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USDA Loan Rates, Lenders, Guidelines and Information

Do You Have to Pay Higher Interest Rates on Jumbo Loans?

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Jumbo loans pose a higher risk to lenders. You borrow more money, which naturally makes you a higher risk. It doesn’t matter if you have great credit and low debt ratios, just the amount of your mortgage puts the lender at risk for default.

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Does this risk automatically give you a higher interest rate though? It really depends on each situation. Below we help you understand what lenders consider before giving you an interest rate on your jumbo loan.

The Demand in the Market

Most lenders sell their loans, with the exception of portfolio lenders. If you are a standard borrower with good credit and decent debt ratios, you won’t need portfolio lenders. If you use a lender that sells mortgages, your interest rate will depend on the demand. Are there investors out there waiting to buy your loan? Are there a lot of investors competing for the loans? If so, you have a better chance of securing a lower interest rate because investors want your business.

If the demand in the market is low, meaning that there aren’t a lot of investors vying for your loan, the rates may be higher. Lenders need to make your loan enticing for investors to want it, which means they need to be able to make more money on it. If the demand is down, you’ll likely pay the higher interest rate.

Your Individual Factors

Now, the demand in the market doesn’t matter if you don’t have the good qualifying factors to back it up. Just like a conforming loan amount, lenders need to look at your individual risk of default. The riskier your loan profile, the higher the interest rate a lender will charge. You can expect the rate to get even higher if you need a jumbo loan amount.

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Consider the following factors before applying for a jumbo loan:

  • Maximize your credit score – It’s a good idea to start working on your credit score at least 12 months before you apply for a jumbo loan. Typically, jumbo loans require a higher credit score for you to qualify for it. But, the higher your credit score is, the lower the interest rate a lender can provide. Lenders base your interest rate on your risk of default and a high credit score can help decrease that risk.
  • Lower your debt ratio – Another factor in your risk of default is your debt ratio. Your jumbo mortgage payment will likely take up a good portion of your income. If you have other outstanding debts on top of it, you put your risk of default higher than it would be if you didn’t have other debts. If you have the chance to pay off other debts or at least pay them down, you lower your risk of default, which may give you a lower interest rate.
  • Choose the right loan type – Lenders base your risk of default on the type of loan you take too. If you choose an ARM loan, for example, you are a higher risk of default because your interest rate has the chance to increase over the life of the loan. The same is true for your loan term. If you choose the maximum loan term of 30 years, you put the lender at the greatest risk of default. If you borrow their money for less time, say 15 or 20 years, you lower that risk and therefore lower your interest rate.
  • Increase your down payment – Another way to lower your interest rate is to increase your down payment or decrease your loan-to-value ratio. The lower your LTV, the less risk the lender faces of default. When you have your own money invested in the home, you are more likely to make your payments or you put your own money at risk.

Other Ways to Get a Lower Interest Rate

You have one more way to get the lower interest rate that you want. You can buy it down with what they call ‘discount points.’ This is a fee you pay at the closing in the form of a percentage of your loan amount. Most lenders will discount your interest rate 1/8th to 1/4th for every point that you pay. For example, on a $500,000 loan, one point would equal $5,000.

Of course, this only makes sense to do if you will stay in the home for the long-term. If you know, you’ll move in the next five years or so, it doesn’t make sense to pay more money upfront. Lenders consider this money prepaid interest. They give you a lower interest rate over the life of the loan if you agree to pay it upfront.

Getting the lowest interest rate on your jumbo loan is in your hands. The more work you do ahead of time to decrease your risk of default, the better interest rate you will get. Of course, you should also shop around to find the lender that will give you the best rate on your loan.

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Can You Buy a Fixer-Upper With a USDA Loan?

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You found the perfect fixer-upper, but you need USDA financing because of your low income and no money for a down payment. The USDA usually requires homes to pass their appraisal, which includes their minimum property requirements.

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Can you buy a fixer-upper with your USDA loan? You might be able to, but you must meet certain requirements.

The Home Must be Livable

One of the USDA’s largest rules is that you must be able to live in the home while it’s being renovated. If the home is beyond inhabitable, you won’t be able to use USDA financing on it. While you live in the home, the work must be completed within six months. If the work will take more than six months, you can’t use USDA financing.

