There is a loan program that’s somewhat under-utilized and it really shouldn’t be. It’s the USDA home loan program and while it’s not the home financing answer for everyone, for those who can take advantage of this special type of home loan, there might be no better choice. The USDA home loan program has taken a few twists and turns over the years and that might very well be one of the reasons the USDA loan isn’t used when it should be.
Update: As of 2019, loans supported by the USDA (“USDA loans”) require a 600 credit score. Information on this article may be outdated. Please call our staff for further details.
The United States Department of Agriculture, or USDA, oversees the USDA Office of Rural Development. The Rural Development Administration was established in 1990 and one of its duties was to administer the Farmers Home Administration, or FmHA program which was later moved directly to the USDA Rural Development office. You can probably tell already that the various name changes and government departments the home loan program went through might have been one of the main contributors to the USDA loan being somewhat in hiding.
However, for lenders that do actively promote and approve USDA home loans, they know that regardless of the program’s origin, it’s one of the better programs available. Why? No money down. Zero. And some very competitive interest rates, as well. How does it work?
USDA Home Loan Program Basics
The USDA home loan is one of the three government-backed mortgage programs available in today’s marketplace. In addition to the USDA program, VA and FHA loans also fall into this category. They’re government-backed because should the loan ever go into default, the lender is compensated for all or part of the loss. As it relates to the USDA home loan program, the lender is compensated for all of the loss and the guarantee is funded by what the USDA refers to as the “guarantee fee.” There is both an upfront fee of 1.00% of the sales price as well as an annual fee paid in monthly installments of 0.35% of the sales price. This assumes the zero down option. These fess were lowered October 1, 2016. These lower monthly insurance premiums can make a significant monthly payment difference in comparing the differences between selecting a USDA loan versus an FHA loan.
The USDA loan was put into place to help develop rural and semi-rural areas. These areas are vast, covering nearly 97% of the United States. The program can’t be used in urban and suburban areas but in zones identified by the USDA. The USDA uses the census numbers taken every 10 years to determine which geographic areas qualify for this program. If a property is not located within the approved zone, the loan can’t be used. In addition, the USDA loan limits the household income for qualification purposes. In general, household income cannot exceed 115% of the median income for the area.
The USDA manages as website that consumers can access that allows them to input a property address including zip code that will identify whether or not a prospective property falls into an approved area. If it does, the borrowers must also meet the income limits. Note the 115% of the median income for the area isn’t gross income but considers estimated adjustments allowing for withholdings. This number more closely resembles available funds to take care of credit obligations, including the new mortgage.
For instance, let’s say a couple find a home a few miles outside of town that is listed for $200,000. There is no down payment and with the 1.00% guarantee fee, the loan amount will then be $202,000. The monthly premium of 0.35% annually works to around $58. USDA loans will also require impound accounts for property taxes and insurance. The USDA home loan program is only available with a fixed rate of 15 or 30 years, there are no variable rate options.
Using this scenario and a 30 year fixed rate of say 4.00%, the principal and interest payment would be $1,186, the monthly premium $58 with estimated property taxes of $170 per month and insurance $80 for total payment of $1,494.
The Streamline Refinance
The USDA home loan can also be used when refinancing an existing USDA mortgage and is one of the easiest loans to qualify for. How easy? The USDA “streamline” refinance requires no minimum credit score and no property appraisal or property inspections required. This also means you can be “underwater” on your mortgage, owing more than the property is worth, and still qualify for the USDA streamline refinance.
As long as the home is your primary residence and the existing mortgage is a USDA home loan, you can qualify for this program as long as you have made no payments 30 days or more past the due date within the past 12 months.
Currently, the USDA streamline program is available in 34 states with more being added.
Don’t Fly Solo
Here’s why it’s important to speak with a loan officer experienced with the USDA program. An experienced loan officer can qualify both you and the property with updated guidelines. Or, borrowers mistakenly calculate their qualifying income and come to the conclusion they make too much money when in fact, after allowable income deductions, they do.
Your lender will also need to make sure the property is structurally sound and a licensed inspector determines that:
• There is no termite or wood destroying pest damage
• Plumbing, water and wastewater is functional
• Heating and cooling units working properly
• Electrical up to code
This inspection is part of any inspection performed by an approved and state licensed residential property inspector.
Consumers researching the USDA home loan on their own may also come to their own conclusion the property would not qualify because there are homes already around the subject property and does not look anything like “rural.” Yet as demographics shift over the years, areas that look nothing like rural as defined by the USDA actually are. What was once considered open country by the USDA may not be populated with as many as 20,000 residents. Remember, the USDA makes this determination every 10 years as a result of the national census. The last census was taken in 2010 so we’re more than halfway past the old census. It’s very possible the home you’re looking at does qualify for a USDA home loan after all. You can do your own initial research but make sure your assumptions are correct by speaking directly with an experienced loan officer who knows the details of the USDA home loan program.
This program deserves some very serious consideration and if during your shopping around for a lender and you want a home loan that requires as little cash as possible and you’re not VA eligible, the USDA home loan might very well be your best choice. But again, don’t make that call flying solo.
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