USDA Mortgages- What’s the real story?
A few weeks ago, I was working with a client on a home purchase who had a few other quotes he was comparing. One of them was a good quote for the scenario (which was a conventional loan with 10% down) but I was able to save him a full 1% in the rate and reduce his down payment so that money could go toward paying off some high interest rate debt. That’s what you get for talking to a pro instead of a call center rep! It’s not the first time I have told someone they are barking up the wrong tree with the loan they are asking for, but let’s talk about how I worked my magic.
The USDA Rural Housing Service has two single family mortgage options, both of which are 0 down:
Direct Loan- Like it sounds, done directly between you and USDA. Borrowers must be low or very low income, availability is based off the amount of funding available, and requirements to qualify include being “without decent, safe, and sanitary housing” and “be unable to obtain a loan from other resources on terms and conditions that can be reasonably expected to meet” - if you have the time and meet the requirements, though, you won’t find a better rate or terms.
Guaranteed Loan- this is originated by typical mortgage lenders (like us!) and the process is similar to any other loan type, except that the insurance backing the loan is issued by USDA instead of HUD in the case of an FHA loan or the VA. Rates are still lower than conventional loans, and mortgage insurance is less than FHA. It’s a great option if you qualify.
I told my client about my game plan, and he was on board, but when he asked his colleagues at the credit union where he works, they warned him that they had tried to do a few of these loans but had never had one get approved and actually close. Yikes! As always, when I sit down to write, I googled to see what information is already out there and as always, the internet was full of bad information. As someone who pathologically can’t allow people to be wrong on the internet, here’s the real scoop:
Income Qualification:
The Guaranteed loan is available for low to moderate income borrowers as determined by household income. This means even if someone isn’t on the mortgage, their income will need to be documented and factored in. If you think that the underwriters won’t be able to tell that someone else will be living with you, or that you babysit on the weekends, or anything else, think again! All bank accounts must be disclosed and any transfers that indicate other accounts or other household members will have to be documented. The income limit is more generous on this program than many others, though. At the time I write this, in the Richmond, Virginia metro area, a household of up to 4 people can earn up to $126,850 - Check out your area HERE
Property Location:
The property must be located in a rural area as defined by the USDA. Anywhere outside the orange shaded areas will work on these maps of the states where we are licensed: Virginia and Florida. You can check your specific address by entering it in the USDA Property Eligibility Search
Credit Score:
This one has a lot of bad information. In theory, there is no minimum credit score requirement. This is much more applicable to the direct loans that are treated more like a social service than the guaranteed loan. For credit scores under a 640, additional credit analysis is required and there can not be any late payments within 12 months, more than 2 latehousing payments within 24 months, outstanding collections (except medical) or collections paid within the last 6 months, and so on. In my experience, the approval on this program for a lower credit score really only works for people who just don’t have much credit but also don’t have negative items on their report.
Debt to Income Ratio:
USDA is unique among loan types that it strongly evaluates the front end ratio, or the ratio of your housing payment only to your monthly income. The standard ratio is 29% for a USDA loan, so for a borrower who makes $5000 per month, the mortgage payment including tax, insurance, and the monthly guarantee fee can be no more than 29% * 5000 = $1450 - this can be increased slightly if the mortgage payment is less than or equal to your current housing payment, 3 months’ worth of your payment left over in reserves, being with your current employer for 2 years, and/or a credit score over 680, but this program is typically going to have the most stringent requirements for monthly housing payment in the qualification.
Asset Maximum:
This program is restricted to those who can not put 20% down on the mortgage- retirement accounts aren’t included in this, but if you have the ability to make a 20% down payment, cover closing costs, and the payment on that conventional loan is within standard debt ratios, you will not be eligible for USDA.
Property Type:
Frequently, people assume that this is the right loan for farm-type properties, and while there are options through USDA for farms where you can provide a business plan, farming resume, etc., the guaranteed single family mortgage isn’t the one. This program requires that the land value is no more than 30% of the total property value (So significant acreage is generally not going to work) and that it is not income producing, so no structures that would point to a working farm or operating a business. Additionally, these must be “modest” homes, which means that large square footage may not be approved, swimming pools are a no-go, and the condition of the home must be safe and livable without significant repairs needed or deferred maintenance.