What constitutes a livable home will vary by lender. Obviously, you need to be able to live in the home without fear of any dangers or obstacles making your daily life difficult. There cannot be the presence of things like lead paint or asbestos, as they don’t make for a livable home.

The Home can Only Need Minor Renovations

If the home needs a major overhaul, you can count USDA financing out of the running. The home can only need minor renovations that cost no more than 10% of the loan amount. On a 150,000 loan, the renovations cannot cost more than $15,000.

While this does limit the work you can do on a home, it still leaves you plenty of room for renovation. While knocking down walls or adding rooms might not be feasible, you may be able to do things like replace a deck, paint the exterior of the house, or put on a new roof, just as a few examples.

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You Don’t Handle the Payments

Your lender will handle the payments to the licensed contractors working on your home. The contractors will have a contract that the lender will approve that will include a distribution of funds schedule. The contractor must then meet the dates on the contract in order to receive the funds.

The lender will do a final inspection to ensure that the contractor did everything according to the agreement before they will release the final payment. You must also sign off on the work saying that it is satisfactory according to the agreement as well.

You May Need a Contingency Fund

Some lenders require you to have a contingency fund to make sure you have money should an emergency arise. It’s impossible for contractors to figure out everything that could go on when they renovate your home. If something comes up that will cost a lot of money to fix, you’ll need the contingency fund to rely on if you don’t have enough in the money borrowed for the home.

Contractors Do the Work Most of the Time

A majority of the time, contractors are necessary to do the work on your home. If you are capable, though, you may be able to do the work yourself, but your lender must approve you to do so. In order to qualify, you must be able to prove not only that you have the knowledge to do the work, but also that you have the time to get it done within six months. The work that you do also cannot exceed 10% of the loan amount, just as is the case if a contractor does the work.

The bottom line is that you can buy a fixer-upper with USDA financing, but it must be a minor fixer-upper. You can’t buy a home that is completely unlivable that needs thousands upon thousands of dollars of work. If you find a home that’s doable, but needs a facelift, though, it could be a good candidate for USDA financing.

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How to Boost your Credit Score Quickly

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You know you need a good credit score to get favorable terms on your mortgage, but how do you do it? Most changes to your credit score take many months to take effect. Luckily, there are a few tips you can use to boost your credit score quicker.

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Keep reading to see how you can get your credit score higher today.

Decrease Your Credit Utilization

One of the first things you should focus on is your credit utilization. This is the comparison of your outstanding revolving debt to your total credit balances. A good rule of thumb is to keep your credit utilization rate at or below 30%. This means that no more than 30% of your total credit balances should be outstanding.

Here’s an example:

You have three credit cards each with a $1,000 credit limit. One credit card has a $250 balance, one has a $500 balance, and the other a $750 balance. Your total outstanding revolving debt is $1,500 and your total available balance is $3,000. That means your credit utilization rate is well above the 30% threshold. This could hurt your credit score more than you realize.

Your credit utilization rate makes up 30% of your credit score. That’s a big percentage. If you are able to keep your credit utilization rate within the parameters spoke about above, you will have a better chance of your credit score improving quickly.

Typically, as soon as you pay your credit card balances down and your credit card companies report it to the credit bureaus, your credit score will improve.

Get Rid of Incorrect Information

If you don’t check your credit report often, you may not know if there is incorrect information reporting on it. You have access to one free credit report from each of the three credit bureaus every year. This means you could potentially check your credit reports for accuracy up to three times per year. We recommend that you take advantage of this.

As you go through your credit report, you’ll see the information reported. If there are accounts that don’t belong to you on there, get to the bottom of the issue right away. You may have been a victim of identity theft or there could have been an honest mistake. Either way, get in touch with the credit bureau and the reporting credit card company to eliminate the account from your credit report. It’s best if you do this in writing.

If there is other incorrect information on your credit report, such as a late payment you didn’t make late or a missed payment that you know you made, you’ll have to write to the credit bureaus for this too. In this case, you’ll need to provide evidence to the credit bureau why the information is incorrect. Any time you write to the credit bureau, they must investigate and respond to your request within 30 days with their findings. If they miss this deadline, the account must drop from your credit report according to the law. Any incorrect information that you have corrected can help increase your credit score quickly.

