The USDA Rural Housing program was enacted by Congress in 1992 to serve neighborhoods in smaller communities across the United States. The USDA insures loans that it’s approved direct lenders make to borrowers that fit their income and property eligibility guidelines.
The goal of the USDA loan program is to guarantee a loan for a Direct lender who is approved by USDA to receive a government guarantee for underwriting a loan to meet its guidelines. The lender has to follow USDA’s guidelines in order to be eligible to get the loan Guaranteed. Also, unlike other government backed loan programs, USDA requires it’s approved lenders to send them some information on the loan file “prior to closing” for it to review and issue what’s called a Conditional Commitment on. This commitment is USDA giving its okay for the lender to close on a loan with its blessing the way it has been approved and underwritten by the lender. Because the lender has to send information to the state USDA office to get approval prior to closing it adds a few weeks of processing time to a USDA loan. All lenders have to follow this process and no lender has control over the processing time of the state Rural Housing office. Lenders can however advise and guide you at application on what the current turn times are so that you can adjust your closing/moving date accordingly before writing a contract on a new home. Be prepared to provide the following during your loan process so that we can approve your loan.
- Last two years worth of information for both your work and living history
- Paystubs and other income verification information
- W2’s and tax returns if you receive commission or self-employed income
- 60 days worth of bank statements
- Proof of any recently paid judgments or collections
- A letter of explanation for any recent bankruptcies or credit delinquencies
Depending upon your unique situation, additional information may be asked for in order to get your loan approved. An appraisal of the property you are purchasing will be ordered and completed by a 3rd party appraiser who will verify the property’s value for us as the lender and make sure the property doesn’t have any repairs needed before it can meet USDA’s guidelines.
Once we have received a loan commitment from USDA we will finalize your loan approval. We will schedule your closing for you with a local settlement company so that you can become a new homeowner.
This entire process usually takes somewhere between 30 to 60 days from your application date depending upon the turn time for your state’s USDA office and how quickly you provide us the information we need in a timely manner.
USDA Loan Guidelines: Rural and Suburban Mortgages
Down payment and/or funds needed to close?
The USDA has NO down payment requirement. You can finance 100% of the purchase price of a home with a USDA loan. And because the program allows the seller to pay closing costs your Real Estate Agent can help negotiate your contract where the seller pays all of your closing costs so that you get into your new home with truly no money down.
Interest Rate and terms
The interest rates available on USDA loans is a low 30 year fixed rate-often the same or lower than your typical FHA or Conventional 30 year loan rates. There are no other fixed rate terms available other than 30 years. And there are no adjustable rate programs available.
Since the loan is government backed are there similar fees to FHA?
In 2012, in changing its Rural Housing program, the U.S. Department of Agriculture took a page from the book of the Federal Housing Administration (FHA).
Formerly, the loan program was taxpayer-subsidized. Today however, it’s self-funded. To remain free of taxpayer-subsidy, the USDA chose to change the way it charges its borrowers mortgage insurance.
As of October 1, 2015, USDA mortgage funding fee and monthly mortgage insurance rates moved to:
- For purchases, 2.75% upfront fee paid at closing, based on the loan size.
- For refinances, 2.75% upfront fee paid at closing, based on the loan size.
- For all loans, a 0.50% annual fee based on the remaining principal balance.
So, for example, a $100,000 loan size in Radford, Virginia, would require a $2,750 funding fee payment at closing paid to Rural Housing, and $41.66 of mortgage insurance paid monthly. This $41.66 would be paid in your normal monthly payment with your taxes and insurance escrow. The good news is that you can also finance the upfront funding fee amount into your loan so that you don’t have to come out of pocket with any funds.
How does this compare to FHA? Upfront mortgage insurance premiums on FHA loans are a bit lower currently @ 1.75% upfront, but the monthly amount on FHA loans is much higher at up to .85% annually on the average U.S. home price.
USDA determines property eligibility based on recent census data. In regards to income qualifications, USDA bases this on each individual county’s median income information and the size of a borrower’s family. Fortunately there is a simple way for you to look this information up, as USDA has a convenient website: Click here to check your home’s USDA loan eligibility
No, the USDA Rural Housing Program can be used by first-time buyers and repeat buyers. However, if you are buying a new home you will have to sell your current home before you can close on your new USDA loan. There are some extenuating circumstances where an exception can be granted in cases where your current home has safety issues for your family or you have been transferred as a result of your job to a completely new town and are in need of new housing in that area.
Other than the upfront funding fee of 2.75% (which can be financed into your loan amount). USDA has the same typical closing costs as other loan programs. In fact, their monthly mortgage insurance costs are lower than comparable FHA and conventional loan programs.
Yes, USDA loans allow gifts from family members and non-family members. You will need a gift letter to accompany your loan application. We can provide you information in regards to this gift letter and guide you through the process.
Any judgment that you have unpaid will have to be settled and paid prior to closing your loan, however, older collections don’t necessarily have to be paid especially if they are medical collections and you have other compensating factors like a good job history, you’ve paid your rents on time and overall debt load is low.
Generally, if you have had a bankruptcy or foreclosure on your credit you will have to wait 3 years from the time of foreclosure and/or the time the bankruptcy was discharged. In some cases if you can prove that the bankruptcy/foreclosure was a result of a one-time extreme hardship, you may be able to purchase sooner.
Though there is no minimum credit score required for USDA, in today’s world it is extremely hard to get a loan approved and funded if your minimum credit score is below 640. If your score is below 640 currently, don’t let this deter you however as we can offer suggestions on things you can do to raise your score and in some cases raise it fairly quickly (within 30 days or so). If your score is above 640, USDA guidelines are generally pretty liberal with past credit issues. This is especially true if your last 12 to 24 months have shown steady on time payments with your current bills.
Though there is no minimum credit score required for USDA, in today's world it is extremely hard to get a loan approved and funded if your minimum credit score is below 640. If your score is below 640 currently, don't let this deter you however as we can offer suggestions on things you can do to raise your score and in some cases raise it fairly quickly (within 30 days or so). If your score is above 640, USDA guidelines are generally pretty liberal with past credit issues. This is especially true if your last 12 to 24 months have shown steady on time payments with your current bills.
USDA is looking for “income stability”. Typically that means 2 years of recent work history in the same line of work with little or no job gaps. However, if you have had a recent layoff or have changed jobs recently you still can be eligible if you can demonstrate that you have income stability with your present job. If you are unsure of whether or not your income would be considered “stable”, this is something we can help you determine in advance during your pre-approval process.
Self-employed persons can use the USDA Rural Housing Program. If you are self-employed and want to use USDA financing you will be asked to provide 2 years of federal tax returns to verify your self-employment income and generally a 2 year average of income will be used. If your income has declined significantly from one year to the next be prepared to explain why, as this could prevent you from showing that your current income is stable.
Yes but only if you currently have a USDA loan on your home. If you do, you are allowed to lower your rate only and you cannot get any funds back on your refinance even if you have a lot of equity in your home.
No, the Rural Housing Program is for residential property that you are going to live in.
This is just some of the information in regards to this wonderful loan program. ALCOVA has closed thousands of these loans and are one of the leading USDA Lenders in the Mid-Atlantic area. We welcome the opportunity to answer more of your questions or to give you advice on this program. Feel free to reach out to us with absolutely no obligation. Also, feel free to visit our main web page goalcova.com for additional information.