The USDA Rural Development Loan also known as RD or USDA Loan is one of the best loan types available to home buyers today. It was designed by USDA (United States Department of Agriculture) to serve low to moderate income families in rural areas. While the loan is available to buyers in rural areas it also serves the bedroom communities or outlying areas of larger metropolitan areas. There are many benefits to the USDA Rural Development Loan. The major focus for most is the 100% no money down feature. Outside of the Veterans Home Loan there is no other loan type available that does not require a down payment. With that said there are several other benefits that make it a very attractive loan for home buyers.
USDA Rural Development Loan Benefits
-No Money Down (100% Loan)
-Low Monthly Mortgage Insurance
-Flexible Credit Standards
-Seller Paid Closing Costs
-No Maximum Purchase Limit
-Competitive Fixed Rates
Qualifying for USDA Loan
To qualify for the USDA Home Loan home buyers must meet a few requirements outside of the basic credit requirements that all loans have. Home buyers must first select a property that is in a qualifying area. This areas are typically areas that have populations of 20K or less. The assumption is that the property must be extremely rural which is just not the case. Often times properties in outlying metropolitan areas can qualify. The best way to determine if a property qualifies is to look up a particular address on the USDA eligibility map. The other requirement is buyers can not exceed the maximum household income threshold. This is defined by households of 1-4 and 5+. The maximum income is listed by each county in each state
USDA Rural Loan Credit Requirements
One of the many benefits of the USDA Loan is the credit requirements. Unlike some of the other loan types available today the USDA Rural Development Loan allows borrowers with less than perfect credit. A borrower is only required to be 3 year removed from a previous foreclosure. This is very lienant compared to a conventional loan that requires up to 7 years removal. While USDA doesn’t set a minimum credit most all lenders do. The majority of lenders will allow a borrower with a credit score as low as 640 to obtain a loan with this program. People are allowed to use alternative credit. This is credit such as utility bills and cell phone bills. A borrower that has had a previous bankruptcy can obtain a USDA Loan after only 2 years.
Guaranteed USDA Loan
There are two types of USDA Rural Development Loans which are the Direct and the Guaranteed. The Direct is exactly that. Borrower will deal directly with their local USDA office in order to obtain a loan. While there are some benefits to this way a large percentage of borrowers select to go the Guaranteed route. A Guaranteed is a loan where the borrower obtains the loan from a private lender and USDA guarantees the loan. There is more flexibility with this loan versus dealing directly. Also borrowers can work with a local lender where as there may not be a local USDA office.
USDA Guarantee Fee
A USDA Rural Development Loan will have whats called a guarantee fee. There is a upfront and annual fee. These fees are are used to help keep the program going. When a borrwer defaults on a USDA Loan USDA will cover a large part of the outstanding balance. The current upfront fee is 2.75%. The word upfront is often a little confusing for people. The fee is actually rolled into the loan so for example a $100,000 loan b becomes a $102,750 loan. With that being said there is little impact on the monthly payment because the extra $2750 is spread over 30 years. The annual fee is a little misleading as well because it is actually paid monthly. The factor used is .50%. Where the upfront has a small impact on the monthly payment the annual fee does have a significant impact. On the same $100,000 loan the annual fee would be approximately $41 per month. While no one likes the added money the USDA Loan is significantly lower in this area compared to other loan types. For example the FHA loan uses a monthly factor of .85% so on the same $100,000 loan the borrower will pay $85. In some cases conventional loans is even higher.
USDA Home Loan Closing Costs
Closing costs is something every loan has. While lenders technically separate closing costs from pre-paids it is usually all lumped together when discussing a buyers closing costs. The great thing about the USDA Loan is that allows the seller to pay up to 6% of the loan amount towards their closing costs and pre-paids. In the majority of instances this is more than enough to cover everything. For example on a $100,000 loan the seller can pay up to $6,000 towards the buyers costs.