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Get Payment Arrangements

If you have bad debt on your credit report, you can get ahead by arranging a payment arrangement with your creditor. The payment arrangement should then be reported to the credit bureaus. This way they know that you are paying your debt down and on time. Rather than showing that you have a late payment, the credit bureaus and potential lenders will see that you are making good on your debt.

While this method won’t increase your credit score overnight, it will help your credit score increase slightly right away since the negative information won’t be on your credit report any longer. Of course, this only works if you stay on time with your payment arrangements.

Become an Authorized User

The final step you can use to increase your credit score quickly is to become an authorized user on a family member’s account. This only works if the credit card company reports the authorized user to the credit bureaus, though.

You should only become an authorized user on a family member’s account that uses their credit card and pays the bill on time. You don’t want a large balance reporting in your name, as that will upset your utilization rate. But if you have a family member that uses their credit card and pays it off each month, the positive credit information can help your credit score.

Improving your credit score doesn’t happen overnight, but it can happen quickly using any of the steps above. You can use one or multiple steps to help your credit score increase that much faster when you want to get a mortgage.

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Using the USDA Eligibility Map to Find Eligible Homes

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The USDA provides 100% financing for borrowers that buy in a rural area and that have low to moderate household income. The USDA has designated rural areas that you may not think is rural at first glance, though. The USDA changes their boundaries approximately every 3 to 5 years with the new census tract.

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The best way to tell if a home is in an eligible area is to use the USDA eligibility map. We will help you understand how to use this map so that you can choose homes in an eligible area.

Reading the USDA Eligibility Map

The USDA Eligibility map shows you the general rural areas. Once you click on the ‘property eligibility’, you must accept the disclaimer. Then you’ll see a map of the entire United States. From there, you’ll either enter a specific address or you can search a general area.

If you already have your eye on a property, you can enter that address in the address bar at the top of the map. You’ll know immediately if the home is eligible for USDA financing or not. If the home’s address is not eligible, you can search the areas nearby to find an area where you can focus your search for a home. You are able to zoom in or out on the map. Any areas shaded pink are ineligible, so you know not to focus your searches there.

If you don’t have a property in mind, you can search the map in general areas. Start by clicking on the state you want to live. From there, you can zoom in and zoom out on the map to find eligible areas. Once you find a street, you want to inquire about, click on the pushpin icon at the top of the map and then click on the street you want to live. It will tell you immediately if the area is eligible for USDA financing.

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Taking it One Step Further

Don’t assume that if a home is on the map as ‘eligible’ that you’ll be able to secure USDA financing on it. The home has to pass the USDA appraisal. The USDA has what they call Minimum Property Requirements. These are standards each home must have in order for the USDA to approve the loan. The requirements include:

  • The house must have street access year-round without any hazards or obstacles.
  • The foundation must be in good condition without any visible cracks.
  • The walls and other structural features of the home must be stable.
  • There cannot be any mold or mildew growth in the basement or crawl space.
  • The roof must be in good condition with at least five years of life left.
  • All systems must be in good working order including the electrical, plumbing, and gas systems.
  • If the home has well and septic, the systems must be in good working order.
  • The home must have access to clean water
  • All appliances must be working.
  • All HVAC systems must be working.
  • There cannot be any evidence of pest damage.

The appraiser will report back to the lender regarding the status of the house. His report will include a value, which the lender needs since USDA loans provide 100% financing. But his main job is to make sure the home is in good enough condition for the USDA to insure it.

The USDA’s Role in the Loan

It sounds like the USDA has a major role in your loan, and they do, but it’s likely different than you think. The USDA sets rules, but they appoint certain lenders to provide those loans. These approved lenders underwrite, close, and fund the loan. Before they can close on it, though, they must send a complete underwriting package to the USDA. The USDA then has the final say whether the loan deserves USDA financing.

If you are approved, the USDA provides the lender with a guaranty. This guaranty states that the USDA will pay the lender back a portion of the money they lose if you default on the loan. This is how the lender is able to get away with giving you 100% financing and having flexible guidelines.

Use the USDA map to find your eligible homes, but you also have to make sure the property is in decent enough condition for the USDA to approve it. The process can seem time-consuming, but it’s worth it in the end.

