What is a USDA loan? | USDA loan eligibility

Family sitting in front of homeThe USDA Loan Program, also known as the rural development home loan, is a 30 year fixed rate mortgage designed for home buyers with low to moderate income. The USDA home loans are mortgages backed by the United Department of Agriculture. The USDA does not actually lend the mortgage money to the home buyer, but provides default insurance to USDA approved lenders who offers the USDA home loans. The default insurance is a great incentive to lenders to provide mortgage money to home buyers who are unable meet the requirements for a traditional mortgage. The USDA home loan does not require a down payment, 100% financing. There are income limits with USDA mortgages and the house must be located in a designated rural location. Surprisingly, many areas across the United States are eligible for a USDA home loan. USDA Loan Calculator

Are there closing costs with USDA loans?

There are closing costs with the USDA home loan, just like any other mortgage; including title insurance, appraisal, transfer tax and mortgage tax stamps if applicable.

Are there income limits for USDA loans?

There are income limits with the USDA home loan, however, the income limits are very generous. The maximum income needs to be below 115% of the median household income adjusted for family size for the county where the home is located. The USDA provides a USDA Income Eligibility tool to help home buyers determine whether their income meets the USDA income requirement. Please understand that only a qualified loan officer can accurately determine income eligibility.

Are USDA loans for first time home buyers?

The USDA rural housing loan is available to first time home buyers and non-first time homebuyers.

Can you build a house with a USDA loan?

Yes! The USDA rural home loan program permits home buyers to build a new home; and, use 100% financing!

Can a USDA loan have a cosigner?

The USDA home loan program permits a cosigner. The cosigner(s) will not compensate for bad credit, but will help improve the applicant's debt to income ratio. Debt to income is a simple formula that compares the total monthly debt payments to the total monthly income. For example, if the the total monthly income is $4,000 and the total monthly debt payments total $1,000, then the debt ratio is 25%. ($1,000 divided by $4,000 = 25%). The USDA desires applicants to stay under 41% for the monthly bills and new mortgage payment. The cosigner can help with the debt ratio if the cosigner's has moderate debt and satisfactory monthly income. In short, the cosigner's income and debt is added in to the borrower's income and debt. Hopefully, the combination of income will drive down the debt ratio and make the application more attractive to the lender.

If you're thinking about adding a parent or the parents as a co-signer, they'll have to live in the house. That's right, co-signers are required to occupy the property. Non-occupant borrowers are not allowed.

Do all banks offer USDA loans?

No. Lenders must be approved by the USDA to offer home buyers USDA financing. Some lenders who are not approved may try to talk you out of a USDA loan because the lender does not offer the program.

Do USDA loans finance manufactured homes?

The USDA will finance a new modular home, provided it is permanently attached to a foundation, and is taxed as real estate.

On July 21, 2017, the USDA announced two manufactured housing pilot programs to allow financing to existing manufactured homes in a limited number of states. States currently participating in the pilot include: Colorado, Iowa, Louisiana, Nevada, New Hampshire, New York, North Dakota, Ohio, Pennsylvania, Texas, Vermont, Virginia, and Wyoming. The Rural Housing Service is now expanding the pilot to include additional states.

The loan request must be from an eligible applicant and all the pilot conditions must be met. To be eligible for financing under this pilot, existing manufactured homes (including new units which have been on the dealer’s lot in excess of 12 months) must meet the following pilot conditions in addition to all other program requirements that have not been waived.

The unit must have been constructed on or after January 1, 2006, in conformance with the Federal Manufactured Home Construction and Safety Standards (FMHCSS), as evidenced by an affixed Housing and Urban Development (HUD) Certification Label.

The manufactured home must be taxed and classified as real estate; the remaining economic life of the property must meet or exceed the 30 year term of the proposed mortgage loan;

The unit must not have had any modifications or alterations to it since construction in the factory. Read more

Do USDA loans have prepayment penalties?

USDA do not have prepayment penalties.

Do USDA loans have pmi?

The USDA home loans have an "upfront" mortgage insurance premium of 1% of the loan amount. For example, if the loan amount is $100,000, the upfront mortgage insurance cost would be $1,000 ($100,000 X 1% = $1,000). The mortgage insurance can be paid in cash at settlement or financed with the loan.

In addition to the initial mortgage insurance requirement, the USDA also charges a monthly premium as part of the mortgage payment. The monthly cost is .35% of the loan amount. Another example, multiply the loan amount of $100,000 X .0035 = $350. Now divide $350 by 12 months for the monthly mip (pmi) cost of $29.17.

Do USDA loans require escrow?

USDA loans require an escrow for property taxes and homeowners insurance.

Does the USDA loan require home inspection?

The USDA program does not require a home inspection, although the USDA highly recommends a home inspection.

Does the USDA loan require septic inspection?

Yes . . .
Individual sewage systems may be acceptable when the cost to connect to a public or community sewage system is not reasonable as defined by the lender. The lender is required to obtain a septic evaluation. A FHA roster appraiser who certifies the property meets required HUD’s Single Family Housing Policy Handbook, a government health authority, a licensed septic system professional, or a qualified home inspector may perform the septic evaluation. The inspector may require additional inspections as a result of the inspection. The septic system must be free of observable evidence of failure. Existing dwellings appraised by a HUD roster appraiser, who has indicated the dwelling meets the required HUD handbook policy does not require further septic certification. SOURCE: USDA underwriting manual, page 12-15