MORTGAGE MATTERS

4 min read

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Jul 2016

6 Things You Should Know About the USDA Loan

Backed by the US Department of Agriculture, these loans offer those living in smaller and rural communities the opportunity to own a home at affordable rates. In fact, USDA mortgage loans offer you even more options if you’re interested in something other than a conventional loan, FHA loan, or a VA loan. Here are 6 things you should know about USDA to see if it’s something you may be interested in.

1. USDA loans are not just for farmers even though they are called "rural" loans

USDA does require that your home be in a rural area, but this can include some areas that are surprisingly suburban. You’re not limited to country properties or farming communities. You cannot use the loan to purchase a “working farm,” meaning a farm used for commercial purposes. To see if a property you’re interested in is eligible, you can visit the USDA website.

2. There is no down payment for USDA loans

You can finance 100% of the purchase price, which means no need for a down payment. USDA also allows gift funds from family and friends should you decide to make a down payment. There are also down payment assistant programs to help with your down payment.

3. You are required to get mortgage insurance on USDA loans

Because you can finance 100% of the loan, USDA loans also require mortgage insurance, which currently consists of a 2.75% upfront fee (USDA calls this a guarantee fee) and a .50% annual guarantee fee of the principal loan amount. You can roll the 2.75% into your loan amount.

4. You have different property options with USDA loans

As mentioned above, you’re not limited to farms so this gives you plenty of options for your new home. Here are some home types you can consider with a USDA:

  • Existing homes

  • New Manufactured homes

  • New construction

  • Condominiums

  • Modular homes

  • Planned Unit Developments (PUDs)

This shows that farms are not the only type of home that you can purchase with a USDA although you cannot use the USDA loan for investment properties or a vacation home.

5. USDA loans have income limits.

USDA loans are all about affordability so they have established income limits for their loans. These limits are based on the Department of Housing and Urban Development (HUD) Area Median Income (AMI) limits. Currently, USDA is allowing 115% of the AMI established by HUD.

6. USDA refinances are also available

USDA also does refinancing with a few different programs, particularly through the Streamlined-Assist Program because of its many advantages, although Non-Streamlined and Streamlined are available as well. Unlike with some other loans, you cannot use the USDA to do a cash-out refinance but the programs do have their benefits and you’re able to skip a monthly payment.

Non-Streamlined and Streamlined

You can add or remove borrowers, for example, if you got married or are getting a divorce, you can add someone to the loan or remove them. You don’t necessarily have to have a drop in your payment to take advantage of these programs. For example, if you already have a great rate and monthly payment but have to remove a borrower from the loan, the Non-Streamlined and Streamlined are good options. If the appraisal value isn’t enough to cover both the pay-off on your mortgage, closing costs, and guarantee fee then you may need to be prepared to pay those costs out-of-pocket with a Non-Streamlined and Streamlined program. Unlike the Streamlined-Assist Program, you have to have a good payment history for the last 6 months, where late payments do not exceed 30 days. With a Streamlined-Assist it’s longer.

Streamlined-Assist

There are many advantages of the Streamlined-Assist Program, making it a more desired refinance program over the others.

The Streamlined Refinance helps you save money by reducing your rate and/or extending your loan term.

An appraisal is not required for the Streamlined-Assist program, which means that your loan amount is not limited to the market value of the property, therefore, you can roll your closing costs into your USDA loan and not pay them out of pocket. There are no debt-to-income (DTI) requirements although income limits do apply. For instance, the total household annual income can’t exceed the moderate level for the area that you’re interested in purchasing a house. But you don’t have to compare your income against your debts, the way you did when you first qualified for your USDA loan. Because you’d need to already have a USDA loan to qualify for this refinance program, there’s less paperwork with this loan program which saves you time when qualifying. You have to have a good payment history for the last 12 months. As mentioned previously, late payments are those that exceed 30-days and may be reported. You’re not able to remove a borrower from the loan but can add a borrower, for example, if you were to already have a USDA loan and then got married and would like to add your significant other to the loan, then you’re able to do so.