Congress’s stated mission for the FmHA was “to foster and encourage the family farm system of agriculture in this country.” To do so, the agency provided loans to farmers and ranchers for acquiring and improving real estate, equipment, and livestock, as well as for annual operating purposes. At one point, the FmHA and the Farm Credit System held over 40% of all agricultural loans in the U.S. However, problems began to emerge with the FmHA over the years. By the 1980s, 40% of FmHA borrowers had become seriously delinquent on their loans. Meanwhile, the value of many of the assets, like land and equipment, dropped by as much as 20-30% in certain parts of the country. Congress subsequently directed the U.S. Government Accountability Office (GAO) to conduct a study of the FmHA. In its April 1992 report, the GAO found that as much as 70% of the FmHA’s portfolio was at risk due to delinquent borrowers. And this was even after the FmHA forgave $4.5 billion in debt from 1989-1990. By September 1991, the FmHA had acquired over 3,100 farms from delinquent borrowers. The GAO concluded that the ineffective implementation of the FmHA’s loan servicing standards contributed to many of these problems.
How the Farmers Home Administration Works Today
Today, the FmHA is known as the USDA Office of Rural Development. The agency currently has an $86 billion portfolio of loans and aims to administer nearly $16 billion in program loans, loan guarantees, and grants through its programs. Borrowers can apply for USDA Rural Development home loans such as those for single-family housing. If eligible, they can receive 100% financing through an approved USDA lender. Rural Development loans are similar to Federal Housing Administration (FHA) loans in that both are intended to help low- and middle-income families achieve homeownership. However, there are some stricter criteria for borrowers to qualify for a USDA loan. For example:
The borrower must show they can repay the loan, but their income can’t exceed 115% of the median income in that area. Borrowers should have a minimum credit score of 640, which is considered a “reliable” score by the USDA and can qualify them for automatic approval. A borrower’s debt-to-income (DTI) ratio, which is the amount they spend versus the amount of income they have coming in, should not exceed 41%.
In addition, the property must be located in an area determined to be rural by the USDA.
Pros and Cons of a USDA Loan
Pros Explained
100% financing available: The USDA’s Single Family Housing Direct Loan, for example, offers 100% financing with no down payment required.Flexible terms: Lenders and borrowers are free to negotiate any mutually acceptable fixed interest rate. Terms, however, must be 30 years.Refinancing available: As long as your payments are current, you can refinance a USDA loan.
Cons Explained
Location restrictions: Eligible borrowers must purchase a property that’s deemed to be in a rural area by the USDA. Guarantee fee included: While the USDA doesn’t technically require mortgage insurance for its Rural Development single-family direct loans, the agency does charge an annual guarantee fee. These fees are paid to USDA by the approved lender and are usually included in the homeowner’s monthly loan payment.Income limits: Borrowers cannot earn over 115% of the median income in the area they’re looking to buy a home.
