USDA Rural Development

USDA  RD Logo

USDA is a program allows home buyers to purchase with zero down with reduced mortgage insurance. Contrary to the program’s title, the USDA does not focus solely on rural properties.

USDA’s Rural Housing is the only program that has (household) gross income caps and property eligibility areas. When the borrower qualifies, the USDA Rural Housing program is the go-to program for increasing purchasing power as it results in a lower payment.

 

Eligibility in Detail

Here the Property Eligibility section:

https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp

Either zoom in to an area, or enter a specific address, to find Property Eligibility. The rule of thumb for USDA property eligibility is that a non-metro area must have less than 35,000 population.

 

For gross Income Eligibility the 1-4 person household limit was recently increased to $97,750. 5+ person households have an income cap of $129,050. An often overlooked method of calculating your gross household income is that USDA allows the deduction of childcare expenses to achieve Income Eligibility. Deducting childcare expenses for USDA gross income calculation works for every county, nationwide.

Here is the PDF for Income Eligibility:

http://www.rd.usda.gov/files/RD-GRHLimitMap.pdf

This PDF specifies the income cap for each metropolitan statistical area (MSA), typically by county. View the PDF and click your state. Then, scroll to find your specific county.

 

Benefits

An item that is unique to USDA is that it allows the financing of closing costs. Typically, lenders base the loan-to-value (LTV) on the lesser of the purchase price versus appraised value. USDA lends up to the appraised value. Buyers often have seller credits for closing costs and prepaid expenses. If, however, a seller credit is not obtained, closing costs and prepaid expenses can be financed up to the appraised value. Instead of funds out of pocket, a buyer can actually walk away from their closing with a portion of their earnest money returned!

 

Lenders need separate company approval through the USDA for originating this program’s loans, so many local banks and credit unions may overlook the program. These companies are often not approved for the program, not familiar with its features, or both. We have found many local lenders are not approved for originating any government-sponsored loans, so the only option that gets introduced to potential borrowers is conventional financing. While conventional financing works best for many people, avoiding comparison for multiple programs and their benefits results a more costly overall experience.

 

Especially important is the aspect of mortgage insurance (MI), which is required for all loan programs, when putting down less than 20%. This mortgage insurances the lender against losses from a defaulted mortgage loan. Without it, lenders would likely require a minimum of 20% for all borrowers (like the early 1980’s). Conventional and WHEDA programs calculate your MI Factor based on your down payment and credit score. This tiered mortgage insurance can cost borrowers with less than 760 scores hundreds of dollars each month.

 

Case Study:

We recently had two home buyers looking to buy their first house and had little money for down payment. One lender recommended WHEDA which grants 3% of the purchase price as a second mortgage, and it requires home buyer education courses. The borrower had Fair credit and the resulting mortgage insurance factor was 1.43. This means that 1.43% of the loan amount is charged per year. Since the MI payment is monthly, that 1.43% is divided by 12 months. This resulted in a monthly MI payment of $298/mo on a $250,000 purchase. While the buyers weren’t happy about so much of their income going towards mortgage insurance, they accepted that their less-than-perfect credit can raise a mortgage payment.

 

Upon talking to a friend that was a client of ours, the buyers were introduced to Mortgage Statz. When we first talked, the buyers were frustrated with the prospect of paying $298/mo just for mortgage insurance. We compared all programs and found the USDA program as the best option as it requires zero down and the MI factor is 0.35%, regardless of credit score. On their proposed $250k purchase price, this resulted in a monthly MI payment of $73/mo.

 

While skeptical in our first conversation, the buyers were ecstatic to learn that they could afford more house because the USDA program saved $225/mo. They are now moved in to their new house,  Until they followed the intro from their friend, and called Mortgage Statz, they never thought they could afford this house.

 

Give us a call, or drop us a line, with your specific scenario. We’re happy to help find the best loan structure for you and your family.

Here is the general site with more program-related info:

https://www.rd.usda.gov/files/MN-SFH-GRHLenderguide.pdf