Understanding USDA Rural Development Loans
Unlike in years past, when it comes to financing your new home there are only four mortgage options available to homebuyers. These are FHA or Federal Housing Authority loans, Conventional or FANNIE MAE Conforming loans, RD or USDA Rural Development loans and VA or Veteran Administration loans.
Understanding and striving to meet the “ever changing” criteria for these loan programs is important to achieving a successful home purchase. This is just one of the many reasons why it’s essential that the Realtor you choose to help facilitate your home purchase, are themselves, well versed in the underwriting process and guidelines of each of these programs.
Smart Move Real Estate agents (Smart Agents) are highly trained in the criteria and processes of each of these loan programs.
RD (Rural Development) 100% LOAN: These loans are typically made by a bank or direct mortgage lender. A borrower can choose to go through a “middle man” called a mortgage broker, however, they will typically pay higher rates and fees by doing this. RD loans are not typically provided by the USDA itself, they simple “insure” the lender providing you with the loan against loss in the event of a default.
As of the writing of this article, the current basic criteria for an USDA RD loans are:
There is not necessarily a maximum loan amount for a Rural Development loan. The program is set up as a income “capped” program. The income caps and maximum Debt to Income (DTI) ratios set by USDA will inherently limit the amount of mortgage a borrower may receive. However, depending on the applicants total debt to income ratio, a borrower could purchase a home with this program that is priced well in the $300,000 range. RD Loan eligibility is based upon “total household” income. Currently the maximum household income for a family of 4 or less purchasing in Livingston Parish is $86,850 after adjustments. For a family of 5 or more the maximum household income is $114,650 after adjustments for child care or care for a disabled family member. This will include any income which comes into the house from children, adult children and/or senior adults who may reside with you. Do not attempt to calculate this yourself! If you have a question about the income or area limitations of USDA RD Loans, you may want to contact an Approved USDA RD Loan Specialist.
Additionally, RD Loans are available only in certain areas designated by the USDA as rural. However, It might surprise you what the USDA considers a rural community. Many of the outer lying communities which make up the Greater Baton Rouge market area will qualify for a RD Loan. In fact, many homes in Livingston parish which includes the city of Denham Springs will qualify for this 100% financing. Also, homes in Prairieville and Gonzales in Ascension parish will qualify RD loan program. With today revisions to the qualifying areas, most of East Rouge parish will now qualify. Here again, check with your real estate professional or a Approved USDA RD Loan Specialist for specific qualifying areas. Though most properties in East Baton Rouge Parish will not qualify, Zachary, Greenwell Springs and Central are a demand market areas which affords the opportunity to use the Rural Development program. Use this link to determine if your house, or the house you may wish to purchase is in an USDA Rural Development eligible area.
RD Loans do not require a down payment to qualify. However, the buyer may still need funds for closing costs, pre-paid taxes, insurance, and escrow account setups. There are certain circumstances which will allow the buyer to receive these funds as a gift from a family member. However, you will need to talk to a Approved RD Loan Specialist to see if your unique situation will allow for this. If gift funds are not possible and you do not have enough cash to close the sale, your Smart Agent can many times negotiate with the home seller to pay these expenses for you.
The minimum credit score which is required by most of our direct lenders to qualify for a 100% RD Purchase loan is 600 but can be as low a 560. If you have had some credit issues in the past, many times your Approved USDA RD Loan Specialist will be able to help you remedy some of these and increase your score enough to allow you to purchase your new home.
RD borrowers must have a good 12 month rental or mortgage history to qualify. However, you may still be able to qualify if you have never rented or owned a home. Remember, you’re buying a house. The lender and USDA are primarily concerned with how you pay your housing expenses! If you currently rent from a property management company the lender will simply have to get a Verification of Rent (VOR) from the property management company. However, if you rent from an individual, you are most likely going to be REQUIRED to produce the last twelve months of cancelled checks to prove you paid your rent on time. On occasion, there can be exceptions for this requirement. You will need to discuss this with your Approved USDA RD Loan Specialist.
- What about old charged off accounts and medical bills? DON’T DO ANYTHING WITH THEM! Many times a homebuyer will try to “fix” their own credit by calling old accounts seeking to settle them. This very move can keep you from purchasing your home! A quick rule of thumb is “the older the account, the less it will impact your credit score.” Contacting these companies to settle them will re-age the account. This will actually take an item which may only impact your score slightly, and turn it into an item which WILL negatively impact your score. If you have derogatory entries on your credit bureau, let your Approved USDA RD Loan Specialist direct you how, and which ones, to fix.
- RD Funding Fee & Mortgage Insurance: As mentioned earlier, in most cases, RD only insures the lender against loss. They do not, in most cases, directly provide the loan. Thus being the case, RD charges a 2.00% Funding Fee which is added on top of the principle mortgage amount. In addition, RD borrowers will pay a monthly mortgage insurance premium of .40% of the loan. Unlike conventional loans, the Mortgage Insurance premium will steadily decrease over the life of the loan. Mortgage insurance on a Conventional loan will typically cease once the balance of loan reaches 78% of the value of the house. Mortgage Insurance can be removed after 24 months of on time payments if the property owner can prove through an appraisal that the property value is greater that 80%
An example RD Mortgage Payment will look like this: Principle Loan Amount $153,061 – 4.25% interest for 30 years.
- Principle and Interest Payment: $752.96
- Mortgage Insurance Payment: $50.64
- Escrow for Tax & Insurance: $146.52
- TOTAL MONTHLY PAYMENT: $950.12
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