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How Does a USDA Construction-to-Permanent Loan Work?

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If you want to build a new home, but want USDA financing, you can have your cake and eat it too, so to speak. The USDA 100% financing program offers a single-close program that allows you to build a home with just one loan.

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The construction loan part of the program is a temporary loan. This loan provides you with the funds necessary to build the home. At this point, there isn’t any collateral for the lender as there isn’t a home for you to move into yet. Once the home is ready for you to live in it, the loan turns into a permanent mortgage, just as you would get if you bought an existing home.

Finding the Right Contractor

When you use USDA financing to build your home, you’ll need to use a USDA-approved contractor. Not just any contractor will do. Since the USDA offers their guarantee as soon as the closing happens, they want to know that you are using a reputable contractor.

This means:

  • The contractor has plenty of experience (typically at least 2 years)
  • The contractor has the proper license and insurance
  • The contractor doesn’t have a negative credit history
  • The contractor doesn’t have liens against him
  • The contractor can pass a background check

You can either search for a USDA lender on your own or use the help of your USDA-approved lender. If you use a lender that’s handled new construction loans before, they should have a list of builders they’ve used before. They can fill you in on the experience their past borrowers had to help you make your decision for your home.

Qualifying for the Loan

Qualifying for a USDA construction loan works the same as qualifying for a standard USDA purchase loan. The USDA offers 100% financing on properties located within a rural area. In order to qualify though, you must meet the USDA requirements:

  • 640 credit score
  • 29% housing ratio
  • 41% total debt ratio
  • Total household income that is within the USDA standards
  • Proof that you’ll occupy the home as your primary residence
  • Proof that you cannot qualify for any other loan program

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The Loan Disbursements

You’ll close the USDA purchase loan just as you would any other loan. The lender then handles the distribution of the funds. They distribute the funds according to the contract drawn up between the contractor and the lender prior to the closing.

The lender handles the payment to all contractors, subcontractors, and sellers (including the seller of the land). All you have to do is worry about making your payments on time. While construction is ongoing on your home, you are only responsible for the interest payments on your loan. This should free up money for you to live elsewhere in the meantime.

Once you can move into the home, your construction loan automatically turns into a permanent mortgage. At that point, the loan is re-amortized to reflect the remaining principal for the remaining term. You then make standard principal and interest payments as you would for a standard purchase loan.

The benefit of the USDA construction loan is that you don’t have to go through two closings. This means you save money on closing costs as well as the headache of dealing with two loans. You only have to qualify one time, so you don’t have to worry that you might not qualify for permanent financing once the home is built. Just like any other USDA loan, you are free to shop around with different lenders to find the one with the most attractive terms.

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Does Mortgage Prequalification Affect Your Credit Score?

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As a preliminary step to the mortgage process, you may obtain a prequalification from a lender. In fact, it’s a good idea to do so just so you know that you have a chance to qualify for a loan program. While the prequalification isn’t binding in any way, it can give you an idea of where you stand.

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During the prequalification process, you tell the loan officer the amount of your monthly income, the amount of your monthly debts, the credit score you think you have, and the amount of liquid assets you have on hand. The loan officer may also ask a few questions about your employment, housing history, and credit history. With this information in hand, the lender will provide you with a prequalification, assuming you fit the mold for their programs.

During this time, the loan officer doesn’t pull your credit and your credit score isn’t affected in any way.

An Estimate of What you Can Afford

Basically, the prequalification is an estimate of the loan you could ‘probably’ get. Because the lender doesn’t ask for official documentation and they don’t pull your credit report, they don’t base the decision on anything official. Instead, they base the prequalification on the information you provide. If you decide to move forward with the lender, it’s up to you to provide the documentation necessary to prove the information you provided.

The Difference in the Preapproval

If you decide to move forward with a lender, you may want to get a preapproval before you shop for a home. The preapproval lets sellers and/or realtors know that you qualify to receive the loan necessary to buy the home.

The preapproval takes the prequalification one step further. Rather than telling the lender your income, debts, and asset amounts, you prove it by providing your paystubs, W-2s, asset statements, and a copy of your credit report. The underwriter will evaluate these documents and determine if you qualify for the home.

