* Updated as of December 2016
USDA stands for United States Department of Agriculture. The Rural Housing Service (RHS) is a department within USDA that offers the Guaranteed Rural Housing Loan Program – most people know it as the USDA Loan.
The USDA loan program is designed to assist low and moderate income families in getting affordable mortgages in eligible rural areas. To access the USDA loan eligibility map, click here.
My current mortgage loan originator license allows me to originate loans in Utah, so I will look at the Beehive State in more detail. However, these USDA loan program guidelines apply in all states, with expected variations in income and loan limits.
There are a number of restrictions associated with USDA Rural loans, but don’t let that deter you from purchasing an eligible property.
If you don’t mind living further from the busy city life, USDA loans rank number two in my book – right after the VA military loans. What’s there not to like?
Just like Utah FHA loans have an Up Front Mortgage Insurance fee, and an Annual Mortgage Insurance fee, Utah USDA loans have a Guarantee Fee and an Annual Guarantee Fee.
The Guarantee Fee amount is currently at 1%
The Annual Guarantee Fee amount is currently at 0.35%
Example: On a $200,000 loan amount with 100% financing, your up front/one time Guarantee Fee would be $2,000; your annual guarantee fee would be $700 – which translates into $58.33/month.
Compare this to the same FHA loan with a 3.5% minimum downpayment ($7,000), Up Front Mortgage Insurance of 1.75% – $3,500, and annual mortgage insurance of 0.85% – $1,700 ($142 per month).
Most real estate agents know about the awesome benefits of the USDA loan program. If you’re in Utah, but don’t yet have a real estate agent, check out my list - one of these awesome girls or guys would be more than happy to help you find your dream home!
The only loan option available at this time is a 30 year fixed interest rate loan.
Finding the eligibility of a property is easy when using the official link to the USDA map. Just to give you an idea, here is how to map looks like in Utah (click to enlarge):
Other property requirements are:
Because this is a loan program designed to help low to moderate income families, you, the borrower, cannot own any other homes at the time of the USDA loan closing. If you do own other property, it has to be sold prior to, or concurrently with your USDA loan closing.
An exception can be granted if you are re-locating, and your other home is either:
USDA does not have set loan limits in the same way FHA or VA loans do. The maximum loan amount is determined by the borrower’s ability to qualify when applying the restrictions on income and debt to income percentage.
We’ll look at the USDA income restrictions in two areas that can impact your approval: actual income and assets owned.
Your household income may not exceed 115% of the area’s median income level as determined by rural development. You can check your eligibility on USDA’s website by clicking here.
Keep in mind that adult (over 18 years of age) household members that are not on the loan application must also provide income verification for their employment status.
Adjustments to reduce annual income include:
You must not have sufficient assets to meet the downpayment and closing costs associated with a conventional, uninsured mortgage product (loan to value of of 80% or less).
Interest income for family assets over $5,000 must be considered for annual income.
Net family assets are defined as the value of equity in real property, savings, IRAs, demand deposits, market value of stocks, bonds or other forms of capital investments; business or household assets disposed of for less than fair market value for 2 years preceding the date of the loan application. 401Ks are not considered in net family assets.
A 580 minimum credit score is required for approval. A minimum of 2 credit accounts (auto loan, credit card, personal loan etc) with at least a 12 month history are required on the credit report. This last part is very important for people that have been through bankruptcy, because they will need to re-establish credit before applying for a mortgage loan.
Your credit history must indicate a reasonable ability and willingness to meet obligations as they become due. If your credit is between 580-639, your rental or mortgage history in the past 12 months will be analyzed, and any late payments will have to be explained. There is additional scrutiny, and a final USDA underwriting approval is required for credit scores under 640, which adds 1-2 weeks to your loan closing timeframe.
Bankruptcy - has a 3 year waiting period.
Chapter 7 must be discharged at least 3 years back with an acceptable credit history since the bankruptcy. A 2 year waiting period is acceptable if extenuating circumstances can be documented.
Chapter 13 borrowers are eligible if they have 12 months payments in the plan with no lates, and approval from the bankruptcy court/trustee.
Foreclosure - has a 3 year waiting period from the date the title was transferred out of your name (which is not always the same as the foreclosure date – check the county records or with your previous lender)
Pre-Foreclosure and Short Sale - 3 year waiting period. The credit report must reflect a zero balance on mortgage liens included in the foreclosure /short sale OR documentation must be obtained to support no further obligation.
Exceptions may be considered to the 3 year wait, if the credit profile demonstrates strong mitigating circumstances, such as:
- 640 or greater credit score
- Satisfactory 12-month documented housing payment history
- NO late payments leading up to the short sale, and the circumstances leading up to short sale must have been beyond the borrower’s control and temporary in nature.
Delinquent student loans - must be satisfied prior to loan closing, or have an acceptable repayment plan, reporting six months of positive payments.
Late payments on any installment accounts within the past 12 months – only one is acceptable, and it will require a written explanation.
Standard qualifying ratios of 29/41 may be exceeded with compensating factors.
Compensating factors can be:
- a credit score over 680
- the new proposed house payment is equal or less than the verified current house/rent payment
- savings, cash reserves or liquid assets are equal to, or grater than 3 months of the mortgage payment (taxes and insurance included)
- at least 2 years of stable employment history with current employer.
Co-signed loans can be excluded from the debt ratios if it can be verified that the main borrower on the loan is current on the loan payments over the past 12 months (bank statements or canceled checks are required).
I hope I’ve answered all your USDA rural loan questions in this article.
If there is anything else you’d like to know about, please e-mail me at firstname.lastname@example.org or call/text me at (801) 473-3154.
Use my easy, secure online application and I will prepare a USDA Pre-Qualification Letter within hours, letting you know the loan amount you can qualify for.
Happy house hunting!