USDA Home Loan Program
When you want to buy a home, finding the best mortgage program could make a significant difference to your long-term finances. If you are looking to live in rural Virginia, you could benefit from the advantages offered by the USDA’s mortgage program.
Choosing a USDA Mortgage Loan
The United States Department of Agriculture has a program to make buying a home in rural Virginia easier. It used to be the case that rural home buyers were underserved by lenders. However, the USDA created a program to guarantee loans, allowing lenders to offer loans to these homebuyers.
There are some advantages to a USDA loan over conventional and other types of loans:
- No down payment. Buyers in rural areas who qualify for this loan don’t have to save the money for a down payment.
- No private mortgage insurance (PMI). However, there are other fees paid upfront and annually that are typically lower than PMI.
- Competitive fixed interest rates.
- More flexible credit requirements. The USDA doesn’t require a specific credit score, leaving it to lenders to set their requirements.
- The seller is allowed to pay some of the closing costs.
- There aren’t any penalties for repaying the loan early.
Virginia USDA Loan Fees
The USDA rural housing program offers protection to lenders, guaranteeing loans through its program. This program is partially self-funded through the funding fees charged to borrowers.
Though this is similar to private mortgage insurance, it is typically less expensive. There is a 1% fee upfront that can be financed through the loan, and 0.35% paid annually. This annual fee is a percentage of the remaining principal balance and is divided by 12 and added to monthly loan payments.
Qualifying for a USDA Rural Development Loan in Virginia
Before you can benefit from the advantages of a USDA loan program, you need to make sure it is suitable for your situation and that you can qualify.
Rural Locations
To qualify for a USDA loan in Virginia, the home must be in a rural location. So if the home is in the middle of a city, this probably won’t be the loan for you.
However, even if you think the home isn’t in a rural location, you might be surprised by what the USDA considers eligible. Most areas in Virginia are eligible unless the home is in or around Richmond or Norfolk, or within other cities in the state.
The USDA has a map on their website which you can search to find if the home will be eligible. The basic requirements for eligibility are areas with a population under 10,000, but still rural in character. It doesn’t matter if the area is close to densely populated parts of the state, it could still qualify.
Created for Moderate-Income Families
There isn’t an absolute maximum loan amount on this type of loan, with the borrower’s income restricting the loan size. The program was created to help moderate-income families purchase a home, also limiting the size of home loans available.
The maximum income is based on the average income in the area where the home is located. The maximum is 115% of the median income for the county, and it is also based on the number of people that will live in the home.
You need to remember that the income of everybody who will live in the home counts towards the maximum income limit. Many counties in Virginia have a maximum income limit of $110,650 with fewer than five people living in the home. With five or more people the income limit rises to $146,050.
Some areas of Virginia have higher median incomes, increasing the amount that can be financed with a USDA loan.
Debt-to-Income Rules
Two debt-to-income calculations are used during the underwriting process. With the primary ratio, the lender may not approve loans when the borrower has debts that are more than 29% of their gross income. This rises to 41% when the mortgage payments are included in the overall ratio.
If the borrower has a higher credit score and otherwise good finances, they might be able to exceed these limits.
Eligible Homes
Even if the property is located in a rural location it isn’t the end of the story, with the home needing to meet certain standards.
The home is expected to be between 400 and 2,000 square feet, though homes either smaller or larger can also be eligible if they meet additional guidelines. For example, a larger home would still need to have reasonable ownership costs and the buyer would need justification for wanting more space.
Even though the loan is backed by the USDA, the land or the buildings can’t be used to primarily generate an income for the owner. The owner can operate a business from home but a commercial building cannot be financed.
Property that includes farm buildings like barns or silos can be purchased as long as they aren’t going to be used for commercial purposes. Homes with solar panels that generate an income aren’t restricted in the same way, though there can be issues with ownership or lease agreements.
The home has to be the home buyer’s primary residence, so no second homes or investment properties. There is also a limit to the amount of land that can be included in the property. Properties with more than five acres are not eligible.
Single-family homes, townhouses, and condos can be eligible for a USDA home loan. However, if you want to fund the purchase of a condo, the condominium building has to have been approved by the HUD, the VA, Fannie Mae, or Freddie Mac.
If the home meets these guidelines, it still needs to be appraised to show it meets USDA standards.
USDA Appraisals
The USDA’s property standards help protect the buyer, making sure the home isn’t in a bad or unsafe condition. These standards also protect the lender, reducing their risk if the borrower defaults.
An appraiser will visit the home, using the HUD’s Single Family Housing Policy Handbook to judge whether it meets the requirements. As well as assessing the condition of the property, it is the appraiser’s job to find the market value.
The appraiser will use comparable home sales to assess the value. They will use recent sales of similar properties in the same area if possible, to provide a more accurate assessment.
When the home is appraised, the home buyer will want it to be valued for the amount they have offered to pay or more and to find that it is in good condition. The appraiser will inspect all parts of the home to check the condition, paying particular attention to the following areas:
- The roof. Is the roof damaged and what is the expected remaining lifetime before replacement is required?
- Attic space. Is there any sign of water damage or indications of mold, and is there enough ventilation?
- Does the external structure of the home require repainting and is there damage that might allow moisture in?
- The foundation. The appraiser will look for significant cracks that could cause the homeowner serious future issues.
- The basement. Is there mold, dampness, or anything that indicates structural issues with the home?
- The sump pump. If there is a sump pump it will be checked to ensure it functions correctly.
- Is the water pressure high enough to meet the requirements of the home? The appraiser will also check for leaks.
- Electrical systems. There shouldn’t be any exposed or frayed wiring or other problems with the electrical system.
- Heating, ventilation, and air conditioning. These systems will be checked to ensure they function and don’t immediately need to be replaced.
- Doors and windows. There cannot be cracks in windows or any indication of mold. The doors should have working locks and be in good condition.
- The flooring should be in a fair condition.
- Lead paint. If the home was constructed before 1978, there could be lead paint in the home. Damage to painted surfaces could expose this hazardous paint and needs to be fixed before the sale can go ahead.
These are just some of the areas that will be looked at during the appraisal. Overall, the home should be safe to live in without any obvious hazards that will cause problems for the homeowner.
If there are problems with the home that means it isn’t eligible for a USDA loan, it is usually up to the seller to make repairs. If they are unwilling to pay for this work, the buyer could still agree to pay the bill if they really love the home. Keep in mind that you could be out that money if the loan does not go through.
Otherwise, the buyer can walk away from the contract and keep their earnest money if they have a contingency that allows this in the purchase agreement.
Summing Up the USDA Guaranteed Loan Program in Virginia
If you want to buy a home that isn’t in an urban area of Virginia, the United States Department of Agriculture loans program offers a lot. Borrowers often find it easier to qualify for this type of loan compared to conventional mortgages and it has more attractive terms without the need for a down payment.
