is your total gross monthly income compared to your total monthly debts. Any debts you currently have, such as credit cards or car payments will be included in the ratio. In addition, the lender needs to figure your new mortgage payment including the principal, interest, taxes, and insurance into the ratio. Generally, they want to see a debt ratio lower than 41% for this USDA program.
How to Apply for the USDA Section 184 Loan
Applying for the USDA Section 184 Loan is as simple as applying for any other loan program. You just have to find a USDA approved lender who offers the program. The USDA must approve any lender before they can provide the Section 184 loan. To make your search easier, here is a list of approved lenders. Of course, you should always contact the lender first to make sure they still participate in the program.
Once you apply with a lender, they will evaluate your loan file to determine your eligibility. If the lender is willing to write and fund the loan, they will approve it. From there, the loan file must go to the USDA for final approval. Because the USDA guarantees the loans the lenders fund, they have the final say. They want to make sure the loan is not so risky that foreclosure is imminent. If you were to foreclose on the loan, the USDA is on the hook for the defaulted amount. They then have possession of your home, which they have to try to sell. The entire process is tedious and expensive, which is why the USDA has the final say in which loans get approved.
Down Payments and Fees
Most government-sponsored loan programs offer low down payments and the USDA Section 184 Loan is no exception. If your loan amount exceeds $50,000, you must put down just 2.25% on the home. For example, on a $75,000 loan, you would have to put $1,687.50 down. If your loan amount is less than $50,000, you only have to put down 1.25%. On a $50,000 loan, this means $625.
The Section 184 Loan also has a guarantee fee you must pay at the closing. Right now, this amount equals 1.5% of the loan amount. On the $75,000 loan, this means $1,125. The good news is you can roll this fee into your loan at the closing without affecting your LTV. If your loan has an LTV higher than 78%, you will also have to pay annual mortgage insurance in the amount of 0.15%. On the $75,000 loan, this equals $112.50 per year or $9.37 per month.
How to Use the Section 184 Loan
There are many different ways you can use the Section 184 Loan including:
- Purchase of a new home
- Refinance an existing home
- Fixing up a home
- Purchase and fix up a home
- Build a new home
The only caveat to using the loan for any of the above purposes is that the home is owner occupied. It cannot be a second home or investment home – you must live in it.
The Benefits of the USDA Program
There are many benefits of the USDA Section 184 program. Aside from the fact that you have to put very little down on the home, the program is highly regulated. This means the following benefits:
- No prepayment penalties
- Fixed interest rate (adjustable rates are not allowed)
- The term cannot exceed 30 years
- Low interest rates
- Many available lenders
If you are tired of getting declined for financing because of your enrollment in a tribe, consider the USDA Section 184 Loan program. It provides you with affordable financing with very few restrictions. With the guarantee of the government to cover your loan, many lenders are willing to provide this type of financing to those living in a tribe. Consider shopping around with any of the lenders on the above list to find the best interest rates and closing costs to make your home purchase, refinance, or rehabilitation as affordable as possible.