USDA Direct Loan Borrowers – Subsidy Recapture

Date: April 16, 2012

Homeowners with a Section 502 USDA Direct Loan receive a "Subsidy", which is the value given by Rural Development to USDA Direct borrowers for receiving preferential interest rate and/or mortgage payment financing. This Subsidy account will be listed on the monthly mortgage coupon, instructions for receiving a payoff, and the final payoff statement.

The Subsidy granted on loans originated after October 1, 1979 is subject by Rural Development to a Subsidy Recapture. The amount of the Subsidy Recapture that Rural Development is entitled to claim when the house is sold, refinanced, or no longer is the primary residence of the borrower determined by the following factors:

Purchase price of the house if sold
Appraised value of the house if refinanced
Capital improvements, such as room additions, adding a fence, deck, or enclosed porch; can be used to reduce the amount of the Subsidy Recapture

Scenarios for treatment of the Subsidy Recapture when refinance a Direct Loan to a USDA Guarantee non-Streamline Loan are as follows:

Scenario 1: the appraised value of the house exceeds the outstanding principal balance of the Direct Loan:

The homeowner may be entitled to receive a 25% reduction off the current Subsidy Recapture balance if included in the new USDA Guarantee Loan
The Subsidy Recapture can be included in the new USDA Guarantee Loan
The Subsidy Recapture can be "subordinated" to the new first mortgage until the property is sold, transferred, or no longer occupied by the homeowner

Scenario 2: the appraised value of the house is close to the outstanding principal balance of the Direct Loan:

The Subsidy Recapture may be waived by Rural Development since there has been no increase in property value since the loan was originated
If sufficient equity in the property exists the Subsidy Recapture can be included in the new USDA Guarantee Loan
The Subsidy Recapture can be “subordinated” to the new first mortgage until the property is sold, transferred, or no longer occupied by the homeowner

Scenario 3: the appraised value of the house is less than the amount of the outstanding principal balance of the Direct Loan:

The Subsidy Recapture may be waived by Rural Development since there has been no increase in property value since the loan was originated
The Subsidy Recapture can be "subordinated" to the new first mortgage until the property is sold, transferred, or no longer occupied by the homeowner
The homeowner will need to bring cash to the table to cover the difference between the appraised value of the house and the outstanding principal balance of the Direct Loan


Share |
Blog Ping