The biggest hurdle that most people face when buying a home is the down payment. For some people, it could take 5 years or longer to raise enough for a 5% down payment on an average priced home. However, the USDA Rural Housing Loan is a much better solution that is available to thousands of potential borrowers.
How They Work
If the initials USDA sound familiar, it is likely due to grocery shopping. USDA stands for the United States Department of Agriculture. Among other things, they govern how meat and produce are handled and stored for grocery stores. This same department also provides a mortgage program through qualified lenders all across the state.
The single most important factor for qualifying for the Rural Development mortgage is the location of the home. The property must be within a zone or area labeled as rural by the USDA. In fact, when people contact their local lender to ask for help with this program, the first thing the lender will do is to type in the address on the rural property website and affirm that the property is in a rural zone.
Don’t be misled by the term rural. Books, movies, and television shows use the term rural to describe a location that is far removed from a major city and any resemblance of modern luxuries. However, that is not the case with the Rural Development mortgage. Aside from major cities like Milwaukee, Green Bay, and Madison most areas in WI qualify for the program. In fact, only the central part of the major cities is off-limits to this program. This means that suburbs and quaint areas that are just a few miles from the center of major cities may qualify.
Down Payment Not Necessary
The rules of the Rural Development program will allow qualifying borrowers to get a mortgage that is 100% of the selling price of the property. If the appraised value is less than the asking price, the appraised value will be used for the mortgage.
In terms of upfront costs, this makes the USDA mortgage a much cheaper option than most other types of home mortgages.
The USDA guarantees mortgages to lenders for qualified borrowers. This means that if a borrower is no longer able to make the payments and the lender is forced to take the home, USDA will pay the lender for their losses.
In order to provide this guarantee, there needs to be a source of funds. Funds come from a funding fee for each mortgage. The fee is 1% of the original mortgage amount. Borrowers have the option of either paying the fee when the mortgage closes or adding the fee to the balance and paying it over time.
Along with the 1% funding fee, borrowers also are asked to pay a yearly fee. This fee is 0.35% of the outstanding balance of the mortgage. The fee is assessed once a year and the borrower pays it over 12 months. An example would be a homeowner who has a balance of $199,987 one year after buying their home. 0.35% x $199,987 = $699.96. The amount of $699.96 would be divided by 12 and added to the borrower’s monthly payments. The total amount of the fee goes down each year as the balance decreases.
Limit on Income Instead of Loan Amount
FHA and Conventional mortgages have stated loan limits. This means that if a borrower wishes to use either FHA or conventional financing, they must get a mortgage that is at or below those limits. There is no set loan limit. Instead, there is a limit on the amount of income a borrower or their family may have in order to qualify for the program.
There are varying limits based on the city, county, and state where the property is located. Along with the location, the number of people that intend to live in the home also plays a role in the income limits.
For underwriting purposes, all income from all parties that intend to live at the home is included. For example, suppose a married husband and wife have a teenage son and an elderly relative that will live with them. If the elderly relative has social security or retirement income and the teenage son has a part-time job, both incomes will be included along with the married husband and wife. This is an important feature to keep in mind if you are considering this mortgage.
Relaxed Credit Requirements
The credit rules used to qualify a borrower for this mortgage are very similar to the rules used for FHA mortgages. This grants more access to more borrowers that may not qualify for a conventional mortgage.
Homes That Can Be Purchased
Borrowers are allowed to choose from a variety of home types. Most people choose a single-family, stick-built home. They will also allow a condo unit if the condominium building meets certain standards. USDA also approves mortgages on a PUD.
This program is not very restrictive about the type of ownership of the home being sold. The home could be a bank foreclosure, or a home being sold as a short sale. Of course, a home being sold by a long-time owner is the most common transaction. So long as the property is located within a designated rural zone and the home meets the necessary guidelines of a professional appraisal, there should not be any problems getting the home qualified for the mortgage.
Along with the benefits mentioned above, other features make the USDA Rural Development program a good option for many borrowers.
- All buyers are welcome to apply. Whether they are a first time buyer or have owned multiple homes in the past.
- The seller can contribute part of the sales price towards the closing cost of the home. The rules state that a maximum of 6% of the home’s price can be used to pay closing costs.
- A home buying class is not required of borrowers that qualify
- Interest rates are comparable, if not better compared to conventional programs
- Borrowers can pay off the mortgage early without being charged a prepayment penalty.
These added benefits, along with the lack of a down payment requirement, make this program a great option for many buyers.
Rural Development Refinance Options
This mortgage can be used not only for buying a home but there is also a unique refinance option called a streamline refinance. The streamline refinance can only be used by homeowners that currently have a USDA mortgage. Here are the highlights of how the refinance works
- With the new mortgage, the term is fixed for 30 years
- Borrowers may not get extra cash from the refinance
- Within the last 12 months, borrowers are not allowed to have any late payments on the mortgage
- Any current USDA mortgage can be considered for the streamline refinance. This includes properties located in an area that has lost its rural designation.
- The new calculated payment for the refinance has to be a minimum of $50 lower than the existing payment.
- The closing costs, as well as the existing balance, will be consolidated into the new mortgage.
- Borrowers will need to provide proof of income via pay stubs, tax returns, etc.
Summing Up The USDA Mortgage
The USDA Rural Housing mortgage is a great program, with an excellent history, that is available to thousands of borrowers across the state. Being able to buy a home with average credit scores and nothing down makes this an affordable option for lots of potential buyers.