USDA Rural Development Mortgage
When you are choosing which loan program is right for you, you might not consider the USDA. As this program is designed for homes in rural areas, you might not think it is suitable for your situation. However, the majority of Michigan should be covered and this type of loan offers many benefits.
USDA Requirements
Locations
The U.S. Department of Agriculture operates this program, designed to help buyers in rural communities. Before you go any further, you need to find out if the location of the home you want to buy is in a rural Michigan location.
Most of Michigan is considered rural by the USDA, and as long as the home is outside of urban areas, it should be eligible. Even then, there are locations that you might assume aren’t considered rural, but actually qualify.
Created for Moderate-Income Families
To be approved for a USDA home loan you have to meet income limit requirements. If fewer than 5 people are living in the home, the maximum is $110,650. With 5 or more residents this rises to $146,050, and with more than 8 people living in the home, this increases further. These maximum loan limits can vary between counties in Michigan.
The income of all the members in the household counts towards the maximum. So if you have a child with a part-time job or a parent with retirement income, these have to be counted.
If you and the home are eligible, there are many reasons why choosing a USDA loan might be the right fit.
Reasons to Consider a USDA Loan
No Down Payments
The USDA allows buyers without a down payment to qualify for a loan. This avoids the need to save a large sum of money, which can often delay home buying.
There are a lot of expenses when buying a home, so anything that cuts your upfront costs can be very welcome.
Private Mortgage Insurance is Not Required
With a conventional loan you need to pay private mortgage insurance if you’re down payment is below 20%. The USDA does not require mortgage insurance to be paid, however, they do have a similar up-front guarantee fee and an annual fee.
The up-front guarantee fee is typically cheaper than private mortgage insurance, with a 1% up-front fee and 0.35% annual fee. This should mean that your monthly payments are cheaper with this type of mortgage when compared to a conventional or FHA loan.
Interest Rates
When applying for a loan you want the best interest rates to reduce your costs over the loan term. The USDA interest rates are competitive compared to other types of loans. Borrowers should be able to get fixed interest rates that are as good as the rates currently available with other programs.
With lower interest rates, this means that you will pay less overall and have more manageable monthly payments.
Seller Contributions
With this loan, the seller can pay up to 6% of the purchase price to help the buyer with closing costs. These closing costs can be financed into the loan as long as they stay within the market value. But if the appraisal is the same or lower than the purchase price, it can’t be financed into the loan.
Qualifying for a USDA Mortgage
If your home is situated in a rural location and you are within the income maximum, there are still some things you need to qualify.
Credit Score
This program does not have a minimum credit score requirement. However, lenders can set their own minimums, which are often referred to as overlays.
Typically, when you want to qualify for the USDA program, you will find the requirement for the minimum credit score to not be as strict as conventional loans. The lender will also want to see that you have a good history of making loan payments on time.
Debt-to-Income Ratio
Two debt-to-income ratios are used when calculating your eligibility. The primary ratio does not include the new mortgage payments, and the overall ratio does.
For the primary ratio, your debts can be no more than 29% of your gross income. With the overall ratio, which includes mortgage payments, debts cannot be more than 41% of income.
With an annual income of $72,000, $6,000 per month, 29% would mean a maximum of $1,740 debt, and 41% allows for $2,460 of debt including the mortgage payment. Included in the mortgage payments are taxes and homeowners insurance, so if you have other debts like a car loan or credit cards, you might find you are closer to the maximum than you expect.
Maximum Loans
The USDA does not have a maximum loan amount, leaving this decision to the lender. The lender will look at income, debt, and the size of the household to decide the maximum available.
USDA Property Rules
Even though this loan program is designed for rural areas, it can’t be used to buy farm buildings or farmland. The borrower must use the home as their main residence, and it cannot be a second home or rental property.
This program allows the loan to be used to purchase single family homes with up to five acres of land, townhouses, and condos can be eligible. Condos are eligible if they are located in an area considered rural and the development is approved by the HUD, the FHA, the VA, Fannie Mae, or Freddie Mac.
Eligible homes have to be between 400 and 2,000 square feet. Although homes outside of these sizes can be approved with extra requirements.
The property has to be for permanent living, with at least a bedroom, bathroom, kitchen, and living room. The property also has to comply with zoning rules or to have been accepted under previous rules.
Along with these requirements, the home will have to be appraised to ensure it meets quality standards.
USDA Appraisals
An independent appraiser is used to check that the home meets the guidelines set out by the HUD. They will also assess the market value of the property based on comparable sales data.
An appraisal is used to ensure that the borrower isn’t buying a home that needs a lot of repairs or is unsafe to live in. The appraisal also helps the lender to ensure they aren’t lending more money than the home is worth. This means it is less likely that the lender will lose money should the home enter foreclosure proceedings.
The appraiser will review the whole home checking the condition for problems. Some of the things they will check include:
- The foundation, checks for cracks and other issues.
- The structure, to make sure the home doesn’t have any immediate problems.
- The basement, checking for moisture and structural issues.
- The roof, to make sure it will not need replacement within five years.
- Heating, plumbing, and electrical systems. Checks will be made to ensure these systems function as expected.
- Water supply and sewage disposal have to meet Rural Housing and Community Development Service guidelines.
- Windows and doors will be checked to show that they are in good condition with working locks.
- Staircases should have a handrail, and not have any safety issues.
- There should be access from a public road that can be used in all weather conditions.
As long as the home meets the minimum requirements the purchase can proceed, but if it doesn’t repairs will be needed. Usually, it will be up to the seller to pay for repairs, but they might not agree. The buyer could agree to pay for the necessary repairs themselves, though there is a risk they still won’t get the home.
The buyer can walk away if no agreement is reached, keeping their earnest money if covered by a contingency in the purchase agreement.
USDA Guidelines After Bankruptcy or Foreclosure
If you’ve gone through serious financial problems resulting in bankruptcy or foreclosure, loan approval can be more difficult. With the USDA program, you will have to wait a certain amount of time before applying for a mortgage.
After a Chapter 11 bankruptcy has been discharged, you will need to wait at least three years before applying.
With a Chapter 13 bankruptcy, permission can be requested from the bankruptcy court to apply for a mortgage one year after beginning the repayment program. However, this could potentially lead to other creditors reexamining your income and requesting a change to your debt payments. The repayment program can also be used as evidence to show you have a good history of making payments.
If your previous home was sold as a short sale, you will need to wait two years before applying for a USDA mortgage. In the case of a foreclosure, three years need to pass after the official date of foreclosure.
Summing Up Purchasing a Home in Michigan with a USDA Home Loan
Purchasing a home in Michigan with a USDA loan is possible on more properties than you might imagine. If the home you want to buy is outside of urban areas, there are many reasons to consider this type of loan. You can buy without a down payment, benefit from more flexible financial requirements, and keep your monthly payments affordable.
