Indiana USDA Rural Development Mortgage
When looking to buy a home in Indiana, saving a large down payment could delay your purchase for years. Your lender might require 5% of the sale price as a down payment to qualify for the loan, but with a USDA Rural Housing guaranteed home loan, this is something you won’t have to worry about.
USDA Home Loan Basics
The United States Department of Agriculture was established by President Abraham Lincoln to help rural America thrive. They oversee food, agriculture, natural resources, and rural development. Part of their rural development mandate includes housing and providing loans and loan guarantees.
The USDA guarantees loans to moderate and lower-income families buying homes in what they classify as rural areas. If you are buying a home in one of these areas, and you meet their other requirements, there are many advantages to choosing a loan backed by the USDA.
No Down Payments
The USDA allows borrowers to buy with no down payment. This offers quite a saving on upfront costs when buying your home.
The loan-to-value of the loan can exceed 100% of the market value of the property when the guarantee fee is financed. If the home you want to buy is appraised for less than the price agreed, this appraisal value is the amount used for the home loan.
Without the requirement to save for a down payment, you won’t have to wait while you save the money you need to buy a home. This gives USDA loans an advantage over conventional and FHA loans.
No Maximum Loan Limit
The USDA does not restrict the maximum loan amount. The income of the borrower is the limiting factor. The total income of the household is considered when the loan agreement is signed, and there can be slight differences in the limits between counties.
USDA mortgages are intended for moderate-income families, so you may find that you exceed the maximum amount particularly if you have more than one person contributing to the household income. When calculating adjusted income, the income of all household members must be considered.
As of 2024, the adjusted Indiana rural income limits for the majority of counties are; $110,650 for households with fewer than 5 people, and $146,050 with 5 or more residents. If there are more than 8 residents, the limit increases further for each additional person.
The lender will also consider your debts when underwriting the mortgage. Generally, the borrower will need to have a debt-to-income ratio of 41% or less.
If all of your debts, including the proposed mortgage payments, are more than 41% of your gross income, you may not get the mortgage amount you want from your lender.
Affordable Monthly Payments
The interest rates available are usually competitive compared to conventional and FHA loans. The fixed interest rate on the loan should be as good or close to the best currently available through other types of mortgages. This means that a borrower with a USDA loan should have affordable monthly payments.
Closing Cost Credits
The USDA mortgage loan is designed for low and moderate income families, and to help further, the seller is allowed to pay some or all of the closing costs.
The seller can agree to pay up to 6% of the asking price to cover the closing costs, and these are known as closing cost credits.
USDA Funding Fees
While the USDA does not require borrowers to pay private mortgage insurance, they guarantee the loan should the borrower default and this money has to come from somewhere. The USDA funding fee is used to repay lenders for any losses when a borrower defaults.
There are two parts to the funding fee; a 1% upfront cost, and 0.35% of the outstanding balance each year. The 0.35% fee is assessed yearly and spread over 12 months.
Though this is an unwelcome cost for home buyers it does compare favorably to similar fees payable with other mortgage types.
USDA Mortgage Qualifying Guidelines
The USDA does not require that home buyers meet a minimum credit score. Despite this, the lender is likely to have their own guidelines for minimum credit scores that need to be met for approval. In the industry, it’s commonly referred to as mortgage overlays.
If you have had issues qualifying for conventional home loans, you should find it easier with a USDA mortgage. Lenders like to see that potential borrowers have kept up with their monthly payments for other loans over the past two years.
Eligible Rural Areas in Indiana
If you are interested in using a USDA loan to fund the purchase of your home, the location is all-important. You might not immediately think that you will qualify for a USDA as the home isn’t in a rural area. However, you might be surprised at what is considered rural and eligible for a USDA loan.
If the property is located outside of major cities and their suburbs, the home could be eligible. So if the home isn’t located within Indianapolis, Fort Wayne, South Bend, Anderson, Marion, and other cities, you might qualify.
Even if you are buying a home in a neighborhood that is very close to a densely populated area, it could still be considered rural. If it has a population of fewer than 10,000 and still has a rural character, it likely doesn’t matter that it is close to a densely populated area.
The area also has to have a lack of mortgage availability for moderate and lower-income borrowers. As areas change and populations grow, eligible areas can change over time.
Types of Homes Allowed
As long as the home is going to be the primary residence, the USDA allows many types of homes to be purchased. Single-family homes and townhouses are eligible as are condos as long as the condo development meets the USDA’s requirements.
Any home that is purchased through the USDA loan program has to meet certain standards. The standards are created to not only protect the borrower but also the lender in the event of foreclosure.
The requirements for a home to be financed using a USDA loan include
- As a minimum, the home must include a kitchen, dining room, bedroom, and bathroom
- It cannot include buildings or land mainly used to generate income
- Rental properties cannot be purchased
- The home cannot have an in-ground swimming pool
- Generally, only homes between 400 and 2000 square feet are accepted, though smaller and larger homes can still be financed with additional requirements
The home also has to conform to the USDA’s minimum property requirements. This involves an appraiser visiting the property to find the fair market value and to inspect it to check its condition.
The appraiser uses the HUD’s Single Family Housing Policy Handbook to help them assess whether the home meets the required standard. This includes inspecting the following items:
- The foundations, checking for cracks
- The structure, looking for signs of moisture damage and checking the condition
- The basement, for moisture and to ensure the sump pump functions
- The roof, to check for leaks
- Crawl and attic space to ensure there is enough ventilation and no mold or leaks
- Electrical, heating, and plumbing systems to ensure they work correctly
- The exterior, windows, and doors checking their condition for problems
- The appraiser will also check that there is suitable access to the road in all weather
These are just some of the requirements that will be looked at and featured in the appraiser’s report. If there are problems with the home, repairs could be needed and it will normally be the seller that pays. The seller might not agree to pay for these repairs, and if that happens the buyer can walk away with their earnest money deposit as long as there is a contingency in their contract.
USDA Refinance Options
If you already have a mortgage, the USDA offers refinancing options. If you already have a home loan through the USDA program, you can get a Streamline Refinance. Even if the Indiana home is no longer considered to be in a rural location, it can still be considered for USDA refinancing.
As you might imagine, it is easier to refinance to a new mortgage with a lower interest rate when choosing this option. There will be less paperwork to complete and your home may not need a new appraisal.
To benefit from these advantages, homeowners cannot be behind on their mortgage and need to have paid their last 12 monthly mortgage payments on time. The homeowner will need to provide proof of income, but the closing costs can be consolidated into the new loan.
Summing Up USDA Loans in Indiana
Though you might not expect to be eligible for this type of mortgage, there are more areas in Indiana that the USDA considers to be rural than you might imagine. And if you do qualify, USDA loans have some attractive benefits that make them very competitive with other options.