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If you do qualify, the lender will write a preapproval better that will state the loan amount you can receive. It will also state the conditions that you must meet in order to close on the loan. Typically, the conditions have to do with the property itself, but some may have to do with your financial situation too.

How a Preapproval Affects Your Credit Score

A preapproval can affect your credit score slightly because the lender will pull your credit. Typically, any inquiry on your credit report costs you five points on your credit score. While five points isn’t much, it can push you over the edge if your credit score was close to the minimum required credit score for a given program.

If you decide you want to shop around for the best rate, you may secure a preapproval from several lenders. While this is recommended, you may worry what it will do to your credit report. While it’s true that an inquiry costs you five points on your credit score, if you secure preapprovals from different lenders, each one will pull your credit report. If you do this within a short time (2-3 weeks), you will only be hit with one inquiry because the credit bureaus recognize the need to shop around for the right interest rate.

Mortgage prequalification doesn’t affect your credit score because lenders don’t pull your credit for this step. If you take the process any further with any lender, though, it will affect your credit score, which is why you need to be swift in your actions and make your decision within a short time so that the credit bureaus only hit you for one inquiry.

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When is the First Mortgage Payment Due After a USDA Loan Closing?

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When you close on a USDA loan, you won’t make a payment for at least one month. It sounds too good to be true, right? It’s really not the ‘free ride’ it seems like. Keep reading to find out how it works.

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Closing Your USDA Loan

You and your lender will choose a closing day for your USDA loan. You obviously can’t close on it until the underwriter clears it for closing. At this point, your lender will draw up the closing documents and you’ll meet your loan officer at the chosen title company. At the title company, an escrow agent will close your loan for you.

As you review your documents, you’ll see a Closing Disclosure. This document shows you all of the charges the lender and other third parties are charging for their role in your loan. Among those costs, you’ll see ‘prepaid costs,’ especially prepaid interest. This is the interest charged on your loan from the date of closing to the end of the month.

The closer you close to the end of the month, the less prepaid interest you pay. You can call the interest per diem interest, as it’s a per day charge. So if you close 10 days before the end of the month, you’ll pay 10 days of interest. If you close 2 days before the end of the month, you’ll pay 2 days of interest. As you can see, it works in your benefit to close as close to the end of the month as possible.

Why You Don’t Owe a Payment Right Away

You might still be thinking ‘what about the interest for the next month?’ If you don’t make a mortgage payment until the following month, when do you pay the interest for the entire month that you have the loan?

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It’s simple – all of the interest that you pay, you pay in arrears. In other words, the interest you pay in October covers the interest from September. The interest you pay in November covers the interest for October.

This is why you ‘skip’ a payment. In reality, you are still paying interest from the day you take out the loan. You just don’t have to make a formal payment until the first of the month after the month of your closing.

For example, if you close on your loan on October 15th, your first USDA mortgage payment is due on December 1st. You would pay per diem interest to cover the rest of October. The mortgage payment you make then covers the interest from November.

The Exception to the Rule

In some cases (rare), you may be able to request that your mortgage payment start the very next month. This is the case when you close on your loan on the 1st, 2nd, or 3rd of the month. Lenders don’t usually allow this practice much after the 3rd day of the month.

If you do close on one of the above dates, you can ask the lender to credit you the few days of interest and have your first mortgage payment due in the very next month. Only lenders that can process the loan and get your account set up quickly can offer this option, though. It’s usually best if you stick to the late in the month closing in order to make things the easiest. This also gives you more time to prepare yourself for your new mortgage payment.

Either way, you are going to pay the same amount of interest on your USDA loan regardless of the closing date. It all comes down to how much money you have to come up with at the closing as well as how soon your first payment is due. Make sure you cover all of your options with your lender so that you make the choice that works the best for you.

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How to Transfer Ownership of a House With a USDA Mortgage to a Family Member

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If you own your home and have USDA financing on it, you may be able to transfer your ownership to a family member. In order to do this, your family member must assume the loan. Not many loan programs allow loan assumptions, but the USDA is one of them.

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Keep reading to learn what a loan assumption means and how you can go about it.

What Does a Loan Assumption Mean?

