Illinois residents that are looking for a way to buy a home with no down payment should take a hard look at the Rural Development Loan (USDA loan for short). This mortgage is an excellent way for first time home buyers to save money on the acquisition cost and get a competitive fixed interest rate at the same time.
Highlights Of The Illinois USDA Mortgage
The USDA, which stands for the United States Department of Agriculture, has guidelines for their loans and they work in a similar manner to FHA and VA. The USDA Rural Development office does not lend money directly to borrowers. Instead, the office approves various lenders to offer the Illinois rural development loan to qualified borrowers.
True Zero-Down Option
The rules for this mortgage state that a qualified borrower may receive a loan equal to 100% of the property’s appraised value, plus the upfront guarantee fee. When comparing this to a loan that requires a down payment ranging from 3% to 10% of the home’s price, this mortgage option can save borrowers thousands of dollars.
This one factor may also give potential borrowers the opportunity to buy a home sooner than they expected since they will not need to spend months or years saving funds for the down payment.
Location of the Property
The rural development loan is often referred to as a rural mortgage. This comes from the primary defining characteristic of the loan; in order to be approved for the mortgage, the property must be designated as a rural location as defined by the USDA map.
But wait, don’t let that scare you. In layman’s terms, rural actually means outside of a major metro downtown area. In fact, most counties across Illinois have many homes that will qualify for the rural definition.
The main goal of this loan is to offer people a chance to buy a single-family home. The loan does not offer financing for large farming operations or a home that includes a large amount of acreage. The maximum amount of acreage available to be financed with a home purchase is 5 acres.
Along with single-family homes, a condo that is located in a designated rural area is also allowed. Townhomes can also be purchased with the Illinois rural development loan program.
In order to be eligible for this mortgage, the borrower(s) must plan to live in the property as their primary home.
The rural development program is not available for vacation homes or rental properties.
The rural development program has always been aimed at helping individuals with lower or moderate incomes.
In order to continue serving this market, the loan guidelines are very clear about household income.
Maximum Income Limit
For all borrowers, regardless of their intended place of residence, the maximum amount of the household income shall not be higher than 115% of that area’s median income. As an example, if you are looking to purchase a property in a location whose median income happens to be $58,000, then your household income cannot exceed $66,700.
Notice that the previous discussion mentioned “household” income. This is very important to understand for 2 reasons.
- The median for the average fluctuates by the number of people who will live in the home. Therefore, a married couple with no children will have a slightly lower median compared to a family of 5.
- The annual income from each working person living at the residence will be counted. This includes the income for teenagers working part-time jobs or elderly relatives who receive a pension.
View current income limits.
Unlike other types of loans, USDA does not place a limit on the amount of money a person may borrow to purchase a home. The loan limit is determined by the borrower’s income and existing debt. So long as the borrower’s combined household income meets the median income rule and the borrower’s debt-to-income ratio is in line with the rules, the borrower can be approved for the loan.
Calculating Debt-to-Income Ratio
This mortgage has a primary debt to income ratio as well as an overall debt to income ratio. These ratios are in place to help prevent the borrower from getting over-extended with debt.
The primary debt to income ratio is set at 29%. This means that the borrower’s monthly income, before taxes and other deductions are removed, is compared to the proposed home payment. As long as the proposed payment is less than 29%, they meet the ratio. Keep in mind that the home payment will also include escrow amounts for the annual property taxes and homeowner’s insurance.
The overall debt to income ratio is set at 41%. All of the borrower’s monthly debt payments, along with the proposed house payment, may not exceed 41% of the gross monthly income.
For example, using the previous example of a family who makes $66,700 per year, their monthly income would be $5,558 ($66,700 divided by 12 months).
So, this would mean that the proposed home payment, including escrow amounts, cannot be higher than $1,612 ( $5,558 x 0.29 = $1,612).
It also means that the proposed house payment added to all the current debt payments could not be above $2,279 ( $5,558 x 0.41 = $2,279) .
Besides the guidelines that cover the home’s location, the borrower’s income, and debt ratios, there are other guidelines that potential borrowers need to be aware of.
All borrowers that wish to use the rural development program to purchase a home must be able to prove their yearly income. Generally speaking, based on the way a person earns income, the following information will be needed
|Source of Income||Required Documents|
|Hourly or commissioned Employee||
|Self-Employed or Business Owner||
|Retired or Disabled||
Potential borrowers seeking to qualify for this program will need to fall into one of the following categories:
- Full citizen of the USA
- National non-citizen
- Qualified alien
The lender will ask for your proof of citizenship prior to getting the loan approved. You may also be asked to provide the proof again at the time of closing.
Not Only for First Time Home Buyers
The USDA mortgage is an excellent way for people to buy their first home. However, there is no restriction in the guidelines. People who are looking to purchase their 2nd home or even their 7th home may apply as long as they meet the other requirements.
Minimum Credit Requirements
The credit rules that determine if a person is approved for this mortgage are more relaxed in comparison to conventional mortgages. In fact, many lenders have stated that the relaxed credit standards used to approve FHA applicants are very similar to USDA loans. People that have struggled in the past with their credit are now able to make their payments on time should feel good about their chances of getting approved USDA.
PMI or Private Mortgage Insurance
With all mortgages there comes a risk that the borrower may not be able to repay the loan at some point in the future. If this happens, the home is foreclosed and the lender loses money on the transaction.
In order to mitigate some of that risk, this program requires borrowers to pay a monthly premium known as private mortgage insurance.
This premium is applied to the loan in 2 ways:
- When the loan is closed and the borrower is ready to take possession of the home, a fee of 1% of the original loan balance is added to the mortgage. This allows the borrower to pay the fee over time.
- The second premium is calculated yearly. 0.35% of the outstanding mortgage balance is broken down into 12 payments and added to the monthly mortgage obligation.
Who is NOT a Good Fit for this loan?
Based on the various criteria listed above, only 2 types of people should avoid this mortgage.
The first group is the city lovers. Any individual or family that dreams of living downtown in a major city, with lovely views of the skyline, access to parks, and convenient trips to shopping and entertainment via public transportation should not consider this mortgage. The areas in and immediately around downtown areas do not typically qualify for the rural designation.
High earners should also not apply. Individuals that have either started a company that yields them a six-figure personal income, or highly paid professionals, will typically have a yearly income that is much higher than USDA’s allowable guidelines.
Summing Up The USDA Loan for Illinois Residents
In general terms, the rural development loan program is a great option for many potential homeowners. It is especially appealing to people that would like to purchase a home without the necessity of making a large down payment.