USDA financing is a flexible program for low to middle-income borrowers. If you don’t mind living in a rural area and you meet the income requirements, this 100% financing program is a great option. Before you apply for this government-backed loan, there are some things you should know about it.
You Can Make too Much Money for USDA Loans
It sounds odd, but you can make too much money and not qualify for this loan. The USDA allows households to make up to 115% of the average income for your area. But, this doesn’t just mean you and your co-borrower. It includes all members of your household.
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Do grandma and grandpa live with you? Do they have a job? Their income counts. Do you have adult children living with you? Their income counts too. This is only for loan eligibility. First, you must be eligible for the program, and then you must qualify. Getting over this first hurdle requires meeting the USDA strict requirements. You can view the income limits for your area here.
There are More Rural Areas Than You Think
You must live in a rural area to use this program. But, the USDA views rural a little differently than we do. You might be surprised to see how many areas are eligible. The government uses the latest census tract, which only happens every 10 years. They base the eligible areas on population and if they are outside of the city lines.
You don’t have to resign yourself to living out in the middle of cornfields. In fact, a large majority of the United States is considered rural according to their eligibility map. Simply put in your address or zoom in on your state to find eligible areas on this map.
You Don’t Need a Down Payment
If you qualify for USDA financing, you can borrow 100% of the purchase price of the home. This helps low to middle-income borrowers afford the loan they need. There are still closing costs you will have to pay unless you work out another situation. Some lenders may offer a no-closing cost loan which means you get a slightly higher interest rate, but the lender covers the closing costs. You can also work it out with the seller to cover the closing costs for you by raising your offer on the home.
You’ll Pay a Funding Fee
The USDA loan is backed by the government. The program is self-funded. In order to keep up their reserves, the government must charge an upfront funding fee. This money goes into their reserves to help them continue to guarantee loans. If someone defaults on this government-backed loan, the USDA will pay the lender back some of the money they lost, taking the money from the reserves.
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Right now, they charge 1% of the loan amount. For example, if you borrow $100,000, you would pay $1,000 for this fee. This is in addition to any other closing fees the lender, title company, and any other third parties charge.
You’ll Pay Annual Mortgage Insurance
You’ll also have to pay annual mortgage insurance each month. This is similar to Private Mortgage Insurance. However, you cannot cancel this insurance no matter how much you owe on the home. You pay it over the life of the loan.
Right now, the amount is only 0.35% of the outstanding loan amount. On the $100,000 example from above, you would owe $350 per year. This comes out to just $29.17 per month.
The Home Must be Modest
Because the USDA loan is for low to middle-income borrowers, they require that the home be modest. In other words, there should be adequate living room for a family of your size. But, there should not be any luxurious accommodations or excessive space.
The USDA requires that the home be safe, sanitary, and modest in size. They are not guaranteeing a loan for a luxurious home that is larger than you need. They also won’t insure homes that have a swimming pool or other unnecessary luxurious accommodations.
You Cannot Qualify for Any Other Program
Finally, the USDA will not provide you with funding if you can qualify for another loan program. For example, let’s say you have a 650 credit score, a 29% front-end ratio, a 41% back-end ratio, and have $20,000 in savings. In this case, you may qualify for FHA financing. You have to put 3.5% of the loan amount down, which on a $100,000 loan, means $3,500. You have that plus more with your $20,000 in savings. You also have the credit scores and debt ratios to qualify.
If, on the other hand, you had a 640 credit score, only $3,000 in savings, and a 29/41 debt ratio, you would not qualify for FHA financing. You would not have the money to make the 3.5% down payment. In this case, you could qualify for the 100% USDA financing.
USDA loans provide a great opportunity to secure low-interest and low-cost 100% financing. Shop around with different approved lenders to find the best loan for you. Each lender can have their own requirements on top of what the government requires.