As of July 22, 2019, the Rural Housing Service published a final rule to their USDA Single Close Pilot Program. The pilot program launched last year, and Land Gorilla shared the new features on this blog. The new program will go into effect on August 22, 2019.
As noted in the Federal Register, the purpose of the rule is to “provide increased flexibility in loan terms to facilitate and encourage single close loans, which will stimulate new construction, rehabilitation, and homeownership in rural areas.”
What “Construction to Perm” Loan Programs Does The USDA Offer?
It’s important for lenders to know that the USDA will offer TWO options for Single-close Construction to Permanent loans. They are: the original single-close program (interest only on funds disbursed), and the new Ginnie Mae securitizable version (fully disbursed into escrow account and immediately amortizing at closing).
Different lenders will benefit from one or the other as the difference really comes down to:
- Whether interest is accrued on funds disbursed until the house is complete OR
- Whether the borrower(s) makes a full principal, interest, taxes, and insurance (PITI) payment during the construction of the house.
To the lender, option one means the SC CTP loan remains in the lenders portfolio or on a warehouse line until completion and is saleable at that later date. Option two means the loan is immediately saleable through the Ginnie Mae securitization process before the house is built and the lender’s gain on sale is booked immediately.
The Current USDA Single-Close CTP Loan Program
The USDA offers the traditional SC CTP loan program where the borrower pays interest only on funds disbursed during the interim construction period. Lenders get the Loan Note Guarantee at the time the loan is closed.
The New USDA Ginnie Mae Securitizable Single-Close CTP Program
The new option is a securitizable loan program that’s great for lenders who want to immediately sell the CTP loan once the loan is closed. The securitizable version is structured differently as the loan is fully dispersed at settlement, similar to a FHA 203k renovation loan. The loan proceeds are wired into the lenders’ custodial escrow account. The borrower must pay principal and interest on the entire loan amount which can be paid through a payment reserve account that is funded from loan proceeds.
This new version provides benefits to the lender, among which are:
- Lenders can securitize and sell the loan immediately after settlement and receive their gain on sale, sometimes during the same month that the loan is closed
- Lenders avoid having to hedge their interest rate risk during the construction term
- Allows for the creation of a PITI reserve account funded from loan proceeds for up to 12 months
- Lenders no longer have to offer a higher interest rate during construction compared to the permanent rate. The Borrower’s interest rate is the same from beginning to end
- Removes the requirement for a loan conversion (modification) or re-amortization at the end of the construction period
These actions are taken to provide low-to-moderate income households in rural areas greater opportunities and options to acquire affordable, newly constructed homes or rehabilitate an existing home, provide greater cost efficiency during construction, and increase viability in the secondary mortgage market.