When someone assumes your loan, they pick up where you left off on the loan. In other words, they ‘take over’ your mortgage. This means that their mortgage balance is the amount of your outstanding balance. The new borrower gets your interest rate and loan terms. The loan matures in however many months/years you have left on it.

Not just anyone can assume your USDA loan, though.

Qualifying for an Assumable Loan

Your family member has to qualify to assume a loan, much like they would have to qualify for their own loan. The lender that holds the loan needs to make sure that they can make the payments. They don’t want to take on a higher risk of default.

In fact, you don’t even start with the lender when you are trying to assume your loan to a family member. You must start with the USDA. They must grant their approval before a lender can move forward. Keep in mind, the USDA will only approve assumptions of current mortgages. If you, the original borrower, is behind on their payments, it won’t be an option.

The USDA will make sure not only that the mortgage is current, but also that the person assuming the loan agrees to assume the loan at that time, regardless of the home’s value. It works in their benefit to find out the home’s value so that they can see the amount of equity they’d have in the home.

Once your family member makes it past the USDA, it’s time to get the lender’s approval. The lender will make sure that your family member has the minimum qualifications to get a USDA loan.

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The USDA has flexible guidelines, however, they must first see if you are eligible for the loan program. The USDA only writes loans for low and moderate-income families that don’t make more than 115% of the average income for the area. Keep in mind that the USDA takes into account total household income to prove eligibility, not just the income of the borrower(s). Borrowers can check their eligibility here.

Once your family member proves eligibility, they must qualify for the loan. This means at least a 640 credit score, a 29% housing ratio, and a 41% total debt ratio. Your family member also shouldn’t have any defaulted federal loans on their credit report, and have stable income/employment.

If your family member passes each of these requirements, the assumption may be able to happen.

Taking Care of Business

Once you know your family member can assume the loan, it’s time to make it happen. You must take the proper steps with your lender. They will let you know what you need to do. Each lender has their own process that usually involves some type of paperwork. You may also pay a fee to get it done.

Once your transfer the loan, you then have to transfer ownership of the property. Transferring the loan doesn’t automatically make this happen. You may have to request a Quit Claim Deed from your title company. This publicly recorded document officially transfers ownership of the home from you to your family member.

Should you Get Paid?

The one question you need to ask yourself is if you want to get paid in this transaction. Do you want your family member to pay you the difference between the home value and the mortgage? That’s the equity you have in the home. Think long and hard about how much you want to gift to your family member.

If you do want some of the equity, your family member can either pay you in cash, which is the easiest, or take out a second mortgage to pay you. Of course, you’ll need to work out the details before you start the assumption process because the new 2nd mortgage will change your debt ratio, which can affect your family member’s ability to assume the loan.

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What is the Maximum Loan Amount for USDA Loans?

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USDA financing provides 100% loans for eligible borrowers. Just how much can you borrow though? The allowed amount may surprise you.

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The USDA Maximum Loan Amount

Technically, the USDA doesn’t have a maximum loan amount. What it depends on is your debt ratio. The USDA allows a 29% housing ratio. They also allow a 41% total debt ratio. This right here will tell you the maximum amount you can borrow.

Because the USDA also maximizes the amount of income you can make in order to be eligible for a USDA loan, they indirectly set maximum loan amounts. For example, if the maximum monthly income in your area is $6,000, you may only qualify for a maximum mortgage payment of $1,740 as that is 29% of $6,000. Of course, in order to truly qualify for that amount, your other debt would have to low enough to keep your total debt ratio at or below 41% of your gross monthly income.

Proving Eligibility for the USDA Loan

Before you try to determine your maximum USDA loan amount, though, you should determine if you are eligible for the USDA loan in the first place. USDA loans are technically for low to moderate income families that cannot qualify for any other type of loan.

You can determine your USDA eligibility by determining your gross monthly income for your household. This includes anyone over the age of 18 that makes an income in your household. This includes children that make an income and still live with you.

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Before you assume you won’t qualify because you have too many working or income producing family members living with you, learn the allowances you may receive.

If you have any of the following, you can take the appropriate allowance off your gross monthly income:

  • Children under the age of 18-years old give you an allowance of $480 per child
  • Children over the age of 18 that are full-time students give you an allowance of $480 per child
  • Any disabled family members living with you give you an allowance of $480 per person
  • Any elderly family members (over the age of 62) give you an allowance of $400 per person

These allowances, any of which you are eligible to receive, get deducted from your gross monthly income. In some cases, they could knock you down from ineligible to eligible for the USDA program.

