USDA or the United States Department of Agriculture offers mortgage loans for home purchase. Although some of these things may sound too good to be true, all of the following facts about the USDA Home Loan program are 100% true.
Disclaimer: Before reading any further please understand one very important point. The goal of this article is not to cast a light on any other type of mortgage loan. There are lots of good mortgage loans available to a wide range of buyers. This article is simply showing some of the advantages of one type of mortgage, the USDA home loan. With that out of the way, let’s begin.
USDA Loan Limit
Most loans only allow borrowers to get a mortgage up to a certain point. For example, the VA mortgage and the conventional mortgage typically will not provide a loan higher than $417,000. FHA may loan a bit more, up to $625,000, but it must be in a high cost area such as Los Angeles, Chicago, New York city, etc. Otherwise the limit is much lower.
For a USDA loan, there is no expressly written limit provided in the guidelines. Loan amount limits are based on falling within the income limits and debt ratios of the USDA Rural Housing program.
USDA Credit History
At one end of the spectrum is the FHA mortgage that has allowed borrowers with less than perfect credit to qualify for a home. Moving along the spectrum we come to the VA mortgage which is slightly stricter in terms of credit than FHA. Then there is the conventional and Jumbo mortgages that usually only allow people with the highest credit scores to qualify.
The USDA program guidelines are closer to the FHA mortgage loan rules. In fact, people who do not have much established credit may even qualify with other sources of payment history. Examples can include utility bills, car insurance payments and a steady history of savings.
USDA Borrowing Limit
The VA mortgage is one of the last remaining programs that will allow borrowers to buy a home without making a down payment. The FHA program requires a 3.5% down payment* and a conventional loan can range from 3% all the way to 20%. Jumbo loan requirements have changed in recent years and some lenders will allow only a 10% to 15% down payment, but that is not always the case. Many buyers seeking a jumbo home loan must often pay 20% to 30% as a down payment.
The USDA program will allow borrowers to receive a loan up to the home’s appraised value.
USDA Debt to Ratio limits
The VA program has held fast to their single rule that the borrower’s current debt, plus proposed mortgage, may not be higher than 41% of the person’s monthly gross income. On the other hand, a jumbo loan may have lower ratios for overall debt-to-income and specific ratios for comparing just the mortgage payment to the borrower’s income. The FHA guidelines, generally speaking, have two ratios. The person’s overall mortgage payment should not be higher than 31% of the borrower’s monthly income. The mortgage payment added to existing debt should not be more than 43% of the monthly income.
USDA mortgage guidelines are very similar to the FHA rules. This protects borrowers from buying a home that is too expensive for them.
USDA Mortgage Insurance
Mortgage insurance is a necessary fee to protect the lenders. In order to offer mortgages with such low down payments, the lenders take on the risk that the borrowers may not be able to fulfill their obligation. Mortgage insurance fees help cover some of that risk.
For FHA loans there is a fee paid at time of purchase of 1.75% of the loan amount. This charge is usually added to the loan. In addition, 0.85% of the outstanding balance is assessed each year and spread over the next 12 payments.
In a similar fashion, the VA home loan charges up to 2.4% (first time use) of the total loan as a mortgage insurance fee. No other mortgage insurance fee is charged.
The USDA charges 2% of the initial loan amount as mortgage insurance. However, the annual mortgage insurance charge is only 0.5% of the remaining balance and is spread over the following 12 payments. Like FHA, these charges are added to the overall mortgage loan.
USDA Eligibility Maps
USDA home loans are the best kept secret in home buying. If you’re not a U.S. military veteran, this is the only way to get a zero-down loan with rates even lower than those offered by Fannie Mae and Freddie Mac.
What’s the catch? None really, except that the home must be in an area designated “rural” by the US Department of Agriculture. But don’t start thinking farms and backwoods. Established suburbs across the U.S. are eligible.
The USDA has not updated their eligibility maps in nearly 15 years. Based on the census in the year 2000, the maps do not take into account the massive growth in suburban areas over the past decade and a half. For home buyers, that means a window of opportunity to pay zero-down for a home that is close to employment, schools, and recreation.
But that window is closing. USDA tried to update their maps in 2013. That date was pushed out to 2014, then again to October 2015. Will they put off updating their happily outdated maps to 2016? I sure wouldn’t count on it if I were looking for a home. Get qualified for a USDA loan now, and take advantage the least known but most advantageous loophole in the mortgage market.
After all, if a person with less than perfect credit can buy a home with no money down, it would seem like people would fill the real estate offices with offers to buy a home. There are two small catches that can be handled by most borrowers.
The first catch is the home’s location. USDA will only offer a loan on a home that is situated in an area deemed rural. Before you stop reading, please understand this one important point. The vast majority of every county located across this great country has some area deemed rural. In fact, most of the outer lying areas of some of the biggest cities are actually deemed rural. This means that almost any major city or town will have numerous homes that qualify for USDA financing.
The second catch is actually favorable to most borrowers. USDA will only allow people with modest income to qualify for a mortgage. Each city and county has income limits based on the number of people living in a home. If your income falls within those limits then you could get a USDA loan. In fact, USDA is quite generous and will allow people whose income is higher than the local average using their 115% rule.
For example, if you have 4 people living in your home and the income limit is $59,000 for your area then you could be approved for a mortgage even though your household annual income is $67,850.
For more information;