USDA Eligible Areas
The USDA Rural Development Loan has a couple of unique features. One of those features is property location. The property must be located in whats considered an eligible area. The vast majority of the U.S qualifies but areas with larger populations do not. It is determined based on the most recent census. While the loan was designed for rural areas that is not always the case. A good rule of thumb is areas with 20K or less in population. Often times outlying areas near major metropolitan areas will qualify. The best way to determine if a property qualifies is too look up the address or area on the USDA website.
USDA Household Income Limits
Another unique feature of the USDA loan is that is has household income limits. The limits are set based on the number of individuals in the home and the county where they are located. It is broken down into two categories 1-4 people and 5+. The confusing part for a lot of people is that this has nothing to do with debt to income ratio qualifications and that you have to consider the income of all individuals that are working in the home regardless if they are on the loan or not. Since the maximum household income can vary from county to county best way to see what the max allowed is to check USDA’s website.
USDA Rural Development Lenders
When it comes to lenders not all are equal and this especially applies when it comes to USDA Mortgage Lenders. Not all lenders offer the USDA Loan and of those who do offer it a not all specialize in it. For borrowers it is often encouraged to work with a lender that has a significant part of their monthly production in USDA Loans. Understanding the properties, areas, and requirements takes a company really understands and focuses on this particular product.
USDA Maximum Loan Amount
One of the many questions people have about the USDA loan is in regards to the maximum loan amount. The easy answer is there is no USDA maximum loan amount. While that is true the product self regulates the loan amounts because of other restrictions. The first is the debt to income ratio. Like any loan the USDA Loan will only allow the debt versus the borrower’s gross income to be so high. The main guideline that keeps the loan sizes in check is the household income restriction. The maximum household income for most areas is below $100k. If the debt ratio is capped and the household income is capped then only so much home can be afforded and this is how the product regulates the maximum loan amounts. Because of this it is uncommon to see loans amounts $200k and up.
USDA Refinance
The USDA Home Loan is commonly associated with new home purchases. With the 100% no money down feature it’s very obvious as to why it is so popular for home buyers. What a lot people do not know is that the USDA Home Loan program can be used for a refinance transaction. There is one catch however and that is the original that is being refinanced from must be a USDA Home Loan. The USDA program only allows refinances for existing USDA Loans. All other USDA criteria that is in place for a purchase applies to the refinance.
USDA Eligibility Map
One of the unique requirements of the USDA Home Loan is that it requires buyers to purchase a home in a qualifying area. To determine if a property is in an eligible area the easiest thing to do is use the USDA Loan eligibility map on the USDA website. Eligible areas are determined based on populations from the most recent census. The rule of thumb is areas with a population less than 20k. The USDA eligibility map is very easy to use. You can search by a specific address or see a larger view of an area to see where major boundaries are. The map takes the guess work out of the process so borrowers and lenders alike know for 100% certainty if a property qualifies or not.
USDA Loan for First Time Home Buyers
The USDA Home Loan is very popular and as you can see for good reason. That holds very for First Time Home Buyers. Buying ones first home can be nerve racking and many of the features of the USDA Rural Development Loan make it the go to loan type for first time buyers. Coming up with a down payment can be difficult for anyone especially for younger people who have just entered the work force. It takes time to save a down payment and the USDA Rural Development Loan takes this burden away. This is also true for funds for closing costs. Low mortgage insurance along with flexible credit have made it really popular with first time buyers.
USDA Rural Development Loan and Other Loan Types
We shown the many benefits of the USDA Rural Development Loan but how does that compare to other loan types. There are basically four loan types available today which are the USDA Loan, VA Loan, FHA Loan, and Conventional Loan. The VA Loan is designed for Veterans so if a borrwer does not have a VA Certificate of Eligibility they do not qualify. This loan does offer 100% financing so it is a very good loan type. The FHA Loan requires 3.5% down and has many of the same features as the USDA Loan but it does have higher monthly mortgage insurance.The conventional loan typically requires 5% down and much better credit.
USDA Loan Occupancy Requirements
The USDA Rural Development is very attractive to everyone. With that said the loan is only available to those seeking to purchase or refinance their primary residence. It is not allowed for transactions for no owner occupied property or second homes. Additionally a home buyer can not use the loan for their primary residence if they have a rental property or second home. USDA does not allow buyers to have other properties.