Proving You Can Afford the Loan

The number one factor the USDA wants to make sure is that you can comfortably afford the loan. Lenders are going out on a limb to give you USDA financing, because they provide 100% financing and you only need a 640 credit score. You have to be able to prove beyond a reasonable doubt that you can afford the loan amount the lender approves for you.

While the USDA guidelines are flexible, the USDA is careful about who they provide loans to. They want to make sure that you are not a high risk of default. This is because the USDA provides a guaranty to the lender. The USDA doesn’t fund the loan, but they do promise the lender they will pay the back a portion of the money they lost if you default on the loan.

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What Happens to Earnest Money if a Buyer Backs Out?

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If you want to win a bid on a home, you should put earnest money down on it. This lets the seller know that you are a serious buyer and won’t back out of the contract.

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What happens if you need to back out of it at some point though? It’s been known to happen. Do you lose the money you put down on the home?

Since earnest money can be as much as 1% – 3% of the home’s purchase price, we aren’t talking about a small amount of money here. Luckily, there are ways to get your earnest deposit back, but you have to follow the letter of the law.

The Brief Window of Opportunity

You may have a small opportunity to get your earnest money back shortly after you deposit it with an escrow agent. The escrow agent is the third party that holds the funds. They don’t go directly to the seller. The seller can’t have the funds until the escrow settles, or in other words, when the loan closes and the house sells.

Once you deposit the funds with the escrow agent, your jurisdiction may allow around 48 hours to ask for a refund. Keep in mind that each jurisdiction is different, so you should check with your realtor and/or real estate attorney to find out the laws in your area.

You should also know the proper procedure to request the refund. Some areas require the request in writing or with a specific form. If you don’t follow the rules, the seller could argue that you didn’t request the funds properly and fight to keep the earnest money even after you back out of the sale.

Contingencies and Escrow Money Refunds

Even if you pass the short window of opportunity of having buyer’s remorse, you may still have the option to get out of the contract with your earnest money in hand. This is possible if you have contingencies in your purchase contract.

Contingencies are opportunities to back out of the contract if a specific condition doesn’t occur. If this is the case, you may be able to request the return of your earnest money.

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Here are the most common contingencies:

  • Financing contingency – You can request a specific amount of time to get your financing in order. If you fail to get a ‘clear to close’ before the expirationof this contingency, you have the right to back out of the contract and not lose your earnest money.
  • Home sale contingency – If you have a current home you need to sell before you can qualify for financing on the new home, you can set up this contingency. If you don’t have an executed purchase contract on the home by the specified date, you can back out of the sale and keep your earnest deposit.
  • Inspection contingency – You have a specific period to have the inspection performed and for you to review the report. If the inspector finds things wrong with the home that affectsits livability or value, you can back out of the contract. Of course, you also have the chance to negotiate with the seller if you think he/she can fix the issues, but you should do this before the inspection contingency expires. If things don’t go your way, you can back out of the contract.
  • Appraisal contingency – You also have a specific period to have the appraisal performed. If the appraiser finds that the home isn’t worth as much as you agreed to pay, you have an issue. You can either pay the difference between the value and the agreed upon price or negotiate the sales price with the seller again. If neither of these options work, you can back out of the sale if you have an appraisal contingency on the home.

The contingencies aren’t automatically in every purchase contract. You have to request them and make sure that the seller accepts them. Some sellers won’t accept a contract with any contingencies. If that’s the case, you may want to look at a different home anyway. It’s important to work with your real estate attorney on this topic to make sure that if you walk away, you still have your earnest money in hand.

If you back out of the purchase outside of the small window of no-questions asked and after all contingencies expire (or you didn’t have any contingencies), you may lose your earnest money. It’s up to the seller on how he wants to proceed. Some sellers are willing to give the earnest money back, especially if it’s a serious reason that you backed out of the contract. Other sellers keep the money and they have every right to do so.

If there is a dispute regarding the ownership of the earnest money, the escrow agent keeps the money in his possession. He will do this until the dispute is settled either among the two of you or with the help of attorneys.

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