USDA Guaranteed Home Loan
USDA Guaranteed Rural Development home loans offer 100% financing to eligible home buyers throughout the United States.
In this article, I’ll walk you through the most commonly known features and benefits of a USDA loan, as well many little known tips, tricks and secrets to qualifying for one of the best 100% financing home loan programs available today.
- USDA Eligible Areas
- Understanding USDA Income Limits
- USDA Compensating Factors
- 2018 USDA Mortgage Insurance Rates
- Financing Your Closing Costs
- Finding a USDA Expert
USDA Guaranteed Eligible Areas
It’s a common misunderstanding that USDA Guaranteed loans are only available to buy farmland. That is not the case at all. You can use a USDA Guaranteed loan to buy any home in an eligible census tract.
In some cases, you may find that one home is USDA eligible, while another home across the street is not. In other cases, entire Counties are USDA eligible.
The simplest way to determine if you are in one of these areas is by entering an address into the USDA Property Eligibility map.
Understanding USDA Income Limits
There are no loan limits when buying a home using a USDA Guaranteed loan. The maximum loan amount is determined by your income limit.
There are three different income calculations required to qualify for a USDA Guaranteed loans.
- Adjusted Annual Income – Your annual household income minus certain qualified household deductions
- Qualifying Income – Your adjusted annual income compared to established income limits to determine eligibility of all eligible adults in the household
- Repayment Income – The stable and dependable income used to calculate debt ratios and determine whether you can afford the home.
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.
USDA Compensating Factors
Credit requirements are quite different for USDA rural development loans than Conventional Fannie Mae or FHA, VA Government loans.
The Underwriting Guidelines state that there are not really any specific credit score requirements although it does require that you must have a credit history that indicates a reasonable ability and willingness to meet obligations as they become due.
A credit history that includes 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.
Compensating factors include…
- 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.
2018 USDA Mortgage Insurance Rates
With most traditional mortgages, any time you buy with less than 2o% down, mortgage insurance is required.
Conventional mortgages use Private Mortgage Insurance (PMI) companies, and the mortgage insurance rate is based on your credit score, and the loan to value.
With less than 10% down payment, and a credit score under 740, PMI rates tend to be some of the highest out of any other traditional home mortgage loan.
FHA loans are Government insured loans, requiring an upfront mortgage insurance premium of 1.75% of the purchase price, plus a monthly mortgage insurance rate of .85% for any down payment less than 5%.
As of the writing of this article in April 2018, USDA Guaranteed loans have the lowest mortgage insurance rates out of any of these programs.
USDA Guaranteed Mortgage Insurance Rates
- Upfront Guarantee Fee – 1.00% of the loan amount
- Monthly Mortgage Insurance – .35% of the loan amount
Hands down, USDA Guaranteed loans offer the lowest cost mortgage insurance rates, especially considering that you’re financing 100% of the purchase price!
Financing Your Closing Costs
With a “no down payment” loan, you will still have closing costs. Closing costs include third party costs like attorney fees, escrow fees, title insurance, prepaid interest, the funding of your impound account, and any City or County transfer fees or recording fees.
USDA Guaranteed loans offer a unique feature that no other loan program offers…The ability to finance your closing costs up to 104% of the purchase price.
Financing your closing costs can only be done if the appraised value is greater than the contractual purchase price. Let’s break this down into a real example.
Financed Closing Costs Example
- Purchase price on a new home is $200,000
- Closing costs for the purchase of this home are $8,000
- The appraised value of the home comes in at $210,000
I used $8,000 as the total closing costs in this example because it’s 4% of the purchase price. While this is probably much too high for a $200,000 purchase price, you would be allowed to borrow $208,000 for a home that costs $200,000.
Finding a USDA Expert
As we often do here at Find My Way Home, we specialize in loan programs that are often misunderstood, or not understood at all by inexperienced loan officers.
Many big box lenders will not even offer USDA loans, and will try to flip you into a Conventional or FHA loan.
USDA Guaranteed loans have many qualifying features that make it easy for an inexperienced loan officer to give you inaccurate, or misleading information about your ability to qualify for this program.
Finding an experienced loan officer is not as difficult as you might think. If you are in a USDA eligible area and would like to explore this option, we can help.
You can contact me directly in the comment section below, submit a question here, or click on the banner below, and I can match you with a professional loan officer that is an expert with USDA Guaranteed financing.