Benefits of USDA Loans
If you are lucky enough to live in an area that a USDA loan program can be used, this is a great opportunity! The USDA program is designed for rural areas and to provide homeownership opportunities to low-medium income households. Let me explain this further to help potential homeowners see the opportunity that USDA loans provide.
Let’s start with why would you consider a USDA loan? USDA loans have helpful features such as:
- 100% financing of the purchase price.
- Closing Costs can be included in the loan amount IF the home appraises for more than the purchase price.
- Sellers can give up to 6% of the purchase price towards paying the closing costs for the borrower (Conventional is limited to 3%).
- Rates are lower or equivalent to Conventional rates.
- Credit does not have to be perfect. In fact, credit requirements are not as strict as Conventional, allowing for lower score borrowers to become homeowners!
- USDA loans have the lowest Mortgage Insurance both monthly and “upfront” of any loan in the secondary market currently.
As you can see, the USDA program is very borrower friendly. As with any loan program, there is always the other side of the coin. USDA is the program we do the most volume with for our customers, but there is a possibility a borrower will not qualify for the loan type due to specific factors that USDA has in place.
The USDA Guaranteed Home Loan Program (the official name!) is geared to low to medium income households, as mentioned previously in this article. What that means for the consumer is that USDA places an income cap by county that households may not exceed to be eligible for this loan type. Each county has its own cap, and our Loan Officers can provide this information to any applicant interested in a USDA loan. Unfortunately, there are times we must advise a borrower that they make too much money for this program.
Another feature to be aware of with USDA loans is the areas of eligibility. Most rural areas are eligible, but USDA updates their eligibility area every five years to eliminate areas that have outgrown the parameters of the USDA program through population growth. USDA defines the areas eligible for their program as towns that have populations under 20,000, although if an area up to 35,000 in population shows rural characteristics, USDA has been known to allow this area to be eligible for USDA lending.
The final detail for USDA loans that consumers should be aware of is the “conventional test” that is part of USDA guidelines. The conventional test is a list of parameters a consumer’s application must be reviewed for and tests their qualifications to determine if they could qualify for a conventional loan. If the borrower has the following, USDA will not allow them to obtain a USDA Loan:
- If the applicant has available funds of at least 20% that can be used towards a down payment.
- If the applicant has available in addition to the 20% down payment, the funds for closing costs.
- If the applicant’s debt to income ratios do not exceed 28% for housing ratio and 36% for total debt ratio when applying the 20% down payment.
- If the applicant can demonstrate they can qualify for a conventional loan.
If any of these qualifications for the conventional test can be eliminated then the applicant does not meet the requirements to obtain a traditional conventional loan and may proceed to apply for a USDA home loan.
The final thought for those that might have an interest in this loan program is in regard to the property itself. The home can only be a single-family property and may not be a working farm. The program is not for income producing property. A farm loan would be best obtained using a local bank who understands the agriculture business for the area. This home loan is for purchasing a regular stick-built home in a small, rural town. Typically, when speaking about property and home types, this does bring up further questions.
We encourage potential borrowers to apply using our smart phone app or online first. This gives our Loan Officers the details they need to confidently advise on a borrower’s options and loan types. As much as we love the USDA program and all it’s great perks, we know that mortgage loans are not a one size fits all. Our goal is to assist borrowers in finding the loan that works best for their situation and family. Let us help you know what you can afford, how to navigate the process and provide you with honest answers to all your questions. We want to be your Mortgage Lender!