USDA 100% Home Loan Financing Facts
The USDA 100% Financing Home Loan is another one of those programs you just don’t hear that much about.
I know what you’re thinking….Do I have to buy a dairy farm to qualify?
NO - These loans are not for buying farms, as a matter of fact, they cannot be used for purchasing an income producing dairy or agricultural property.
With a rural development home loan you can buy a single family residence as long as you and the property meet certain requirements.
Here is a partial list of USDA eligible Counties and Cities in California
The top 3 reasons why USDA Home Loans are amazing:
- No Down Payment (100% loan)
- No Monthly Mortgage Insurance
- Can finance closing costs (up to 104%)
NOTE: In past this program often ran out of funds and would be unavailable for some time until funding is made available again. In July 2010 changes were made that resulted in it being a perpetually funded program. This was accomplished by increasing the USDA Guarantee fee from 2.125% to 3.5%. This Guarantee fee can be financed into the loan similar to FHA’s upfront mortgage insurance premium.
Property Qualification Requirements - A home must be located in an USDA eligible area. The simplest way to determine if you are in one of these areas is by entering an address into the USDA Property Eligiblity map.
If the property address is determined to be in an eligible area, you may use a USDA loan to purchase the home.
Income Requirements - The income limits on a USDA loan are based on number of working adults in the household regardless of whether or not they are on the loan. There are a series of credits that are afforded for child care and dependents under 18 as you calculate the family’s “qualifying income”.
The USDA site has this Income Calculator available for you to determine whether or not your family will qualify.
Credit Requirements - Credit requirements are quite different for USDA rural development loans than Conventional Fannie Mae or FHA, VA Governement loans.
The Underwriting Guidelines state that there are not really any specific credit score requirements although it does require that:
Applicants must have a credit history that indicates a reasonable ability and willingness to meet obligations as they become due. A credit history reflecting any or all of the following is considered unacceptable credit history:
- More than one 30-day late within the past 12 months.
- Bankruptcy or foreclosure discharged less than 36 months
- Outstanding judgments within the past 12 months
- Two or more rent payments 30 days late within the past 3 years.
- Outstanding collection accounts with no payment arrangements
- Outstanding tax liens or delinquent federal debt with no payment arrangements
- Accounts converted to collections in the past 12 months.
The qualifying “Debt to Income Ratios” are somewhat more strict than conventional or FHA & VA loan programs at 29/41 but “compensating factors” will allow you to exceed these numbers with a waiver.
Compensating factors include, but are not limited to, the following:
- Credit score of 660 or higher for any applicant
- Cash reserves after closing
- Potential for increased earnings and career advancement
- Similar housing expenditure
- Conservative use of credit
- Additional compensation not included in qualifying income, such as part time job income that lacks a stable job history, potential bonus or commission income from a job.
- Low total obligation ratio. (A low total obligation ratio does not compensate for a high PITI ratio; however, when other strong compensating factors are present a low total obligation ratio should be viewed as a positive mitigating factor.
I can tell you that our experience with USDA loans have been that they are very flexible once you meet the basic guidelines for qualifying.
I know this is a lot of technical underwriting lender speak and I apologize if it sounds like greek. As you know, I don’t like to dumb things down, I’m interested in giving you facts.
Here are a few facts that ARE easy to understand:
- USDA 100% Home Loan Financing are 30 year fixed rate mortgages
- USDA 100% Home Loan Financing has very competitive interest rates
- USDA 100% Home Loan Financing does not have pre-payment penalties
- USDA 100% Home Loan Financing does not require a down payment
- USDA 100% Home Loan Financing does not have monthly mortage insurance
Potential Challenges - Because this is a 100% loan you may experience sellers that are reluctant about selling to a buyer with no down payment.
The good news is that we are working on several of these loans as I write this and Realtors in rural areas are familiar with the loan program. Many Agents may even advertise on the MLS that the home is located in an USDA eligible area.